10-K - CZNC - Equibles

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2020

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

For the transition period from _______________ to _________________________.

Commission file number: 0-16084

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

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark whether the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ◻ No ⌧

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ◻ No ⌧

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 (Section 232.405 of this chapter) 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 definitions 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 has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ⌧

The aggregate market value of the registrant’s common stock held by non-affiliates at June 30, 2020, the registrant’s most recently completed second fiscal quarter, was $274,805,802.

The number of shares of common stock outstanding at March 3, 2021 was 16,000,948.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for the annual meeting of its shareholders to be held April 22, 2021 are incorporated by reference into Parts III and IV of this report.

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TABLE OF CONTENTS

	Page(s)
Part I:
Item 1. Business	3-5
Item 1A. Risk Factors	5-8
Item 1B. Unresolved Staff Comments	8
Item 2. Properties	9
Item 3. Legal Proceedings	9
Item 4. Mine Safety Disclosure	9
Part II.
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	9-12
Item 6. Selected Financial Data	12
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations	12-36
Item 8. Financial Statements and Supplementary Data	37-95
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	96
Item 9A. Controls and Procedures	96-97
Item 9B. Other Information	97
Part III:
Item 10. Directors, Executive Officers and Corporate Governance	97
Item 11. Executive Compensation	97
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	97
Item 13. Certain Relationships and Related Transactions, and Director Independence	98
Item 14. Principal Accountant Fees and Services	98
Part IV:
Item 15. Exhibits and Financial Statement Schedules	99-103
Signatures	104

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PART I

ITEM 1. BUSINESS

Citizens & Northern Corporation (“Corporation”) is a holding company whose principal activity is community banking. The Corporation’s principal office is located in Wellsboro, Pennsylvania. The largest subsidiary is Citizens & Northern Bank (“C&N Bank” or the “Bank”). The Corporation’s other wholly-owned subsidiaries are Citizens & Northern Investment Corporation and Bucktail Life Insurance Company (“Bucktail”). Citizens & Northern Investment Corporation was formed in 1999 to engage in investment activities. Bucktail reinsures credit and mortgage life and accident and health insurance on behalf of C&N Bank.

The Corporation’s acquisition of Covenant Financial, Inc. (“Covenant”) was completed July 1, 2020. Covenant was the parent company of Covenant Bank, a commercial bank which operated a community bank office in Bucks County, Pennsylvania and another in Chester County, Pennsylvania. Pursuant to the transaction, Covenant merged with and into the Corporation and Covenant Bank merged with and into C&N Bank. Total purchase consideration was $63.3 million, including common stock with a fair value of $41.6 million and cash of $21.7 million. Holders of Covenant common stock prior to the consummation of the merger held approximately 12.9% of the Corporation’s common stock outstanding immediately following the merger.

Over the past few years, the Corporation has been employing a growth strategy. Presently, a majority of C&N Bank’s operations are conducted in its legacy markets in the northern tier/north central region of Pennsylvania and southern tier of New York. In 2020, with the acquisition of Covenant, the Bank expanded its presence in Southeastern Pennsylvania. The Covenant acquisition follows the acquisition of Monument Bancorp, Inc. (“Monument”) in 2019, as well as the opening of a lending office in York, Pennsylvania which is located in southcentral Pennsylvania. Mainly as a result of the acquisitions, the Corporation’s consolidated total assets at December 31, 2020 of $2.2 billion were up 73% from the corresponding total at December 31, 2018. Similarly, gross loans of $1.6 billion at December 31, 2020 were up 99% from December 31, 2018 and total deposits of $1.8 billion were up 76% from December 31, 2018.

C&N Bank is a Pennsylvania banking institution that was formed by the consolidation of Northern National Bank of Wellsboro and Citizens National Bank of Towanda in 1971. C&N Bank has held its current name since May 6, 1975, at which time C&N Bank changed its charter from a national bank to a Pennsylvania bank. The Bank has expanded its presence over the past several decades through a series of mergers as well as by opening new branch and lending offices and providing access to banking services via the internet and through ATMs. At December 31, 2020, the Bank had 29 branch offices, including 23 in the northern tier/north central region of Pennsylvania, 4 in Southeastern Pennsylvania (3 in Bucks County and 1 in Chester County) and 2 in the southern tier of New York State. In addition to its branch locations, the Bank had lending offices in York, Pennsylvania and Elmira, New York.

C&N Bank provides an extensive range of banking services, including deposit and loan products for personal and commercial customers. The Bank also maintains a trust department that provides a wide range of financial services, such as 401(k) plans, retirement planning, estate planning, estate settlements and asset management. C&N Financial Services Corporation (“C&NFSC”), a wholly-owned subsidiary of the Bank, is a licensed insurance agency that provides insurance products to individuals and businesses and through its broker-dealer division, offers mutual funds, annuities, educational savings accounts and other investment products through registered agents. C&NFSC’s operations are not significant in relation to the total operations of the Corporation.

In 2017, C&N Bank established Northern Tier Holding LLC, to acquire, hold and dispose of real property acquired by the Bank. C&N Bank is the sole member of Northern Tier Holding LLC.

All phases of the Bank’s business are competitive. The Bank competes with online financial institutions, local commercial banks headquartered in our market areas and other commercial banks with branches in our market area. Many of the online financial institutions and some of the banks that have branches in our market areas are larger in overall size. With respect to lending activities and attracting deposits, the Bank also competes with savings banks, savings and loan associations, insurance companies, regulated small loan companies and credit unions. Also, the Bank competes with mutual funds, exchange-traded funds and other investment vehicles for deposits. C&N Bank competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals for trust, investment management, brokerage and insurance services. The Bank is generally competitive with all financial institutions in our service areas with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. The Bank serves a diverse customer base and is not economically dependent on any small group of customers or on any individual industry. 3

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At December 31, 2020, C&N Bank had total assets of $2,222,478,000, total deposits of $1,827,881,000 and net loans outstanding of $1,632,824,000.

Most activities of the Corporation and its subsidiaries are regulated by federal or state agencies. The primary regulatory relationships are described as follows:

●	The Corporation is a bank holding company formed under the provisions of Section 3 of the Federal Reserve Act. The Corporation is under the direct supervision of the Federal Reserve and must comply with the reporting requirements of the Federal Bank Holding Company Act.
●	C&N Bank is a state-chartered, nonmember bank, supervised by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking and Securities.
---	---
●	C&NFSC is a Pennsylvania corporation. The Pennsylvania Department of Insurance regulates C&NFSC’s insurance activities. Brokerage products are offered through third party networking agreements.
---	---
●	Bucktail is incorporated in the state of Arizona and supervised by the Arizona Department of Insurance.
---	---

A copy of the Corporation’s annual report on Form 10-K, quarterly reports on Form 10-Q, current events reports on Form 8-K, and amendments to these reports, will be furnished without charge upon written request to the Corporation’s Treasurer at P.O. Box 58, Wellsboro, PA 16901. Copies of these reports will be furnished as soon as reasonably possible after they are filed electronically with the Securities and Exchange Commission. The information is also available through the Corporation’s web site at www.cnbankpa.com

Human Capital

The Corporation’s Board of Directors and executive leadership team have established the following mission, vision and values:

Mission: Creating value through lifelong relationships with our customers, teammates, shareholders and communities.

Vision: Every customer says “C&N is the ONLY bank I need.”

Values: Teamwork, Respect, Responsibility and Accountability, Excellence, Integrity, Client Focus, Have Fun.

We recognize that our ability to create value on a consistent basis is highly dependent upon the effectiveness of our team.

The Corporation‘s key human capital management objectives are to attract and retain diverse raw and seasoned talent that fits our values and culture. Our talent strategy focuses on acquiring new employees through branding and outreach programs, developing employees though a robust onboarding program, ongoing training, and performance management, and retaining employees through recognition, engagement, and an attractive total rewards package.

Diversity and Inclusion

At C&N Bank, we are committed to creating value through relationships. At the heart of this mission is a promise of excellence in service to all people, as demonstrated by our commitment to equity of opportunity, inclusion and our fostering of a spirit of belonging. We live our values of respect, integrity and excellence by creating access and providing support to help our diverse constituents of customers, teammates, shareholders and communities in achieving their financial goals. We embrace inclusion of all of our stakeholders as an important component of our vision to be the ONLY bank our customers need.

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Compensation and Benefits

The Corporation offers competitive compensation to attract and retain talent. Our generous total rewards package includes market-competitive salary, bonuses or sales commissions, short-term and long-term equity incentives, healthcare and retirement benefits, and paid time off. Employees have regular performance reviews and salary raises commensurate with performance. Employees have access to a holistic suite of items within our employee assistance program that caters to physical, emotional, and mental wellbeing for the employee and their family. Additionally, we have conducted discretionary bonus payouts – the most recent grant program took place in 2020 and was in recognition of our employees’ special efforts during the COVID-19 pandemic.

Training and Development

The Corporation provides a robust training and development program that supports our culture, prepares employees for their immediate role, develops them for long term success at the bank and supports personal enrichment. We offer functional training, culture building exercises, personal development, C&N Bank history, C&N Bank integration and ongoing technical training throughout each year. Employees also have access to additional educational and development opportunities including tuition reimbursement and certification programs.

Communication and Engagement

At C&N, we believe in the importance of employee communication and engagement. We utilize several methods to foster engagement, including activities such as Employee Recognition programs, Service Anniversary Awards, Bank wide monthly calls, semi-annual Bank wide events, annual employee surveys, focus groups, daily huddles, and the Giving Back, Giving Together community service program. We believe keeping our team well informed, connected, and appreciated adds to the success of our organization.

ITEM 1A. RISK FACTORS

The Corporation is subject to the many risks and uncertainties applicable to all banking companies, as well as risks specific to the Corporation’s geographic locations. Although the Corporation seeks to effectively manage risks, and maintains a level of equity that exceeds the banking regulatory agencies’ thresholds for being considered “well capitalized” (see Note 18 to the consolidated financial statements), management cannot predict the future and cannot eliminate the possibility of credit, operational or other losses. Accordingly, actual results may differ materially from management’s expectations. Some of the Corporation’s significant risks and uncertainties are discussed below.

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

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

The effect of COVID-19 and related events, including those described above and those not yet known or knowable, could have a negative effect on the Corporation’s business prospects, financial condition and results of operations, as a result of quarantines; market volatility; market downturns; changes in consumer behavior; business closures; deterioration in the credit quality of borrowers or the inability of borrowers to satisfy their obligations (and any related forbearances or restructurings that may be implemented); changes in the value of 5

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collateral securing outstanding loans; changes in the value of the investment securities portfolio; effects on key employees, including operational management personnel and those charged with preparing, monitoring and evaluating the Corporation’s financial reporting and internal controls; declines in the demand for loans and other banking services and products; declines in demand resulting from adverse impacts of the disease on businesses deemed to be “non-essential” by governments; branch or office closures and business interruptions; and efforts to integrate the businesses of the Corporation and Covenant.

Risk Related to Acquisition Activity – As described in Item 1, the Corporation has completed two acquisitions of banking companies over the past two years (Covenant and Monument) and expanded its geographic footprint to Southeastern and southcentral Pennsylvania. Further, management intends to continue to pursue additional acquisition opportunities. Potential acquisitions may disrupt the Corporation’s business and dilute shareholder value. We regularly evaluate merger and acquisition opportunities and conduct due diligence activities related to possible transactions with other financial institutions and financial service companies. Acquiring other banks, businesses, or branches involves various risks commonly associated with acquisitions, including: potential exposure to unknown or contingent liabilities of the target company, exposure to potential asset quality issues of the target company, difficulty and expense of integrating the operations and personnel of the target company, potential disruption to the Corporation’s business, potential diversion of management’s time and attention, the possible loss of key employees and customers of the target company, difficulty in estimating the value of the target company and potential changes in banking or tax laws or regulations that may affect the target company. Acquisitions may involve the payment of a premium over book and market values, and, therefore, some dilution of the Corporation’s tangible book value and net income per share of common stock may occur in connection with any future transaction. Furthermore, failure to realize the expected revenue projections, cost savings, increases in geographic or product presence, and/or other projected benefits from recent or future acquisitions could have a material adverse effect on the Corporation’s financial condition or results of operations.

Credit Risk from Lending Activities - A significant source of risk is the possibility that losses will be sustained because borrowers, guarantors and related parties may fail to perform in accordance with the terms of their loan agreements. Most of the Corporation’s loans are secured, but some loans are unsecured. With respect to secured loans, the collateral securing the repayment of these loans may be insufficient to cover the obligations owed under such loans. Collateral values may be adversely affected by changes in economic, environmental and other conditions, including declines in the value of real estate, changes in interest rates, changes in monetary and fiscal policies of the federal government, wide-spread disease, terrorist activity, environmental contamination and other external events. In addition, collateral appraisals that are out of date or that do not meet industry recognized standards may create the impression that a loan is adequately collateralized when it is not. The Corporation has adopted underwriting and credit monitoring procedures and policies, including regular reviews of appraisals and borrower financial statements, that management believes are appropriate to mitigate the risk of loss. Also, as discussed further in the “Provision and Allowance for Loan Losses” section of Management’s Discussion and Analysis, the Corporation attempts to estimate the amount of losses that may be inherent in the portfolio through a quarterly evaluation process that includes several members of management and that addresses specifically identified problem loans, as well as other quantitative data and qualitative factors. Such risk management and accounting policies and procedures, however, may not prevent unexpected losses that could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

Interest Rate Risk - Business risk arising from changes in interest rates is an inherent factor in operating a banking organization. The Corporation’s assets are predominantly 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. Significant fluctuations in interest rates could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

Limited Geographic Diversification - The Corporation grants commercial, residential and personal loans to customers primarily in the Corporation’s legacy markets of the northern tier/north central regions of Pennsylvania and southern tier of New York and in Southeastern 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 these regions. Deterioration in economic conditions could adversely affect the quality of the Corporation’s loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

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Competition - All phases of the Corporation’s business are competitive. Some competitors are much larger in total assets and capitalization than the Corporation, have greater access to capital markets and can offer a broader array of financial services. There can be no assurance that the Corporation will be able to compete effectively in its markets. Furthermore, developments increasing the nature or level of competition could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

Inability to Attract and Develop Qualified Personnel – The Corporation believes that our future success will depend in large part on our ability to attract, develop and retain highly qualified management, lending, financial, technical, marketing, sales, and support personnel. Competition for qualified personnel is intense and we cannot ensure success in attracting or retaining qualified personnel. There may be only a limited number of persons with the requisite skills to serve in these positions, and it may be increasingly difficult for us to hire personnel over time. Our ability to retain key officers and employees may be further impacted by legislation and regulation affecting the financial services industry. For example, legislation and bank regulatory action that places restrictions on executive compensation at, and the pay practices of, financial institutions may further impact our ability to compete for talent with other industries that are not subject to the same limitations as financial institutions. Any inability to attract, develop and retain significant numbers of qualified management and other personnel would have a material adverse effect on our business, results of operations and financial condition.

Breach of Information Security and Technology Dependence - The Corporation relies on software, communication, and information exchange on a variety of computing platforms and networks and over the Internet. Despite numerous safeguards, the Corporation cannot be certain that its systems are entirely free from vulnerability to attack or other technological difficulties or failures. The Corporation relies on the services of a variety of vendors to meet its data processing and communication needs. If information security is breached or other technology difficulties or failures occur, information may be lost or misappropriated, services and operations may be interrupted, and the Corporation could be exposed to claims from customers. Any of these results could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

Government Regulation and Monetary Policy - The Corporation and the banking industry are subject to extensive regulation and supervision under federal and state laws and regulations. The requirements and limitations imposed by such laws and regulations limit the way the Corporation conducts its business, undertakes new investments and activities and obtains financing. These regulations are designed primarily for the protection of the deposit insurance funds and consumers and not to benefit the Corporation’s shareholders. Financial institution regulation has been the subject of significant legislation in recent years and may be the subject of further significant legislation in the future, none of which is in the control of the Corporation. Significant new laws or changes in, or repeals of, existing laws could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity. Further, federal monetary policy, particularly as implemented through the Federal Reserve System, significantly affects short-term interest rates and credit conditions, and any unfavorable change in these conditions could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

Bank Secrecy Act and Related Laws and Regulations - These laws and regulations have significant implications for all financial institutions. In recent years, they have increased due diligence requirements and reporting obligations for financial institutions, created new crimes and penalties, and required the federal banking agencies, in reviewing merger and other acquisition transactions, to consider the effectiveness of the parties to such transactions in combating money laundering activities. Even innocent noncompliance and inconsequential failure to follow the regulations could result in significant fines or other penalties, which could have a material adverse impact on the Corporation’s financial condition, results of operations or liquidity.

The Federal Home Loan Bank of Pittsburgh - Through its subsidiary (C&N Bank), the Corporation is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. The Corporation has a line of credit with the FHLB-Pittsburgh that is secured by a blanket lien on its loan portfolio. Access to this line of credit is critical if a funding need arises. However, there can be no assurance that the FHLB-Pittsburgh will be able to provide funding when needed, nor can there be assurance that the FHLB-Pittsburgh will provide funds specifically to the Corporation should its financial condition deteriorate and/or regulators prevent that access. The inability to access this source of funds could have a materially adverse effect on the Corporation’s financial flexibility if alternate financing is not available at acceptable interest rates. The failure of the FHLB-Pittsburgh or the FHLB system in general, may materially impair the Corporation’s ability to meet short- and long-term liquidity needs or to meet growth plans.

The Corporation owns common stock of the FHLB-Pittsburgh to qualify for membership in the FHLB system and access services from the FHLB-Pittsburgh. The FHLB-Pittsburgh faces a variety of risks in its operations including interest rate risk, counterparty credit risk, 7

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and adverse changes in its regulatory framework. In addition, the 11 Federal Home Loan Banks are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB cannot meet its obligations, other FHLBs can be called upon to make required payments. Such risks affecting the FHLB-Pittsburgh could adversely impact the value of the Corporation’s investment in the common stock of the FHLB-Pittsburgh and/or affect its access to credit.

Soundness of Other Financial Institutions - In addition to the FHLB-Pittsburgh, the Corporation maintains other credit facilities that provide it with additional liquidity. These facilities include secured and unsecured borrowings from the Federal Reserve Bank and third-party commercial banks. The Corporation believes that it maintains a strong liquidity position and that it is well positioned to withstand foreseeable market conditions. However, legal agreements with counterparties typically include provisions allowing them to restrict or terminate the Corporation’s access to these credit facilities with or without advance notice and at their sole discretion.

Financial institutions are interconnected because of trading, clearing, counterparty, and other relationships. Financial market conditions have been negatively impacted in the past and such disruptions or adverse changes in the Corporation’s results of operations or financial condition could, in the future, have a negative impact on available sources of liquidity. Such a situation may arise due to circumstances that are outside the Corporation’s control, such as general market disruptions or operational problems affecting the Corporation or third parties. The Corporation’s efforts to monitor and manage liquidity risk may not be successful or sufficient to deal with dramatic or unanticipated reductions in available liquidity. In such events, the Corporation’s cost of funds may increase, thereby reducing net interest income, or the Corporation may need to sell a portion of its securities and/or loan portfolio, which, depending upon market conditions, could necessitate realizing a loss.

Securities Markets – The fair value of the Corporation’s available-for-sale debt securities, as well as the revenues the Corporation earns from its Trust and Financial Management and brokerage services, are sensitive to price fluctuations and market events.

Declines in the values of the Corporation’s securities holdings, combined with adverse changes in the expected cash flows from these investments, could result in other-than-temporary impairment charges. For additional information regarding debt securities, see the “Securities” section of Management’s Discussion and Analysis and Note 7 to the consolidated financial statements.

The Corporation’s Trust and Financial Management revenue is determined, in part, from the value of the underlying investment portfolios. Accordingly, if the values of those investment portfolios decrease, whether due to factors influencing U.S. or international securities markets, in general, or otherwise, the Corporation’s revenue could be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in securities markets.

Mortgage Banking – Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program. Since 2014, the Corporation has also originated and sold residential mortgage loans to the secondary market through the MPF Original program. Both of these programs are administered by the Federal Home Loan Banks of Pittsburgh and Chicago. At December 31, 2020, the total outstanding balance of residential mortgages sold and serviced through the two programs amounted to $278,857,000. The Corporation must strictly adhere to the MPF Xtra and MPF Original program guidelines for origination, underwriting and servicing loans, and failure to do so may result in the Corporation being forced to repurchase loans or being dropped from the program. As of December 31, 2020, the total outstanding balance of residential mortgage loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,714,000. If the volume of such forced repurchases of loans were to increase significantly, or if the Corporation were to be dropped from the programs, it could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

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ITEM 2. PROPERTIES

The Corporation’s full-service banking branch properties as of December 31, 2020 totaled 29 branches located in Bradford, Bucks, Cameron, Chester, Lycoming, McKean, Potter, Sullivan and Tioga Counties in Pennsylvania and Steuben County in New York. Of those branches, 25 were owned and 4 were leased. The Corporation operates loan production offices in Elmira, New York and York, Pennsylvania and operates 4 administrative offices in Wellsboro and Doylestown, Pennsylvania. Of the 35 total properties, 29 were owned and 6 were leased. The Corporation’s headquarters is located in Wellsboro, Pennsylvania.

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

QUARTERLY SHARE DATA

Trades of the Corporation’s stock are executed through various brokers who maintain a market in the Corporation’s stock. The Corporation’s stock is listed on the NASDAQ Capital Market with the trading symbol CZNC. As of December 31, 2020, there were 2,147 shareholders of record of the Corporation’s common stock.

The following table sets forth the high and low sales prices of the common stock and dividends declared per quarter during 2020 and 2019.


		2020									2019
								Dividend									Dividend
								Declared									Declared
								per									per
	****	High		****	Low		****	Quarter		****	High		****	Low		****	Quarter
First quarter		$	29.06		$	15.69		$	0.27		$	27.07		$	23.60		$	0.37
Second quarter			22.89			16.20			0.27			29.25			25.02			0.27
Third quarter			20.76			14.92			0.27			27.00			22.52			0.27
Fourth quarter			20.84			16.05			0.27			28.58			24.23			0.27

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. Also, 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. These restrictions are described in Note 18 to the consolidated financial statements. 9

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Effective April 21, 2016, the Corporation’s Board of Directors approved a treasury stock repurchase program. Under this program, the Corporation is authorized to repurchase up to 600,000 shares of the Corporation’s common stock. The Board of Directors’ April 21, 2016 authorization provides that: (1) the treasury stock repurchase program shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. To date, no purchases have been made under this repurchase program.

The following table sets forth a summary of purchases by the Corporation, in the open market, of its equity securities during the fourth quarter 2020:


	****		****			****	Total Number of	****	Maximum
							Shares		Number of
							Purchased		Shares that May
							as Part of		Yet
							Publicly		be Purchased
		Total Number		Average			Announced		Under
		of Shares		Price Paid			Plans		the Plans or
Period		Purchased		per Share			or Programs		Programs
October 1 - 31, 2020		0		$	0		0		600,000
November 1 - 30, 2020		0		$	0		0		600,000
December 1 - 31, 2020		0		$	0		0		600,000

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PERFORMANCE GRAPH

Set forth below is a chart comparing the Corporation’s cumulative return to stockholders against the cumulative return of the Russell 2000 and a Peer Group Index of similar banking organizations selected by the Corporation for the five-year period commencing December 31, 2015 and ended December 31, 2020. The index values are market-weighted dividend-reinvestment numbers, which measure the total return for investing $100.00 five years ago. This meets Securities & Exchange Commission requirements for showing dividend reinvestment share performance over a five-year period and measures the return to an investor for placing $100.00 into a group of bank stocks and reinvesting any and all dividends into the purchase of more of the same stock for which dividends were paid.

<br><br><br><br><br><br>
	Period Ending
Index	12/31/15	12/31/16	12/31/17	12/31/18	12/31/19	12/31/20
Citizens & Northern Corporation	100.00	131.18	125.40	144.14	161.19	119.65
Russell 2000 Index	100.00	121.31	139.08	123.76	155.35	186.36
Peer Group	100.00	135.91	161.32	145.48	175.14	138.85

Peer Group includes all publicly traded SEC filing Commercial Banks & Thrifts within NJ, NY, OH, PA, MD, and WV with assets between $1.1B and $4.6B as of 9/30/2020

Source: S&P Global Market Intelligence

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EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information concerning the Stock Incentive Plan and Independent Directors Stock Incentive Plan, both of which have been approved by the Corporation’s shareholders. The figures shown in the table below are as of December 31, 2020.


		****		Number of
	Number of	Weighted-		Securities
	Securities to be	average		Remaining
	Issued Upon	Exercise		for Future
	Exercise of	Price of		Issuance Under
	Outstanding	Outstanding		Equity Compen-
	Options	Options		sation Plans
Equity compensation plans approved by shareholders	57,111	$	18.92	269,746

Equity compensation plans not approved by shareholders	0		N/A	0

More details related to the Corporation’s equity compensation plans are provided in Notes 1 and 13 to the consolidated financial statements.

ITEM 6. SELECTED FINANCIAL DATA

Not applicable.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

●	the effect of the novel coronavirus (COVID-19) and related events
●	changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates
---	---

●changes in general economic conditions

●legislative or regulatory changes

●downturn in demand for loan, deposit and other financial services in the Corporation’s market area

●increased competition from other banks and non-bank providers of financial services

●	technological changes and increased technology-related costs

●changes in accounting principles, or the application of generally accepted accounting principles

●	failure to achieve merger-related synergies and difficulties in integrating the business and operations of acquired institutions

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

CORONAVIRUS (COVID-19) OUTBREAK

The Corporation’s Pandemic Committee has been very active since March 2020, providing frequent communication with employees and clients by telephone, video conference, email and digital tools, while substantially limiting business travel. Since the pandemic 12

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began, the Committee instituted measures to protect the health of employees and clients, including temporarily operating branch locations on a drive-through only basis and transitioning a significant portion of the Corporation’s employees to remote work. Currently all branches have limited operations to drive-up and appointment-only services. No furloughs or layoffs of employees have been made to date.

Emergency restrictions on the activities of businesses and individuals have resulted in significant adverse economic effects and a significant number of layoffs and furloughs of employees nationwide and in the regions in which the Corporation operates. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects. In 2020, the Corporation increased the allowance for loan losses $785,000 based on an increase in qualitative factors related to potential deterioration in economic conditions. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its economic impact, the total impact on the Corporation’s loan portfolio is not determinable.

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

On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA Act”), which both funds the federal government until September 30, 2021 and broadly addresses additional COVID-19 responses and relief. Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of temporary relief from troubled debt restructurings established under Section 4013 of the CARES Act to the earlier of a) January 1, 2022, or b) the date that is 60 days after the date on which the national COVID-19 emergency terminates.

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

To work with clients impacted by COVID-19, the Corporation is offering short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to merging with the Corporation on July 1, 2020, Covenant Financial Inc. (“Covenant”) had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the current crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Consistent with Section 4013 of the CARES Act and guidance from the joint interagency statement described in the preceding paragraphs, the modified loans have not been reported as past due, nonaccrual or as TDRs at December 31, 2020. Most of the modifications under the program became effective in March or the second quarter 2020 and provided a deferral of interest or principal and interest for 90-to-180 days. Accordingly, most of the loans for which deferrals were granted returned to full payment status prior to December 31, 2020. At December 31, 2020, there were 45 loans in deferral status with a total recorded investment of $37,397,000, including 27 commercial loans with a total recorded investment of $35,002,000. A breakdown of these commercial loans by industry is as follows: 13

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	Deferrals Remaining
	As of December 31, 2020
(Dollars In Thousands)	Number
	of	Recorded
Commercial Loans Modified - Summary	Loans	Investment
Accommodation and food services - hotels	6	$	25,090
Lessors of residential buildings & dwellings	4		3,108
Lessors of nonresidential buildings (except miniwarehouses)	2		2,471
Accommodation and food services - other	3		1,102
Transportation and warehousing	4		952
Real estate rental and leasing - other	2		927
Religious organizations	2		755
Golf courses and country clubs	1		380
Breweries	2		201
Personal care services	1		16
	27	$	35,002

The Corporation began accepting and processing applications for loans under the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) and Treasury Department on April 3, 2020. Covenant also engaged in PPP lending starting in early April 2020. Under the PPP, the Corporation provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage interest, and utilities. PPP loans will be forgiven subject to clients providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.

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

As of December 31, 2020, the recorded investment in PPP loans was $132,269,000, including contractual principal balances of $134,802,000, increased by a market rate adjustment on PPP loans acquired from Covenant of $504,000 and reduced by net deferred origination fees of $3,037,000. Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $1,945,000 for the year ended December 31, 2020.

Capital Strength

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

C&N Bank’s leverage ratio (Tier 1 capital to average assets) at December 31, 2020 of 10.12% is significantly higher than the well-capitalized threshold of 5%, an excess capital amount of $113.9 million. Similarly, the total capital to risk-weighted assets ratio at December 31, 2020 is 15.98%, which exceeds the well-capitalized threshold of 10%, an excess capital amount of $88.7 million.

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

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ACQUISITIONS OF COVENANT FINANCIAL, INC. AND MONUMENT BANCORP, INC

The Corporation’s acquisition of Covenant was completed July 1, 2020. Covenant was the parent company of Covenant Bank, a commercial bank which operated a community bank office in Bucks County, Pennsylvania and another in Chester County, Pennsylvania. Pursuant to the transaction, Covenant merged with and into the Corporation and Covenant Bank merged with and into C&N Bank. Total purchase consideration was $63.3 million, including common stock with a fair value of $41.6 million and cash of $21.7 million. Holders of Covenant common stock prior to the consummation of the merger held approximately 12.9% of the Corporation’s common stock outstanding immediately following the merger.

In connection with the acquisition, effective July 1, 2020, the Corporation recorded goodwill of $24.1 million and a core deposit intangible asset of $3.1 million. Assets acquired included loans valued at $464.2 million, cash and due from banks of $97.8 million, bank-owned life insurance valued at $11.2 million and securities valued at $10.8 million. Liabilities assumed included deposits valued at $481.8 million, borrowings valued at $64.0 million and subordinated debt valued at $10.1 million. The assets purchased and liabilities assumed in the acquisition were recorded at their preliminary estimated fair values at the time of closing and may be adjusted for up to one year subsequent to the acquisition.

The acquisition of Covenant follows the acquisition of Monument Bancorp, Inc. (“Monument”) on April 1, 2019. Monument was the parent company of Monument Bank, with two community banking offices and a lending office in Bucks County, Pennsylvania. Monument merged with and into the Corporation and Monument Bank merged with and into C&N Bank. The total transaction value of the Monument acquisition was $42.7 million.

In 2020, the Corporation incurred pre-tax merger-related expenses related to the Covenant transaction of $7.7 million. Merger-related expenses include severance and similar expenses as well as expenses related to conversion of Covenant’s core customer system data into the Corporation’s core system and legal and other professional expenses. Management expects additional merger-related expenses associated with the Covenant acquisition will be insignificant.

Merger-related expenses associated with the Monument transaction totaled $3.8 million for the year ended December 31, 2019.

EARNINGS OVERVIEW

Net income for the year ended December 31, 2020 was $19,222,000, or $1.30 per diluted share as compared to 2019 net income of $19,504,000 or $1.46 per share. Earnings for the year ended December 31, 2020 were significantly impacted by the Covenant acquisition, including the effects of merger-related expenses described earlier. Earnings for the year ended December 31, 2020 included a pre-tax loss of $1.6 million on prepayment of long-term borrowings (Federal Home Loan Bank of Pittsburgh advances) with outstanding balances totaling $48.0 million. The borrowings included several advances maturing in 2022 through 2024 with a weighted-average interest rate of 1.77% and a weighted-average duration of 2.3 years. Management estimated the use of excess cash to prepay borrowings would generate an improvement in the net interest margin of approximately 0.11% in 2021 over previous internal projections, and that the loss would be recovered through higher future earnings in approximately two years. Excluding the impact of merger-related expenses, loss on prepayment of borrowings and net securities gains, adjusted (non-U.S. GAAP) earnings for 2020 would be $26,514,000 or $1.79 per share as compared to similarly adjusted (non-GAAP) earnings of $22,756,000 or $1.70 per share for 2019.

The following table provides a reconciliation of the Corporation’s 2020 earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to comparative non-U.S. GAAP results excluding merger-related expenses, loss on prepayment of borrowings and net securities gains. Management believes disclosure of 2020 and 2019 earnings results, adjusted to exclude the impact of these items, provides useful information to investors for comparative purposes. 15

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RECONCILIATION OF NET INCOME AND

DILUTED EARNINGS PER SHARE TO NON-U.S.

GAAP MEASURE

(Dollars In Thousands, Except Per Share Data)


	****	Year Ended December 31, 2020								Year Ended December 31, 2019
		Income						Diluted		Income						Diluted
		Before						Earnings		Before						Earnings
		Income		Income				per		Income		Income				per
		Tax		Tax		Net		Common		Tax		Tax		Net		Common
		Provision		Provision		Income		Share		Provision		Provision		Income		Share
Results as Presented Under U.S. GAAP		$	23,212	$	3,990	$	19,222	$	1.30	$	23,409	$	3,905	$	19,504	$	1.46
Add: Merger-Related Expenses (1)			7,708		1,574		6,134				4,099		829		3,270
Add: Loss on Prepayment of Borrowings (1)			1,636		344		1,292				0		0		0
Net Gains on Available-for-Sale Debt Securities (1)			(169)		(35)		(134)				(23)		(5)		(18)
Adjusted Earnings (Non-U.S. GAAP)		$	32,387	$	5,873	$	26,514	$	1.79	$	27,485	$	4,729	$	22,756	$	1.70
(1)	Income tax has been allocated based on a marginal income tax rate of 21%. The effect on the income tax provision of merger-related expenses is adjusted for the estimated nondeductible portion of the expenses.
---	---

In 2020, interest income on loans acquired from Covenant, partially offset by interest expense on deposits, borrowings and subordinated debt assumed, contributed to growth in net interest income, while costs associated with the expansion contributed to an increase in noninterest expenses. Results for 2019 were significantly impacted by the Monument acquisition.

Other significant variances were as follows:

●	Net interest income was up $13,077,000 (24.0%) in 2020 over 2019, reflecting the benefits of growth, particularly from the mid-year Covenant acquisition as well as the impact of former Monument activity for the full year as compared to the final nine months of 2019. In 2020, annual average outstanding loans totaled $1.445 billion, an increase of $387.5 million over 2019, and annual average total deposits of $1.586 billion were up $372.7 million. The net interest margin was 3.69% for 2020, down from 3.86% in 2019. The average yield on earning assets in 2020 was down 0.37% from 2019, while the average rate on interest-bearing liabilities was down 0.30% between periods. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $3,272,000 for 2020 as compared to a net positive impact of $558,000 in 2019.
●	The provision for loan losses of $3,913,000 for 2020 was higher than the 2019 provision by $3,064,000. The provision included the impact of a charge-off of $2,219,000 on a commercial loan of $3,500,000. In total, the 2020 provision included a net charge of $2,238,000 related to specific loans (net decrease in specific allowances on loans of $126,000 and net charge-offs of $2,364,000) and a $1,675,000 increase in the collectively determined portion of the allowance for loan losses. The increase in the collectively determined portion of the allowance includes the impact of an increase in the net charge-off experience factor for commercial loans and an increase in qualitative factors. In comparison, the 2019 provision of $849,000 included a net reduction in expense of $232,000 related to specific loans (net decrease in specific allowances on loans of $554,000 and net charge-offs of $322,000), a net $1,193,000 charge attributable to loan growth and a net reduction in expense of $112,000 related to changes in historical loss and qualitative factors and the unallocated portion of the allowance.
---	---
●	Noninterest income increased $5,060,000, or 26.2% in 2020 over 2019. Significant variances include the following:
---	---
Ø	Net gains from sales of loans totaled $5,403,000 in 2020, an increase of $4,479,000 over 2019, reflecting an increase in volume of mortgage loans sold, resulting mainly from the impact of lower interest rates on the housing market and refinancing activity. Total proceeds from sales of residential mortgage loans amounted to $163.1 million in 2020 as compared to $30.1 million in 2019.
---	---

Other noninterest income totaled $3,010,000, an increase of $1,135,000 over 2019. Income from realization of tax credits of $504,000 was $349,000 higher in 2020 as compared to 2019. In 2020, income from a life insurance arrangement in which benefits were split between C&N and heirs of a former employee was $279,000. Dividend income from Federal Home Loan Bank stock of $654,000 was up $167,000, reflecting a higher average balance of stock held due to increased borrowings and

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credit card interchange income totaled $289,000 in 2020, an increase of $76,000 over 2019. Fee income from credit enhancement provided on residential mortgage loans sold totaled $227,000 in 2020, an increase of $137,000 over 2019.

Ø	Service charges on deposit accounts were down $1,127,000, or 21.0% in 2020 over 2019 as the volume of consumer and business overdraft activity fell.

●	Noninterest expense, excluding merger-related expenses and loss on prepayment of borrowings, increased $10,171,000 in 2020 over 2019. Significant variances included the following:
Ø	Salaries and wages and benefits expense increased $6,581,000, reflecting: inclusion of Covenant for six months in 2020 and the former Monument operations for all of 2020 as compared to nine months in 2019; an increase in incentive compensation mainly attributable to increases in earnings performance as compared to peers and an increase in residential mortgage origination volume; annual merit-based salary adjustments; an increase in overtime pay related mainly to mortgage lending activity; a reduction in expense due to a higher proportion of payroll costs capitalized (added to the carrying value of loans) due to the high volume of PPP loans originated; and an increase in health care expense due to higher claims on the Corporation’s partially self-insured plan.
---	---
Ø	Data processing expenses increased $1,050,000, including the impact of increases in software licensing and maintenance costs associated with core banking, lending, trust and other functions as well as professional fees associated with analysis of the Corporation’s online delivery channel.
---	---
Ø	Other noninterest expense increased $761,000. Within this category, significant variances included the following:
---	---
●	Other operational losses increased $554,000, including estimated accruals of $340,000 for penalties related to certain information returns and an estimated accrual of $200,000 related to a state tax reporting matter.
---	---
●	Donations expense increased $460,000, mainly due to an increase in donations associated with the Pennsylvania Educational Improvement Tax Credit program.
---	---
●	Amortization of core deposit intangibles increased $318,000, mainly resulting from the Covenant acquisition.
---	---
●	Expenses related to other real estate properties decreased $340,000. The reduction resulted from the completion in the first quarter 2020 of a complex commercial workout situation for which a significant amount of expenses were incurred in 2019.
---	---
●	Consulting expenses related to the overdraft privilege program decreased $201,000 consistent with the decrease in overdraft fees collected.
---	---
Ø	Professional fee expense increased $623,000, including costs associated with a change in certain trust administrative activities to handle them on an outsourced basis.
---	---
Ø	Occupancy expense increased $381,000, primarily reflecting an increase due to the Covenant acquisition.
---	---
Ø	Pennsylvania shares tax expense increased $309,000 reflecting the impact of an increase in C&N Bank’s stockholder’s equity.
---	---
●	The income tax provision was $3,990,000 for the year ended December 31, 2020, up from $3,905,000 for the year ended December 31, 2019. Pre-tax income was $197,000 lower for the year ended December 31, 2020 as compared to the year ended December 31, 2019. The effective tax rate was 17.2% for the year ended December 31, 2020, slightly higher than the 16.7% effective tax rate for the year ended December 31, 2019.
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More detailed information concerning the Corporation’s earnings results are provided in other sections of Management’s Discussion and Analysis. 17

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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. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses, and additional discussion of the allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

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

Goodwill – Goodwill is tested at least annually at December 31 for impairment, or more often if events or circumstances indicate there may be impairment. In 2020, the COVID-19 pandemic led to government-imposed emergency restrictions that have had significant adverse effects on macroeconomic conditions. The ultimate effect of COVID-19 on the local or broader economy is not known nor is the ultimate length of the restrictions described and any accompanying effects.

In testing goodwill for impairment at December 31, 2020, the Corporation by-passed performing a qualitative assessment and performed a quantitative assessment based on comparison of the Corporation’s market capitalization to its stockholders’ equity, resulting in the determination that the fair value of its reporting unit, its community banking operation, exceeded its carrying amount. Accordingly, there was no goodwill impairment at December 31, 2020.

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

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 I, II and III include information regarding the Corporation’s net interest income in 2020 and 2019. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the tables.

Fully taxable equivalent net interest income was $68,545,000 in 2020, $13,013,000 (23.4%) higher than in 2019. Interest income was $12,325,000 higher in 2020 as compared to 2019; interest expense was lower by $688,000 in comparing the same periods. As presented in Table II, the Net Interest Margin was 3.69% in 2020 as compared to 3.86% in 2019, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) decreased to 3.49% in 2020 from 3.56% in 2019. 18

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Income from purchase accounting-related adjustments in 2020 had a positive effect on net interest income of $3,272,000, including an increase in income on loans of $1,888,000 and reductions in interest expense on time deposits of $928,000 and on borrowed funds of $456,000. The positive impact to the net interest margin from purchase accounting adjustments was 0.18% in 2020 and 0.04% in 2019.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $78,140,000 in 2020, an increase of 18.7% from 2019. Interest and fees on loans receivable increased $13,881,000, or 24.9%, to $69,606,000 in 2020 from $55,725,000 in 2019. Table III shows the increase in interest on loans includes $17,713,000 attributable to an increase in volume and a decrease of $3,832,000 related to a decrease in average yield. The average balance of loans receivable increased $387,539,000 (36.6%) to $1,445,098,000 in 2020 from $1,057,559,000 in 2019. The increase in average balance reflects the Corporation’s purchase of Covenant on July 1, 2020. The average balance of loans outstanding in 2020 attributable to the former Covenant operations totaled $234,062,000, including PPP loans of $32,279,000. Excluding Covenant, average loans outstanding increased $153,477,000, including PPP loans of $66,187,000. The increase in average loans outstanding includes the effect of loans acquired from Monument, effective April 1, 2019, as well as subsequent loan growth over the last three quarters of 2019. The average yield on loans in 2020 was 4.82% compared to 5.27% in 2019.

Interest income on available-for-sale debt securities totaled $8,203,000 in 2020, a reduction of $1,328,000 from the total for 2019. As indicated in Table II, average available-for-sale debt securities (at amortized cost) totaled $328,445,000 in 2020, a decrease of $28,839,000 (8.1%) from 2019. The average yield on available-for-sale debt securities decreased to 2.50% in 2020 from 2.67% in 2019.

Interest income from interest-bearing deposits in banks totaled $251,000 in 2020, a decrease of $263,000 from the total for 2019. The most significant categories of assets within this category include interest-bearing balances held with the Federal Reserve and investments in certificates of deposit issued by other banks. The average balance increased $58,876,000, partly due to cash received in the Covenant transaction that was not fully deployed. The average yield on interest-bearing deposits with banks fell to 0.31% in 2020 from 2.37% in 2019, which is a result of the decreases to the rates paid on balances held at the Federal Reserve.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense decreased $688,000, or 6.7%, to $9,595,000 in 2020 from $10,283,000 in 2019. Table II shows that the overall cost of funds on interest-bearing liabilities decreased to 0.72% in 2020 from 1.02% in 2019.

Total average deposit balances (interest-bearing and noninterest-bearing) increased $372,722,000 to $1,586,409,000 in 2020 from $1,213,687,000 in 2019. The average balance of deposits from the former Covenant operations totaled $225,541,000. Excluding Covenant average deposits for 2020, deposits increased $147,181,000 over the comparative amount for 2019, reflecting the inclusion of deposits assumed from Monument for all of 2020 as compared to nine months in 2019 as well as increases in deposits related to PPP and other government stimulus programs.

Interest expense on deposits decreased $959,000 in 2020 over 2019. The average rate on interest-bearing deposits decreased to 0.60% in 2020 from 0.89% in 2019, consistent with the reduction in market rates in 2020.

Interest expense on borrowed funds increased $271,000 in 2020 as compared to 2019. Total average borrowed funds increased $46,553,000 to $129,265,000 in 2020 from $82,712,000 in 2019. The increase in average borrowed funds includes the impact of borrowings originated to fund loan growth in the last three quarters of 2019 and borrowings assumed from Covenant. The average rate on total borrowed funds was 1.83% in 2020 compared to 2.53% in 2019. The decrease in the average rate on borrowed funds in 2020 reflects the impact of a reduction in market rates. 19

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TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE


		Year Ended
		December 31,				Increase/
(In Thousands)		2020		2019		(Decrease)
INTEREST INCOME
Interest-bearing due from banks		$	251	$	514	$	(263)
Available-for-sale debt securities:
Taxable			5,534		7,008		(1,474)
Tax-exempt			2,669		2,523		146
Total available-for-sale debt securities			8,203		9,531		(1,328)
Loans receivable:
Taxable			64,460		53,086		11,374
Paycheck Protection Program (Taxable)			2,924		0		2,924
Tax-exempt			2,222		2,639		(417)
Total loans receivable			69,606		55,725		13,881
Other earning assets			80		45		35
Total Interest Income			78,140		65,815		12,325

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking			948		1,155		(207)
Money market			1,172		962		210
Savings			230		246		(16)
Time deposits			4,881		5,827		(946)
Total interest-bearing deposits			7,231		8,190		(959)
Borrowed funds:
Short-term			367		733		(366)
Long-term			1,291		1,013		278
Subordinated debt			706		347		359
Total borrowed funds			2,364		2,093		271
Total Interest Expense			9,595		10,283		(688)

Net Interest Income		$	68,545	$	55,532	$	13,013
(1)	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%.
---	---
(2)	Fees on loans are included with interest on loans and amounted to $4,134,000 in 2020 and $919,000 in 2019.
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TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES


(Dollars In Thousands)	Year					Year
	Ended		Rate of			Ended		Rate of
	12/31/2020		Return/			12/31/2019		Return/
	Average		Cost of			Average		Cost of
	Balance		Funds%			Balance		Funds%
EARNING ASSETS
Interest-bearing due from banks	$	80,587		0.31	%	$	21,711		2.37	%
Available-for-sale securities,
at amortized cost:
Taxable		238,407		2.32	%		284,072		2.47	%
Tax-exempt		90,038		2.96	%		73,212		3.45	%
Total available-for-sale debt securities		328,445		2.50	%		357,284		2.67	%
Loans receivable:
Taxable		1,285,383		5.01	%		988,560		5.37	%
Paycheck Protection Program (Taxable)		98,466		2.97	%		0		0.00	%
Tax-exempt		61,249		3.63	%		68,999		3.82	%
Total loans receivable		1,445,098		4.82	%		1,057,559		5.27	%
Other earning assets		2,357		3.39	%		1,439		3.13	%
Total Earning Assets		1,856,487		4.21	%		1,437,993		4.58	%
Cash		25,439					19,906
Unrealized gain/loss on securities		12,487					1,347
Allowance for loan losses		(11,018)					(8,876)
Bank-owned life insurance		24,415					18,543
Bank premises and equipment		19,826					15,914
Intangible assets		43,330					25,531
Other assets		38,859					30,111
Total Assets	$	2,009,825				$	1,540,469

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	$	310,782		0.31	%	$	217,910		0.53	%
Money market		298,736		0.39	%		194,849		0.49	%
Savings		189,316		0.12	%		167,677		0.15	%
Time deposits		397,974		1.23	%		344,446		1.69	%
Total interest-bearing deposits		1,196,808		0.60	%		924,882		0.89	%
Borrowed funds:
Short-term		34,212		1.07	%		33,521		2.19	%
Long-term		83,500		1.55	%		43,917		2.31	%
Subordinated debt		11,553		6.11	%		5,274		6.58	%
Total borrowed funds		129,265		1.83	%		82,712		2.53	%
Total Interest-bearing Liabilities.		1,326,073		0.72	%		1,007,594		1.02	%
Demand deposits		389,601					288,805
Other liabilities		20,800					14,624
Total Liabilities		1,736,474					1,311,023
Stockholders' equity, excluding accumulated
other comprehensive income/loss		263,253					228,103
Accumulated other comprehensive income/loss		10,098					1,343
Total Stockholders' Equity		273,351					229,446
Total Liabilities and Stockholders' Equity	$	2,009,825				$	1,540,469
Interest Rate Spread				3.49	%				3.56	%
Net Interest Income/Earning Assets				3.69	%				3.86	%

Total Deposits (Interest-bearing
and Demand)	$	1,586,409				$	1,213,687
(1)	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.
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TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES


(In Thousands)		Year Ended 12/31/2020 vs. 12/31/2019
		Change in		Change in		Total
		Volume		Rate		Change
EARNING ASSETS
Interest-bearing due from banks		$	477	$	(740)	$	(263)
Available-for-sale debt securities:
Taxable			(1,078)		(396)		(1,474)
Tax-exempt			530		(384)		146
Total available-for-sale debt securities			(548)		(780)		(1,328)
Loans receivable:
Taxable			15,075		(3,701)		11,374
Paycheck Protection Program (Taxable)			2,924		0		2,924
Tax-exempt			(286)		(131)		(417)
Total loans receivable			17,713		(3,832)		13,881
Other earning assets			31		4		35
Total Interest Income			17,673		(5,348)		12,325

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking			387		(594)		(207)
Money market			437		(227)		210
Savings			29		(45)		(16)
Time deposits			816		(1,762)		(946)
Total interest-bearing deposits			1,669		(2,628)		(959)
Borrowed funds:
Short-term			15		(381)		(366)
Long-term			693		(415)		278
Subordinated debt			386		(27)		359
Total borrowed funds			1,094		(823)		271
Total Interest Expense			2,763		(3,451)		(688)

Net Interest Income		$	14,910	$	(1,897)	$	13,013
(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 amounts of the change in each.
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NONINTEREST INCOME

TABLE IV - COMPARISON OF NONINTEREST INCOME


(Dollars in Thousands)	Years Ended
	December 31,					$	%
	2020		2019			Change	Change
Trust and financial management revenue	$	6,321	$	6,106	$	215	3.5	%
Brokerage revenue		1,343		1,266		77	6.1	%
Insurance commissions, fees and premiums		184		167		17	10.2	%
Service charges on deposit accounts		4,231		5,358		(1,127)	(21.0)	%
Service charges and fees		304		332		(28)	(8.4)	%
Interchange revenue from debit card transactions		3,094		2,754		340	12.3	%
Net gains from sales of loans		5,403		924		4,479	484.7	%
Loan servicing fees, net		(61)		100		(161)	(161.0)	%
Increase in cash surrender value of life insurance		515		402		113	28.1	%
Other noninterest income		3,010		1,875		1,135	60.5	%
Total noninterest income, excluding realized gains on securities, net		24,344		19,284		5,060	26.2	%
Realized gains on available-for-sale debt securities, net		169		23		146	634.8	%
Total noninterest income	$	24,513	$	19,307	$	5,206	27.0	%

Total noninterest income, excluding realized gains and losses on securities, increased $5,060,000 (26.2%) in 2020 compared to 2019. Changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

NONINTEREST EXPENSE

TABLE V - COMPARISON OF NONINTEREST EXPENSE


(Dollars in Thousands)	Year Ended
	December 31,					%
	2020		2019		Change	Change
Salaries and wages	$	25,599	$	20,644		24.0	%
Pensions and other employee benefits		7,463		5,837		27.9	%
Occupancy expense, net		3,010		2,629		14.5	%
Furniture and equipment expense		1,451		1,289		12.6	%
Data processing expenses		4,453		3,403		30.9	%
Automated teller machine and interchange expense		1,231		1,103		11.6	%
Pennsylvania shares tax		1,689		1,380		22.4	%
Professional fees		1,692		1,069		58.3	%
Telecommunications		863		744		16.0	%
Directors' fees		730		673		8.5	%
Other noninterest expense		7,428		6,667		11.4	%
Total noninterest expense, excluding merger-related expenses and loss on prepayment of borrowings		55,609		45,438		22.4	%
Merger-related expenses		7,708		4,099		88.0	%
Loss on prepayment of borrowings		1,636		0
Total noninterest expense	$	64,953	$	49,537		31.1	%

All values are in US Dollars.

Total noninterest expenses increased $15,416,000 (31.1%) in 2020 as compared to 2019. Total noninterest expenses excluding merger-related expenses and loss on prepayment of borrowings increased $10,171,000 (22.4%) in 2020 as compared to 2019. Merger-related expenses are discussed in the Acquisitions of Covenant Financial Inc. and Monument Bancorp, Inc. section of Management’s Discussion 23

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and Analysis. Loss on prepayment of borrowings and other changes of significance are discussed in the Earnings Overview section of Management’s Discussion and Analysis.

INCOME TAXES

The effective income tax rate was 17.2% of pre-tax income in 2020, up from 16.7% in 2019. The Corporation’s effective tax rates differed from the statutory rate of 21% mainly because of the effects of tax-exempt interest income. The higher effective income tax rate in 2020 as compared to 2019 resulted mainly from a reduction in tax-exempt interest income and an increase in nondeductible penalties.

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. At December 31, 2020, the net deferred tax asset was $2,705,000, up from the balance at December 31, 2019 of $2,618,000. The most significant changes in temporary difference components included a net increase of $2,170,000 in the deferred tax liability resulting from appreciation in available-for-sale debt securities attributable to lower interest rates as well as Covenant acquisition-related adjustments to loans, a net operating loss carryforward, core deposit intangibles, bank premises and equipment and operating leases.

The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. Further, the value of the benefit from realization of deferred tax assets would be impacted if income tax rates were changed from currently enacted levels.

Management believes the recorded net deferred tax asset at December 31, 2020 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

Additional information related to income taxes is presented in Note 14 to the consolidated financial statements.

SECURITIES

The objectives of the Corporation’s available-for-sale debt securities (investment) portfolio are to maintain high credit quality, achieve good portfolio balance, support liquidity needs, maximize return on earning assets within reasonable risk parameters, provide an adequate amount of pledgeable securities, support local communities by purchasing securities they issue for public projects and programs, provide a means to hedge the Corporation’s interest rate risk exposure, and minimize taxes. Management continually evaluates the size and mix of securities held in the available-for-sale debt securities portfolio while considering these objectives.

Table VI shows the composition of the available-for-sale debt securities portfolio at December 31, 2020 and 2019. The amortized cost of available-for-sale debt securities was $334,552,000 at December 31, 2020 and $342,278,000 at December 31, 2019. Within the securities portfolio, mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies decreased to 40.5% of the amortized cost basis of the portfolio at December 31, 2020 from 64.8% at December 31, 2019. Investments in tax-exempt and taxable municipal bonds increased to 48.3% of the portfolio at December 31, 2020 from 30.5% at December 31, 2019. These changes in portfolio mix were based on changes in liquidity and interest rate risk management needs and current market yields for various categories of securities.

As reflected in Table VI, the fair value of available-for-sale securities as of December 31, 2020 was $14,780,000, or 4.4%, greater than the total amortized cost basis. In comparison, the aggregate unrealized gain position at December 31, 2019 was $4,445,000, or 1.3% of the total amortized cost basis. The unrealized appreciation in the portfolio in 2020 resulted mainly from a decrease in interest rates.

Management has reviewed the Corporation’s holdings as of December 31, 2020 and concluded that unrealized losses on all of the securities in an unrealized loss position are considered temporary. Note 7 to the consolidated financial statements provides more detail concerning the Corporation’s processes for evaluating securities for other-than-temporary impairment. 24

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TABLE VI - INVESTMENT SECURITIES


		2020						2019
		Amortized			Fair			Amortized			Fair
(In Thousands)	****	Cost		****	Value		****	Cost		****	Value
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury		$	12,184		$	12,182		$	0		$	0
Obligations of U.S. Government agencies			25,349			26,344			16,380			17,000
Obligations of states and political subdivisions:
Tax-exempt			116,427			122,401			68,787			70,760
Taxable			45,230			47,452			35,446			36,303
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			36,853			38,176			58,875			59,210
Residential collateralized mortgage obligations			56,048			57,467			115,025			114,723
Commercial mortgage-backed securities			42,461			45,310			47,765			48,727
Total Available-for-Sale Debt Securities		$	334,552		$	349,332		$	342,278		$	346,723

The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2020. Yields on tax-exempt securities are presented on a fully taxable-equivalent basis. For callable securities, yields on securities purchased at a discount are based on yield-to-maturity, while yields on securities purchased at a premium are based on yield to the first call date. Yields on mortgage-backed securities are estimated and include the effects of prepayment assumptions. 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.


	****	Within		****		****	One-		****		****	Five-		****		****	After		****		****			****		****
		One					Five					Ten					Ten									****
(Dollars In Thousands)		Year			Yield		Years			Yield		Years			Yield		Years			Yield		Total			Yield	****
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury		$	6,027		0.11	%	$	6,157		0.12	%	$	0		0.00	%	$	0		0.00	%	$	12,184		0.11	%
Obligations of U.S. Government agencies			0		0.00	%		4,999		0.35	%		12,509		1.54	%		7,841		3.42	%		25,349		1.89	%
Obligations of states and political subdivisions:
Tax-exempt			3,408		3.71	%		20,160		2.87	%		28,037		2.82	%		64,822		2.64	%		116,427		2.76	%
Taxable			3,974		2.63	%		14,856		2.83	%		6,989		2.86	%		19,411		2.64	%		45,230		2.73	%
Sub-total		$	13,409		1.78	%	$	46,172		2.23	%	$	47,535		2.50	%	$	92,074		2.73	%	$	199,190		2.48	%
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities																							36,853		1.93	%
Residential collateralized mortgage obligations																							56,048		1.73	%
Commercial mortgage-backed securities																							42,461		2.45	%
Total																						$	334,552		2.29	%

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. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase due to increased refinance activity and other factors. In the table above, the entire balances and weighted-average rates for mortgage-backed securities and collateralized mortgage obligations are shown in one period.

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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 December 31, 2020, and management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in 2021.

Table VII shows the composition of the loan portfolio as of the end of the years 2016 through 2020. From December 31, 2016 through December 31, 2018, total loans outstanding increased $75.7 million (10.1%) and the overall mix by segment remained fairly constant, with residential mortgage loans of approximately 55% to 56% of the portfolio at each year-end, and commercial loans of 42% to 43% of the portfolio. At December 31, 2019, gross loans outstanding totaled $1,182,222,000, an increase of $354.7 million (42.9%) from December 31, 2018. At December 31, 2020, gross loans outstanding totaled $1,644,209,000, an increase of $462.0 million (39.1%) from December 31, 2019. A significant portion of the Corporation’s loan growth in 2019 was attributable to the Monument acquisition, while, similarly, growth in 2020 is attributable to the Covenant acquisition as well as due to new loans originated in the southeastern and southcentral Pennsylvania markets. At December 31, 2020, commercial loans represented approximately 61% of the portfolio while residential mortgage loans totaled 38% of the portfolio.

While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial,” “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-K. Total participation loans outstanding amounted to $65,741,000 at December 31, 2020, up slightly from $64,633,000 at December 31, 2019. At December 31, 2020, the balance of participation loans outstanding includes a total of $40,009,000 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 $8,437,000 at December 31, 2020 and $9,947,000 at December 31, 2019.

Table VIII presents loan maturity data as of December 31, 2020. Fixed-rate loans are shown in Table VIII based on their contractually scheduled principal repayments, and variable-rate loans are shown based on the date of the next change in rate. Table VIII shows that fixed-rate loans are approximately 43% of the loan portfolio and approximately 34% of the portfolio are variable-rate loans that re-price after more than one year. Variable-rate loans re-pricing after more than one year include residential and commercial real estate secured loans. The Corporation’s substantial investment in long-term, fixed-rate loans and variable-rate loans with extended periods until re-pricing is one of the concerns management attempts to address through interest rate risk management practices.

Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. In 2020, the Corporation’s activity under the MPF Direct Program was minimal.

For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it 26

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is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At December 31, 2020, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,714,000, and the corresponding total outstanding balance of repurchased loans at December 31, 2019 was $1,770,000.

At December 31, 2020, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled $278,857,000, including loans sold through the MPF Xtra program of $149,463,000 and loans sold through the Original program of $129,394,000. At December 31, 2019, outstanding balances of loans sold and serviced through the two programs totaled $178,446,000, including loans sold through the MPF Xtra program of $104,707,000 and loans sold through the Original Program of $73,739,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of December 31, 2020 and December 31, 2019.

For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At December 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,766,000, and the Corporation has recorded a related allowance for credit losses in the amount of $500,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2019, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,618,000, and the related allowance for credit losses was $333,000. Income related to providing the credit enhancement (included in other noninterest income in the consolidated statements of income) totaled $227,000 in 2020 and $90,000 in 2019. A provision for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $167,000 was recorded in 2020 with no corresponding charge in 2019. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Covenant had also been a participating SBA lender. Pursuant to the Covenant acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the loans originated through the various SBA loan programs acquired from Covenant as of July 1, 2020 and recorded an allowance for SBA claim adjustments of $800,000. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on loans originated by Covenant was $17,041,000 at December 31, 2020. In the fourth quarter 2020, the Corporation recorded a reduction in other noninterest expense of $70,000 resulting from better collection experience on certain claims than had been estimated in determining the allowance at July 1, 2020. At December 31, 2020, the allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) had a balance of $730,000. 27

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TABLE VII – Five-year Summary of Loans by Type


(Dollars In Thousands)	****	2020		****	%	2019		****	%	2018		****	%	2017		****	%	2016		****	%
Residential mortgage:
Residential mortgage loans - first liens		$	532,947		32.4	$	510,641		43.2	$	372,339		45.0	$	359,987		44.1	$	334,102		44.4
Residential mortgage loans - junior liens			27,311		1.7		27,503		2.3		25,450		3.1		25,325		3.1		23,706		3.2
Home equity lines of credit			39,301		2.4		33,638		2.8		34,319		4.1		35,758		4.4		38,057		5.1
1-4 Family residential construction			20,613		1.3		14,798		1.3		24,698		3.0		26,216		3.2		24,908		3.3
Total residential mortgage			620,172		37.8		586,580		49.6		456,806		55.2		447,286		54.8		420,773		56.0
Commercial:
Commercial loans secured by real estate			531,810		32.3		301,227		25.5		162,611		19.6		159,266		19.5		150,468		20.0
Commercial and industrial			159,577		9.7		126,374		10.7		91,856		11.1		88,276		10.8		83,854		11.2
Small business administration - paycheck protection program			132,269		8.0		0		0.0		0		0.0		0		0.0		0		0.0
Political subdivisions			53,221		3.2		53,570		4.5		53,263		6.4		59,287		7.3		38,068		5.1
Commercial construction and land			42,874		2.6		33,555		2.8		11,962		1.4		14,527		1.8		14,287		1.9
Loans secured by farmland			11,736		0.7		12,251		1.0		7,146		0.9		7,255		0.9		7,294		1.0
Multi-family (5 or more) residential			55,811		3.4		31,070		2.6		7,180		0.9		7,713		0.9		7,896		1.1
Agricultural loans			3,164		0.2		4,319		0.4		5,659		0.7		6,178		0.8		3,998		0.5
Other commercial loans			17,289		1.1		16,535		1.4		13,950		1.7		10,986		1.3		11,475		1.5
Total commercial			1,007,751		61.2		578,901		49.0		353,627		42.7		353,488		43.3		317,340		42.2
Consumer			16,286		1.0		16,741		1.4		17,130		2.1		14,939		1.8		13,722		1.8
Total			1,644,209		100.0		1,182,222		100.0		827,563		100.0		815,713		100.0		751,835		100.0
Less: allowance for loan losses			(11,385)				(9,836)				(9,309)				(8,856)				(8,473)
Loans, net		$	1,632,824			$	1,172,386			$	818,254			$	806,857			$	743,362

TABLE VIII – LOAN MATURITY DISTRIBUTION


		As of December 31, 2020

		Fixed-Rate Loans													Variable- or Adjustable-Rate Loans
		1 Year			1-5			>5							1 Year			1-5			>5
(In Thousands)	****	or Less		****	Years		****	Years		****	Total		****	****	or Less		****	Years		****	Years		****	Total
Real Estate		$	29,159		$	192,348		$	231,459		$	452,966			$	288,368		$	343,930		$	177,140		$	809,438
Commercial			23,149			173,492			35,275			231,916				93,529			30,579			9,495			133,603
Consumer			3,585			9,494			2,988			16,067				219			0			0			219
Total		$	55,893		$	375,334		$	269,722		$	700,949			$	382,116		$	374,509		$	186,635		$	943,260

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. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses.

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

The allowance for loan losses was $11,385,000 at December 31, 2020, up from $9,836,000 at December 31, 2019. Table X shows that the collectively determined portion of the allowance increased $1,675,000 across all loan classes, including an increase in the collectively determined portion of the allowance related to commercial loans of $1,632,000. This increase was primarily due to increases in qualitative factors related to economic conditions in 2020 and an increase in the historical loss factor on commercial loans.

Table X shows total specific allowances on impaired loans decreased $126,000 to $925,000 at December 31, 2020 from $1,051,000 at December 31, 2019. This net decrease included the impact of the elimination of a specific allowance of $678,000 at December 31, 2019 on a commercial loan that was repaid for less than the full principal balance resulting in a charge-off of $107,000 in the second quarter of 2020 as well as the elimination of $125,000 in specific allowances on loans no longer considered impaired at December 31, 2020. 28

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This reduction in specific allowances on impaired loans was partially offset by allowances totaling $701,000 at December 31, 2020 related to three commercial loan relationships with an aggregate recorded investment of $7,312,000 that management identified as impaired in the second quarter 2020 and that were still considered impaired at December 31, 2020.

Loans acquired from Covenant that were identified as having a deterioration in credit quality (purchased credit impaired, or PCI), were valued at $6,648,000 at July 1, 2020 and $6,537,000 at December 31, 2020. The remainder of the portfolio was deemed to be the performing component of the portfolio. The calculation of the fair value of performing loans included a discount for credit losses of $7,219,000 reduced by accretion of $1,857,000 in the third and fourth quarters of 2020 to $5,362,000 at December 31, 2020. The discount recorded in the acquisition represented an estimate of the present value of credit losses based on market expectations at the date of acquisition.

Loans acquired from Monument that were identified as having a deterioration in credit quality (PCI) were valued at $441,000 at April 1, 2019 and $304,000 at December 31, 2020. The remainder of the portfolio was deemed to be the performing component of the portfolio. Performing loans acquired from Monument are presented net of a discount for credit losses of $617,000 at December 31, 2020 and $1,216,000 at December 31, 2019. This discount reflects an estimate of the present value of credit losses based on market expectations at the date of acquisition of $1,914,000, subsequently reduced as accretion has been recognized based on estimated and actual principal pay-downs.

Table XI shows the allowance for loan losses totaled 0.69% of gross loans outstanding at December 31, 2020, down from 0.83% at December 31, 2019 and down from levels in excess of 1.00% from 2016 to 2018. Table XI also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.05% at December 31, 2020, in line with ratios from the previous years.

The provision for loan losses by segment for 2020 and 2019 is as follows:


(In Thousands)	2020		2019
Residential mortgage	$	27	$	374
Commercial		3,847		197
Consumer		39		192
Unallocated		0		86
Total	$	3,913	$	849

The provision for loan losses is further detailed as follows:

Residential mortgage segment


(In Thousands)	2020		2019
(Decrease) increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	(58)	$	238
(Decrease) increase in collectively determined portion of the allowance attributable to:
Loan (reduction) growth		(240)		171
Changes in historical loss experience factors		(88)		47
Changes in qualitative factors		413		(82)
Total provision for loan losses - Residential mortgage segment	$	27	$	374

Commercial segment


(In Thousands)	2020		2019
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	2,215	$	(614)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Loan growth		432		1,025
Changes in historical loss experience factors		831		(371)
Changes in qualitative factors		369		157
Total provision for loan losses - Commercial segment	$	3,847	$	197

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Consumer segment


(In Thousands)	2020		2019
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	81	$	144
(Decrease) increase in collectively determined portion of the allowance attributable to:
Loan reduction		(30)		(3)
Changes in historical loss experience factors		(15)		31
Changes in qualitative factors		3		20
Total provision for loan losses - Consumer segment	$	39	$	192

Total – All segments


(In Thousands)	2020		2019
Increase (decrease) increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	2,238	$	(232)
Increase (decrease) in collectively determined portion of the allowance attributable to:
Loan growth		162		1,193
Changes in historical loss experience factors		728		(293)
Changes in qualitative factors		785		95
Sub-total		3,913		763
Unallocated		0		86
Total provision for loan losses - All segments	$	3,913	$	849

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 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 2020, net charge-offs were $2,364,000, including charge-offs of $2,465,000 and recoveries of $101,000. The Corporation’s overall net charge-off experience in 2020 was elevated compared to results over the past several years due to the impact of a charge-off of $2,219,000 on a commercial loan with an outstanding balance of $3,500,000 in the third quarter 2020. Table XII shows the average rate of net charge-offs as a percentage of loans was 0.16% in 2020, with an annual average over the five-year period ended December 31, 2020 of 0.08%, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018.

Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). Total nonperforming loans as a percentage of outstanding loans was 1.42% at December 31, 2020, up from 0.88% at December 31, 2019, and nonperforming assets as a percentage of total assets was 1.10% at December 31, 2020, up from 0.80% at December 31, 2019. Table XI presents data at the end of each of the years ended December 31, 2016 through 2020. Table XI shows that total nonperforming loans as a percentage of loans of 1.42% at December 31, 2020, though up from December 31, 2019, was lower than the corresponding year-end ratio from 2016 through 2018. Similarly, the December 31, 2020 ratio of total nonperforming assets as a percentage of assets of 1.10% was lower than the corresponding ratio from 2016 through 2018.

Total impaired loans of $17,818,000 at December 31, 2020 are up $12,332,000 from the corresponding amount at December 31, 2019 of $5,486,000. The increase in impaired loans includes the net impact of classification as impaired of the commercial loans referred to above in the discussion of specific allowances and the loans purchased with credit impairment from Covenant. Table XI shows that the 30

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total balance of impaired loans at December 31, 2020 was higher than the year-end amounts over the period 2016-2019, which ranged from a low of $9,511,000 in 2017 to the high of $17,818,000 at December 31, 2020.

Total nonperforming assets of $24,729,000 at December 31, 2020 are $11,418,000 higher than the corresponding amount at December 31, 2019, summarized as follows:

●	Total nonaccrual loans at December 31, 2020 of $21,416,000 was $12,198,000 higher than the corresponding December 31, 2019 total of $9,218,000. Similar to the discussions above related to impaired loans and nonperforming assets, this increase reflects the impact of net changes in classification as impaired of the commercial loans subject to specific allowances and the loans purchased from Covenant with credit impairment described above.
●	Total loans past due 90 days or more and still accruing interest amounted to $1,975,000 at December 31, 2020, an increase of $768,000 from the total at December 31, 2019. The increase includes $631,000 from loans secured by commercial real estate and $121,000 increase on residential. Management has evaluated the loans within this category and determined they are well secured and in the process of collection at December 31, 2020.
---	---
●	Foreclosed assets held for sale consisted of real estate, and totaled $1,338,000 at December 31, 2020, a decrease of $1,548,000 from $2,886,000 at December 31, 2019. Within this decrease, there was a reduction of $1,134,000 related to the sale of a commercial real estate property in the first quarter of 2020. At December 31, 2020, the Corporation held six such properties for sale, with total carrying values of $80,000 related to residential real estate and $1,258,000 related to commercial real estate. At December 31, 2019, the Corporation held ten such properties for sale, with total carrying values of $292,000 related to residential real estate, $70,000 of land and $2,524,000 related to commercial real estate. The Corporation evaluates the carrying values of foreclosed assets each quarter based on the most recent market activity or appraisals for each property.
---	---

As reflected in Table XI, total loans past due 30-89 days and still accruing interest amounted to $5,918,000 at December 31, 2020, down from $8,889,000 at December 31, 2019. This variance includes the effect of fluctuations in 30-89 day past due residential mortgage loans, which totaled $5,084,000 at December 31, 2020, down from $7,816,000 at December 31, 2019. Management monitors the status of delinquent residential mortgage loans on an ongoing basis and has considered delinquency trends, which were generally favorable throughout most of 2020, in evaluating the allowance for loan losses at December 31, 2020.

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

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of December 31, 2020. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

Tables IX through XII present historical data related to the allowance for loan losses. 31

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TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES


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

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES


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

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TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS AND TROUBLED DEBT RESTRUCTURINGS (TDRs)


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

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

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TABLE XII – FIVE-YEAR HISTORY OF LOAN LOSSES


(Dollars In Thousands)	****	2020		****	2019		****	2018		****	2017		****	2016		****	Average		****
Average gross loans		$	1,445,098		$	1,057,559		$	822,346		$	780,640		$	723,076		$	965,744
Year-end gross loans			1,644,209			1,182,222			827,563			815,713			751,835		$	1,044,308
Year-end allowance for loan losses			11,385			9,836			9,309			8,856			8,473		$	9,572
Year-end nonaccrual loans			21,416			9,218			13,113			13,404			8,736		$	13,177
Year-end loans 90 days or more past due and still accruing			1,975			1,207			2,906			3,724			6,838			3,330
Net charge-offs			2,364			322			131			418			637			774
Provision for loan losses			3,913			849			584			801			1,221			1,474
Earnings coverage of charge-offs			10	x		76	x		210	x		56	x		37	x		78	x
Allowance coverage of charge-offs			5	x		31	x		71	x		21	x		13	x		28	x
Net charge-offs as a % of provision for loan losses			60.41	%		37.93	%		22.43	%		52.18	%		52.17	%		52.51	%
Net charge-offs as a % of average gross loans			0.16	%		0.03	%		0.02	%		0.05	%		0.09	%		0.08	%
Income before income taxes on a fully taxable equivalent basis			24,192			24,453			27,564			23,350			23,861			24,684

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

The Corporation’s significant fixed and determinable contractual obligations as of December 31, 2020 include repayment obligations related to time deposits and borrowed funds. Information related to maturities of time deposits is provided in Note 11 to the consolidated financial statements. Information related to maturities of borrowed funds is provided in Note 12 to the consolidated financial statements. The Corporation’s operating lease commitments with terms of one year or less and other commitments at December 31, 2020 are immaterial. Information concerning operating lease commitments with terms greater than one year is provided in Note 17 to the consolidated financial statements. The Corporation’s significant off-balance sheet arrangements include commitments to extend credit and standby letters of credit. Off-balance sheet arrangements are described in Note 16 to the consolidated financial statements.

As described in more detail in the Financial Condition section of Management’s Discussion and Analysis, the Corporation sells residential mortgage loans for which 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. At December 31, 2020, outstanding balances of such loans sold totaled $278,857,000.

Also, for loans sold under the MPF Original program, the Corporation provides a credit enhancement. At December 31, 2020, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $6,766,000, and the Corporation has recorded a related allowance for credit losses in the amount of $500,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets.

As discussed in the Financial Condition section of Management’s Discussion and Analysis, the Corporation is a participating SBA lender and may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. In some cases, the Corporation may sell the SBA-guaranteed portion of the loan back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. If it is determined that the ongoing compliance requirements are not met, the Corporation could be subject to claim adjustments on SBA guaranteed loans. At December 31, 2020, the Corporation’s total exposure to SBA guarantees was $17,041,000 with a recorded claims adjustment allowance of $730,000, included in accrued interest and other liabilities in the consolidated balance sheets. 34

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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 December 31, 2020, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $71,237,000.

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

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale securities with a carrying value of $15,126,000 at December 31, 2020.

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


		Outstanding						Available						Total Credit
(In Thousands)	****	December 31,		****	December 31,		****	December 31,		****	December 31,		****	December 31,		****	December 31,
		2020			2019			2020			2019			2020			2019
Federal Home Loan Bank of Pittsburgh		$	72,222		$	136,424		$	698,977		$	416,122		$	771,199		$	552,546
Federal Reserve Bank Discount Window			0			0			14,654			14,244			14,654			14,244
Other correspondent banks			0			0			45,000			45,000			45,000			45,000
Total credit facilities		$	72,222		$	136,424		$	758,631		$	475,366		$	830,853		$	611,790

The significant increase in credit available from the Federal Home Loan Bank of Pittsburgh in 2020 resulted from an increase in the borrowing base created by the acquisition of real estate secured loans from Covenant. At December 31, 2020, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of short-term borrowings of $18,000,000, long-term borrowings of $53,822,000 and a $400,000 letter of credit. At December 31, 2019, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $64,000,000, short-term borrowings of $20,297,000 and long-term borrowings with a total amount of $52,127,000.

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 debt securities to meet its obligations. At December 31, 2019, the carrying value of available-for-sale debt securities in excess of amounts required to meet pledging or repurchase agreement obligations was $124,510,000.

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

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

Details concerning capital ratios at December 31, 2020 and December 31, 2019 are presented in Note 18 to the consolidated financial statements. Management believes, as of December 31, 2020, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, the Corporation’s and C&N Bank’s capital ratios at December 31, 2020 and December 31, 2019 exceed the Corporation’s Board policy threshold levels. Management expects C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future.

Future dividend payments 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. These restrictions are described in Note 18 to the consolidated financial statements. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability 35

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to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold sufficient capital commensurate with its overall risk profile.

To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization 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 December 31, 2020, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:


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

A banking organization with a buffer greater than 2.5% 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. The rule also prohibits a banking organization 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 December 31, 2020, C&N Bank’s Capital Conservation Buffer (determined based on the minimum total capital ratio) was 7.98%.

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income within stockholders’ equity. The balance in Accumulated Other Comprehensive Income related to unrealized gains (losses) on available-for-sale debt securities, net of deferred income tax, amounted to $11,676,000 at December 31, 2020 and $3,511,000 at December 31, 2019. Changes in accumulated other comprehensive income (loss) are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale debt securities are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 7 to the consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale debt securities for other-than-temporary impairment at December 31, 2020.

Stockholders’ equity is also affected by the underfunded or overfunded status of defined benefit pension and postretirement plans. The balance in Accumulated Other Comprehensive Income related to defined benefit plans, net of deferred income tax, was $119,000 at December 31, 2020 and $180,000 at December 31, 2019.

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ITEM 8. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

<br><br>
<br><br>	****	December 31,		****	December 31,
(In Thousands, Except Share and Per Share Data)		2020			2019
ASSETS
Cash and due from banks:
Noninterest-bearing		$	24,780		$	17,667
Interest-bearing			77,077			17,535
Total cash and due from banks			101,857			35,202
Available-for-sale debt securities, at fair value			349,332			346,723
Marketable equity security			1,000			979
Loans held for sale			942			767

Loans receivable			1,644,209			1,182,222
Allowance for loan losses			(11,385)			(9,836)
Loans, net			1,632,824			1,172,386

Bank-owned life insurance			30,096			18,641
Accrued interest receivable			8,293			5,001
Bank premises and equipment, net			21,526			17,170
Foreclosed assets held for sale			1,338			2,886
Deferred tax asset, net			2,705			2,618
Goodwill			52,505			28,388
Core deposit intangibles, net			3,851			1,247
Other assets			32,831			22,137
TOTAL ASSETS		$	2,239,100		$	1,654,145

LIABILITIES
Deposits:
Noninterest-bearing		$	465,332		$	285,904
Interest-bearing			1,355,137			966,756
Total deposits			1,820,469			1,252,660
Short-term borrowings			20,022			86,220
Long-term borrowings			54,608			52,127
Subordinated debt			16,553			6,500
Accrued interest and other liabilities			27,692			12,186
TOTAL LIABILITIES			1,939,344			1,409,693

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation
preference per share; no shares issued			0			0
Common stock, par value $1.00 per share; authorized 20,000,000 shares;
issued 15,982,815 and outstanding 15,911,984 at December 31, 2020;
issued 13,934,996 and outstanding 13,716,445 at December 31, 2019			15,983			13,935
Paid-in capital			143,644			104,519
Retained earnings			129,703			126,480
Treasury stock, at cost; 70,831 shares at December 31, 2020 and 218,551
shares at December 31, 2019			(1,369)			(4,173)
Accumulated other comprehensive income			11,795			3,691
TOTAL STOCKHOLDERS' EQUITY			299,756			244,452
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY		$	2,239,100		$	1,654,145

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

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Consolidated Statements of Income


	Years Ended December 31,
(In Thousands Except Per Share Data)	2020		2019
INTEREST INCOME
Interest and fees on loans:
Taxable	$	67,384	$	53,086
Tax-exempt		1,768		2,104
Interest on mortgages held for sale		62		22
Interest on balances with depository institutions		251		514
Income from available-for-sale debt securities:
Taxable		5,534		7,008
Tax-exempt		2,143		2,014
Dividends on marketable equity security		18		23
Total interest and dividend income		77,160		64,771
INTEREST EXPENSE
Interest on deposits		7,231		8,190
Interest on short-term borrowings		367		733
Interest on long-term borrowings		1,291		1,013
Interest on subordinated debt		706		347
Total interest expense		9,595		10,283
Net interest income		67,565		54,488
Provision for loan losses		3,913		849
Net interest income after provision for loan losses		63,652		53,639
NONINTEREST INCOME
Trust and financial management revenue		6,321		6,106
Brokerage revenue		1,343		1,266
Insurance commissions, fees and premiums		184		167
Service charges on deposit accounts		4,231		5,358
Service charges and fees		304		332
Interchange revenue from debit card transactions		3,094		2,754
Net gains from sale of loans		5,403		924
Loan servicing fees, net		(61)		100
Increase in cash surrender value of life insurance		515		402
Other noninterest income		3,010		1,875
Sub-total		24,344		19,284
Realized gains on available-for-sale debt securities, net		169		23
Total noninterest income		24,513		19,307
NONINTEREST EXPENSE
Salaries and wages		25,599		20,644
Pensions and other employee benefits		7,463		5,837
Occupancy expense, net		3,010		2,629
Furniture and equipment expense		1,451		1,289
Data processing expenses		4,453		3,403
Automated teller machine and interchange expense		1,231		1,103
Pennsylvania shares tax		1,689		1,380
Professional fees		1,692		1,069
Telecommunications		863		744
Directors' fees		730		673
Loss on prepayment of borrowings		1,636		0
Merger-related expenses		7,708		4,099
Other noninterest expense		7,428		6,667
Total noninterest expense		64,953		49,537
Income before income tax provision		23,212		23,409
Income tax provision		3,990		3,905
NET INCOME	$	19,222	$	19,504
EARNINGS PER COMMON SHARE - BASIC	$	1.30	$	1.46
EARNINGS PER COMMON SHARE - DILUTED	$	1.30	$	1.46

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

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Consolidated Statements of Comprehensive Income


	Years Ended December 31,
(In Thousands)	2020		2019
Net income	$	19,222	$	19,504

Unrealized gains on available-for-sale debt securities:
Unrealized holding gains on available-for-sale debt securities		10,504		9,920
Reclassification adjustment for gains realized in income		(169)		(23)
Other comprehensive income on available-for-sale debt securities		10,335		9,897

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		(49)		87
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(29)		(32)
Other comprehensive (loss) income on unfunded retirement obligations		(78)		55

Other comprehensive income before income tax		10,257		9,952
Income tax related to other comprehensive income		(2,153)		(2,091)

Net other comprehensive income		8,104		7,861

Comprehensive income	$	27,326	$	27,365

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

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Consolidated Statements of Changes in Stockholders’ Equity

(In Thousands Except Share and Per Share Data)


										Accumulated
										Other
	Common		Treasury	Common		Paid-in		Retained		Comprehensive		Treasury
	Shares		Shares	Stock		Capital		Earnings		(Loss) Income		Stock		Total
Balance, January 1, 2019	12,655,171	****	335,841	$	12,655	$	72,602	$	122,643	$	(4,170)	$	(6,362)	$	197,368
Net income									19,504						19,504
Other comprehensive income, net											7,861				7,861
Cash dividends declared on common stock, 1.18 per share									(15,667)						(15,667)
Shares issued for dividend reinvestment plan			(62,232)				439						1,187		1,626
Shares issued from treasury and redeemed related to exercise of stock options			(18,071)				(146)						344		198
Restricted stock granted			(48,137)				(918)						918		0
Forfeiture of restricted stock			3,758				71						(71)		0
Stock-based compensation expense							798								798
Purchase of restricted stock for tax withholding			7,392										(189)		(189)
Shares issued for acquisition of Monument Bancorp, Inc., net of equity issuance costs	1,279,825				1,280		31,673								32,953
Balance, December 31, 2019	13,934,996	****	218,551		13,935		104,519		126,480		3,691		(4,173)		244,452
Net income									19,222						19,222
Other comprehensive income, net											8,104				8,104
Cash dividends declared on common stock, 1.08 per share									(15,999)						(15,999)
Shares issued for dividend reinvestment plan			(77,525)				34						1,496		1,530
Shares issued from treasury and redeemed related to exercise of stock options			(10,407)				(70)						201		131
Restricted stock granted			(70,940)				(1,370)						1,370		0
Forfeiture of restricted stock			5,290				100						(100)		0
Stock-based compensation expense							1,050								1,050
Purchase of restricted stock for tax withholding			5,862										(163)		(163)
Shares issued for acquisition of Covenant Financial, Inc., net of equity issuance costs	2,047,819				2,048		39,381								41,429
Balance, December 31, 2020	15,982,815	****	70,831	$	15,983	$	143,644	$	129,703	$	11,795	$	(1,369)	$	299,756

All values are in US Dollars.

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

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CONSOLIDATED STATEMENTS OF CASH FLOWS


		Years Ended December 31,
(In Thousands)	****	2020		2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	19,222	$	19,504
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			3,913		849
Loss on prepayment of borrowings			1,636		0
Realized gains on available-for-sale debt securities, net			(169)		(23)
Net amortization of securities			1,570		1,341
Increase in cash surrender value of life insurance			(515)		(402)
Depreciation and amortization of bank premises and equipment			1,981		1,749
Net accretion of purchase accounting adjustments			(2,524)		(375)
Stock-based compensation			1,050		798
Deferred income taxes			(361)		172
Decrease in fair value of servicing rights			576		331
Gains on sales of loans, net			(5,403)		(924)
Origination of loans held for sale			(158,909)		(29,978)
Proceeds from sales of loans held for sale			163,149		30,144
(Increase) decrease in accrued interest receivable and other assets			(2,645)		1,188
Increase (decrease) in accrued interest payable and other liabilities			2,473		(2,068)
Other			(260)		155
Net Cash Provided by Operating Activities			24,784		22,461
CASH FLOWS FROM INVESTING ACTIVITIES:
Net cash and cash equivalents provided by (used in) business combination			75,955		(1,778)
Proceeds from maturities of certificates of deposit			740		580
Purchase of certificates of deposit			(2,500)		0
Proceeds from sales of available-for-sale debt securities			28,941		96,148
Proceeds from calls and maturities of available-for-sale debt securities			94,486		81,204
Purchase of available-for-sale debt securities			(105,354)		(57,655)
Redemption of Federal Home Loan Bank of Pittsburgh stock			8,496		10,137
Purchase of Federal Home Loan Bank of Pittsburgh stock			(5,146)		(9,208)
Net decrease (increase) in loans			1,564		(96,628)
Proceeds from bank owned life insurance			0		796
Purchase of premises and equipment			(3,137)		(2,870)
Proceeds from sale of foreclosed assets			2,262		1,768
Other			273		174
Net Cash Provided by Investing Activities			96,580		22,668
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits			86,941		(4,822)
Net decrease in short-term borrowings			(99,969)		(38,307)
Proceeds from long-term borrowings			25,891		48,500
Repayments of long-term borrowings and subordinated debt			(54,831)		(38,173)
Sale of treasury stock			131		198
Purchase of vested restricted stock for tax withholding			(163)		(189)
Common dividends paid			(14,469)		(14,041)
Net Cash Used in Financing Activities			(56,469)		(46,834)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			64,895		(1,705)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			31,122		32,827
CASH AND CASH EQUIVALENTS, END OF YEAR		$	96,017	$	31,122
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Right-of-use assets recognized at adoption of ASU 2016-02		$	0	$	1,132
Leased assets obtained in exchange for new operating lease liabilities		$	167	$	745
Accrued purchase of available-for-sale securities		$	994	$	0
Accrued income from life insurance claim		$	279	$	0
Assets acquired through foreclosure of real estate loans		$	0	$	2,053
Interest paid		$	10,742	$	9,601
Income taxes paid		$	3,137	$	3,234

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION – 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”), as well as C&N Bank’s wholly-owned subsidiaries, C&N Financial Services Corporation and Northern Tier Holding LLC. C&N Bank is the sole member of Northern Tier Holding LLC. All material intercompany balances and transactions have been eliminated in consolidation.

NATURE OF OPERATIONS – The Corporation provides banking and related services to individual and corporate customers. Lending products include commercial, mortgage and consumer loans, as well as specialized instruments such as commercial letters-of-credit. Deposit products include various types of checking accounts, passbook and statement savings, money market accounts, interest checking accounts, Individual Retirement Accounts and certificates of deposit. As discussed further in Note 3, in 2020 the Corporation expanded its presence in Southeastern Pennsylvania by acquiring Covenant Financial, Inc. (“Covenant”). The Covenant acquisitions follows the acquisition of Monument Bancorp, Inc. (“Monument”) in 2019, as well as the opening of a lending office in York, Pennsylvania which is located in southcentral Pennsylvania.

The Corporation provides wealth management services through its trust department, including administration of trusts and estates, retirement plans, and other employee benefit plans, and investment management services. The Corporation offers a variety of personal and commercial insurance products through C&N Financial Services Corporation. C&N Financial Services Corporation also offers mutual funds, annuities, educational savings accounts and other investment products through registered agents.

Management has determined that the Corporation has one reportable segment, “Community Banking.” All of the Corporation’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Corporation supports the others.

The Corporation is subject to competition from other financial institutions. It is also subject to regulation by certain federal and state agencies and undergoes periodic examination by those regulatory authorities. As a consequence, the Corporation’s business is particularly susceptible to being affected by future federal and state legislation and regulations.

USE OF ESTIMATES – The financial information is presented in accordance with generally accepted accounting principles and general practice for financial institutions in the United States of America (“U.S. GAAP”). In preparing financial statements, management is required to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements. In addition, these estimates and assumptions affect revenues and expenses in the financial statements and as such, actual results could differ from those estimates.

Material estimates that are particularly susceptible to change include: (1) the allowance for loan losses, (2) fair values of debt securities based on estimates from independent valuation services or from brokers and (3) assessment of goodwill for possible impairment.

INVESTMENT SECURITIES – Investment securities are accounted for as follows:

Available-for-sale debt securities – includes debt securities not classified as held-to-maturity or trading. Such securities are reported at fair value, with unrealized gains and losses excluded from earnings and reported separately through accumulated other comprehensive income (loss), net of tax. Premiums on non-amortizing available-for-sale debt securities are amortized using the level yield method to the earliest call date, while discounts on non-amortizing securities are amortized to the maturity date. Premiums and discounts on amortizing securities (mortgage-backed securities) are amortized using the level yield method over the remaining contractual life of the securities, adjusted for actual prepayments. Realized gains and losses on sales of available-for-sale securities are computed on the basis of specific identification of the adjusted cost of each security. Securities within the available-for-sale portfolio may be used as part of the Corporation’s asset and liability management strategy and may be sold in response to changes in interest rate risk, prepayment risk or other factors.

Other-than-temporary impairment – Credit-related declines in the fair value of available-for-sale debt securities that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment (OTTI) losses, 42

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management considers (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. The credit-related impairment is recognized in earnings and is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. For debt securities classified as held-to-maturity, if any, the amount of noncredit-related impairment is recognized in other comprehensive income and accreted over the remaining life of the debt security as an increase in the carrying value of the security.

Marketable equity security – The marketable equity security is carried at fair value with unrealized gains and losses included in other noninterest income in the consolidated statements of income.

Restricted equity securities – Restricted equity securities consist primarily of Federal Home Loan Bank of Pittsburgh stock, and are carried at cost and evaluated for impairment. Holdings of restricted equity securities are included in Other Assets in the consolidated balance sheets, and dividends received on restricted securities are included in Other Income in the consolidated statements of income.

DERIVATIVES – In connection with the acquisition of Covenant, the Corporation became a party to derivative financial instruments. These financial instruments consist of interest rate swap agreements which contain master netting and collateral provisions designed to protect the party at risk. Interest rate swaps with commercial banking customers were executed to facilitate their respective risk management strategies. Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans from Covenant (acquired by the Corporation) into fixed interest rate exposures. Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps that Covenant had in place with a third party (assumed by the Corporation), 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. Interest differentials paid or received under the swap agreements are reflected as adjustments to interest and fees on loans. The notional amounts of the interest rate swaps are not exchanged and do not represent exposure to credit loss. The fair value of interest rate derivatives is included in the balance of other assets and other liabilities in the consolidated balance sheets.

LOANS HELD FOR SALE – Mortgage loans held for sale are reported at the lower of cost or market, determined in the aggregate.

LOANS RECEIVABLE – Loans originated by the Corporation which management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at unpaid principal balances, less the allowance for loan losses and net deferred loan fees. Interest income is accrued on the unpaid principal balance. Loan origination and commitment fees, as well as certain direct origination costs, are deferred and amortized as a yield adjustment over the lives of the related loans using the interest method.

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. The residential mortgage segment includes the following classes: first and junior lien residential mortgages, home equity lines of credit and residential construction loans. The most significant classes of commercial loans are commercial loans secured by real estate, non-real estate secured commercial and industrial loans, loans to political subdivisions, commercial construction, multi-family residential and loans secured by farmland.

Loans are placed on nonaccrual status for all classes of loans when, in the opinion of management, collection of interest is doubtful. Any unpaid interest previously accrued on those loans is reversed from income. Interest income is not recognized on specific impaired loans unless the likelihood of further loss is remote. Interest payments received on loans for which the risk of further loss is greater than remote are applied as a reduction of the loan principal balance. Interest income on other nonaccrual loans is recognized only to the extent of interest payments received. Generally, loans are restored to accrual status when the obligation is brought current, has performed in accordance with the contractual terms for a reasonable period of time (generally six months) and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The past due status of all classes of loans receivable is determined based on contractual due dates for loan payments. Also, the amortization of deferred loan fees is discontinued when a loan is placed on nonaccrual status. 43

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PURCHASED LOANS – The Corporation purchased loans in connection with its acquisition of Covenant in 2020 and Monument in 2019, some of which had, at the acquisition dates, shown evidence of credit deterioration since origination. The Corporation considers several factors as indicators that an acquired loan has evidence of deterioration in credit quality. These factors include loans 90 days or more past due, loans with an internal risk rating of substandard or below, loans classified as nonaccrual by the acquired institution and loans that have been previously modified in a troubled debt restructuring. The purchased loans that showed evidence of credit impairment were designated as the purchased credit impaired (“PCI”) loans and were recorded at fair value, with no carryover of the allowance for loan losses. The PCI loans acquired are secured by real estate and the fair value of each loan at the acquisition date was determined based on the estimated proceeds to be derived from selling the collateral, net of selling costs. The PCI loans were placed into nonaccrual status upon acquisition (and remained in nonaccrual status at December 31, 2020) as the Corporation cannot reasonably estimate cash flows expected to be collected in order to compute yield on the loans.

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable yield and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable yield. The nonaccretable yield represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require us to evaluate the need for an allowance for credit losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable yield which we then reclassify as accretable yield that is recognized into interest income over the remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to collect is performed in a similar manner as that used to determine our allowance for credit losses. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable yield portion of the fair value adjustment.

ALLOWANCE FOR LOAN LOSSES – The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. All, or part, of the principal balance of loans receivable are charged off to the allowance as soon as it is determined that the collection of all, or part, of the principal balance is highly unlikely. Non-residential consumer loans are generally charged off no later than when they are 120 days past due on a contractual basis, or earlier in the event of bankruptcy or if there is an amount deemed uncollectible.

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 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. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of December 31, 2020 and 2019, management determined that no allowance for credit losses related to unfunded loan commitments was required.

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

The specific component relates to loans that are classified as impaired based on a detailed assessment of certain larger loan relationships evaluated by a management committee referred to as the Watch List Committee. Specific loan relationships are identified for evaluation based on the related credit risk rating. For individual loans classified as impaired, an allowance is established when the collateral value less estimated selling costs, present value of discounted cash flows or observable market price of the impaired loan is lower than the carrying value of that loan. 44

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

The general component covers pools of loans by loan class including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such a loan: (1) is subject to a restructuring agreement, (2) has an outstanding balance of $400,000 or more and a credit grade of Special Mention, Substandard or Doubtful, or (3) has an estimated loss of $100,000 or more. The pools of loans for each loan segment are evaluated for loss exposure based upon average historical net charge-off rates, adjusted for qualitative factors. The time period used in determining the average historical net charge-off rate for each loan class is based on management’s evaluation of an appropriate time period that captures an historical loss experience relevant to the current portfolio. Qualitative risk factors (described in the following paragraph) are evaluated for the impact on each of the three distinct segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. Any adjustments to the factors are supported by a narrative documentation of changes in conditions accompanying the allowance for loan losses calculation.

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

Purchased loans that did not show evidence of credit deterioration at the acquisition dates were initially recorded at fair value, including a discount for credit losses reflecting an estimate of the present value of credit losses based on market expectations. The general component of the allowance on purchased loans is evaluated separately from the rest of the portfolio. This evaluation includes consideration of the qualitative risk factors described above as well as the remaining purchased discount.

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

For commercial loans secured by real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

For commercial and industrial loans secured by non-real estate collateral, such as accounts receivable, inventory and equipment, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable aging data or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. 45

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Loans whose terms are modified are classified as troubled debt restructurings if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve reductions in required payments, an extension of a loan’s stated maturity date or a temporary reduction in interest rate. Loans classified as troubled debt restructurings are designated as impaired. Nonaccrual troubled debt restructurings may be restored to accrual status if the ultimate collectability of principal and interest payments under the modified terms is not in doubt, and there has been a period (generally, for at least six consecutive months) of satisfactory payment performance by the borrower either immediately before or after the restructuring.

In March 2020, various regulatory agencies, including the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation issued an interagency statement on loan modifications and reporting for financial institutions working with customers affected by COVID-19. The interagency statement was effective immediately and impacted accounting for loan modifications. The agencies confirmed with the staff of the FASB that short-term modifications made on a good faith basis in response to COVID-19 to borrowers who were current prior to any relief, are not to be considered TDRs. Provisions of the CARES Act Section 4013 largely mirrored the provisions of the interagency statement, providing that modified loans were not to be considered TDRs if they were performing at December 31, 2019 and other consideration set forth in the interagency statements were met. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented or at December 31, 2019.

BANK PREMISES AND EQUIPMENT – Bank premises and equipment are stated at cost less accumulated depreciation. Repair and maintenance expenditures which extend the useful lives of assets are capitalized, and other repair and maintenance expenditures are expensed as incurred. Depreciation expense is computed using the straight-line method.

IMPAIRMENT OF LONG-LIVED ASSETS – The Corporation reviews long-lived assets, such as premises and equipment and intangibles, for impairment whenever events or changes in circumstances indicate the carrying amount of an asset may not be recoverable. These changes in circumstances may include a significant decrease in the market value of an asset or the manner in which an asset is used. If there is an indication the carrying value of an asset may not be recoverable, future undiscounted cash flows expected to result from use of the asset are estimated. If the sum of the expected cash flows is less than the carrying value of the asset, a loss is recognized for the difference between the carrying value and fair market value of the asset.

FORECLOSED ASSETS HELD FOR SALE – Foreclosed assets held for sale consist of real estate acquired by foreclosure and are initially recorded at fair value, less estimated selling costs.

GOODWILL – Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Goodwill is tested at least annually at December 31 for impairment, or more often if events or circumstances indicate there may be impairment. The Corporation has the option of performing a qualitative assessment to determine whether any further quantitative testing for impairment is necessary. The option of whether or not to perform a qualitative assessment is made annually.

CORE DEPOSIT INTANGIBLES – Amortization of core deposit intangibles is calculated using an accelerated method. In determining amortization using the accelerated method for any given period, the amount of expected cash flows for that period that were used in determining the acquisition-date fair value is divided by the total amount of expected cash flows over the life of the asset. That percentage is multiplied by the initial carrying amount of the asset to arrive at amortization expense for that period. If the Corporation’s cash flow patterns differ significantly from the initial estimates, the amortization schedule would be adjusted prospectively.

SERVICING RIGHTS – The estimated fair value of servicing rights related to mortgage loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans. The valuation of servicing rights is adjusted quarterly, with changes in fair value included in Loan Servicing Fees, Net, in the consolidated statements of income. Significant inputs to the valuation include expected net servicing income to be received, the expected life of the underlying loans and the discount rate. The servicing rights asset is included in Other Assets in the consolidated balance sheets.

INCOME TAXES – Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases given the provisions of the enacted tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon 46

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available evidence. Tax benefits from investments in limited partnerships that have qualified for federal low-income tax credits are recognized as a reduction in the provision for income tax over the term of the investment using the effective yield method. The Corporation includes income tax penalties in the provision for income tax. The Corporation has no accrued interest related to unrecognized tax benefits.

STOCK COMPENSATION PLANS – The Corporation’s stock-based compensation policy applies to all forms of stock-based compensation including stock options and restricted stock. All stock-based compensation is accounted for under the fair value method as required by U.S. GAAP. The expense associated with stock-based compensation is recognized over the vesting period of each individual arrangement.

The fair value of each stock option is estimated on the date of grant using the Black-Scholes-Merton option valuation model. The fair value of restricted stock is based on the current market price on the date of grant.

OFF-BALANCE SHEET FINANCIAL INSTRUMENTS – In the ordinary course of business, the Corporation has entered into off-balance sheet financial instruments consisting of commitments to extend credit and standby letters of credit. Such financial instruments are recorded in the financial statements when they become payable.

CASH FLOWS – The Corporation utilizes the net reporting of cash receipts and cash payments for certain deposit and lending activities. Cash equivalents include federal funds sold and all cash and amounts due from depository institutions and interest-bearing deposits in other banks with original maturities of three months or less.

REVENUE RECOGNITION – The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in the determination of the amount and timing of revenue from contracts with customers.

Additional disclosures related to the Corporation’s largest sources of noninterest income within the consolidated statements of income from contracts with customers that are subject to Accounting Standards Codification (ASC) Topic 606 are as follows:

Trust and financial management revenue – C&N Bank’s trust department provides a wide range of financial services, including wealth management services for individuals, businesses and retirement funds, administration of 401(k) and other retirement plans, retirement planning, estate planning and estate settlement services. Trust clients are located primarily within the Corporation’s geographic markets. Assets held in a fiduciary capacity by C&N Bank are not the Corporation’s assets and are therefore not included in the consolidated balance sheets. The fair value of trust assets under management was approximately $1,103,228,000 at December 31, 2020 and $1,007,113,000 at December 31, 2019. Trust and financial management revenue is included within noninterest income in the consolidated statements of income.

Trust revenue is recorded on a cash basis, which is not materially different from the accrual basis. The majority (approximately 83%, based on annual 2020 results) of trust revenue is earned and collected monthly, with the amount determined based on a percentage of the fair value of the trust assets under management. Wealth management fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. The services provided under such a contract represent a single performance obligation under the Accounting Standards Updates (ASUs) because it embodies a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. None of the contracts with trust customers provide for incentive-based fees. In addition to wealth management fees, trust revenue includes fees for provision of services, including employee benefit plan administration, tax return preparation and estate planning and settlement. Fees for such services are billed based on contractual arrangements or established fee schedules and are typically billed upon completion of providing such services. The costs of acquiring trust customers are incremental and recognized within noninterest expense in the consolidated statements of income.

Service charges on deposit accounts – Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged for withdrawals by deposit customers from other financial institutions’ ATMs; and a variety of other monthly or transactional fees for services provided to retail and business customers, mainly associated with checking accounts. All deposit liabilities are considered to have one-day terms and therefore related fees are recognized in income at the time when the 47

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services are provided to the customers. Incremental costs of obtaining deposit contracts are not significant and are recognized as expense when incurred within noninterest expense in the consolidated statements of income.

Interchange revenue from debit card transactions – The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the time when the services are provided and related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within noninterest expense in the consolidated statements of income.

RECENT ACCOUNTING PRONOUNCEMENTS

The Financial Accounting Standards Board (FASB) issues ASUs to the FASB 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 foreseeable future.

Recent Accounting Pronouncements - Adopted

Effective January 1, 2020, the Corporation adopted ASU 2018-13, Fair Value Measurement (Topic 820), which modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented. Note 22 provides disclosure regarding fair value measurements of the Corporation’s financial instruments. Adoption of this ASU did not have a material impact on the Corporation’s consolidated financial position or results of operations.

Recently Issued But Not Yet Effective Accounting Pronouncements

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

ASU 2020-04, Reference Rate Reform (Topic 848) provides temporary optional guidance to ease the potential burden in accounting for reference rate reform. The amendments in Update 2020-04 are elective and apply to all entities that have contracts, hedging relationships, and other transactions that reference LIBOR or another reference rate expected to be discontinued. The guidance includes a general principle that permits an entity to consider contract modifications due to reference rate reform to be an event that does not require 48

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contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:

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

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

BUSINESS COMBINATIONS

Acquisition of Covenant Financial, Inc.

On July 1, 2020, the Corporation completed its acquisition of Covenant Financial, Inc. (“Covenant”). Covenant was the holding company for Covenant Bank, which operated banking offices in Bucks and Chester Counties of Pennsylvania. Management believes the acquisition provides an opportunity to expand the Corporation’s presence in a higher growth market and further leverage the Corporation’s capital to enhance long-term shareholder value.

The consolidated financial statements include the formerly separate Covenant operations from July 1, 2020 through December 31, 2020. Since the activities of the former Covenant operations have been combined with those of the Corporation, separate disclosure of Covenant-related financial information included in the consolidated financial statements is not practicable.

Total purchase consideration was $63,266,000, including cash paid to former Covenant shareholders totaling $21,654,000 and 2,047,819 shares of Corporation common stock issued with a value of $41,612,000. In the table below, the cash portion of merger consideration includes $183,000 of costs directly related to issuance of stock, and the equity portion of merger consideration has been reduced by these costs.

The merger was accounted for using the acquisition method of accounting and, accordingly, purchased assets, including identifiable intangible assets, and assumed liabilities were recorded at their respective acquisition date fair values. The fair value measurements of assets acquired and liabilities assumed are subject to refinement for up to one year after the closing date of the acquisition as additional information relative to closing date fair values becomes available.

As adjusted in the fourth quarter 2020, the fair value of assets acquired, excluding goodwill, totaled $608,485,000, while the fair value of liabilities assumed totaled $569,336,000. Goodwill represents consideration transferred in excess of the fair value of the net assets acquired. At December 31, 2020, goodwill associated with the acquisition was $24,117,000. The goodwill resulting from the acquisition represents the value expected from the further expansion of the Corporation’s market penetration into Southeastern Pennsylvania, adding to the base established in the acquisition of Monument Bancorp, Inc. in 2019. Goodwill acquired in the Covenant merger is not deductible for tax purposes as the acquisition is accounted for as a tax-free exchange for tax purposes.

In the fourth quarter 2020, the Corporation recorded adjustments to the initial fair value measurements of certain assets and liabilities that resulted in a net decrease in goodwill of $21,000, summarized as follows:


(In Thousands)
Preliminary goodwill balance, September 30, 2020	$	24,138
Adjustments in fourth quarter 2020:
Write-down purchased credit impaired loan		556
Increase deferred tax asset, net		(410)
Decrease other liabilities		(167)
Goodwill balance, December 31, 2020	$	24,117

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The following table summarizes the consideration paid for Covenant and the estimated fair values of the assets acquired and liabilities assumed at the acquisition date:


(In Thousands)
Fair value of consideration transferred:
Cash	$	21,837
Common stock issued		41,429
Total consideration transferred	$	63,266

Estimated fair value of assets acquired and (liabilities) assumed:
Cash and cash equivalents	$	97,792
Available-for-sale debt securities		10,754
Loans receivable		464,236
Bank-owned life insurance		11,170
Accrued interest receivable		1,922
Bank premises and equipment		3,250
Foreclosed assets held for sale		860
Deferred tax asset, net		1,879
Core deposit intangible		3,144
Goodwill		24,117
Other assets		13,478
Deposits		(481,796)
Short-term borrowings		(33,950)
Long-term borrowings		(30,025)
Subordinated debt		(10,091)
Accrued interest and other liabilities		(13,474)
Estimated excess fair value of assets acquired over liabilities assumed	$	63,266

In the consolidated statements of cash flows, investing and financing activities exclude the following noncash items: the issuance of common stock as part of the merger consideration as well as the following categories of assets acquired and liabilities assumed from Covenant as reflected in the table above: available-for-sale debt securities, loans receivable, bank-owned life insurance, bank premises and equipment, foreclosed assets held for sale, core deposit intangible, goodwill, other assets (including Federal Home Loan Bank of Pittsburgh stock of $2,939,000), deposits, short-term borrowings, long-term borrowings, subordinated debt and accrued interest and other liabilities.

Acquisition date fair values for available-for-sale securities were determined using Level 1 inputs consistent with the methods discussed further in Note 22.

The determination of estimated fair values of the acquired loans required the Corporation to make certain estimates about discount rates, future expected cash flows, market conditions and other future events that are highly subjective in nature. Based on such factors as past due status, nonaccrual status, bankruptcy status, and credit risk ratings, the acquired loans were evaluated, and twenty-four loans displayed evidence of credit quality deterioration. These loans are accounted for under ASC 310-30 (purchased credit impaired, or “PCI”). The majority of the purchased loans did not display evidence of impairment, and thus are accounted for under ASC 310-20. Expected cash flows, both principal and interest, were estimated based on key assumptions covering such factors as prepayments, default rates and severity of loss given default. These assumptions were developed using both Covenant’s historical experience and the portfolio characteristics as of the acquisition date as well as available market research. The fair value estimates for acquired loans were based on the amount and timing of expected principal, interest and other cash flows, including expected prepayments, discounted at prevailing market interest rates applicable to the types of acquired loans, which the Corporation considers Level 3 fair value measurements. 50

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Loans acquired from Covenant were measured at fair value at the acquisition date with no carryover of an allowance for loan losses. The following table presents performing and PCI loans acquired, by loan segment and class, as adjusted, at July 1, 2020:


(In Thousands)	Performing		PCI		Total
Residential mortgage:
Residential mortgage loans - first liens	$	65,883	$	0	$	65,883
Residential mortgage loans - junior liens		4,141		75		4,216
Home equity lines of credit		8,368		0		8,368
1-4 Family residential construction		11,437		0		11,437
Total residential mortgage		89,829		75		89,904
Commercial:
Commercial loans secured by real estate		240,482		4,152		244,634
Commercial and industrial		39,068		806		39,874
Commercial construction and land		63,740		0		63,740
Loans secured by farmland		73		0		73
Multi-family (5 or more) residential		23,065		1,615		24,680
Other commercial loans		952		0		952
Total commercial		367,380		6,573		373,953
Consumer		379		0		379
Total	$	457,588	$	6,648	$	464,236

The following table presents the updated fair value adjustments made to the amortized cost basis of loans acquired on July 1, 2020:


(In Thousands)
Gross amortized cost at acquisition	$	472,012
Fair value adjustments:
Market rates		2,909
Credit adjustment on non-impaired loans		(7,219)
Credit adjustment on impaired loans		(3,466)
Fair value at acquisition	$	464,236

The market rate adjustment represents the movement in interest rates, irrespective of credit adjustments, compared to the contractual rates of the acquired loans. The credit adjustment made on non-PCI loans represents changes in credit quality of the underlying borrowers from loan inception to the acquisition date.

The credit adjustment on PCI loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that have been deemed uncollectible for each loan. The PCI loans are secured by real estate or other collateral, and the fair value of each loan was determined based on the estimated proceeds to be derived from selling the collateral, net of selling costs. The PCI loans were placed into nonaccrual status upon acquisition (and remained in nonaccrual status at December 31, 2020) as the Corporation cannot reasonably estimate cash flows expected to be collected in order to compute yield on the loans.

The Corporation recognized a core deposit intangible of $3,144,000. The core deposit intangible represents the estimated value of lower-cost funding provided by the nonmaturity deposits assumed in comparison with the Corporation’s estimated cost of borrowing funds in the market. The valuation assumptions to determine the core deposit intangible were comprised of level 2 and level 3 inputs. The core deposit intangible will be amortized over a weighted-average life of 5.4 years.

Deposit liabilities assumed were segregated into two categories: (1) nonmaturity deposits (checking, savings and money market), and (2) time deposits (deposit accounts with a stated maturity). The fair values of both categories of deposits were determined using level 2 fair value measurements. For nonmaturity deposits, the acquisition date outstanding balance of the assumed demand deposit accounts approximates fair value. In determining the fair value of time deposits, the Corporation discounted the contractual cash flows of the deposit accounts using prevailing market interest rates for time deposit accounts of similar type and duration. 51

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Short-term and long-term borrowings assumed consisted of advances from the Federal Home Loan Bank of Pittsburgh. The fair value of borrowings was determined using Level 2 measurements by discounting the contractual cash flows of the borrowings using Federal Home Loan Bank interest rates available July 1, 2020 for advances to the same maturities as those of the deposits assumed.

Subordinated debt assumed included two issues: (1) agreements with par values totaling $8,000,000, maturing in June 2026, redeemable at par beginning in June 2021 and bearing interest at 6.25%; and (2) an agreement with a par value of $2,000,000, maturing in July 2027, redeemable at par beginning in July 2022 and bearing interest at 6.50%. The fair value of subordinated debt was determined using Level 2 measurements by comparing the interest rates on the debt to the rates on similar recent issues of comparable size by other similar-sized banking companies.

The Corporation incurred merger-related expenses associated with the Covenant transaction of $7,708,000 in 2020 and $287,000 in 2019. Merger-related expenses include severance and similar expenses, costs associated with termination of data processing contracts and conversion of Covenant’s customer accounting data into the Corporation’s core system, legal and other professional fees and various other costs.

The following table presents pro forma information as if the merger between the Corporation and Covenant had been completed on January 1, 2019. The pro forma information does not necessarily reflect the results of operations that would have occurred had the merger taken place at the beginning of 2019. The supplemental pro forma information excludes merger-related expenses totaling $9,061,000 in 2020 (including $1,353,000 incurred by Covenant), or $7,245,000 net of tax (including $1,111,000 incurred by Covenant). The pro forma also excludes a tax benefit of $600,000 that Covenant realized from stock-based compensation vested upon completion of the merger. The pro forma information does not include the impact of possible business model changes nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.


	Year Ended
	Dec. 31,		Dec. 31,
(In Thousands Except Per Share Data)	2020		2019
Interest income	$	88,379	$	88,830
Interest expense		13,407		15,156
Net interest income		74,972		73,674
Provision for loan losses		4,013		1,309
Net interest income after provision for loan losses		70,959		72,365
Noninterest income		24,657		20,550
Net gains on securities		169		23
Loss on prepayment of borrowings		1,636		0
Other noninterest expenses		60,094		62,377
Income before income tax provision		34,055		30,561
Income tax provision		6,227		5,311
Net income	$	27,828	$	25,250
Earnings per common share - basic	$	1.75	$	1.64
Earnings per common share - diluted	$	1.75	$	1.63

Business Combination – Acquisition of Monument Bancorp, Inc.

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

Total purchase consideration was $42.7 million, including cash paid to former Monument shareholders totaling $9.6 million and 1,279,825 shares of Corporation common stock issued with a value of $33.1 million, net of costs directly related to stock issuance of $181,000. 52

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In connection with the transaction, the Corporation recorded goodwill of $16.4 million and a core deposit intangible asset of $1.5 million. Total loans acquired on April 1, 2019 were valued at $259.3 million, while total deposits assumed were valued at $223.3 million, borrowings were valued at $111.6 million and subordinated debt was valued at $12.4 million. The subordinated debt included an instrument with a fair value of $5.4 million that was redeemed on April 1, 2019 with no realized gain or loss. The Corporation acquired available-for-sale debt securities valued at $94.6 million and sold the securities in early April for approximately no realized gain or loss. The assets purchased and liabilities assumed in the merger were recorded at their estimated fair values at the time of closing, subject to refinement for up to one year after the closing date. There were no adjustments to the fair value measurements of assets or liabilities in 2020.

Merger-related expenses associated with the Monument acquisition, including legal and professional expenses and conversion of Monument’s customer accounting data into the Corporation’s core system, were $3,812,000 in 2019.

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)	****	Years Ended
		December 31,		December 31,
		2020		2019
Basic
Net income		$	19,222	$	19,504
Less: Dividends and undistributed earnings allocated to participating securities			(116)		(100)
Net income attributable to common shares		$	19,106	$	19,404
Basic weighted-average common shares outstanding			14,743,386		13,298,736
Basic earnings per common share (a)		$	1.30	$	1.46
Diluted
Net income attributable to common shares		$	19,106	$	19,404
Basic weighted-average common shares outstanding			14,743,386		13,298,736
Dilutive effect of potential common stock arising from stock options			3,662		22,823
Diluted weighted-average common shares outstanding			14,747,048		13,321,559
Diluted earnings per common share (a)		$	1.30	$	1.46
(a)	Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares with nonforfeitable dividends (participating securities).
---	---

The weighted-average number of nonvested restricted shares outstanding was 89,718 shares in 2020 and 68,358 shares in 2019.

Anti-dilutive stock options are excluded from net income per share calculations. Weighted-average common shares available from anti-dilutive instruments totaled 32,538 shares in 2020. There were no anti-dilutive instruments in 2019.

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COMPREHENSIVE INCOME

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


(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
2020
Unrealized gains on available-for-sale debt securities:
Unrealized holding gains on available-for-sale debt securities		$	10,504		$	(2,205)		$	8,299
Reclassification adjustment for (gains) realized in income			(169)			35			(134)
Other comprehensive income on available-for-sale debt securities			10,335			(2,170)			8,165
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income			(49)			11			(38)
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost			(29)			6			(23)
Other comprehensive loss on unfunded retirement obligations			(78)			17			(61)
Total other comprehensive income		$	10,257		$	(2,153)		$	8,104

(In Thousands)	****	Before-Tax		****	Income Tax		****	Net-of-Tax
		Amount			Effect			Amount
2019
Unrealized gains on available-for-sale debt securities:
Unrealized holding gains on available-for-sale debt securities		$	9,920		$	(2,084)		$	7,836
Reclassification adjustment for (gains) realized in income			(23)			5			(18)
Other comprehensive income on available-for-sale debt securities		$	9,897		$	(2,079)		$	7,818
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income			87			(19)			68
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost			(32)			7			(25)
Other comprehensive income on unfunded retirement obligations			55			(12)			43
Total other comprehensive income		$	9,952		$	(2,091)		$	7,861

Items reclassified out of each component of accumulated other comprehensive income (loss) are as follows:


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

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Changes in the components of accumulated other comprehensive income (loss), included in stockholders’ equity, are as follows:


(In Thousands)	****	Unrealized		****	Accumulated
		Gains			Unfunded			Other
	****	(Losses)		****	Retirement		****	Comprehensive
	****	on Securities		****	Obligations		****	Income (Loss)
2020
Balance, beginning of period		$	3,511		$	180		$	3,691
Other comprehensive income (loss) during year ended December 31, 2020			8,165			(61)			8,104
Balance, end of period		$	11,676		$	119		$	11,795

2019
Balance, beginning of period		$	(4,307)		$	137		$	(4,170)
Other comprehensive income during year ended December 31, 2019			7,818			43			7,861
Balance, end of period		$	3,511		$	180		$	3,691

CASH AND DUE FROM BANKS

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


(In Thousands)	****	December 31,		****	December 31,
		2020			2019
Cash and cash equivalents		$	96,017		$	31,122
Certificates of deposit			5,840			4,080
Total cash and due from banks		$	101,857		$	35,202

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

Historically, C&N Bank has been required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, C&N Bank had no required reserves at December 31, 2020 and $20,148,000 at December 31, 2019.

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SECURITIES

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


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

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


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

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

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The following table presents gross unrealized losses and fair value of available-for-sale debt securities with unrealized loss positions that are not deemed to be other-than-temporarily impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at December 31, 2020 and 2019:


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


December 31, 2019		Less Than 12 Months						12 Months or More						Total
(In Thousands)		Fair			Unrealized			Fair			Unrealized			Fair			Unrealized
	****	Value		****	Losses		****	Value		****	Losses		****	Value		****	Losses
Obligations of states and political subdivisions:
Tax-exempt		$	6,429		$	(38)		$	0		$	0		$	6,429		$	(38)
Taxable			5,624			(68)			161			(2)			5,785			(70)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			9,771			(35)			14,787			(102)			24,558			(137)
Residential collateralized mortgage obligations			31,409			(195)			30,535			(415)			61,944			(610)
Commercial mortgage-backed securities			0			0			8,507			(107)			8,507			(107)
Total temporarily impaired available-for-sale debt securities		$	53,233		$	(336)		$	53,990		$	(626)		$	107,223		$	(962)

Gross realized gains and losses from available-for-sale securities and the related income tax provision were as follows:


(In Thousands)	2020		2019
Gross realized gains from sales	$	222	$	24
Gross realized losses from sales		(53)		(1)
Net realized gains	$	169	$	23
Income tax provision related to net realized gains	$	35	$	5

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The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of December 31, 2020. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.


(In Thousands)		December 31, 2020
		Amortized			Fair
	****	Cost		****	Value
Due in one year or less		$	13,409		$	13,506
Due from one year through five years			46,172			47,758
Due from five years through ten years			47,535			50,110
Due after ten years			92,074			97,005
Sub-total			199,190			208,379
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			36,853			38,176
Residential collateralized mortgage obligations			56,048			57,467
Commercial mortgage-backed securities			42,461			45,310
Total		$	334,552		$	349,332

Investment securities carried at $247,373,000 at December 31, 2020 and $215,270,000 at December 31, 2019 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 12 for information concerning securities pledged to secure borrowing arrangements and Note 21 for information related to securities pledged against interest rate swap obligations.

Management evaluates securities for 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 December 31, 2020 and 2019 is provided below.

Debt Securities

At December 31, 2020 and 2019, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of these debt securities at December 31, 2020 and 2019 to be temporary.

Equity Securities

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheets, was $9,720,000 at December 31, 2020 and $10,131,000 at December 31, 2019. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at December 31, 2020 and December 31, 2019. In making this determination, management concluded that 58

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recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

The Corporation’s marketable equity security, with a carrying value of $1,000,000 at December 31, 2020 and $979,000 at December 31, 2019, consisted exclusively of one mutual fund. There was no unrealized gain/loss on the mutual fund at December 31, 2020 and an unrealized loss of $21,000 at December 31, 2019. The decrease in the unrealized loss of $21,000 in 2020 and the decrease in the unrealized loss of $29,000 in 2019 are included in other noninterest income in the consolidated statements of income. There were no sales of equity securities in 2020 and 2019.

LOANS

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

Summary of Loans by Type

(In Thousands)


	****	Dec. 31,		****	Dec. 31,
	****	2020			2019
Residential mortgage:
Residential mortgage loans - first liens		$	532,947		$	510,641
Residential mortgage loans - junior liens			27,311			27,503
Home equity lines of credit			39,301			33,638
1-4 Family residential construction			20,613			14,798
Total residential mortgage			620,172			586,580
Commercial:
Commercial loans secured by real estate			531,810			301,227
Commercial and industrial			159,577			126,374
Small Business Administration - Paycheck Protection Program			132,269			0
Political subdivisions			53,221			53,570
Commercial construction and land			42,874			33,555
Loans secured by farmland			11,736			12,251
Multi-family (5 or more) residential			55,811			31,070
Agricultural loans			3,164			4,319
Other commercial loans			17,289			16,535
Total commercial			1,007,751			578,901
Consumer			16,286			16,741
Total			1,644,209			1,182,222
Less: allowance for loan losses			(11,385)			(9,836)
Loans, net		$	1,632,824		$	1,172,386

In the table above, outstanding loan balances are presented net of deferred loan origination fees, of $6,286,000 at December 31, 2020 and $2,482,000 at December 31, 2019.

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 the northern tier and northcentral Pennsylvania, the southern tier of New York State and southeastern Pennsylvania. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10%of total loans at either December 31, 2020 or December 31, 2019.

On March 27, 2020, the CARES Act was signed into law. The CARES Act is a $2 trillion stimulus package designed to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A provision in the CARES Act includes creation of the Paycheck Protection Program (“PPP”) through the Small Business Administration (“SBA”) and Treasury Department. Under the PPP, the Corporation, as an SBA-certified lender, provides SBA-guaranteed loans to small businesses to pay their employees, rent, mortgage 59

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interest, and utilities. PPP loans will be forgiven subject to clients’ providing documentation evidencing their compliant use of funds and otherwise complying with the terms of the program.

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

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. Covenant also engaged in PPP lending starting in early April 2020. As of December 31, 2020, the recorded investment in PPP loans was $132,269,000, including contractual principal balances of $134,802,000, increased by a market rate adjustment on PPP loans acquired from Covenant of $504,000 and reduced by net deferred origination fees of $3,037,000. Net deferred origination fees and the market rate adjustment on PPP loans are recognized in interest income as yield adjustments (net accretion over the term of the loans). Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $1,945,000 for the year ended December 31, 2020.

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

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

To work with clients impacted by COVID-19, the Corporation is offering short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to the merger, Covenant had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the current crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the 60

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deferred amounts will be moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual or as TDRs at December 31, 2020. Most of the modifications under the program became effective in March and the second quarter 2020 and provided a deferral of interest or principal and interest for 90-to-180 days. Accordingly, many of the loans for which deferrals were granted returned to full payment status prior to December 31, 2020. The quantity and balances of modifications outstanding under the program at December 31, 2020 are as follows:


	Deferrals Remaining
	As of December 31, 2020
(Dollars in Thousands)	Number
	of	Recorded
	Loans	Investment
COVID-19-related loan modifications:
Residential mortgage	15	$	2,334
Consumer	3		61
Commercial	27		35,002
Total	45	$	37,397

The ultimate effect of COVID-19 on the local or broader economy is not known. In 2020, the Corporation increased the allowance for loan losses $785,000 based on an increase in qualitative factors related to potential deterioration in economic conditions. Further, in June, September and December 2020, the Corporation’s credit administration and commercial lending staffs performed reviews of commercial credits with “Pass” ratings in an effort to reduce the risk of failing to identify loans that should be evaluated for risk rating downgrade or a specific allowance. Updated risk ratings and specific allowances based on the December 2020 review have been included in the December 31, 2020 information presented below. Because of the significant uncertainties related to the ultimate duration of the COVID-19 pandemic and its economic impact, the total impact on the Corporation’s loan portfolio is not determinable.

As described in Note 3, effective July 1, 2020, the Corporation acquired loans pursuant to its acquisition of Covenant, and effective April 1, 2019, the Corporation acquired loans pursuant to the acquisition of Monument. The acquired loans were recorded at their initial fair value, with adjustments made to the gross amortized cost of loans based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. In the last three quarters of 2019 and year ended December 31, 2020, the Corporation 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 years ended December 31, 2020 and 2019, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:


(In Thousands)
	Year Ended
	December 31,		December 31,
	2020		2019
Market Rate Adjustment
Adjustments to gross amortized cost of loans at beginning of period	$	(1,415)	$	0
Market rate adjustment recorded in acquisition		2,909		(1,807)
(Amortization) accretion recognized in interest income		(776)		392
Adjustments to gross amortized cost of loans at end of period	$	718	$	(1,415)
Credit Adjustment on Non-impaired Loans
Adjustments to gross amortized cost of loans at beginning of period	$	(1,216)	$	0
Credit adjustment recorded in acquisition		(7,219)		(1,914)
Accretion recognized in interest income		2,456		698
Adjustments to gross amortized cost of loans at end of period	$	(5,979)	$	(1,216)

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The following table presents the components of the purchase accounting adjustments related to the PCI loans acquired from Covenant as of July 1, 2020:


(In Thousands)	July 1, 2020
Contractually required principal at acquisition	$	10,114
Non-accretable discount		(3,466)
Expected cash flows	$	6,648

A summary of PCI loans held at December 31, 2020 and December 31, 2019 is as follows:


(In Thousands)		December 31,			December 31,
	****	2020		****	2019
Outstanding balance		$	10,316		$	759
Carrying amount			6,841			441

Transactions within the allowance for loan losses, summarized by segment and class, were as follows:


	****	December 31,		****							December 31,
Year Ended December 31, 2020		2019							Provision		2020
(In Thousands)		Balance			Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens		$	3,405		$	0	$	39	$	80	$	3,524
Residential mortgage loans - junior liens			384			0		1		(36)		349
Home equity lines of credit			276			0		4		1		281
1-4 Family residential construction			117			0		0		(18)		99
Total residential mortgage			4,182			0		44		27		4,253
Commercial:
Commercial loans secured by real estate			1,921			0		0		1,130		3,051
Commercial and industrial			1,391			(2,236)		16		3,074		2,245
Commercial construction and land			966			(107)		0		(405)		454
Loans secured by farmland			158			0		0		(38)		120
Multi-family (5 or more) residential			156			0		0		80		236
Agricultural loans			41			0		0		(7)		34
Other commercial loans			155			0		0		13		168
Total commercial			4,788			(2,343)		16		3,847		6,308
Consumer			281			(122)		41		39		239
Unallocated			585			0		0		0		585
Total Allowance for Loan Losses		$	9,836		$	(2,465)	$	101	$	3,913	$	11,385

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	****	December 31,		****							December 31,
Year Ended December 31, 2019		2018							Provision		2019
(In Thousands)		Balance			Charge-offs		Recoveries		(Credit)		Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens		$	3,156		$	(166)	$	4	$	411	$	3,405
Residential mortgage loans - junior liens			325			(24)		2		81		384
Home equity lines of credit			302			0		5		(31)		276
1-4 Family residential construction			203			0		1		(87)		117
Total residential mortgage			3,986			(190)		12		374		4,182
Commercial:
Commercial loans secured by real estate			2,538			0		0		(617)		1,921
Commercial and industrial			1,553			(6)		6		(162)		1,391
Commercial construction and land			110			0		0		856		966
Loans secured by farmland			102			0		0		56		158
Multi-family (5 or more) residential			114			0		0		42		156
Agricultural loans			46			0		0		(5)		41
Other commercial loans			128			0		0		27		155
Total commercial			4,591			(6)		6		197		4,788
Consumer			233			(183)		39		192		281
Unallocated			499			0		0		86		585
Total Allowance for Loan Losses		$	9,309		$	(379)	$	57	$	849	$	9,836

For the year ended December 31, 2020, the provision for loan losses was $3,913,000, an increase in expense of $3,064,000 as compared to 2019. The provision included the impact of a $2,219,000 charge-off on a commercial loan of $3,500,000. In total, the provision for 2020 included a net charge of $2,238,000 related to specific loans (net decrease in specific allowances on loans of $126,000 and net charge-offs of $2,364,000) and a $1,675,000 increase in the collectively determined portion of the allowance for loan losses. The increase in the collectively determined portion of the allowance includes the impact of an increase in the net charge-off experience factor for commercial loans and an increase in qualitative factors.

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. 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. 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. Risk ratings are updated any time that conditions or the situation warrants. Loans not classified are included in the “Pass” column in the table below.

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


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


December 31, 2019	****									Purchased
(In Thousands)				Special						Credit
		Pass		Mention		Substandard		Doubtful		Impaired		Total
Residential Mortgage:
Residential Mortgage loans - first liens		$	500,963	$	193	$	9,324	$	84	$	77	$	510,641
Residential Mortgage loans - junior liens			26,953		79		471		0		0		27,503
Home equity lines of credit			33,170		59		409		0		0		33,638
1-4 Family residential construction			14,798		0		0		0		0		14,798
Total residential mortgage			575,884		331		10,204		84		77		586,580
Commercial:
Commercial loans secured by real estate			294,397		4,773		1,693		0		364		301,227
Commercial and Industrial			114,293		9,538		2,543		0		0		126,374
Political subdivisions			53,570		0		0		0		0		53,570
Commercial construction and land			32,224		0		1,331		0		0		33,555
Loans secured by farmland			6,528		4,681		1,042		0		0		12,251
Multi-family (5 or more) residential			30,160		0		910		0		0		31,070
Agricultural loans			3,343		335		641		0		0		4,319
Other commercial loans			16,416		0		119		0		0		16,535
Total commercial			550,931		19,327		8,279		0		364		578,901
Consumer			16,720		0		21		0		0		16,741
Totals		$	1,143,535	$	19,658	$	18,504	$	84	$	441	$	1,182,222

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The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of December 31, 2020 and 2019:


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

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


December 31, 2019	****	Loans:						Allowance for Loan Losses:
(In Thousands)
		Individually		Collectively				Individually		Collectively
		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens		$	1,023	$	509,618	$	510,641	$	0	$	3,405	$	3,405
Residential mortgage loans - junior liens			368		27,135		27,503		176		208		384
Home equity lines of credit			0		33,638		33,638		0		276		276
1-4 Family residential construction			0		14,798		14,798		0		117		117
Total residential mortgage			1,391		585,189		586,580		176		4,006		4,182
Commercial:
Commercial loans secured by real estate			684		300,543		301,227		0		1,921		1,921
Commercial and industrial			1,467		124,907		126,374		149		1,242		1,391
Political subdivisions			0		53,570		53,570		0		0		0
Commercial construction and land			1,261		32,294		33,555		678		288		966
Loans secured by farmland			607		11,644		12,251		48		110		158
Multi-family (5 or more) residential			0		31,070		31,070		0		156		156
Agricultural loans			76		4,243		4,319		0		41		41
Other commercial loans			0		16,535		16,535		0		155		155
Total commercial			4,095		574,806		578,901		875		3,913		4,788
Consumer			0		16,741		16,741		0		281		281
Unallocated													585

Total		$	5,486	$	1,176,736	$	1,182,222	$	1,051	$	8,200	$	9,836

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Summary information related to impaired loans as of December 31, 2020 and 2019 is as follows:


(In Thousands)		December 31, 2020									December 31, 2019
		Unpaid									Unpaid
		Principal			Recorded			Related			Principal			Recorded			Related
	****	Balance		****	Investment		****	Allowance		****	Balance		****	Investment		****	Allowance
With no related allowance recorded:
Residential mortgage loans - first liens		$	1,248		$	1,248		$	0		$	645		$	617		$	0
Residential mortgage loans - junior liens			160			105			0			42			42			0
Commercial loans secured by real estate			7,168			5,398			0			684			684			0
Commercial and industrial			1,781			1,287			0			563			563			0
Loans secured by farmland			84			84			0			129			129			0
Multi-family (5 or more) residential			2,770			1,614			0			0			0			0
Agricultural loans			0			0			0			76			76			0
Total with no related allowance recorded			13,211			9,736			0			2,139			2,111			0

With a related allowance recorded:
Residential mortgage loans - first liens			1,200			1,200			9			406			406			0
Residential mortgage loans - junior liens			309			309			153			326			326			176
Commercial loans secured by real estate			6,501			6,501			691			0			0			0
Commercial and industrial			72			72			72			904			904			149
Construction and other land loans			0			0			0			1,261			1,261			678
Loans secured by farmland			0			0			0			478			478			48
Total with a related allowance recorded			8,082			8,082			925			3,375			3,375			1,051
Total		$	21,293		$	17,818		$	925		$	5,514		$	5,486		$	1,051

In the table immediately above, loans to two borrowers are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. Each of these loans is collateralized by one property, and the allowance associated with each of these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property. The total allowance related to these two borrowers was $153,000 at December 31, 2020 and $176,000 at December 31, 2019. 66

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


(In Thousands)					Interest Income Recognized on
	Average Investment in				on Impaired Loans
	Impaired Loans				on a Cash Basis
	Year Ended December 31,				Year Ended December 31,
	2020		2019		2020		2019
Residential mortgage:
Residential mortgage loans - first lien	$	1,853	$	1,440	$	116	$	87
Residential mortgage loans - junior lien		392		288		22		12
Home equity lines of credit		57		26		3		4
Total residential mortgage		2,302		1,754		141		103
Commercial:
Commercial loans secured by real estate		5,266		1,562		258		19
Commercial and industrial		2,542		1,186		34		25
Commercial construction and land		521		556		15		71
Loans secured by farmland		319		1,276		27		49
Multi-family (5 or more) residential		202		0		0		0
Agricultural loans		76		399		4		31
Other commercial loans		18		20		1		4
Total commercial		8,944		4,999		339		199
Consumer		0		3		0		0
Total	$	11,246	$	6,756	$	480	$	302

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)		December 31, 2020						December 31, 2019
		Past Due						Past Due
		90+ Days and						90+ Days and
	****	Accruing		****	Nonaccrual		****	Accruing		****	Nonaccrual
Residential mortgage:
Residential mortgage loans - first liens		$	838		$	6,387		$	878		$	4,679
Residential mortgage loans - junior liens			52			378			53			326
Home equity lines of credit			233			299			71			73
Total residential mortgage			1,123			7,064			1,002			5,078
Commercial:
Commercial loans secured by real estate			395			11,550			107			1,148
Commercial and industrial			142			970			15			1,051
Commercial construction and land			0			49			0			1,311
Loans secured by farmland			188			84			43			565
Multi-family (5 or more) residential			0			1,614			0			0
Other commercial			71			0			0			49
Total commercial			796			14,267			165			4,124
Consumer			56			85			40			16
Totals		$	1,975		$	21,416		$	1,207		$	9,218

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual. PCI loans with a total recorded investment of $6,841,000 at December 31, 2020 and $441,000 at December 31, 2019 are classified as nonaccrual. 67

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The table below presents a summary of the contractual aging of loans as of December 31, 2020 and 2019. Loans modified under the Corporation’s program designed to work with clients impacted by COVID-19, as described above, are included in the current and past due less than 30 days category in the table that follows:


(In Thousands)		As of December 31, 2020											As of December 31, 2019
	****	Current &		****			****					****	Current &		****
		Past Due			Past Due			Past Due					Past Due			Past Due		Past Due
		Less than			30-89			90+					Less than			30-89		90+
		30 Days			Days			Days		Total			30 Days			Days		Days		Total
Residential mortgage:
Residential mortgage loans - first liens		$	523,191		$	5,703		$	4,053	$	532,947		$	499,024		$	7,839	$	3,778	$	510,641
Residential mortgage loans - junior liens			27,009			111			191		27,311			27,041			83		379		27,503
Home equity lines of credit			38,919			101			281		39,301			33,115			452		71		33,638
1-4 Family residential construction			20,457			156			0		20,613			14,758			40		0		14,798
Total residential mortgage			609,576			6,071			4,525		620,172			573,938			8,414		4,228		586,580

Commercial:
Commercial loans secured by real estate			529,998			66			1,746		531,810			299,640			737		850		301,227
Commercial and industrial			158,523			55			999		159,577			126,221			16		137		126,374
Small Business Administration - Paycheck Protection Program			132,269			0			0		132,269			0			0		0		0
Political subdivisions			53,221			0			0		53,221			53,570			0		0		53,570
Commercial construction and land			42,590			284			0		42,874			33,505			0		50		33,555
Loans secured by farmland			11,419			95			222		11,736			11,455			666		130		12,251
Multi-family (5 or more) residential			53,860			1,951			0		55,811			31,070			0		0		31,070
Agricultural loans			3,091			2			71		3,164			4,318			1		0		4,319
Other commercial loans			17,289			0			0		17,289			16,535			0		0		16,535
Total commercial			1,002,260			2,453			3,038		1,007,751			576,314			1,420		1,167		578,901
Consumer			16,063			83			140		16,286			16,496			189		56		16,741
Totals		$	1,627,899		$	8,607		$	7,703	$	1,644,209		$	1,166,748		$	10,023	$	5,451	$	1,182,222

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


(In Thousands)		Current &
		Past Due			Past Due			Past Due
		Less than			30-89			90+
	****	30 Days		****	Days		****	Days		****	Total
December 31, 2020 Nonaccrual Totals		$	12,999		$	2,689		$	5,728		$	21,416
December 31, 2019 Nonaccrual Totals		$	3,840		$	1,134		$	4,244		$	9,218

Loans whose terms are modified are classified as TDRs if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired and reviewed each quarter to determine if a specific allowance for loan losses is required. Loans deferred under COVID-19 CARES Act Section 4013 are not classified as TDRs as they meet COVID-19 relief guidance. The outstanding balance of loans subject to TDRs, as well as the contractual aging information at December 31, 2020 and 2019 is as follows:

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Troubled Debt Restructurings (TDRs):


(In Thousands)		Current &
		Past Due			Past Due			Past Due
		Less than			30-89			90+
	****	30 Days		****	Days		****	Days		****	Nonaccrual		****	Total
December 31, 2020 Totals		$	166		$	0		$	418		$	6,867		$	7,451
December 31, 2019 Totals		$	889		$	0		$	0		$	1,737		$	2,626

At December 31, 2020 and 2019, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

A summary of TDRs that occurred during 2020 and 2019 is as follows:


(Balances in Thousands)	2020				****	2019
		****	Post-		****		****	Post-
	Number		Modification		****	Number		Modification
	of		Recorded		****	of		Recorded
	Loans		Investment		****	Loans		Investment
Residential mortgage - junior liens:
Reduced monthly payments and extended maturity date	0		$	0		1		$	18
New loan at lower than risk-adjusted market rate to borrower from whom short sale of other collateral was accepted	1			30		0			0
Commercial loans secured by real estate:
Interest only payments for a nine-month period	1			240		0			0
Principal and interest payment deferral non-COVID related	2			4,831		0			0
Extended interest only payments and reduced monthly payments with a balloon payment at maturity	0			0		1			1,261
Commercial and industrial,
Reduced monthly payments and extended maturity date	0			0		9			448
Multi-family (5 or more) residential,
Principal and interest payment deferral non-COVID related	3			2,170		0			0
Agricultural loans,
Reduced monthly payments and extended maturity date	0			0		1			84
Total	7		$	7,271		12		$	1,811

In the year ended December 31, 2020, the Corporation recorded a specific allowance for loan losses of $416,000 related to a loan secured by commercial real estate for which a TDR concession was also made in 2020 and included in the table above. The other loans for which TDRs were granted in 2020 had no specific impact on the provision or allowance for loan losses.

In the year ended December 31, 2019, the Corporation recorded a specific allowance for loan losses of $678,000 related to the commercial loan secured by real estate in the table above. This loan was subsequently paid off in the first quarter of 2020 for less than the full principal balance, resulting in a charge-off of $107,000.

In 2020 and 2019, payment defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months are summarized as follows:

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		2020					2019
		Number					Number
		of		Recorded			of		Recorded
(Balances in Thousands)	****	Loans	****	Investment		****	Loans	****	Investment
Residential mortgage - first liens		0		$	0		1		$	261
Residential mortgage - junior liens		1			240		1			18
Commercial and industrial		0			0		8			170
Agricultural loans		0			0		1			81
Total		1		$	240		11		$	530

In 2020, one commercial real estate loan experienced a payment default. This loan was individually evaluated for impairment at December 31, 2020 and no specific allowance was recorded as the estimated value of collateral exceeded the outstanding balance. All of the TDRs for which payment defaults occurred in 2019 were related to one commercial relationship. These loans were individually evaluated for impairment at December 31, 2020 and 2019, and no specific allowance for loan losses was recognized because the estimated values of collateral and U.S. Government (Small Business Administration) guarantees exceeded the outstanding balances of the loans.

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 consolidated balance sheets) is as follows:


(In Thousands)	December 31,		December 31,
	2020		2019
Foreclosed residential real estate	$	80	$	292

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


(In Thousands)	December 31,		December 31,
	2020		2019
Residential real estate in process of foreclosure	$	1,246	$	1,717

BANK PREMISES AND EQUIPMENT


	December 31,
(In Thousands)	2020		2019
Land	$	3,826	$	3,199
Buildings and improvements		33,058		28,403
Furniture and equipment		15,235		13,618
Construction in progress		8		1,655
Total		52,127		46,875
Less: accumulated depreciation		(30,601)		(29,705)
Net	$	21,526	$	17,170

Depreciation expense is included in the following line items of the consolidated statements of income:


(In Thousands)	2020		2019
Occupancy expense	$	857	$	775
Furniture and equipment expense		738		692
Data processing expenses		338		239
Telecommunications expenses		48		43
Total	$	1,981	$	1,749

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GOODWILL AND OTHER INTANGIBLE ASSETS, NET

Information related to the core deposit intangibles is as follows:


(In Thousands)	****	December 31,
	****	2020		2019
Gross amount		$	6,639	$	3,495
Accumulated amortization			(2,788)		(2,248)
Net		$	3,851	$	1,247

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


(In Thousands)	Year Ended
	December 31,		December 31,
	2020		2019
Amortization expense	$	540	$	223

In 2020, amortization expense included $292,000 related to the Covenant acquisition and $248,000 related to the Monument acquisition as described in Note 3. In 2019, amortization expense included $214,000 related to the Monument acquisition and $9,000 related to a previous acquisition. The amount of amortization expense to be recognized in each of the ensuing five years is as follows:


(In Thousands)	****
2021		$	535
2022			439
2023			408
2024			390
2025			424

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Changes in the carrying amount of goodwill are summarized in the following table:


(In Thousands)	Year Ended
	December 31,		December 31,
	2020		2019
Balance, beginning of period	$	28,388	$	11,942
Goodwill arising in business combination		24,117		16,446
Balance, end of period	$	52,505	$	28,388

There were no goodwill impairment charges recorded in the years ended December 31, 2020 and 2019.

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DEPOSITS

At December 31, 2020, the scheduled maturities of time deposits are as follows:


(In Thousands)
2021	$	262,358
2022		76,447
2023		27,730
2024		12,621
2025		11,192
2026		59
Total	$	390,407

Time deposits of more than $250,000 totaled $103,024,000 at December 31, 2020 and $84,476,000 at December 31, 2019. As of December 31, 2020, the remaining maturities or time to next re-pricing of time deposits more than $250,000 was as follows:


(In Thousands)
Three months or less	$	25,566
Over 3 months through 12 months		54,883
Over 1 year through 3 years		15,574
Over 3 years		7,001
Total	$	103,024

BORROWED FUNDS AND SUBORDINATED DEBT

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


(In Thousands)	****	December 31,		****	December 31,
		2020			2019
FHLB-Pittsburgh borrowings		$	18,066		$	84,292
Customer repurchase agreements			1,956			1,928
Total short-term borrowings		$	20,022		$	86,220

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


(In Thousands)	****	December 31,		****	December 31,
		2020			2019
Overnight borrowing		$	0		$	64,000
Other short-term advances			18,066			20,292
Total short-term FHLB-Pittsburgh borrowings		$	18,066		$	84,292

The overnight borrowing from FHLB-Pittsburgh had an interest rate of 1.81% at December 31, 2019. At December 31, 2020, other short-term advances included five advances totaling $18,000,000 which are presented in the table inclusive of the unaccreted purchase accounting adjustment, with a weighted-average effective rate of 0.43%. At December 31, 2019, other short-term advances included seven advances totaling $20,297,000 which are presented in the table net of the unamortized purchase accounting adjustment, with a weighted-average effective rate of 2.28%.

The weighted average interest rate on total short-term borrowings outstanding was 0.40% at December 31, 2020 and 1.88% at December 31, 2019. The maximum amount of total short-term borrowings outstanding at any month-end was $56,647,000 in 2020 and $86,220,000 in 2019. 72

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

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At December 31, 2020, the Corporation had available credit in the amount of $14,654,000 on this line with no outstanding advances. At December 31, 2019, the Corporation had available credit in the amount of $14,244,000 on this line with no outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of $15,126,000 at December 31, 2020 and $14,728,000 at December 31, 2019.

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling $1,049,690,000 at December 31, 2020 and $778,877,000 at December 31, 2019. Also, the FHLB-Pittsburgh loan facility requires the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in Other Assets) were $9,720,000 at December 31, 2020 and $10,131,000 at December 31, 2019. The Corporation’s total credit facility with FHLB-Pittsburgh was $771,199,000 at December 31, 2020, including an unused (available) amount of $698,977,000. At December 31, 2019, the Corporation’s total credit facility with FHLB-Pittsburgh was $552,546,000, including an unused (available) amount of $416,127,000.

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 December 31, 2020 and December 31, 2019. The carrying value of the underlying securities was $1,980,000 at December 31, 2020 and $1,951,000 at December 31, 2019.

LONG-TERM BORROWINGS

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


(In Thousands)	****	December 31,		****	December 31,
		2020			2019
Loans matured in 2020 with a weighted-average rate of 2.71%		$	0		$	5,069
Loans maturing in 2021 with a weighted-average rate of 1.36%			26,098			6,000
Loans maturing in 2022 with a weighted-average rate of 0.60%			15,682			20,000
Loans maturing in 2023 with a weighted-average rate of 0.73%			7,224			20,500
Loans maturing in 2024 with a weighted-average rate of 0.75%			5,137			0
Loan maturing in 2025 with a rate of 4.91%			467			558
Total long-term FHLB-Pittsburgh borrowings		$	54,608		$	52,127

Note: Weighted-average rates are presented as of December 31, 2020. ****

SUBORDINATED DEBT

At December 31, 2020 and 2019, outstanding subordinated debt agreements are as follows:


(In Thousands)	****	December 31,		****	December 31,
		2020			2019
Agreements with an aggregate par value of $8,000,000; bearing interest at 6.25%; maturing in June 2026 and redeemable at par in June 2021		$	8,027		$	0
Agreements with an aggregate par value of $6,500,000; bearing interest at 6.50%; maturing in April 2027 and redeemable at par in April 2022			6,500			6,500
Agreement with a par value of $2,000,000; bearing interest at 6.50%; maturing in July 2027 and redeemable at par in July 2022			2,026			0
Total carrying value		$	16,553		$	6,500

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EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS

DEFINED BENEFIT PLANS

The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. Full-time employees no longer accrue service time toward the Corporation-subsidized portion of the medical benefits. The plan contains a cost-sharing feature which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at December 31, 2020 and December 31, 2019 and are not expected to significantly affect the Corporation’s future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.

In an acquisition in 2007, the Corporation assumed the Citizens Trust Company Retirement Plan, a defined benefit pension plan. This plan covers certain employees who were employed by Citizens Trust Company on December 31, 2002, when the plan was amended to discontinue admittance of any future participant and to freeze benefit accruals. Information related to the Citizens Trust Company Retirement Plan has been included in the tables that follow. The Corporation uses a December 31 measurement date for this plan.

The following table shows the funded status of the defined benefit plans:


	****	Pension					****	Postretirement
(In Thousands)	****	2020		****	2019		****	2020		****	2019
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year		$	976		$	870		$	1,326		$	1,349
Service cost			0			0			46			33
Interest cost			23			28			39			50
Plan participants' contributions			0			0			185			184
Actuarial loss (gain)			108			91			11			(63)
Benefits paid			(6)			(13)			(260)			(227)
Benefit obligation at end of year		$	1,101		$	976		$	1,347		$	1,326

CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year		$	971		$	847		$	0		$	0
Actual return on plan assets			97			137			0			0
Employer contribution			0			0			75			43
Plan participants' contributions			0			0			185			184
Benefits paid			(6)			(13)			(260)			(227)
Fair value of plan assets at end of year		$	1,062		$	971		$	0		$	0

Funded status at end of year		$	(39)		$	(5)		$	(1,347)		$	(1,326)

At December 31, 2020 and 2019, the following pension plan and postretirement plan liability amounts were recognized in the consolidated balance sheets:


		Pension						Postretirement
(In Thousands)	****	2020		****	2019		****	2020		2019
Accrued interest and other liabilities		$	39		$	5		$	1,347	$	1,326

At December 31, 2020 and 2019, the following items included in accumulated other comprehensive income had not been recognized as components of expense:


	****	Pension						Postretirement
(In Thousands)	****	2020		****	2019		****	2020		****	2019
Prior service cost		$	0		$	0		$	(217)		$	(248)
Net actuarial loss (gain)			277			255			(211)			(236)
Total		$	277		$	255		$	(428)		$	(484)

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For the defined benefit pension plan, amortization of the net actuarial loss is expected to be $19,000 in 2021. For the postretirement plan, the estimated amount of prior service cost that will be amortized from accumulated other comprehensive income into net periodic benefit cost in 2021 is a reduction in expense of $31,000, and net actuarial gain of $5,000 is expected to be amortized in 2021.

The accumulated benefit obligation for the defined benefit pension plan was $1,101,000 at December 31, 2020 and $976,000 at December 31, 2019.

The components of net periodic benefit costs from defined benefit plans are as follows:


	****	Pension						Postretirement
(In Thousands)	****	2020		****	2019		****	2020		****	2019
Service cost		$	0		$	0		$	46		$	33
Interest cost			23			28			39			50
Expected return on plan assets			(27)			(22)			0			0
Amortization of prior service cost			0			0			(31)			(31)
Recognized net actuarial loss (gain)			16			20			(14)			(21)
Total net periodic benefit cost		$	12		$	26		$	40		$	31

The weighted-average assumptions used to determine net periodic benefit cost are as follows:


	****	Pension				Postretirement
	****	2020	****	2019	****	2020	****	2019	****
Citizens Trust Company Retirement Plan and postretirement plan:
Discount rate		3.10	%	4.10	%	3.25	%	4.50	%
Expected return on plan assets		4.99	%	4.68	%	N/A		N/A
Rate of compensation increase		N/A		N/A		N/A		N/A

The weighted-average assumptions used to determine benefit obligations as of December 31, 2020 and 2019 are as follows:


	****	Pension				Postretirement
	****	2020	****	2019	****	2020	****	2019
Discount rate		2.30	%	3.10	%	2.50	%	3.25	%
Rate of compensation increase		N/A		N/A		N/A		N/A

Estimated future benefit payments, including only estimated employer contributions for the postretirement plan, which reflect expected future service, are as follows:


(In Thousands)	****	Pension		****	Postretirement
2021		$	499		$	79
2022			8			85
2023			192			77
2024			8			83
2025			8			83
2026-2030			367			407

No estimated minimum contribution to the defined benefit pension plan is required in 2021, though the Corporation may make discretionary contributions.

The expected return on pension plan assets is a significant assumption used in the calculation of net periodic benefit cost. This assumption reflects the average long-term rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation.

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The fair values of pension plan assets at December 31, 2020 and 2019 are as follows:


	****	2020	****	2019	****
Mutual funds invested principally in:
Cash and cash equivalents		2	%	3	%
Debt securities		36	%	38	%
Equity securities		51	%	49	%
Alternative funds		11	%	10	%
Total		100	%	100	%

C&N Bank’s Wealth Management Department manages the investment of the pension plan assets. The Plan’s securities include mutual funds invested principally in debt securities, a diversified mix of large, mid- and small-capitalization U.S. stocks, foreign stocks and alternative asset classes such as real estate, commodities, and inflation-protected securities. The fair values of plan assets are determined based on Level 1 inputs (as described in Note 22). The Plan’s assets do not include any shares of the Corporation’s common stock.

PROFIT SHARING AND DEFERRED COMPENSATION PLANS

The Corporation has a profit sharing plan that incorporates the deferred salary savings provisions of Section 401(k) of the Internal Revenue Code. The Corporation’s matching contributions to the Plan depend upon the tax deferred contributions of employees. The Corporation’s total basic and matching contributions were $1,050,000 in 2020 and $891,000 in 2019.

The Corporation has an Employee Stock Ownership Plan (ESOP). Contributions to the ESOP are discretionary, and the ESOP uses funds contributed to purchase Corporation stock for the accounts of ESOP participants. These purchases are made in the market (not directly from the Corporation), and employees are not permitted to purchase Corporation stock under the ESOP. The ESOP includes a diversification feature, which allows participants, upon reaching age 55 and 10 years of service (as defined), to sell up to 50% of their Corporation shares over a period of 6 years. As of December 31, 2020, and 2019, there were no shares allocated for repurchase by the ESOP.

Dividends paid on shares held by the ESOP are charged to retained earnings. All Corporation shares owned through the ESOP are included in the calculation of weighted-average shares outstanding for purposes of calculating earnings per share – basic and diluted. The ESOP held 481,478 shares of Corporation stock at December 31, 2020 and 473,171 shares at December 31, 2019, all of which had been allocated to Plan participants. The Corporation’s contributions to the ESOP totaled $912,000 in 2020 and $718,000 in 2019.

The Corporation has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to operating expense for officers’ supplemental deferred compensation were $286,000 in 2020 and $251,000 in 2019.

In connection with the Covenant acquisition, the Corporation assumed an obligation to provide a supplemental retirement benefit to a former Covenant executive. Under the terms of the agreement, the executive or his heirs will receive monthly payments totaling $1 million over a 10-year period starting in October 2025. Effective July 1, 2020, the Corporation recorded a liability of $499,000 representing the present value of the obligation prior to the executive fully vesting in the benefit. In 2020, the Corporation recorded expense totaling $366,000 related to this obligation, including: (1) $360,000, which is included in merger-related expenses in the consolidated statements of income, representing the impact of the executive fully vesting upon the change in control, and (2) $6,000, which is included in pensions and other employee benefits in the consolidated statements of income, representing the effective interest cost on the obligation from July 1, 2020 through December 31, 2020. The discount rate used to measure the liability at July 1, 2020 and December 31, 2020 was 1.5%. The balance of the liability at December 31, 2020, which is included in accrued interest and other liabilities in the consolidated balance sheets, is $865,000.

The Corporation also has a nonqualified deferred compensation plan that allows selected officers the option to defer receipt of cash compensation, including base salary and any cash bonuses or other cash incentives. This nonqualified deferred compensation plan does not provide for Corporation contributions. 76

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STOCK-BASED COMPENSATION PLANS

The Corporation has a Stock Incentive Plan for a selected group of senior officers. A total of 850,000 shares of common stock may be issued under the Stock Incentive Plan. Awards may be made under the Stock Incentive Plan in the form of qualified options (“Incentive Stock Options,” as defined in the Internal Revenue Code), nonqualified options, stock appreciation rights or restricted stock. Historically through December 31, 2020, all awards made under this Plan have consisted of Incentive Stock Options or restricted stock. Incentive Stock Options have an exercise price equal to the market value of the stock at the date of grant, vest after 6 months and expire after 10 years. There are 166,603 shares available for issuance under the Stock Incentive Plan as of December 31, 2020.

Also, the Corporation has an Independent Directors Stock Incentive Plan. This plan permits awards of nonqualified stock options and/or restricted stock to non-employee directors. A total of 235,000 shares of common stock may be issued under the Independent Directors Stock Incentive Plan. The recipients’ rights to exercise stock options under this plan expire 10 years from the date of grant. The exercise prices of all stock options awarded under the Independent Directors Stock Incentive Plan are equal to market value as of the dates of grant. There are 103,143 shares available for issuance under the Independent Directors Stock Incentive Plan as of December 31, 2020.

Total stock-based compensation expense is as follows:


(In Thousands)	****	2020		****	2019
Restricted stock		$	1,050		$	798
Stock options			0			0
Total		$	1,050		$	798

The following summarizes non-vested restricted stock activity for the year ended December 31, 2020:


			****	Weighted
				Average
		Number		Grant Date
	****	of Shares	****	Fair Value
Outstanding, December 31, 2019		68,200		$	24.53
Granted		70,940		$	23.18
Vested		(31,908)		$	24.97
Forfeited		(5,290)		$	25.09
Outstanding, December 31, 2020		101,942		$	23.42

Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. As of December 31, 2020, there was $1,340,000 total unrecognized compensation cost related to restricted stock, which is expected to be recognized over a weighted average period of 1.5 years.

In 2020 and 2019, the Corporation awarded shares of restricted stock under the Stock Incentive Plan, as follows:


	****	2020	****	2019
Time-based awards to independent directors		7,580		7,620
Time-based awards to employees		45,457		26,827
Performance-based awards to employees		17,903		13,690
Total		70,940		48,137

Time-based restricted stock awards granted under the Independent Directors Stock Incentive Plan in 2020 and 2019 vest over one-year terms. Time-based restricted stock awards granted to employees in 2020 and 2019 vest ratably over three-year terms, subject to continued employment and satisfactory job performance. Performance-based restricted stock awards granted in 2020 and 2019 vest ratably over three-year terms, with vesting contingent upon meeting conditions based on the Corporation’s earnings as specified in the agreements.

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There were no stock options granted in 2020 or 2019. A summary of stock option activity is presented below:


	****	2020				****	2019
				Weighted					Weighted
				Average					Average
				Exercise					Exercise
	****	Shares	****	Price		****	Shares	****	Price
Outstanding, beginning of year		75,897		$	18.69		115,714		$	18.49
Granted		0					0
Exercised		(17,222)		$	18.25		(31,304)		$	17.65
Forfeited		(1,564)		$	15.06		0
Expired		0					(8,513)		$	19.88
Outstanding, end of year		57,111		$	18.92		75,897		$	18.69
Options exercisable at year-end		57,111		$	18.92		75,897		$	18.69
Weighted-average fair value of options forfeited				$	4.26					N/A

The weighted-average remaining contractual term of outstanding stock options at December 31, 2020 was 1.9 years. The aggregate intrinsic value of stock options outstanding was $63,000 at December 31, 2020. The total intrinsic value of options exercised was $128,000 in 2020 and $276,000 in 2019.

The Corporation has issued shares from treasury stock for almost all stock option exercises through December 31, 2020. Management does not anticipate that stock repurchases will be necessary to accommodate stock option exercises in 2021.

In January 2021, the Corporation awarded 63,402 shares of restricted stock under the Stock Incentive Plan and 10,989 shares of restricted stock under the Independent Directors Stock Incentive Plans. The January 2021 restricted stock awards under the Stock Incentive Plan vest ratably over three years. The 2021 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. Total estimated stock-based compensation for 2021 is $1,400,000. The restricted stock awards made in January 2021 are not included in the tables above.

INCOME TAXES

The net deferred tax asset at December 31, 2020 and 2019 represents the following temporary difference components:


	****	December 31,			December 31,
(In Thousands)	****	2020		****	2019
Deferred tax assets:
Allowance for loan losses		$	2,154		$	2,080
Purchase accounting adjustments on loans			1,930			640
Net operating loss carryforward			896			0
Operating leases liability			724			344
Other deferred tax assets			3,089			2,173
Total deferred tax assets			8,793			5,237

Deferred tax liabilities:
Unrealized holding gains on securities			3,104			934
Defined benefit plans - ASC 835			32			49
Bank premises and equipment			1,216			763
Core deposit intangibles			840			272
Right-of-use assets from operating leases			724			344
Other deferred tax liabilities			172			257
Total deferred tax liabilities			6,088			2,619
Deferred tax asset, net		$	2,705		$	2,618

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The provision for income taxes includes the following:


(In Thousands)	****	2020		****	2019
Currently payable		$	4,230		$	3,618
Tax expense resulting from allocations of certain tax benefits to equity or as a reduction in other assets			121			115
Deferred			(361)			172
Total provision		$	3,990		$	3,905

A reconciliation of income tax at the statutory rate to the Corporation’s effective rate is as follows:


	****	2020					2019
(Dollars In Thousands)	****	Amount		****	%	****	Amount		****	%
Expected provision		$	4,875		21.0		$	4,916		21.0
Tax-exempt interest income			(808)		(3.5)			(853)		(3.6)
Increase in cash surrender value and other income from life insurance, net			(170)		(0.7)			(91)		(0.4)
ESOP Dividends			(110)		(0.5)			(113)		(0.5)
State income tax, net of Federal benefit			172		0.7			122		0.5
Other, net			31		0.1			(76)		(0.3)
Effective income tax provision		$	3,990		17.2		$	3,905		16.7

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

The Corporation has no unrecognized tax benefits, nor pending examination issues related to tax positions taken in preparation of its income tax returns. With limited exceptions, the Corporation is no longer subject to examination by the Internal Revenue Service for years prior to 2017.

RELATED PARTY TRANSACTIONS

Loans to executive officers, directors of the Corporation and its subsidiaries and any associates of the foregoing persons are as follows:


	****	Beginning		****	New		****	****		****	Other		****	Ending
(In Thousands)	****	Balance		****	Loans		****	Repayments		****	Changes		****	Balance
13 directors, 9 executive officers 2020		$	14,455		$	242		$	(2,150)		$	5,898		$	18,445
11 directors, 8 executive officers 2019		$	15,144		$	1,027		$	(1,850)		$	134		$	14,455

In the table above, other changes represent net changes in the balance of existing lines of credit and transfers in and out of the related party category.

Deposits from related parties held by the Corporation amounted to $13,182,000 at December 31, 2020 and $8,828,000 at December 31, 2019.

OFF-BALANCE SHEET RISK

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance sheets. The contract amounts of these instruments express the extent of involvement the Corporation has in particular classes of financial instruments. 79

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The Corporation’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Financial instruments whose contract amounts represent credit risk at December 31, 2020 and 2019 are as follows:


(In Thousands)	****	2020		****	2019
Commitments to extend credit		$	317,470		$	256,896
Standby letters of credit			9,107			8,446

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation, for extensions of credit is based on management’s credit assessment of the counterparty.

Standby letters of credit are conditional commitments issued by the Corporation guaranteeing performance by a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Some of the standby letters of credit are collateralized by real estate or other assets, and others are unsecured. The extent to which proceeds from liquidation of collateral would be expected to cover the maximum potential amount of future payments related to standby letters of credit is not estimable. The Corporation has recorded no liability associated with standby letters of credit as of December 31, 2020 and 2019.

Standby letters of credit as of December 31, 2020 expire as follows:


Year of Expiration	****	(In Thousands)
2021		$	8,701
2022			406
Total		$	9,107

OPERATING LEASE COMMITMENTS AND CONTINGENCIES

Operating Lease Commitments

The Corporation leases certain branch locations, office space and equipment. All leases are classified as operating leases. Leases with an initial term of 12 months or less are not recorded on the balance sheet and the related lease expense is recognized on a straight-line basis over the lease term.

Certain leases include options to renew, with renewal terms that can extend the lease term from one to eight years that are reasonably certain of being exercised. The discount rate used in determining the lease liability for each individual lease was the FHLB fixed advance rate which corresponded with the remaining lease term as of January 1, 2019 for leases that existed at adoption and as of the lease commencement date for leases subsequently entered into after January 1, 2019. At December 31, 2020, discount rates ranged from 0.84% to 3.50% with a weighted-average discount rate of 2.07%.

As shown in the table below, at December 31, 2020, right-of-use assets of $3,446,000 were included in other assets, and the related liabilities totaling the same amount were included in accrued interest and other liabilities, in the consolidated balance sheets. At December 31, 2019, right of use assets totaled $1,637,000. In 2020, the Corporation recorded right-of-use asset and lease liabilities from the Covenant acquisition of $1,956,000 and additional right-of-use assets obtained in exchange for lease liabilities of $167,000.

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		December 31,			December 31,
(In Thousands)	****	2020		****	2019
Other assets		$	3,446		$	1,637
Other liabilities		$	3,446		$	1,637

In 2020 and 2019, operating lease expenses are included in the line items of the consolidated statements of income:


(In Thousands)	****	2020		****	2019
Occupancy expense, net		$	342		$	214
Furniture and equipment expense			29			37
Total		$	371		$	251

A maturity analysis of the Corporation’s lease liabilities at December 31, 2020 is as follows:

(In Thousands)

Lease Payments Due


2021	$	484
2022		465
2023		453
2024		446
2025		426
Thereafter		1,494
Total lease payments		3,768
Discount on cash flows		(322)
Total lease liabilities	$	3,446

Litigation Matters

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.

Trust Department Tax Reporting Contingency

Estimated losses related to trust department tax compliance matters totaled $571,000 in 2020, up from $12,000 in 2019. These losses are included in other noninterest expense in the consolidated statements of income. The operational losses in 2020 arose mainly from compliance oversight and failure of the trust department to provide timely responses to tax notices which occurred between 2007 and 2019 but were identified in 2020. In 2020, the Corporation made changes in internal controls and personnel responsible for trust department tax administration activities. Management implemented the changes in internal controls and personnel in an effort to mitigate and prevent the likelihood of new instances of non-compliance from trust department tax administration activities. At December 31, 2020, the balance of accrued interest and other liabilities in the consolidated balance sheets includes $322,000 related to specific tax compliance matters that have been identified; however, no estimate can be made of the amount of additional expenses that may be incurred related to these matters.

REGULATORY MATTERS

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 81

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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 December 31, 2020; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.

Details concerning capital ratios at December 31, 2020 and December 31, 2019 are presented below. Management believes, as of December 31, 2020, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at December 31, 2020 and December 31, 2019 exceed the Corporation’s Board policy threshold levels.


				****	****	****	****	****	****	****	****	****	****		Minimum To Be Well					****	****	****
	****			****		****	Minimum				Minimum To Maintain				Capitalized Under				Minimum To Meet
	****			****		****	Capital				Capital Conservation				Prompt Corrective				the Corporation's
	****	Actual					Requirement			****	Buffer at Reporting Date				Action Provisions				Policy Thresholds
(Dollars In Thousands)	****		Amount	****	Ratio	****	Amount	****	Ratio	****	Amount	****	Ratio	****	Amount	****	Ratio	****	Amount		****	Ratio
December 31, 2020:
Total capital to risk-weighted assets:
Consolidated		$	260,015		17.49	%	N/A		N/A		N/A		N/A		N/A		N/A		$	156,113		≥10.5	%
C&N Bank			236,943		15.98	%	118,602		≥8	%	155,665		≥10.5	%	148,252		≥10	%		155,665		≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated			231,577		15.58	%	N/A		N/A		N/A		N/A		N/A		N/A			126,377		≥8.5	%
C&N Bank			225,058		15.18	%	88,951		≥6	%	126,015		≥8.5	%	118,602		≥8	%		126,015		≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated			231,577		15.58	%	N/A		N/A		N/A		N/A		N/A		N/A			104,075		≥7	%
C&N Bank			225,058		15.18	%	66,714		≥4.5	%	103,777		≥7.0	%	96,364		≥6.5	%		103,777		≥7	%
Tier 1 capital to average assets:
Consolidated			231,577		10.34	%	N/A		N/A		N/A		N/A		N/A		N/A			179,206		≥8	%
C&N Bank			225,058		10.12	%	88,959		≥4	%	N/A		N/A		111,199		≥5	%		177,919		≥8	%

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

Federal regulatory authorities impose a capital rule providing that, 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 December 31, 2020, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:


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

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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 December 31, 2020, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 7.98%.

Banking regulators limit the amount of dividends that may be paid by C&N Bank to the Corporation. Retained earnings against which dividends may be paid without prior approval of the banking regulators amounted to approximately $76,527,000 at December 31, 2020, subject to the minimum capital ratio requirements noted above.

Restrictions imposed by federal law prohibit the Corporation from borrowing from C&N Bank unless the loans are secured in specific amounts. Such secured loans to the Corporation are generally limited to 10% of C&N Bank’s tangible stockholder’s equity (excluding accumulated other comprehensive income) or $22,509,000 at December 31, 2020.

PARENT COMPANY ONLY

The following is condensed financial information for Citizens & Northern Corporation:


CONDENSED BALANCE SHEET	****	Dec. 31,		****	Dec. 31,
(In Thousands)		2020			2019
ASSETS
Cash		$	7,246		$	6,485
Investment in subsidiaries:
Citizens & Northern Bank			292,455			228,413
Citizens & Northern Investment Corporation			12,959			12,353
Bucktail Life Insurance Company			3,804			3,669
Other assets			4			109
TOTAL ASSETS		$	316,468		$	251,029

LIABILITIES AND STOCKHOLDERS' EQUITY
Subordinated debt		$	16,553		$	6,500
Other liabilities			159			77
Stockholders' equity			299,756			244,452
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY		$	316,468		$	251,029

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CONDENSED INCOME STATEMENT
(In Thousands)	****	2020		****	2019
Dividends from Citizens & Northern Bank		$	38,507		$	24,600
Expenses			(1,488)			(1,086)
Income before distributions in excess of income from subsidiaries			37,019			23,514
Distributions in excess of income from subsidiaries			(17,797)			(4,010)
NET INCOME		$	19,222		$	19,504


CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)	****	2020		****	2019
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	19,222		$	19,504
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of purchase accounting adjustment			(38)			0
Loss on repayment of subordinated debt			0			10
Distributions in excess of income from subsidiaries			17,797			4,010
Decrease (increase) in other assets			105			(107)
Increase (decrease) in other liabilities			13			(81)
Net Cash Provided by Operating Activities			37,099			23,336

CASH FLOWS FROM INVESTING ACTIVITIES,
Net cash used in business combination			(21,837)			(9,698)

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayment of subordinated debt			0			(510)
Proceeds from sale of treasury stock			131			198
Purchase of treasury stock			(163)			(189)
Dividends paid			(14,469)			(14,041)
Net Cash Used in Financing Activities			(14,501)			(14,542)

INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS			761			(904)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			6,485			7,389
CASH AND CASH EQUIVALENTS, END OF YEAR		$	7,246		$	6,485

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Investment of net assets acquired in business combination in Citizens & Northern Bank		$	73,426		$	49,765
Common equity issued in business combination		$	41,429		$	32,953
Subordinated debt assumed in business combination		$	10,091		$	7,000
Other liabilities assumed in business combination		$	69		$	114
Interest paid		$	655		$	461

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SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)

The following table presents summarized quarterly financial data for 2020 and 2019:


		2020 Quarter Ended
		March 31,			June 30,			Sept. 30,			Dec. 31,
(In Thousands Except Per Share Data) (Unaudited)	****	2020		****	2020		****	2020		****	2020
Interest income		$	17,037		$	16,513		$	21,751		$	21,859
Interest expense			2,755			2,267			2,469			2,104
Net interest income			14,282			14,246			19,282			19,755
Provision (credit) for loan losses			1,528			(176)			1,941			620
Net interest income after provision (credit) for loan losses			12,754			14,422			17,341			19,135
Other income			5,281			5,528			6,970			6,565
Net gains on available-for-sale debt securities			0			0			25			144
Loss on prepayment of borrowings			0			0			0			1,636
Merger-related expenses			141			983			6,402			182
Other expenses			12,912			12,274			14,648			15,775
Income before income tax provision			4,982			6,693			3,286			8,251
Income tax provision			816			1,255			438			1,481
Net income		$	4,166		$	5,438		$	2,848		$	6,770
Net income attributable to common shares		$	4,146		$	5,405		$	2,830		$	6,727
Net income per share – basic		$	0.30		$	0.39		$	0.18		$	0.43
Net income per share – diluted		$	0.30		$	0.39		$	0.18		$	0.43

	****	2019 Quarter Ended
		March 31,			June 30,			Sept. 30,			Dec. 31,
	****	2019		****	2019		****	2019		****	2019
Interest income		$	13,065		$	17,139		$	17,277		$	17,290
Interest expense			1,350			2,934			3,000			2,999
Net interest income			11,715			14,205			14,277			14,291
(Credit) provision for loan losses			(957)			(4)			1,158			652
Net interest income after (credit) provision for loan losses			12,672			14,209			13,119			13,639
Other income			4,406			4,849			4,963			5,066
Net gains on available-for-sale debt securities			0			7			13			3
Merger-related expenses			311			3,301			206			281
Other expenses			10,696			11,422			11,486			11,834
Income before income tax provision			6,071			4,342			6,403			6,593
Income tax provision			981			693			1,096			1,135
Net income		$	5,090		$	3,649		$	5,307		$	5,458
Net income attributable to common shares		$	5,063		$	3,630		$	5,281		$	5,431
Net income per share – basic		$	0.41		$	0.27		$	0.39		$	0.40
Net income per share – diluted		$	0.41		$	0.27		$	0.39		$	0.40

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21. DERIVATIVE FINANCIAL INSTRUMENTS

In connection with the acquisition of Covenant, the Corporation became 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. At July 1, 2020, the aggregate notional amount of commercial loans subject to interest rate swaps was $137,176,000, and the Corporation recorded the fair value of the derivative asset of $7,932,000 and the fair value of the derivative liability of $7,932,000.

Interest rate swaps with commercial banking customers were executed to facilitate their respective risk management strategies. Under the terms of these arrangements, the commercial banking customers effectively exchanged their floating interest rate exposures on loans from Covenant (acquired by the Corporation) into fixed interest rate exposures. Those interest rate swaps have been simultaneously economically hedged by offsetting interest rate swaps that Covenant had in place with a third party (assumed by the Corporation), 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.

At December 31, 2020, the aggregate notional amount of interest rate swaps was $135,740,000. Subsequent to the merger there were no interest rate swaps originated in 2020. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at December 31, 2020. For the year ended December 31, 2020, the net impact on the consolidated statements of income from interest rate swaps was a reduction in interest income on loans of $698,000.

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 December 31, 2020:


(In Thousands)	At December 31, 2020
	Asset Derivatives				Liability Derivatives
	Notional		Fair		Notional		Fair
	Amount		Value (1)		Amount		Value (2)
Interest rate swap agreements	$	67,870	$	6,566	$	67,870	$	6,566

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

The Corporation’s agreement with its derivative counterparty provides that if the Corporation defaults on any of its indebtedness, including default where repayment of the indebtedness has not been accelerated by the lender, then the Corporation could also be declared in default on its derivative obligations. Further, if the Corporation were to fail to maintain its status as a well or adequately capitalized institution, then the counterparty could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements. Available-for-sale securities with a carrying value of $12,182,000 were pledged as collateral against the Corporation’s liability related to the interest rate swaps at December 31, 2020.

FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

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

Level 1 – Fair value is based on unadjusted quoted prices in active markets that are accessible to the Corporation for identical assets. These generally provide the most reliable evidence and are used to measure fair value whenever available. 86

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

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

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

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


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

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

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

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		December 31, 2019
	****	Quoted		****
		Prices			Other
		in Active			Observable		Unobservable		Total
		Markets			Inputs		Inputs		Fair
(In Thousands)		(Level 1)			(Level 2)		(Level 3)		Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of U.S. Government agencies		$	0		$	17,000	$	0	$	17,000
Obligations of states and political subdivisions:
Tax-exempt			0			70,760		0		70,760
Taxable			0			36,303		0		36,303
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities			0			59,210		0		59,210
Residential collateralized mortgage obligations			0			114,723		0		114,723
Commercial mortgage-backed securities			0			48,727		0		48,727
Total available-for-sale debt securities			0			346,723		0		346,723
Marketable equity security			979			0		0		979
Servicing rights			0			0		1,277		1,277
Total recurring fair value measurements		$	979		$	346,723	$	1,277	$	348,979

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

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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. The following table shows quantitative information regarding significant techniques and inputs used at December 31, 2020 and 2019 for servicing rights assets measured using unobservable inputs (Level 3 methodologies) on a recurring basis:


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


	****	Fair Value at
		12/31/2019		Valuation	Unobservable				Method or Value As of
Asset		(In Thousands)		Technique	Input(s)				12/31/2019
Servicing rights		$	1,277	Discounted cash flow	Discount rate		12.50	%	Rate used through modeling period
					Loan prepayment speeds		183.00	%	Weighted-average PSA
					Servicing fees		0.25	%	of loan balances
							4.00	%	of payments are late
							5.00	%	late fees assessed
						$	1.94		Miscellaneous fees per account per month
					Servicing costs	$	6.00		Monthly servicing cost per account
						$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
							1.50	%	of loans more than 30 days delinquent
							3.00	%	annual increase in servicing costs

The fair value of servicing rights is affected by expected future interest rates. Increases (decreases) in future expected interest rates tend to increase (decrease) the fair value of the Corporation’s servicing rights because of changes in expected prepayment behavior by the borrowers on the underlying loans.

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


(In Thousands)		Years Ended December 31,
	****	2020		****	2019
Servicing rights balance, beginning of period		$	1,277		$	1,404
Originations of servicing rights			988			204
Unrealized losses included in earnings			(576)			(331)
Servicing rights balance, end of period		$	1,689		$	1,277

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

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


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

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


(Dollars In Thousands)	****									Weighted
				Valuation						Average
		Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at	****
Asset		12/31/2019		12/31/2019		12/31/2019		Technique	Inputs	12/31/2019	****

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

Certain of the Corporation’s financial instruments are not measured at fair value in the consolidated financial statements. In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Accordingly, the fair value estimates may not be realized in an immediate settlement of the instrument. Certain financial instruments and all nonfinancial instruments are excluded from disclosure requirements. Therefore, the aggregate fair value amounts presented may not represent the underlying fair value of the Corporation. 90

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


(In Thousands)		Fair Value		December 31, 2020						December 31, 2019
		Hierarchy		Carrying			Fair			Carrying			Fair
	****	Level	****	Amount		****	Value		****	Amount		****	Value
Financial assets:
Cash and cash equivalents		Level 1		$	96,017		$	96,017		$	31,122		$	31,122
Certificates of deposit		Level 2			5,840			6,054			4,080			4,227
Restricted equity securities (included in Other Assets)		Level 2			9,970			9,970			10,321			10,321
Loans, net		Level 3			1,632,824			1,646,207			1,172,386			1,181,000
Accrued interest receivable		Level 2			8,293			8,293			5,001			5,001
Interest rate swap agreements		Level 2			6,566			6,566			0			0

Financial liabilities:
Deposits with no stated maturity		Level 2			1,430,062			1,430,062			877,965			877,965
Time deposits		Level 2			390,407			393,566			374,695			376,738
Short-term borrowings		Level 2			20,022			19,974			86,220			86,166
Long-term borrowings		Level 2			54,608			55,723			52,127			52,040
Subordinated debt		Level 2			16,553			16,680			6,500			6,499
Accrued interest payable		Level 2			390			390			311			311
Interest rate swap agreements		Level 2			6,566			6,566			0			0

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Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors of

Citizens & Northern Corporation

Opinions on the Financial Statements and Internal Control Over Financial Reporting

We have audited the accompanying consolidated balance sheets of Citizens & Northern Corporation and subsidiaries (collectively, the Corporation) as of December 31, 2020 and 2019, and the related consolidated statements of income, comprehensive income, changes in stockholders' equity and cash flows, for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). We also have audited the Corporation's internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework: (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in Internal Control - Integrated Framework: (2013) issued by COSO.

Basis for Opinions

The Corporation's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Corporation's consolidated financial statements and an opinion on the Corporation's internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As described in Management's Report on Internal Control over Financial Reporting, management has excluded from its assessment the internal control over financial reporting of Covenant Financial, Inc., which was acquired on July 1, 2020, and whose financial statements constitute assets of approximately 22.7 percent of the Corporation's consolidated total assets, and interest income and noninterest income of approximately 10.7 percent of the Corporation's consolidated total interest income and noninterest income, as of and for the year ended December 31, 2020. Accordingly, our audit did not include the internal control over financial reporting of Covenant Financial, Inc. 92

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Definition and Limitations of Internal Control Over Financial Reporting

A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the consolidated financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially challenging, subjective or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Allowance for Loan Losses, General Reserve - Qualitative Factors - Refer to Notes 1 and 8 to the Consolidated Financial Statements

Critical Audit Matter Description

As disclosed in Note 8 to the Corporation's consolidated financial statements, the Corporation's loan portfolio totaled $1,644,209,000 as of December 31, 2020, and the related allowance for loan losses was $11,385,000. As described in Note 1 and Note 8, the allowance for loan losses consists of two major components: (1) a specific component consisting of the valuation allowance for loans individually evaluated for impairment (specific component), representing $925,000 and (2) a general component consisting of the valuation allowance for pool of loans with similar risk characteristics collectively evaluated for impairment (general reserves), representing $10,460,000. The general reserves are further broken down as reserves assigned to each pool of loans based on both historical net charge-off experience ($1,146,000), and reserves related to qualitative factors ($9,314,000).

The determination of the allowance for loan losses requires significant estimates and subjective assumptions which require a high degree of judgment relating to how those assumptions impact probable incurred credit losses within the loan portfolio. Changes in these assumptions could have a material effect on the Corporation's financial results. Qualitative risk factors are evaluated for the impact on each of the three distinct loan segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management's judgment using relevant information available at the time of the evaluation. Management has designed qualitative factors that include such factors as 1) economic conditions within its market area, 2) the Corporation's lending policies, 3) changes or trends in the portfolio, 4) risk profile, 5) competition and 6) regulatory requirements. To formulate the additional allocations to the allowance for loan losses for general reserve qualitative factors, management multiplies the outstanding principal balance of the various commercial loan classes by the applicable qualitative factor. Management's identification and analysis of these issues requires significant judgment. We identified the estimate of the general reserves qualitative factors of the allowance for loan losses with respect to the commercial loan segments as a critical audit matter as it involved especially subjective auditor judgment.

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How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to address this critical audit matter included:

●	Testing the design and operating effectiveness of internal controls relating to the evaluation of the management's assumptions and inputs used to develop the qualitative factor adjustments, including controls addressing:
o	Management's review of the accuracy of inputs related to qualitative factor adjustments included within the allowance for loan losses calculation.
---	---
o	Management's review of the qualitative and quantitative conclusions reached related to the qualitative factor adjustments and the resulting allocation to the allowance for loan losses.
---	---
o	Management's process for determining classification and valuation of loans that have been separately evaluated from the general reserves of the allowance for loan losses due to their status as impaired or acquired loans.
---	---
o	Management's review of risk rating changes of commercial loans which could have an impact on determination of qualitative factor adjustments.
---	---
●	Substantively testing the appropriateness of the judgments and assumptions used in management's estimation process for developing the qualitative factor adjustments, including:
---	---
o	Analyzing loans separately evaluated from the general reserve qualitative factors calculation for propriety of classification as acquired or impaired loans.
---	---
o	Evaluating the relevance and reliability of underlying internal and external data inputs used as a basis for the qualitative factor adjustments and corroborating these inputs by comparing to the Corporation's lending practices, historical loan portfolio performance and third-party macroeconomic data, as well as giving appropriate consideration to current economic factors.
---	---
o	Evaluating the completeness and accuracy of risk ratings for a selection of commercial loans and timeliness of commercial loan risk rating changes.
---	---
o	Analytically evaluating the qualitative factors allocation year over year and testing allocations for reasonableness.
---	---

Business Combination, Fair Value of Acquired Loans Receivable - Refer to Note 3 to the Consolidated Financial Statements

Critical Audit Matter Description

As disclosed in Note 3 to the Corporation's consolidated financial statements, the Corporation completed the acquisition of Covenant Financial, Inc. on July 1, 2020. The Corporation accounted for the acquisition under the acquisition method of accounting for business combinations. Accordingly, the purchase price was allocated to the assets acquired and liabilities assumed based on their respective fair values, including loans receivable of $464.2 million. Management estimated the fair value of loans receivable using a discounted cash flow method, which required management to make significant estimates and assumptions related to the prepayment speeds and recoveries, loss severities, as well as, determine discount rates to present value the cash flows. Changes in assumptions could impact the amount allocated to loans and ultimately the amount recorded as goodwill.

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We identified the assessment of the fair value measurement of loans acquired in the Covenant acquisition as a critical audit matter. The assessment encompassed the evaluation of the fair value methodology for acquired loans, including the valuation assumptions and the inputs used to determine those assumptions. The valuation assumptions related to prepayment speeds, default rates, loss severities and discount rates, involved significant measurement uncertainty and required specialized skills and knowledge to evaluate. Additionally, there was a high degree of auditor judgment involved in designing and performing audit procedures in order to evaluate and test these key assumptions and inputs, including the involvement of fair value specialists.

How the Critical Audit Matter was Addressed in the Audit

The primary procedures we performed to address this critical audit matter included:

●	Testing the design and operating effectiveness of internal controls relating to the evaluation of management's judgments and assumptions in estimating the fair value of acquired loans, including controls addressing:
o	Development of the fair value methodology for the acquired loans.
---	---
o	Determining completeness and accuracy of the data inputs used for key valuation assumptions.
---	---
o	Evaluating the reasonableness of the judgments used for key assumptions.
---	---
●	Substantively testing management's process, including evaluating their judgments and assumptions, for estimating the fair value of acquired loans receivable which included:
---	---
o	Evaluating management's fair value measurement methodology for compliance with U.S. generally accepted accounting principles.
---	---
o	Involving valuation professionals with specialized skills and knowledge to assess the appropriateness of the judgments, assumptions and data used and overall reasonableness of the fair values.
---	---
o	Testing the completeness and accuracy of the acquired loan data used and evaluating the relevance of the loan data on the date of acquisition.
---	---
o	Developing an independent estimate of the fair value of the loans using the Corporation's assumptions and independently developing key assumptions including prepayment speeds, default rates, loss severities and discount rates used by other market participants, and comparing the result to the Corporation's fair value estimate.
---	---

/s/ Baker Tilly US, LLP

We have served as the Corporation’s auditor since 1979.

Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP)

Williamsport, Pennsylvania March 5, 2021

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE 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. This evaluation did not include an assessment of those disclosure controls and procedures that are involved in, and did not include an assessment of, internal control over financial reporting as it relates to Covenant Financial, Inc. 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.

Except as described in the following paragraph, 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.

The Covenant Financial, Inc. acquisition was completed July 1, 2020, and during the last six months of 2020 the Corporation has been engaged in integrating processes and internal control over financial reporting for the former Covenant locations into those of the Corporation. Through August 24, 2020, information related to former Covenant loans, deposits and other customer data was processed using Covenant’s legacy computer system. Effective August 24, 2020, the integration of Covenant’s core customer data system into the Corporation’s system was completed. Though completion of the Covenant core system conversion was a significant milestone, at December 31, 2020, the Corporation’s management had not yet completed changes to processes, information technology systems and other components of internal control over financial reporting as part of integration activities.

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Corporation’s management is responsible for establishing and maintaining effective internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Corporation’s system of internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Corporation’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Corporation’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of the Corporation’s management and directors; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

The Corporation’s management assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, 2020, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control – Integrated Framework (2013). Based on that assessment, we concluded that, as of December 31, 2020, the 96

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Corporation’s internal control over financial reporting is effective based on the criteria established in Internal Control – Integrated Framework (2013).

The Corporation acquired Covenant Financial, Inc. (“Covenant”) effective July 1, 2020. Management excluded from its assessment of the Corporation’s internal control over financial reporting, as of December 31, 2020, Covenant’s internal control over financial reporting associated with assets of approximately 22.7% of the Corporation’s consolidated total assets, and interest income and noninterest income of approximately 10.7% of the Corporation’s consolidated total interest income and noninterest income, as of and for the year ended December 31, 2020.

Baker Tilly US, LLP, the independent registered public accounting firm that audited the Corporation’s consolidated financial statements, has issued an audit report on the Corporation’s internal control over financial reporting as of December 31, 2020. That report appears immediately prior to this report.

March 5, 2021	By:	/s/ J. Bradley Scovill
Date		President and Chief Executive Officer
March 5, 2021	By:	/s/ Mark A. Hughes
Date		Treasurer and Chief Financial Officer

ITEM 9B. OTHER INFORMATION

There was no information the Corporation was required to disclose in a report on Form 8-K during the fourth quarter 2020 that was not disclosed.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information concerning Directors and Executive Officers is incorporated herein by reference to disclosure under the captions “Proposal 1 – Election of Directors,” “Executive Officers,” “Information Concerning Security Ownership” and “Meetings and Committees of the Board of Directors” of the Corporation’s proxy statement dated March 12, 2021 for the annual meeting of stockholders to be held on April 22, 2021.

The Corporation’s Board of Directors has adopted a Code of Ethics, available on the Corporation’s web site at www.cnbankpa.com for the Corporation’s employees, officers and directors. (The provisions of the Code of Ethics are also included in the Corporation’s employee handbook.)

ITEM 11. EXECUTIVE COMPENSATION

Information concerning executive compensation is incorporated herein by reference to disclosure under the captions “Compensation Discussion and Analysis” and “Executive Compensation Tables” of the Corporation’s proxy statement dated March 12, 2021 for the annual meeting of stockholders to be held on April 22, 2021.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to disclosure under the caption “Beneficial Ownership of Executive Officers and Directors” of the Corporation’s proxy statement dated March 12, 2021 for the annual meeting of stockholders to be held on April 22, 2021. 97

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“Equity Compensation Plan Information” as required by Item 201(d) of Regulation S-K is incorporated by reference herein from Item 5 (Market for Registrant’s Common Equity and Related Stockholder Matters) of this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information concerning loans and deposit balances with Directors and Executive Officers is provided in Note 15 to the Consolidated Financial Statements, which is included in Part II, Item 8 of this Annual Report on Form 10-K. Additional information, including information concerning director independence, is incorporated herein by reference to disclosure appearing under the captions “Director Independence” and “Related Person Transaction and Policies” of the Corporation’s proxy statement dated March 12, 2021 for the annual meeting of stockholders to be held on April 22, 2021.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning services provided by the Corporation’s independent auditor Baker Tilly US, LLP, the audit committee’s pre-approval policies and procedures for such services, and fees paid by the Corporation to that firm, is incorporated herein by reference to disclosure under the caption “Fees of Independent Public Accountants” of the Corporation’s proxy statement dated March 12, 2021 for the annual meeting of stockholders to be held on April 22, 2021.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)	(1). The following consolidated financial statements are set forth in Part II, Item 8:

	Page
Report of Independent Registered Public Accounting Firm	92-95
Financial Statements:
Consolidated Balance Sheets - December 31, 2020 and 2019	37
Consolidated Statements of Income - Years Ended December 31, 2020 and 2019	38
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2020 and 2019	39
Consolidated Statements of Changes in Stockholders’ Equity - Years Ended December 31, 2020 and 2019	40
Consolidated Statements of Cash Flows - Years Ended December 31, 2020 and 2019	41
Notes to Consolidated Financial Statements	42-91

(a)	(2) Financial statement schedules are not applicable or included in the financial statements or related notes.

<br><br>	2. Plan of acquisition, reorganization, arrangement, liquidation or succession:
	2.1 Agreement and Plan of Merger dated September 27, 2018, between the Corporation and Monument Bancorp, Inc.	Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed September 28, 2018
	2.2 Agreement and Plan of Merger dated December 18, 2019, between the Corporation and Covenant Financial, Inc.	Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed December 18, 2019
	3. (i) Articles of Incorporation	Incorporated by reference to Exhibit 3.1 of the Corporation’s Form 8-K filed September 21, 2009
	3. (ii) By-laws	Incorporated by reference to Exhibit 3.1(ii) of the Corporation's Form S-4/A filed April 20, 2020
	4. (i) through (v) Instruments defining the rights of securities holders, including indentures	Not applicable
	4. (vi) Description of registrant’s securities	Incorporated by reference to Exhibit 4.(vi) of the Corporation’s Form 10-K filed February 20, 2020
	9. Voting trust agreement	Not applicable
	10. Material contracts:
	10.1 Form of Time-Based Restricted Stock agreement dated January 29, 2021 between the Corporation and Executive Officers pursuant to the Citizens & Northern Corporation Stock Incentive Plan	Filed herewith

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10.2 Form of Performance-Based Restricted Stock Agreement dated January 29, 2021 between the Corporation and Executive Officers pursuant to the Citizens & Northern Corporation Stock Incentive Plan	Filed herewith
10.3 Form of Restricted Stock agreement dated January 29, 2021 between the Corporation and its independent directors pursuant to the Citizens & Northern Corporation Independent Directors Stock Incentive Plan	Filed herewith
10.4 2020 Annual Performance Incentive Award Plan, as Amended	Filed herewith
10.5 2021 Annual Performance Incentive Award Plan	Filed herewith
10.6 2021 Annual Performance Incentive Award Plan - Mortgage Lenders	Filed herewith
10.7 Deferred Compensation Agreement dated December 17, 2015	Incorporated by reference to Exhibit 10.8 filed with Corporation’s Form 10-K on February 15, 2018
10.8 Second Amendment to Employment Agreement dated August 24, 2018 between the Corporation and J. Bradley Scovill	Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 8-K on August 24, 2018
10.9 First Amendment to Employment Agreement dated June 26, 2017 between the Corporation and J. Bradley Scovill	Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 8-K on June 27, 2017
10.10 Employment agreement dated March 2, 2015 between the Corporation and J. Bradley Scovill	Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 8-K on February 9, 2015
10.11 Employment agreement dated September 19, 2013 between the Corporation and Mark A. Hughes	Incorporated by reference to Exhibit 10.2 filed with Corporation’s Form 8-K on September 19, 2013
10.12 Employment agreement dated September 19, 2013 between the Corporation and Harold F. Hoose, III	Incorporated by reference to Exhibit 10.3 filed with Corporation’s Form 8-K on September 19, 2013
10.13 Employment agreement dated September 19, 2013 between the Corporation and Deborah E. Scott	Incorporated by reference to Exhibit 10.4 filed with Corporation’s Form 8-K on September 19, 2013
10.14 Employment agreement dated May 18, 2020 between the Corporation and Janice E. Ward	Incorporated by reference to Exhibit 10.1 filed with Corporation's Form 10-Q on August 6, 2020
10.15 Employment agreement dated December 18, 2019 between the Corporation and Blair T. Rush	Filed herewith
10.16 Form of Indemnification Agreement dated June 27, 2020 between the Corporation and Janice E. Ward	Incorporated by reference to Exhibit 10.3 filed with Corporation's Form 10-Q on August 6, 2020	100

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10.17 Form of Indemnification Agreement dated September 20, 2018 between the Corporation and J. Bradley Scovill	Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on November 1, 2018
10.18 Form of Indemnification Agreement dated January 9, 2018 between the Corporation and Tracy E. Watkins	Incorporated by reference to Exhibit 10.6 filed with Corporation’s Form 10-K on February 15, 2018
10.19 Form of Indemnification Agreement dated February 11, 2015 between the Corporation and Stan R. Dunsmore	Incorporated by reference to Exhibit 10.9 filed with Corporation’s Form 10-K on February 26, 2015
10.20 Form of Indemnification Agreement dated January 2, 2013 between the Corporation and Shelley L. D’Haene	Incorporated by reference to Exhibit 10.5 filed with Corporation’s Form 10-K on February 21, 2013
10.21 Form of Indemnification Agreement dated January 19, 2011 between the Corporation and John M. Reber	Incorporated by reference to Exhibit 10.8 filed with Corporation’s Form 10-K on March 1, 2011
10.22 Form of Indemnification Agreements dated May 2004 between the Corporation and the Directors and certain officers	Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-K on March 14, 2005
10.23 Form of Indemnification Agreement dated February 16, 2021 between the Corporation and Blair T. Rush	Filed herewith
10.24 Change in Control Agreement dated January 9, 2018 between the Corporation and Tracy E. Watkins	Incorporated by reference to Exhibit 10.7 filed with Corporation’s Form 10-K on February 15, 2018
10.25 Change in Control Agreement dated March 17, 2015 between the Corporation and Stan R. Dunsmore	Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on May 8, 2015
10.26 Change in Control Agreement dated January 2, 2013 between the Corporation and Shelley L. D’Haene	Incorporated by reference to Exhibit 10.7 filed with Corporation’s Form 10-K on February 21, 2013
10.27 Change in Control Agreement dated January 20, 2005 between the Corporation and John M. Reber	Incorporated by reference to Exhibit 10.18 filed with Corporation’s Form 10-K on February 18, 2016
10.28 Change in Control Agreement dated December 31, 2003 between the Corporation and Thomas L. Rudy, Jr.	Incorporated by reference to Exhibit 10.2 filed with the Corporation’s Form 10-K on March 14, 2005
10.39 Executive Compensation Recoupment Policy dated September 19, 2013	Incorporated by reference to Exhibit 10.5 filed with Corporation’s Form 8-K on September 19, 2013
10.30 Fifth Amendment to Citizens & Northern Corporation Stock Incentive Plan	Incorporated by reference to Exhibit 10.1 filed with Form 8-K on December 21, 2018	101

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10.31 Fourth Amendment to Citizens & Northern Corporation Stock Incentive Plan and Annual Incentive Plan	Incorporated by reference to Exhibit 10.6 filed with Corporation’s Form 8-K on September 19, 2013
10.32 Third Amendment to Citizens & Northern Corporation Stock Incentive Plan	Incorporated by reference to Exhibit A to the Corporation’s proxy statement dated March 18, 2008 for the annual meeting of stockholders held on April 15, 2008
10.33 Second Amendment to Citizens & Northern Corporation Stock Incentive Plan	Incorporated by reference to Exhibit 10.5 filed with the Corporation’s Form 10-K on March 10, 2004
10.34 First Amendment to Citizens & Northern Corporation Stock Incentive Plan	Incorporated by reference to Exhibit 10.6 filed with the Corporation’s Form 10-K on March 10, 2004
10.35 Citizens & Northern Corporation Stock Incentive Plan	Incorporated by reference to Exhibit 10.7 filed with the Corporation’s Form 10-K on March 10, 2004
10.36 Second Amendment to Citizens & Northern Independent Directors Stock incentive Plan	Incorporated by reference to Exhibit 10.2 filed with Form 8-K on December 21, 2018
10.37 First Amendment to Citizens & Northern Corporation Independent Directors Stock Incentive Plan	Incorporated by reference to Exhibit B to the Corporation’s proxy statement dated March 18, 2008 for the annual meeting of stockholders held on April 15, 2008
10.38 Citizens & Northern Corporation Independent Directors Stock Incentive Plan	Incorporated by reference to Exhibit A to the Corporation’s proxy statement dated March 19, 2001 for the annual meeting of stockholders held on April 17, 2001.
10.39 Citizens & Northern Corporation Supplemental Executive Retirement Plan (as amended and restated)	Incorporated by reference to Exhibit 10.21 filed with the Corporation’s Form 10-K on March 6, 2009
10.40 Form of Indemnification Agreements dated May 24, 2018 between the Corporation and Directors Bobbi J. Kilmer, Terry L. Lehman, Frank G. Pellegrino and Aaron K. Singer	Incorporated by reference to Exhibit 10.1 filed with the Corporation’s Form 10-Q filed August 6, 2018
10.41 Form of Indemnification Agreement dated July 16, 2020 between the Corporation and Stephen M. Dorwart	Incorporated by reference to Exhibit 10.4 filed with the Corporation's Form 10-Q on August 6, 2020
10.42 Form of Indemnification Agreement dated July 16, 2020 between the Corporation and Robert G. Loughery	Incorporated by reference to Exhibit 10.5 filed with the Corporation's Form 10-Q on August 6, 2020
11. Statement re: computation of per share earnings	Information concerning the computation of earnings per share is provided in Note 4 to the Consolidated Financial Statements, which is included in Part II, Item 8 of Form 10-K
12. Statements re: computation of ratios	Not applicable	102

Table of Contents

13. Annual report to security holders, Form 10-Q or quarterly report to security holders	Not applicable
14. Code of ethics	The Code of Ethics is available through the Corporation’s website at www.cnbankpa.com. To access the Code of Ethics, click on “About,” “Investor Relations,” “Corporate Governance Policies,” and “Code of Ethics.”
16. Letter re: change in certifying accountant	Not applicable
18. Letter re: change in accounting principles	Not applicable
21. Subsidiaries of the registrant	Filed herewith
22. Published report regarding matters submitted to vote of security holders	Not applicable
23. Consent of Independent Registered Public Accounting Firm	Filed herewith
24. Power of attorney	Not applicable
31. Rule 13a-14(a)/15d-14(a) certifications:
31.1 Certification of Chief Executive Officer	Filed herewith
31.2 Certification of Chief Financial Officer	Filed herewith
32. Section 1350 certifications	Filed herewith
33. Report on assessment of compliance with servicing criteria for asset-backed securities	Not applicable
34. Attestation report on assessment of compliance with servicing criteria for asset-backed securities	Not applicable
35. Service compliance statement	Not applicable
99. Additional exhibits:
99.1 Additional information mailed or made available online to shareholders with proxy statement and Form 10-K on March 12, 2021	Filed herewith
100. XBRL-related documents	Not applicable
101. Interactive data file	Filed herewith
104. Cover page interactive data file	Not applicable

103

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated.

By:	/s/ J. Bradley Scovill
President and Chief Executive Officer
Date: March 5, 2021
By:	/s/ Mark A. Hughes
Treasurer and Principal Accounting Officer
Date: March 5, 2021

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

BOARD OF DIRECTORS

/s/	Stephen M. Dorwart	/s/	Robert G. Loughery
	Stephen M. Dorwart		Robert G. Loughery
	Date: March 5, 2021		Date: March 5, 2021
/s/	Clark S. Frame	/s/	Frank G. Pellegrino
	Clark S. Frame		Frank G. Pellegrino
	Date: March 5, 2021		Date: March 5, 2021
/s/	Susan E. Hartley	/s/	Timothy E. Schoener
	Susan E. Hartley		Timothy E. Schoener
	Date: March 5, 2021		Date: March 5, 2021
/s/	Bobbi J. Kilmer	/s/	J. Bradley Scovill
	Bobbi J. Kilmer		J. Bradley Scovill
	Date: March 5, 2021		Date: March 5, 2021
/s/	Leo F. Lambert	/s/	Leonard Simpson
	Leo F. Lambert		Leonard Simpson
	Date: March 5, 2021		Date: March 5, 2021
/s/	Terry L. Lehman	/s/	Aaron K. Singer
	Terry L. Lehman		Aaron K. Singer
	Date: March 5, 2021		Date: March 5, 2021

104

EXHIBIT 10.1

CITIZENS & NORTHERN CORPORATION

1995 STOCK INCENTIVE PLAN (As Amended)

TIME-BASED RESTRICTED STOCK AGREEMENT

RESTRICTED STOCK AGREEMENT dated as of the 29th day of January 2021, by and between Citizens & Northern Corporation (the "Corporation") and **** **** an employee of the Corporation or of a subsidiary (the "Recipient").

Pursuant to the Citizens & Northern Corporation 1995 Stock Incentive Plan (the "Plan"), as amended, the Compensation Committee of the Board of Directors (the "Committee") has determined that the Recipient is to be granted, on the terms and conditions set forth herein, **** Restricted Shares of the Corporation's common stock and hereby grants such Restricted Shares.

1. Number of Shares and Price. Restricted Stock shall consist of shares of Stock that will be acquired by and issued to the Recipient at a designated time approved by the board of directors, for no purchase price, and under and subject to such transfer, forfeiture and other restrictions, conditions or terms as shall be determined by the Committee, including but not limited to prohibitions against transfer and substantial risks of forfeiture within the meaning of Section 83 of the Code.

2. Rights of Recipient. Except as otherwise provided in the Plan or the Restricted Stock Agreement, a Recipient of shares of Restricted Stock shall have all the rights as does a holder of Stock, including without limitation the right to vote such shares and receive dividends with respect thereto; however, during the time period of any restrictions, conditions or terms applicable to such Restricted Stock, the shares thereof and the right to vote the same and receive dividends thereon shall not be sold, assigned, transferred, exchanged, pledged, hypothecated, encumbered or otherwise disposed of except as permitted by the Plan or the Restricted Stock Agreement. Cash dividends shall be paid out and shall not participate in Dividend Reinvestment. Stock dividends resulting in whole shares shall be added to the shares held in the Restricted Account and shall be distributed to the Recipient with subsequent distributions of any Award for which they accrued. Partial shares that result from any stock dividend shall be paid to the Recipient in cash at the time of the payment of the stock dividend. If the Restricted Shares expire prior to the satisfaction of performance standards set forth in section 4 or due to forfeiture as set forth in section 5, all shares accrued by virtue of stock dividends shall be forfeited.

3. Holding of Restricted Shares. Each certificate for shares of Restricted Stock shall be deposited with the Secretary of the Corporation, or the office thereof, and shall bear a legend in substantially the following form and content:

This Certificate and the shares of Stock hereby represented are subject to the provisions of the Corporation’s Stock Incentive Plan and a certain agreement entered into between the owner and the Corporation pursuant to said Plan. The release of the Certificate and the shares of Stock hereby represented from such provision shall occur only as provided by said Plan and Agreement, a copy of which are on file in the office of the Secretary of the Corporation.

Upon the lapse or satisfaction of the restrictions, conditions and terms applicable to such Restricted Stock, a certificate for the shares of Stock without such legend shall be issued to the Recipient.

4. Release and Lapse of Restricted Shares. The release of restrictions or expiration of restricted shares awarded under this agreement shall occur over a period of three years. One-third of the total shares will be distributed on the last business day in January each of the three years following the award based on the Recipient’s satisfactory performance of his or her job. All Restricted Shares not distributed due to the Recipient’s unsatisfactory performance of his or her job shall expire and revert back to the Corporation as of the release date on which such determinations are made. No partial shares may be released, thus an amount equal to the next whole share amount will be released subject to the specified performance criteria at each anniversary. The shares released may be in certificate form or may be directed to be held in a custodial account designated by the Recipient.

5. Terms of Forfeiture. If a Recipient’s employment with the Corporation, or a subsidiary, ceases for any reason prior to the lapse of the restrictions, conditions or terms applicable to his or her Restricted Stock, all of the Recipient’s Restricted Stock still subject to unexpired restrictions, conditions or terms shall be forfeited absolutely by the Recipient to the Corporation without payment or delivery of any consideration or other thing of value by the Corporation or its affiliates, and thereupon and thereafter neither the Recipient nor his or her heirs, personal or legal representatives, successors, assigns, beneficiaries, or any claimants under the Recipient’s Last Will or laws of descent and distribution, shall have any rights or claims to or interests in the forfeited Restricted Stock or any certificates representing shares thereof, or claims against the Corporation or its affiliates with respect thereto. Except in the case of disability, employment ceases with the Corporation, or its Subsidiary, on the day the Recipient’s employment is terminated with or without cause, or on their date of death. In the event of disability, the Recipient’s employment is considered terminated on the date for which the Recipient receives the final payment of the Corporation’s, or Subsidiary’s, short-term disability.

6. Non- Transferability of Restricted Stock. The Restricted Stock and this Restricted Stock Agreement shall not be transferable.

7. Change in Control. If any of the change in control events described in Section 11 of the Plan occur, all shares of Restricted Stock shall fully vest and all restrictions on the shares of Restricted Stock shall lapse as follows: In the case of an event specified in clause (a) of the second sentence of the third paragraph of Section 11, the lapse of all restrictions on the shares of Restricted Stock shall occur immediately prior to the consummation of the described transaction and, in the case of an event specified in clause (b) or (c) of said sentence, the full vesting and lapse of restrictions shall occur upon occurrence of the described event.

8. Notices. Any notice required or permitted under this Restricted Stock Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Recipient either at his or her address herein above set forth or such other address as he or she may designate in writing to the Corporation.

9. Failure to Enforce Not a Waiver. The failure of the Corporation to enforce at any time any provision of this Restricted Stock Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

10. Governing Law. This Restricted Stock Agreement shall be governed by and construed according to the laws of the State of Pennsylvania.

11. Incorporation of Plan. The Plan is hereby incorporated by reference and made a part hereof, and the Restricted Stock and this Restricted Stock Agreement are subject to all terms and conditions of the Plan.

12. Amendments. This Restricted Stock Agreement may be amended or modified at any time by an instrument in writing signed by the parties hereto.

IN WITNESS WHEREOF, the parties have executed this Restricted Stock Agreement on the day and year first above written.

	By
		J. Bradley Scovill – President & CEO

		The undersigned hereby accepts and agrees to all the terms and provisions of the foregoing Restricted Stock Agreement and to all the terms and provisions of the Citizens & Northern Corporation 1995 Stock Incentive Plan herein incorporated by reference.

		Recipient

EXHIBIT 10.2

CITIZENS & NORTHERN CORPORATION

1995 STOCK INCENTIVE PLAN (As Amended)

PERFORMANCE-BASED RESTRICTED STOCK AGREEMENT

RESTRICTED STOCK AGREEMENT dated as of the 29^th^ day of January 2021, by and between Citizens & Northern Corporation (the "Corporation") and _____________ an employee of the Corporation or of a subsidiary (the "Recipient").

Pursuant to the Citizens & Northern Corporation 1995 Stock Incentive Plan (the "Plan"), as amended, the Compensation Committee of the Board of Directors (the "Committee") has determined that the Recipient is to be granted, on the terms and conditions set forth herein, _____ Restricted Shares of the Corporation's common stock and hereby grants such Restricted Shares.

1. Number of Shares and Price. Restricted Stock shall consist of shares of Stock that will be acquired by and issued to the Recipient at a designated time approved by the board of directors, for no purchase price, and under and subject to such transfer, forfeiture and other restrictions, conditions or terms as shall be determined by the Committee, including but not limited to prohibitions against transfer and substantial risks of forfeiture within the meaning of Section 83 of the Code.

3. Holding of Restricted Shares. Each certificate for shares of Restricted Stock shall be deposited with the Secretary of the Corporation, or the office thereof, and shall bear a legend in substantially the following form and content:

The release of the Certificate and the shares of Stock hereby represented from such provision shall occur only as provided by said Plan and Agreement, a copy of which are on file in the office of the Secretary of the Corporation.

4. Release and Lapse of Restricted Shares. The release of restrictions or expiration of restricted shares awarded under this agreement shall occur over a period of three years. On each anniversary date of this award, up to one-third of the total shares will be distributed based on the Corporation’s attainment of earnings-based performance standards, based on the following criteria:

· Release of 50% (one-sixth of the total shares awarded) each year will be based on the Corporation achieving a percent ranking of at least 35% of the Core Return on Average Equity (ROAE) within a defined peer group of bank holding companies and thrifts for the defined measurement period as determined by the committee.

· Release of 50% (one-sixth of the total shares awarded) each year will be based on the Corporation achieving a percent ranking of at least 65% of the Core Return on Average Assets (ROAA) within a defined peer group of bank holding companies and thrifts for the defined measurement period as determined by the committee.

For the purpose of determining Core ROAE and Core ROAA. nonrecurring items, as determined by the Committee (to include nonrecurring acquisition expenses), and securities gains and losses, will be excluded from the Corporation’s and the peer group’s earnings results. The Corporation’s earnings will include the operating results of newly acquired business units and the Corporation’s and the peer group’s ROAE and ROAA will be compared on an after-tax basis. The peer group shall include selected publicly traded Commercial Banks and Thrifts within a geographic region reflective of Citizens & Northern’s market area and with total assets of approximately one-half to 2 times those of Citizens & Northern.

The Committee reserves the right to change the composition of the peer group, as well as the method of evaluating the Corporation’s Core ROAE and Core ROAA performance as compared to the peer group, based on mergers or acquisitions involving members of the peer group, changes in size of the Corporation or members of the peer group, or other factors deemed appropriate by the Committee.

All Restricted Shares not distributed due to the Corporation failing to achieve the defined earnings-based performance standards shall expire and revert back to the Corporation as of the anniversary date on which such determinations are made. No partial shares may be released, thus an amount equal to the next whole share amount will be released subject to the specified performance criteria at each anniversary. The shares released may be in certificate form or may be directed to be held in a custodial account designated by the Recipient.

to the Corporation without payment or delivery of any consideration or other thing of value by the Corporation or its affiliates, and thereupon and thereafter neither the Recipient nor his or her heirs, personal or legal representatives, successors, assigns, beneficiaries, or any claimants under the Recipient’s Last Will or laws of descent and distribution, shall have any rights or claims to or interests in the forfeited Restricted Stock or any certificates representing shares thereof, or claims against the Corporation or its affiliates with respect thereto. Except in the case of disability, employment ceases with the Corporation, or its Subsidiary, on the day the Recipient’s employment is terminated with or without cause, or on their date of death. In the event of disability, the Recipient’s employment is considered terminated on the date for which the Recipient receives the final payment under the Corporation’s, or Subsidiary’s, short-term disability program.

6. Non- Transferability of Restricted Stock. The Restricted Stock and this Restricted Stock Agreement shall not be transferable.

7. Change in Control. If any of the change in control events described in Section 11 of the Plan occur, all shares of Restricted Stock shall fully vest and all restrictions on the shares of Restricted Stock shall lapse as follows: In the case of an event specified in clause (a) of the second sentence of the third paragraph of Section 11, the lapse of all restrictions on the shares of Restricted Stock shall occur immediately prior to the consummation of the described transaction and, in the case of an event specified in clause (b) or (c) of said sentence, the full vesting and lapse of restrictions shall occur upon occurrence of the described event.

8. Notices. Any notice required or permitted under this Restricted Stock Agreement shall be deemed given when delivered personally, or when deposited in a United States Post Office, postage prepaid, addressed, as appropriate, to the Recipient either at his or her address herein above set forth or such other address as he or she may designate in writing to the Corporation.

9. Failure to Enforce Not a Waiver. The failure of the Corporation to enforce at any time any provision of this Restricted Stock Agreement shall in no way be construed to be a waiver of such provision or of any other provision hereof.

10. Governing Law. This Restricted Stock Agreement shall be governed by and construed according to the laws of the Commonwealth of Pennsylvania.

11. Incorporation of Plan. The Plan is hereby incorporated by reference and made a part hereof, and the Restricted Stock and this Restricted Stock Agreement are subject to all terms and conditions of the Plan.

12. Amendments. This Restricted Stock Agreement may be amended or modified at any time by an instrument in writing signed by the parties hereto.

IN WITNESS WHEREOF, the parties have executed this Restricted Stock Agreement on the day and year first above written.

	By
		J. Bradley Scovill - President & CEO

		The undersigned hereby accepts and agrees to all the terms and provisions of the foregoing Restricted Stock Agreement and to all the terms and provisions of the Citizens & Northern Corporation 1995 Stock Incentive Plan herein incorporated by reference.

		Recipient

EXHIBIT 10.3

INDEPENDENT DIRECTORS STOCK INCENTIVE PLAN

RESTRICTED STOCK AGREEMENT

A total of ______ shares of RESTRICTED common STOCK, par value $1.00, of Citizens & Northern Corporation, a Pennsylvania business corporation (herein the “Corporation”) is hereby awarded as of January 29, 2021 to ____________ (herein the “Director”), subject in all respects to the terms and provisions of the Citizens & Northern Corporation Independent Directors Stock Incentive Plan (herein the “Plan”), dated April 17, 2001 and amended April 15, 2008, April 19, 2018, and December 20, 2018, and is incorporated herein by reference.

These shares cannot be sold, exchanged, transferred, pledged or otherwise disposed of, except in accordance with the Plan. These transferability restrictions will lapse on the last business day in January 2022, except as provided for in the Plan or described in the following section of this Agreement titled “Change in Control.”

CHANGE IN CONTROL

All Awards of Restricted Stock issued under the Plan which have not fully vested (i.e., continue to have restrictions that have not lapsed) shall automatically fully vest (i.e., all restrictions shall lapse) upon a change in control event as follows: (a) If the Corporation or its stockholders execute an agreement to dispose of all or substantially all of the Corporation’s assets or capital stock by means of sale, merger, consolidation, reorganization, liquidation or otherwise, as a result of which the Corporation’s stockholders as of immediately before such transaction will not own at least fifty percent (50%) of the total combined voting power of all classes of voting capital stock of the surviving entity (be it the Corporation or otherwise), the full lapse of any restrictions on shares of Restricted Stock shall occur immediately prior to the consummation of such transaction; (b) if there is an actual, attempted or threatened change in the ownership of at least twenty-five percent (25%) of all classes of voting capital stock of the Corporation through the acquisition of, or an offer to acquire such percentage of the Corporation’s voting capital stock by any person or entity, or persons or entities acting in concert or as a group, and such acquisition or offer has not been duly approved by the Board; or (c) if during any period of two (2) consecutive years, the individuals who at the beginning of such period constituted the Board, cease for any reason to constitute at least a majority of the Board, unless the election of each director of the Board, who was not a director of the Board at the beginning of such period, was approved by a vote of at least two-thirds of the directors then still in office who were directors at the beginning of such period, thereupon (upon the occurrence of the events described in clause (b) or (c)), the full vesting and lapse of any restrictions on shares of Restricted Stock shall occur.

Dated: January 29, 2021



ATTEST:	BY
		J. Bradley Scovill - President & CEO
Kimberly N. Battin, Corporate Secretary

The Director acknowledges receipt of a copy of the Plan and represents that he or she is familiar with the terms and provisions thereof. The Director hereby accepts this Award subject to all the terms and provisions of the Plan.

Dated:
			Director

EXHIBIT 10.4

2020 Annual Performance Incentive Award Plan (*)

Part I: Plan Administration

Section 1: Purpose of the Plan

The purpose of the Performance Incentive Award Plan ("the Plan") is to provide variable compensation to those employees in key positions who attain and sustain consistently high levels of performance by meeting and exceeding goals and expectations that contribute to the success, profitability, and return to the shareholders of Citizens & Northern Corporation and affiliated Employer(s). The Plan is designed to support operational objectives and financial goals as defined by the long-range and short-range strategic and financial Plans. Additionally, the Plan is designed to provide a component of the management compensation package essential to retaining and attracting quality employees to key positions that contribute significantly to the bank’s financial performance. A key position for the purpose of this plan is a job role that is typically, within the community banking and financial services industries, eligible for performance-based incentive compensation.

Section 2: General Description

There are three components of the Plan: (1) corporate performance; (2) unit/functional performance; and (3) individual performance. The corporate performance component will be subject to the Corporation’s attainment of financial goals relative to a defined peer group. To receive the corporate bonus payout, the company must achieve at least the threshold level. Further, the individual performance component will be subject to an evaluation of the participants’ overall contributions to the “team”. To earn the individual component, the participant must attain at least the threshold performance level.

The unit/functional component is based on the attainment of pre-established goals by the participant and often a team of participants in a given business unit, e.g., retail branch system, commercial lending team. Depending upon the participant’s function, Key Performance Indicators for the participant’s region, or the corporation as a whole, also may be evaluated to determine the unit/functional bonus. To receive the unit/functional bonus payout, the participant must achieve at least the threshold level. Even after attaining at least the Threshold performance, the plan permits the participant’s supervisor or the executive officer for the participant’s area to recommend no bonus payout, or a reduced amount (Corporate, Unit/Functional or Individual) if aspects of the participant’s performance are deemed unsatisfactory.

(*) Employees who are actively engaged in interviewing residential real estate mortgage applicants, processing the applications and closing the loans are excluded from this plan. The Corporation has a separate incentive award plan for such employees.

means to retain and attract top performers who increase the organization’s financial performance by attaining their performance goals. The Plan requires that management perform an annual assessment and establishment of goals and provides a performance review and measurement system. The Plan requires management to consider non-financial goals designed to improve operational and risk management effectiveness, as well as financial goals, as appropriate for each participant’s position. The Plan permits future inclusion of additional positions during a Plan year, if the need arises.

The calculation of the bonus to be distributed to the Plan participants, and the incentive formulas, are constructed to provide awards consistent with strong corporate financial performance and the participant’s exceptional performance in his/her unit/functional area. The incentive formulas ensure a level of incentive award that is competitive with comparable positions and job levels in similar financial institutions, thus enabling Citizens & Northern to attract, retain, and motivate high-performing personnel and support continued growth and profitability. The determination of the bonus payable is described in Part II of this Plan.

The Plan is established to augment regular salary and benefit programs already in existence. The Incentive Plan is not meant to be a substitute for salary increases but supplemental to salary and as stated earlier, a reward for “exceptional" performance.

The Plan has been developed to recognize that the amount of incentive bonus award attainable by key executives should vary depending upon the executive’s position with the company and the competitive levels of incentive bonus for those positions within the banking and financial service industry. Thus threshold, target and maximum Incentive Opportunities are established for each position.

Section 3: Other Payment Conditions

Termination for Reasons Other Than Death, Permanent Disability or Retirement – In the event of termination of employment for reasons other than death, permanent disability or retirement, the participant, at the discretion of the committee, may forfeit all unpaid incentive awards.

The Compensation Committee of the Board, and management, reserve the right to deny or modify an award to any participant. Such action may be due to, but not limited to, the failure of the participant to properly perform during the Plan year. Economic or other circumstances and considerations may dictate that incentive bonuses be reduced or eliminated in any given year. Accordingly, the Board of Directors may amend, alter or terminate the Plan at any time.

In the event a participant becomes disabled for a period greater than two (2) weeks, any salary continuation as a result of the Corporation’s short and long-term disability programs will not be included in the base salary used for the incentive bonus calculation.

Section 4: Administration of the Plan

necessary. The recommendations of the Committee as approved by the board, affecting the construction, interpretation, and administration of the Plan shall be final and binding on all parties, including the Corporation, its subsidiaries and employees.

At or before the beginning of each Plan year, the Committee will review and may revise the operating rules. Performance targets the Incentive Bonus Plan Performance Matrix, and the Incentive Opportunity levels for corporate, individual and unit/functional awards for attaining those targets may be changed in order to emphasize specific goals and objectives of the Plan and to maintain a competitive incentive program. However, it is expected that the Plan will require modification only when significant changes in the organization, goals, personnel, or performance occur. The Chief Executive Officer shall be the Plan Administrator with the power to control and oversee proper administration of the Plan, and may recommend to the Committee proposed changes to the operating rules. Additionally, the Committee may engage a third party expert to review and amend the plan.

An individual or individuals designated by the Chief Executive Officer will perform the computation of incentive awards. Maintenance of participant payment records shall be the responsibility of the Human Resource Director.

Finally, the committee, with board approval, may exclude extraordinary occurrences, which could affect the performance awards, either positively or negatively, but are by their nature outside the significant influence of Plan participants. The characteristics of such extraordinary occurrences are generally that they involve the senior management and the board of directors in:

· The original decision to take some action.

· Mission-driven strategic Initiatives that sacrifice short-term income for long-term gain.

· Issues most related to a restructuring of assets, or unusual expense or income realization.

Extraordinary occurrences may be excluded when calculating performance results to ensure that the best interests of the shareholders are protected and are not brought into conflict with the intent of the Plan. When and if extraordinary occurrences are excluded from the calculation of corporate performance measures, they should also be excluded in calculating the bonus.

Section 5: Plan Participants

Executive management shall select and recommend for participation in the Plan employees in those job positions that are responsible for directing, implementing and performing functions that have a significant influence on the profitability and operational performance of the bank (key employees). Those job positions which are selected for participation in the Plan will be in positions that normally include an incentive bonus component in the compensation package offered by similar financial institutions.

salary for each position. Participants shall be notified of their eligibility as soon as selection is completed and the board of directors has adopted the Plan. The Committee shall review and recommend the inclusion of participants to the full board for their approval.

Positions and thus participants may be added during the Plan year at the discretion of management and the Committee, and the incentive award will be prorated from date of entry into the Plan.

Section 6: Payment of Individual Incentive Compensation Awards

Within 60 days following the end of the Plan year and as soon as the participant’s performance has been evaluated and the financial and operating results are known, participants will receive their incentive payment as determined by the Incentive Bonus Plan Performance Matrix.

Section 7: Incentive Compensation Plan Operating Rules

Before the beginning of each Plan year, the Committee may review and revise, if deemed appropriate, Part II: Operating Rules of the Plan for the year then beginning. The operating rules shall include the following:

a) Identification of positions selected for participation in the Plan

b) The method for determining the amount of the total bonus to be paid to Plan participants, including the Incentive Bonus Plan Performance Matrix.

c) Schedules and formulas for determining the amount of the incentive compensation awards to Plan participants for the Plan year then beginning, including threshold, target and maximum performance measures and the percentage of bonus award determined by corporate, functional/unit and individual performances. Participants will be informed at or before the Plan year of the manner in which performance will be evaluated.

d) Other administrative and procedural rules, which the committee considers appropriate.

After approval by the Committee and the board of directors, management shall, as soon as practical, inform each of the participants of the operating rules for the Plan year then beginning.

Section 8: Performance Progress Reporting

Semi-annually the Plan Administrator will be responsible for communicating attainment of corporate goals during the course of the Plan year. Participants and their direct supervisors will meet periodically to review their performance relative to the established unit/functional and individual goals.

Section 9: Amendment or Termination of Plan

The committee, with concurrence of the board of directors, may terminate, amend, or modify this Plan at any time. The termination, amendment, or modification of the Plan may affect a participant's right to unpaid incentive compensation awards under this Plan.

Section 10: Other Considerations

Recoupment- Amounts allocated or paid pursuant to this Plan shall be subject to recovery by the Corporation under any claw back, recovery, recoupment or similar policy hereafter adopted by the Corporation, whether in connection with Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended from time to time, or otherwise, whether or not required by law.

Active Employment Contingency- Except in the case of a retirement, if a participant voluntarily terminates his or her employment with the Corporation or Bank prior to the date of bonus payout, the bonus will be forfeited.

Right of Assignment - No right or interest of any participant in the Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including levy, garnishment, attachment, pledge, or bankruptcy.

Right of Employment - The participation in or the receipt of an award under this Plan shall not guarantee any employee any right to continued employment; the right to dismiss any employee is specifically reserved to the organization. The receipt of an award for any one year shall not guarantee an employee the right to receive an award for any subsequent year.

Change of Position – If a participant transfers to another position in the organization that is not included in the Incentive Compensation Plan, they will cease being a Plan participant. At the time of the position change a determination will be made as to whether the participant will be eligible for a bonus for the period during which they were a participant.

Withholding for Taxes - The organization shall have the right to deduct from all payments under this Plan any federal, state or local taxes required by law to be withheld with respect to such payments.

Salary - Salary is defined as base earnings for the year, which includes any increase in weekly rate of pay but not including any referral awards, brokerage or insurance commissions, golden nugget payments, taxable fringe benefits or prior bonus payments.

Board Prerogatives – It will be the right of the Board of Directors to amend, alter and/or terminate the plan in its sole discretion at any time.

Part II: Operating Rules

Section l: General

The following Incentive Compensation Plan Operating Rules will be in effect for the 2020 plan year and until revised. These operating rules are subject to change by the Committee before the start of the Plan year, with the approval of the board of directors. It is anticipated that the rules for 2020 will be revised only if significant changes occur in organization, operations, industry compensation practices, or other pertinent factors.

Section 2: Corporate Performance Component - Incentive Bonus Plan Performance Matrix for 2020

The corporate performance component of the Incentive Bonus is calculated based on comparison of C&N’s Return on Average Equity (ROAE) to that of a Peer Group. The chart below will determine the Incentive Opportunity percentage of base salary from which the corporate performance component of a participant’s bonus would be paid:

C&N's	Corporate
Percent	Award as
ROAE Rank	% of
vs Peer	Target
25	33%
30	46.4%
35	59.8%
40	73.2%
45	86.6%
50	100%
55	110.0%
60	120.0%
65	130.0%
70	140.0%
75	150%
80	150%
85	150%
90	150%
95	150%
100	150%
>100	150%

****************************************************************

* The Peer Group shall include selected publicly traded commercial banks and thrifts within MD, NJ, NY, OH,PA, and WV with total assets between $1.1 billion and $4.6 Billion.

EXHIBIT 10.5

2021 Annual Performance Incentive Award Plan (*)

Part I: Plan Administration

Section 1: Purpose of the Plan

Section 2: General Description

Further, the individual performance component will be subject to an evaluation of the participants’ overall contributions to the “team”. To earn the individual component, the participant must attain at least the threshold performance level.

Even after attaining at least the Threshold performance, the plan permits the participant’s supervisor or the executive officer for the participant’s area to recommend no bonus payout, or a reduced amount (Corporate, Unit/Functional or Individual) if aspects of the participant’s performance are deemed unsatisfactory.

The Plan protects shareholders' interests by requiring that the goals established will enhance bottom line performance while not encouraging excessive risk-taking and that a minimum level of performance is achieved before any incentive award can be made. At the same time the Plan provides management with a means to retain and attract top performers who increase the organization’s financial performance by attaining their performance goals. The Plan requires that management perform an annual assessment and establishment of goals and provides a performance review and measurement system. The Plan requires management to consider non-financial goals designed to improve operational and risk management effectiveness, as well as financial goals, as appropriate for each participant’s position. The Plan permits future inclusion of additional positions during a Plan year, if the need arises.

Section 3: Other Payment Conditions

Section 4: Administration of the Plan

Throughout this Plan, reference to the actions and authority of the Compensation Committee of the Board of Directors ("the Committee") also presumes that the Committee will recommend, and the board of directors will approve or disapprove, final disposition of all matters pertaining to administration of the Plan. The Committee, with board approval, has the responsibility to interpret, administer, and amend the Plan as necessary. The recommendations of the Committee as approved by the board, affecting the construction, interpretation, and administration of the Plan shall be final and binding on all parties, including the Corporation, its subsidiaries and employees.

· The original decision to take some action.

· Mission-driven strategic Initiatives that sacrifice short-term income for long-term gain.

· Issues most related to a restructuring of assets, or unusual expense or income realization.

Section 5: Plan Participants

At or before the beginning of each Plan year, the Committee shall review the recommendations of management on the selection of those positions eligible for participation in the Plan for that year. Management shall recommend the Incentive Bonus Plan Performance Matrix for the year. Additionally, management shall recommend a threshold, target and maximum Incentive Opportunity percentage of base salary for each position. Participants shall be notified of their eligibility as soon as selection is completed and the board of directors has adopted the Plan. The Committee shall review and recommend the inclusion of participants to the full board for their approval.

Positions and thus participants may be added during the Plan year at the discretion of management and the Committee, and the incentive award will be prorated from date of entry into the Plan.

Section 6: Payment of Individual Incentive Compensation Awards

Section 7: Incentive Compensation Plan Operating Rules

a) Identification of positions selected for participation in the Plan

b) The method for determining the amount of the total bonus to be paid to Plan participants, including the Incentive Bonus Plan Performance Matrix.

d) Other administrative and procedural rules, which the committee considers appropriate.

After approval by the Committee and the board of directors, management shall, as soon as practical, inform each of the participants of the operating rules for the Plan year then beginning.

Section 8: Performance Progress Reporting

Section 9: Amendment or Termination of Plan

Section 10: Other Considerations

Board Prerogatives – It will be the right of the Board of Directors to amend, alter and/or terminate the plan in its sole discretion at any time.

Part II: Operating Rules

Section l: General

The following Incentive Compensation Plan Operating Rules will be in effect for the 2021 plan year and until revised. These operating rules are subject to change by the Committee before the start of the Plan year, with the approval of the board of directors. It is anticipated that the rules for 2021 will be revised only if significant changes occur in organization, operations, industry compensation practices, or other pertinent factors.

Section 2: Corporate Performance Component - Incentive Bonus Plan Performance Matrix for 2021

C&N's	Corporate
Percent	Award as
ROAE Rank	% of
vs Peer	Target
25	33%
30	46.4%
35	59.8%
40	73.2%
45	86.6%
50	100%
55	110.0%
60	120.0%
65	130.0%
70	140.0%
75	150%
80	150%
85	150%
90	150%
95	150%
100	150%
>100	150%

****************************************************************

* The Peer Group shall include selected publicly traded commercial banks and thrifts within MD, NJ, NY, OH, PA, and WV with total assets between $1.1 billion and $4.6 Billion.

EXHIBIT 10.6

2021 Annual Performance Incentive Award Plan — Mortgage Lenders

Section l: Purpose of the Plan

The purpose of the Performance Incentive Award Plan ("the Plan") is to provide variable compensation to Citizens & Northern employees who are actively engaged in interviewing residential real estate applicants, processing the applications and closing the loans. The Plan is designed to reward mortgage lending employees who attain and sustain consistently high levels of performance by meeting and exceeding defined goals and to provide a component of the compensation package essential to retaining and attracting quality employees in mortgage lending positions. Incentive awards are not directly tied to Company/mortgage business profits nor the terms of the closed-end mortgage transaction or a proxy for a transaction term. The expense of the plan is incorporated into the Company's operating budget. The objective is to align the interests of these employees with the interests of the Company in obtaining superior performance results while being in compliance with the SAFE Act and 12 CFR Part 1026.36 (Regulation Z).

Section 2: General Description

There are two components of the Plan: (l) unit/functional performance; and (2) individual performance. The individual performance component will be subject to an evaluation of the participants' overall contributions to the "team". To earn the individual component, the participant must attain at least the threshold performance level. The unit/functional component is based on the attainment of pre-established goals by the applicable branch or mortgage lending business unit. To receive the unit/functional bonus payout, the participant must achieve at least the threshold level.

In addition to goals based on production, the Plan requires management to consider non-financial goals designed to improve operational and risk management effectiveness, as appropriate for each participant's position. The Plan permits future inclusion of additional positions during a Plan year, if the need arises.

The incentive formulas ensure a level of incentive award that is competitive with comparable positions and job levels in similar financial institutions, thus enabling Citizens & Northern to attract, retain, and motivate high-performing mortgage lending employees.

The Plan has been developed to recognize that the amount of incentive bonus award attainable by key mortgage lending employees should vary depending upon the employee's position with the company and the competitive levels of incentive bonus for those positions within the banking and financial service industry. Thus threshold, target and maximum Incentive Opportunities are established for each position.

Section 3: Other Payment Conditions

Termination for Reasons Other Than Death, Permanent Disability or Retirement — In the event of termination of employment for reasons other than death, permanent disability or retirement, the participant, at the discretion of the committee, may forfeit all unpaid incentive awards.

In the event a participant becomes disabled for a period greater than two (2) weeks, any salary continuation as a result of the Corporation's short and long-term disability programs will not be included in the base salary used for the incentive bonus calculation.

Section 4: Administration of the Plan

Throughout this Plan, reference to the actions and authority of the Compensation Committee of the Board of Directors ("the Committee") presumes that the Committee will recommend, and the board of directors will approve or disapprove, final disposition of all matters pertaining to administration of the Plan. The Committee, with board approval, has the responsibility to interpret, administer, and amend the Plan as necessary. The recommendations of the Committee as approved by the board, affecting the construction, interpretation, and administration of the Plan shall be final and binding on all parties, including the Corporation, its subsidiaries and employees.

At or before the beginning of each Plan year, the Committee will review and may revise the operating rules. The Incentive Opportunity levels for individual and unit/functional awards for attaining those targets may be changed in order to maintain a competitive incentive program. However, it is expected that the Plan will require modification only when significant changes in the organization, goals, personnel, or performance occur. The Chief Executive Officer shall be the Plan Administrator with the power to control and oversee proper administration of the Plan, and may recommend to the Committee proposed changes to the operating rules. Additionally, the Committee may engage a third party expert to review and amend the plan.

Section 5: Plan Participants

Executive management shall select and recommend for participation in the Plan employees in those job positions that are responsible for mortgage lending functions. Those job positions which are selected for

participation in the Plan will be in positions that normally include an incentive bonus component in the compensation package offered by similar financial institutions.

At or before the beginning of each Plan year, the Committee shall review the recommendations of management on the selection of those positions eligible for participation in the Plan for that year. Additionally, management shall recommend a threshold, target and maximum Incentive Opportunity percentage of base salary for each position. Participants shall be notified of their eligibility as soon as selection is completed, and the board of directors has adopted the Plan. The Committee shall review and recommend the inclusion of participants to the full board for their approval.

Positions and thus participants may be added during the Plan year at the discretion of management and the Committee, and the incentive award will be prorated from date of entry into the Plan.

Section 6: Payment of Individual Incentive Compensation Awards

Within 60 days following the end of the Plan year and as soon as the participant's performance has been evaluated, participants will receive their incentive payment.

Section 7: Incentive Compensation Plan Operating Rules

Before the beginning of each Plan year, the Committee may review and revise, if deemed appropriate, the operating rules of the Plan for the year then beginning. The operating rules shall include the following:

a) Identification of positions selected for participation in the Plan

b) The method for determining the amount of the total bonus to be paid to Plan participants.

c) Schedules and formulas for determining the amount of the incentive compensation awards to Plan participants for the Plan year then beginning, including threshold, target and maximum performance measures and the percentage of bonus award determined by functional/unit and individual performances. Participants will be informed at or before the Plan year of the manner in which performance will be evaluated.

d) Other administrative and procedural rules, which the Committee considers appropriate.

After approval by the Committee and the board of directors, management shall, as soon as practical, inform each of the participants of the operating rules for the Plan year then beginning.

Section 8: Performance Progress Reporting

Participants and their direct supervisors will meet periodically to review their performance relative to the established unit/functional and individual goals.

Section 9: Amendment or Termination of Plan

The Committee, with concurrence of the board of directors, may terminate, amend, or modify this Plan at any time. The termination, amendment, or modification of the Plan will not affect a participant's right to unpaid incentive compensation awards under this Plan.

Section 10: Other Considerations

Recoupment- Amounts allocated or paid pursuant to this Plan shall be subject to recovery by the Corporation under any claw back, recovery, recoupment or similar policy hereafter adopted by the Corporation, whether in connection with Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as amended from time to time, or otherwise, whether or not required by law.

Active Employment Contingency- Except in the case of a retirement, if a participant voluntarily is not actively employed by the Corporation prior to the date of bonus payout, the bonus will be forfeited.

Right of Assignment - No right or interest of any participant in the Plan shall be assignable or transferable, or subject to any lien, directly, by operation of law, or otherwise, including levy, garnishment, attachment, pledge, or bankruptcy.

Right of Employment - The participation in or the receipt of an award under this Plan shall not guarantee any employee any right to continued employment; the right to dismiss any employee is specifically reserved to the organization. The receipt of an award for any one year shall not guarantee an employee the right to receive an award for any subsequent year.

Change of Position — If a participant transfers to another position in the organization that is not included in the Incentive Compensation Plan, they will cease being a Plan participant. At the time of the position change a determination will be made as to whether the participant will be eligible for a bonus for the period during which they were a participant.

Withholding for Taxes - The organization shall have the right to deduct from all payments under this Plan any federal, state or local taxes required by law to be withheld with respect to such payments.

Salary - Salary is defined as base earnings for the year, which includes any increase in weekly rate of pay but not including any referral awards, brokerage or insurance commissions, golden nugget payments, taxable fringe benefits or prior bonus payments.

Board Prerogatives — It will be the right of the Board of Directors to amend, alter and/or terminate the plan in its sole discretion at any time. Any Incentive Bonus earned by the Participant at the time of amendment, alteration and/or termination shall remain due and payable as stated.

EXHIBIT 10.15

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (this “Agreement”) is made and entered into as of December 18, 2019 by and among CITIZENS & NORTHERN CORPORATION, a Pennsylvania business corporation (the "Corporation"), CITIZENS & NORTHERN BANK (the "Bank"), a Pennsylvania chartered bank, and Blair T. Rush, an adult individual ("Employee").

WITNESSETH:

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

WHEREAS, Employee currently is employed by Covenant Financial, Inc. as Executive Vice President and by Covenant Bank as President and Chief Operating Officer pursuant to an employment agreement dated as of January 1, 2018 (the "Covenant Employment Agreement"); and

WHEREAS, simultaneously with the execution of this Agreement, the Corporation and the Bank have entered into an Agreement and Plan of Merger (the "Merger Agreement") pursuant to which (i) Covenant Financial, Inc. is to be merged with and into the Corporation and (ii) Covenant Bank is to be merged with and into the Bank (collectively, the "Merger"); and

WHEREAS, the Corporation and the Bank each desire to employ Employee, and Employee desires to accept such employment, effective as of, and contingent upon, the closing of the Merger (the “Effective Date”) all upon the terms and conditions set forth herein.

AGREEMENT

NOW, THEREFORE, the parties hereto, in consideration of the mutual covenants and agreements set forth herein and intending to be legally bound, agree as follows:

1. Employment. Effective as of, and contingent upon, the Effective Date, the Corporation and the Bank each hereby employ Employee and Employee hereby accepts employment with Corporation and the Bank, on the terms and conditions set forth in this Agreement. In the event the Merger Agreement is terminated prior to the Effective Date occurring, this Employment Agreement shall be null and void and of no force or effect.

2. Duties of Employee. Employee shall serve as an Executive Vice President and as a Region President of the Corporation and the Bank, report to the Bank's Chief Executive Officer and shall have supervision and control over, and responsibility for providing leadership and direction for the Region initiatives, programs and activities to promote achievement of enterprise development and financial performance goals, in support of the Corporation's mission, vision, strategic goals and operating plans, and shall have such other powers and duties as may from time to time be prescribed by the Corporation and the Bank in its reasonable discretion, provided such powers and duties are consistent with the Employee's position. Employee shall devote Employee’s full business time, attention and energies to the business of the Corporation and the Bank during the Employment Period (as defined in Section 3 of this Agreement); provided, however, that this Section 2 shall not be construed as preventing Employee from (a) engaging in activities incident or necessary to personal investments, (b) engaging in activities involving charitable, educational,

religious or similar organizations or serving as a member of the board of directors of any non-profit association or corporation, or (c) being involved in any other activity with the prior approval of the Corporation or the Bank, which approval shall not be unreasonably withheld, conditioned or delayed. During the Employment Period, the Employee shall not engage in any business or commercial activities, duties or pursuits which compete with the business or commercial activities of the Corporation or the Bank, nor may the Employee serve as a director or officer or in any other capacity in a company which competes with the Corporation or the Bank. For purposes of this Agreement, the term “Region” means Bucks, Chester, Delaware, Montgomery, Philadelphia Counties in Pennsylvania and adjacent counties in New Jersey.

3. Term of Agreement.

3.1 Employment Period. This Agreement shall be for a three (3) year period (the "Employment Period") beginning on the Effective Date and, if not previously terminated pursuant to the terms of this Agreement, the Employment Period shall end on the close of business on the day prior to the third anniversary of the Effective Date (the “Termination Date”); provided, however, that unless either party gives written notice of non-renewal to the other party at least ninety (90) days prior to the Termination Date, this Agreement will be automatically renewed for successive one (1) year periods beginning on the Termination Date (such date and each annual anniversary thereof, a “Renewal Date”) unless either party gives written notice of non-renewal to the other party at least ninety (90) days prior to the expiration of the applicable Renewal Date.

3.2 Termination for Cause. Notwithstanding the provisions of Section 3.1 of this Agreement, this Agreement may be terminated by the Corporation or the Bank for Cause (as defined herein) upon written notice from the Corporation or the Bank to Employee. As used in this Agreement, "Cause" shall mean any of the following:

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

b) Employee's willful continuing failure to follow the lawful instructions of the Corporation or the Bank (which instructions must be consistent with the terms of this Agreement), after no less than 30 days from the Employee's receipt of written notice, other than a failure resulting from Employee's incapacity because of physical or mental illness;

c) A government regulatory agency recommends or orders in writing that the Chief Executive Officer of the Corporation or the Bank terminate the employment of the Employee with the Corporation or the Bank or relieve him of his duties as such relate to the Corporation or the Bank;

d) Employee's intentional and willful violation of any of the provisions of this Agreement;

e) Conduct on the part of the Employee bringing public discredit to the Bank;

f) Employee's breach of fiduciary duty involving personal profit; or

g) Employee's material violation of Bank policies and procedures which is not cured within 30 days after the Bank gives Employee written notice of such violation.

If this Agreement is terminated for Cause, all of Employee's rights under this Agreement shall cease as of the effective date of such termination, except that (i) the Bank shall pay to Employee the unpaid portion, if any, of his Annual Base Salary (as defined herein) through the date of termination, plus the value of accrued but unused vacation as of such date; and (ii) the Bank shall provide to Employee such post-employment benefits, if any, as may be provided for under the terms of the employee benefit plans of the Bank then in effect.

3.3 Termination for Good Reason. Notwithstanding the provisions of Section 3.1 of this Agreement, this Agreement shall terminate automatically upon Employee's termination of employment for Good Reason. The term "Good Reason" shall mean (i) a material reduction in salary or benefits, including under any incentive compensation plan, (ii) a reassignment which assigns full-time employment duties to Employee at a location more than thirty-five (35) miles from Covenant Bank's corporate headquarters in Doylestown, Pennsylvania on the date of this Agreement (the “Doylestown Location”), (iii) a reduction in any material respect and without Employee’s consent of the authority, duties and responsibilities of Employee, (iv) the receipt of a written notice of non-renewal from the Company to Employee pursuant to Section 3.1 of this Agreement or (v) any other material breach or default by the Corporation or the Bank under any term or provision of this Agreement which is not cured within thirty (30) days after Employee gives the Corporation or the Bank, as applicable, written notice of such breach.

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

3.4 Death. Notwithstanding the provisions of Section 3.1 of this Agreement, this Agreement shall terminate automatically upon Employee's death and Employee's rights under this Agreement shall cease as of the date of such termination, except that (i) the Bank shall pay to Employee's spouse, personal representative, or estate (the “Beneficiary”) the unpaid portion, if any, of his Annual Base Salary through date of death and the balance of the payments (if any) owing pursuant to Section 18(b) below, and (ii) the Bank shall provide to Employee's dependents any benefits due under the Bank's employee benefit plans, including the value of accrued but unused vacation as of such date.

3.5 Disability. If Employee becomes disabled because of sickness, physical or mental disability, the Corporation and the Bank shall have the option to terminate this Agreement by giving thirty (30) days written notice of termination to Employee; provided, however that Employee shall continue to be eligible for benefits under the Bank's long term disability insurance plan. Employee shall be deemed to have become "disabled" at such time as he qualifies (after expiration of any applicable waiting period) to receive benefits for partial or total disability under the Bank's employee long term disability insurance plan. If Employee's employment shall be terminated by reason of his disability, the Bank shall pay Employee his then current Annual Base Salary prorated through the date of termination, together with the amount of any unreimbursed business expenses as of the date of termination, plus the value of accrued but unused vacation as of such date and, except as otherwise provided in this Section 3.5 or Section 4.7, the parties shall have no further obligation to the each other under this Agreement.

4. Employment Period Compensation, Benefits and Expenses.

4.1 Annual Base Salary. For services performed by Employee under this Agreement, Bank shall pay Employee an annual base salary during the Employment Period at the rate of Two Hundred Seventy-Five Thousand Dollars ($275,000) per year, minus applicable withholdings and deductions, payable at the same times as salaries are payable to other employees of the Bank ("Annual Base Salary"). The Annual Base Salary shall be reviewed annually by the Corporation and the Bank and may be increased from time to time but shall not be decreased in any event. Employee's Annual Base Salary, and any and all such increases, shall be deemed to constitute amendments to this Section 4.1 to reflect the increased amounts, effective as of the date established for such increases by the Corporation and the Bank, as the new Annual Base Salary. In reviewing adjustments to Annual Base Salary, the Corporation and the Bank shall consider relevant market data regarding the performance of the Employee.

4.2 Bonus. The Corporation and the Bank may provide for the payment of an annual bonus to the Employee as it deems appropriate to provide incentive to the Employee and to reward the Employee for Employee’s performance. Such bonus may, but need not be, determined in accordance with any approved incentive bonus programs. The payment of any such bonuses will not reduce or otherwise affect any other obligation of the Corporation or the Bank to the Employee provided for in this Agreement.

4.3 Vacations, Holiday, etc. During the term of this Agreement, Employee shall be entitled to be paid annual vacation in accordance with the policies as established from time to time by the Board of Directors of the Bank, but in no event less than four (4) weeks during each calendar year. However, Employee shall not be entitled to receive any additional compensation from Bank for failure to take a vacation, nor shall Employee be able to accumulate unused vacation time from one year to the next. The Employee shall also be entitled to all paid holidays, sick days and personal days provided by the Bank to its regular full-time employees.

4.4 Automobile. During the term of this Agreement, the Bank shall provide the Employee with a vehicle allowance of Seven Hundred Fifty Dollars ($750.00) per month.

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

4.6 Business Expenses. During the term of this Agreement, Employee shall be entitled to receive prompt reimbursement for all reasonable expenses incurred by Employee, which are properly accounted for, in accordance with the policies and procedures established by the Corporation or the Bank for their employees.

4.7 Restricted Stock Grant. Within ten (10) days after the Effective Date, Employee shall receive a grant of Corporation restricted common stock equal in value to One Hundred Fifty

Thousand Dollars ($150,000) based on the closing sale price of the common stock as of the Effective Date (the “Restricted Stock Grant”). The shares of the Corporation’s restricted common stock issued pursuant to the Restricted Stock Grant shall vest ratably over a three (3) year period following the Effective Date. Such grant shall automatically, fully vest (without any further action by the Corporation) as to all unvested shares upon a Change in Control (as defined below), or in the event of a termination of Employee’s employment (a) without Cause, (b) upon Employee’s death or disability, or (c) upon Employee’s resignation of employment for Good Reason.

4.8 Location of Employment. Employee shall be based full-time at the Doylestown Location. The Employee will be required to travel to the Corporation’s headquarters located in Wellsboro, Pennsylvania no more than six (6) days per month.

4.9 Country Club Membership Fees. The Bank shall pay for Executive's initiation fees, membership dues, capital fund assessments and similar items necessary or appropriate to maintain a membership at a country club within the Bank's market area as mutually agreed upon by Bank and Executive.

4.10 Incentive Compensation. During the Employment Period, Employee shall be entitled to annual incentive compensation pursuant to the terms of, the Corporation’s Annual Performance Incentive Award Plan and the Corporation's 1995 Stock Incentive Plan, and any amount awarded to Employee under such plans shall be paid to Employee in accordance with the provisions of such plans.

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

5.1 Any of the following events occurring during the period commencing with the date of a "Change in Control" (as defined in Section 5.2 of this Agreement) and ending on the second anniversary of the date of the Change in Control, shall constitute a "Termination Pursuant to a Change in Control" for purposes of this Agreement:

a) Employee's employment is terminated by the Corporation or Bank or any acquirer or successor thereof without Cause; or

b) Employee terminates Employee's employment for Good Reason.

5.2 As used in this Agreement, "Change in Control" shall mean the occurrence immediately of any of the following:

a) the consummation of (I) a merger, consolidation, division or other fundamental transaction involving the Corporation or the Bank, (II) a sale, exchange, transfer or other disposition of substantially all of the assets of the Corporation or the Bank to any entity which is not a direct or indirect subsidiary of the Corporation, or (III) a purchase by the Corporation or the Bank of substantially all of the assets of another entity; unless (Y) such merger, consolidation, division, sale, exchange, transfer, purchase, disposition or other transaction is approved in advance by eighty percent (80%) or more of the members of the Board of Directors of the Corporation who are not interested in the transaction and (Z) a majority of the members of the Board of Directors of the legal entity

resulting from or existing after any such transaction and a majority of the Board of Directors of such entity's parent corporation, if any, are former members of the Board of Directors of the Corporation; or

b) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934 (the "Exchange Act")), other than the Corporation, a direct or indirect subsidiary of the Corporation, or a person who is the beneficial owner of more than twenty-five percent (25%) of the Corporation's outstanding securities on the date of this Agreement becomes the "beneficial owner" (as defined in Rule l3d-3 under the Exchange Act), directly or indirectly, of securities of the Corporation representing twenty-five percent (25%) or more of the combined voting power of Corporation's then outstanding securities; or

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

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

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

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

a) Employee shall be paid, within twenty (20) days following termination, a lump sum cash payment equal to one and one half (1.5) times the sum of (1) the highest Annual Base Salary during the immediately preceding three calendar years and (2) the highest cash bonus and other cash incentive compensation earned by Employee with respect to one of the three calendar years immediately preceding the year of termination. The amount shall be subject to federal, state, and local tax withholdings.

b) In addition, for a period of twelve (12) months from the date of termination of employment, Employee shall be permitted to continue participation in and the Bank shall maintain the same level of contribution for Employee's participation in the Bank's life, disability, medical/health insurance and other health and welfare benefits in effect with respect to Employee during the one (1) year prior to his termination of employment, or, if Bank is not permitted by the insurance carriers to provide such benefits because Employee is no longer an employee, a dollar amount equal to the cost to Employee of obtaining such benefits (or substantially similar benefits).

c) All unvested restricted stock issued pursuant to the Restricted Stock Grant shall immediately vest.

6.2 Mitigation. Employee shall not be required to mitigate any payment or benefit provided for in this Section 6 by seeking other employment or otherwise, nor shall the amount of payment or the benefit provided for in this Section 6 be reduced by any compensation earned by Employee as the result of employment by another employer or by reason of Employee's receipt of or right to receive any retirement or other benefits after the date of termination of employment or otherwise.

6.3 Limitation on Payment and Benefits.

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

I) the Safe Harbor Amount, or

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

b) All determinations to be made under this Section 6.3 shall be made by an independent public accounting firm chosen by the Corporation (the "Accounting Firm"). In determining whether such Benefit Limit is exceeded, the Accounting Firm shall make a reasonable determination of the value to be assigned to the restrictive covenants in effect for the Employee pursuant to this Agreement, and the amount of the Employee's potential parachute payment under section 280G of the Code shall reduce by the value of those restrictive covenants to the extent consistent with section 280G of the Code.

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

d) All of the fees and expenses of the Accounting Firm in performing the determinations referred to in Section 6.3(b) or any attorney or accountant appointed to represent the Employee pursuant to Section 6.3(c) shall be borne solely by the Corporation.

e) To the extent a reduction to the Total Payments is required to be made in accordance with this Section 6.3, such reduction and/or cancellation of acceleration of equity awards shall occur in the order that provides the maximum economic benefit to the Employee. In the event that acceleration of equity awards is to be reduced, such acceleration of vesting also shall be canceled in the order that provides the maximum economic benefit to the Employee. Notwithstanding the foregoing, any reduction shall be made in a manner consistent with the requirements of section 409A of the Code and where two economically equivalent amounts are subject to reduction but payable at different times, such amounts shall be reduced on a pro rata basis, but not below zero.

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

a) If Employee's employment is involuntarily terminated by the Corporation or the Bank without Cause or is terminated by Employee for Good Reason pursuant to Section 3.3 (other than a Termination Pursuant to a Change in Control), then Bank shall pay (or cause to be paid) to Employee, within twenty (20) days following termination, a lump sum cash payment equal to one (1) times the sum of (l) the highest Annual Base Salary during the immediately preceding three calendar years and (2) the highest cash bonus and other cash incentive compensation earned by Employee with respect to one of the three calendar years immediately preceding the year of termination (the “Severance Payment”). The Severance Payment shall be subject to federal, state and local tax withholdings. In addition, for a period of one (1) year from the date of termination of employment, Employee shall be permitted to continue participation in, and the Bank shall maintain the same level of contribution for, Employee's participation in the Bank's life, disability, medical/health insurance and other health and welfare benefits in effect with respect to Employee during the one (1) year prior to his termination of employment, or, if Bank cannot provide such benefits because Employee is no longer an employee, a dollar amount equal to the cost to Employee of obtaining such benefits (or substantially similar benefits). In addition, if permitted pursuant to the terms of the plan, Employee shall receive additional retirement benefits to which he would have been entitled had his employment continued through the then remaining term of the Employment Period.

b) Employee shall not be required to mitigate the amount of any payment provided for in this Section 7 by seeking other employment or otherwise, nor shall the amount of payment or the benefit provided for in this Section 7 be reduced by any compensation earned by Employee as the result of employment by another employer or by reason of Employee's receipt of or right to receive any retirement or other benefits after the date of termination of employment or otherwise.

c) In the event of a termination pursuant to this Section 7, all restricted stock issued pursuant to Restricted Stock Grant shall immediately vest.

8. Covenant Not to Compete.

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

I) enter into or be engaged (other than by the Corporation or the Bank), directly or indirectly, either for his own account or as agent, consultant, employee, partner, officer, director, proprietor, investor (except as an investor owning less than 5% of the stock of a publicly owned company) or otherwise of any person, firm, corporation or enterprise engaged in (1) the banking (including bank holding company) or financial services industry, (2) starting a new bank or (3) any other activity in which the Corporation, Bank or any of its subsidiaries are engaged during the Employment Period, in either case within a thirty-five (35) mile radius of the legal or principal executive office of the Corporation or the Bank and any branch banking office or other office of the Bank (the "NonCompetition Area"); or

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

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

Notwithstanding anything contained in Section 8(a)(I) to the contrary, if the Corporation or the Bank, as applicable, terminates Employee’s employment without Cause, Employee shall be permitted during the Restricted Period to be engaged as a consultant to an existing bank, bank holding company or other depositary institution in the Non-Competition Area so long as Employee (x) does not become engaged, directly or indirectly, as an employee, partner, officer, director or an investor (except as an investor owning less than 5% of the stock of a publicly owned company) of such entity during the Restrictive Period, and (y) remits to the Bank, within thirty (30) days of Employee’s receipt, all consulting fees actually received by Employee during the Restrictive Period from such entity for any such engagement up to the aggregate amount of the Severance Payment. The foregoing exception shall not modify or alter the restrictions applicable to Employee contained in Sections 8(a)(II), 8(a)(III), or 9 or any other confidentiality obligations applicable to Employee.

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

maximum time and territory and to such other extent as such court may judicially determine or indicate to be reasonable.

c) The provisions of this Section 8 shall be applicable commencing on the date of this Agreement and continuing for one (1) year after the effective date of the termination of Employee's employment. Notwithstanding the above provisions, if the Employee violates the provisions of this Section 8 and the Bank must seek enforcement of the provisions of Section 8 and is successful in enforcing the provisions, either pursuant to a settlement agreement, or pursuant to court order, the covenant not to compete will remain in effect for one (1) full year following the date of the settlement agreement or court order.

d) Employee hereby agrees that the provisions of this Section 8 are fully assignable by the Corporation and the Bank to any successor. Employee also acknowledges that except as otherwise specifically set forth herein, the terms and conditions of this Section 8 will not be affected by the circumstances surrounding termination of Employee’s employment.

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

9. Non-Disparagement. Following the termination of the Employee's employment, the Employee shall not make any public statements which disparage the Corporation or Bank. Notwithstanding the foregoing, nothing in this Section shall prohibit Employee from making truthful statements when required by order of a court or other governmental or regulatory body having jurisdiction.

10. Rules, Regulations and Policies. Employee shall abide by and comply in all material respects with all of the rules, regulations, and policies of the Corporation and the Bank, including without limitation the Bank’s policy of strict adherence to, and compliance with, any and all confidentiality obligations and requirements of the banking, securities, and antitrust laws and regulations.

11. Release. Notwithstanding any other provision of this Agreement, any severance or termination payments or benefits herein described are conditioned on the Employee's execution and delivery to the Corporation and Bank of an effective general release agreement in the form attached hereto as Exhibit A, as such form may be modified by the Corporation, in a manner

consistent with the requirements of the Older Workers Benefit Protection Act and any applicable state law. Notwithstanding any provision of this Agreement to the contrary, in no event shall the timing of the Employee's execution of the release, directly or indirectly, result in the Employee designating the calendar year of payment, and if a payment that is subject to execution of the release could be made in more than one taxable year, payment shall be made in the later taxable year.

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

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

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

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

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

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

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

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

17. Entire Agreement. Upon the Effective Date, this Agreement shall contain the entire agreement of the parties relating to the subject matter of this Agreement and shall supersede and replace the Covenant Employment Agreement and any prior written or oral agreements between them respecting the within subject matter.

18. Successors; Binding Agreement.

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

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

19. Arbitration. The Corporation, the Bank and Employee recognize that in the event a dispute should arise between them concerning the interpretation or implementation of this Agreement, lengthy and expensive litigation will not afford a practical resolution of the issues

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

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

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

22. Applicable Law. This Agreement shall be governed by and construed in accordance with the domestic, internal laws of the Commonwealth of Pennsylvania, without regard to its conflicts of laws principles.

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

24. 409A Safe Harbor.

24.1 General. It is intended that this Agreement shall comply with the provisions of section 409A of the Code and the Department of the Treasury (the "Department") Regulations relating thereto, or an exemption to section 409A of the Code. Any payments that qualify for the "short-term deferral" exception or another exception under section 409A of the Code shall be paid under the applicable exception. For purposes of the limitations on nonqualified deferred compensation under section 409A of the Code, each payment of compensation under this Agreement shall be treated as a separate payment of compensation for purposes of applying the section 409A of the Code deferral election rules and the exclusion under section 409A of the Code for certain short-term deferral amounts. All payments to be made upon a termination of employment under this Agreement may only

be made upon a "separation from service" under section 409A of the Code. In no event may the Employee, directly or indirectly, designate the calendar year of any payment under this Agreement. Within the time period permitted by the applicable Department Regulations (or such later time as may be permitted under section 409A or any Internal Revenue Service or Department rules or other guidance issued thereunder), the Corporation may, in consultation with the Employee, modify the Agreement in order to cause the provisions of the Agreement to comply with the requirements of section 409A of the Code, so as to avoid the imposition of taxes and penalties on the Employee pursuant to section 409A of the Code.

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

24.3 Delay of Payments. Notwithstanding any other provision of this Agreement to the contrary, if the Employee is considered a "specified employee" for purposes of section 409A of the Code (as determined in accordance with the methodology established by the Corporation and the Bank as in effect on the date of termination), (i) any payment that constitutes nonqualified deferred compensation within the meaning of section 409A of the Code that is otherwise due to the Employee under this Agreement during the six-month period following his separation from service (as determined in accordance with section 409A of the Code) shall be accumulated and paid to Employee on the first business day of the seventh month following his separation from service (the "Delayed Payment Date") and (ii) in the event any equity compensation awards held by the Employee that vest upon termination of the Employee's employment constitute nonqualified deferred compensation within the meaning of section 409A of the Code, the delivery of shares of common stock (or cash) as applicable in settlement of such award shall be made on the earliest permissible payment date (including the Delayed Payment Date) or event under section 409A on which the shares (or cash) would otherwise be delivered or paid. The Employee shall be entitled to interest on any delayed cash payments from the date of termination to the Delayed Payment Date at a rate equal to the applicable federal short-term rate in effect under Code section 1274(d) for the month in which the Employee's separation from service occurs. If the Employee dies during the postponement period, the amounts and entitlements delayed on account of section 409A of the Code shall be paid to the person designated by the Employee in writing for this purpose, or in the absence of any such designation, to (i) his spouse if she survives him, or (ii) to his estate if his spouse does not survive him, on the first to occur of the Delayed Payment Date or 30 days after the date of the Employee's death. The foregoing shall apply only to those payments required

hereunder, if any, that do not qualify as short term deferrals or an exempt pay arrangement under section 409A.

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

26. Survival. Notwithstanding anything contained herein to the contrary, Employee's obligations under Sections 8, 9, 10, 11 and 25 shall continue despite the expiration of the term of this Agreement or its termination.

[Signature Page Follows]

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

ATTEST:	CITIZENS & NORTHERN CORPORATION

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


ATTEST:	CITIZENS & NORTHERN BANK

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


WITNESS:		EMPLOYEE
		/s/ Blair T. Rush
		Name: Blair T. Rush

EXHIBIT A

Separation Agreement and General Release

THIS SEPARATION AGREEMENT AND GENERAL RELEASE (this "Agreement'') is made by and between Blair T. Rush (the "Employee"), Citizens & Northern Corporation, a corporation organized and existing under the laws of the Commonwealth of Pennsylvania (the "Corporation'') and Citizens & Northern Bank, a Pennsylvania chartered bank (the "Bank").

WHEREAS, the Employee, the Corporation and the Bank entered into an Employment Agreement dated December 18, 2019 (the "Employment Agreement") that sets forth the terms and conditions of the Employee's employment with the Corporation and the Bank, including the circumstances under which the Employee is eligible to receive severance pay.

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

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

2. Employee's Release. The Employee on the Employee's own behalf and together with the Employee's heirs, assigns, executors, agents and representatives hereby generally releases and discharges the Corporation and the Bank and their respective subsidiaries, affiliates and the respective predecessors, successors (by merger or otherwise) and assigns of any of the foregoing, together with each and every of the present, past and future officers, managers, directors, shareholders, members, general partners, limited partners, employees and agents of any of the foregoing, and the heirs and executors of any of the foregoing (herein collectively referred to as the "Releasees") from any and all suits, causes of action, complaints, obligations, demands, common law or statutory claims of any kind, whether in law or in equity, direct or indirect, known or unknown (hereinafter "Claims"), which the Employee ever had or now has against the Releasees, or any one of them occurring up to and including the date of this Agreement. Notwithstanding anything herein to the contrary, the Employee's release is not and shall not be construed as a release of any future claim by the Employee against the Corporation or the Bank, nor shall it be a release of (i) any claims to enforce this Agreement or applicable sections of the Employment Agreement; (ii) any claims relating to vested rights in retirement, benefits or equity plans; (iii) any claims for indemnity in connection any claim or threatened claim against Employee arising from his employment; (iv) any claim for unemployment compensation or workers compensation or any other claim that cannot lawfully be released by private agreement.

This release specifically includes, but is not limited to:

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

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

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

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

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

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

3. Acknowledgment. The Employee understands that the release of Claims contained in this Agreement extends to all of the aforementioned Claims and potential Claims which arose on or before the date of this Agreement, whether now known or unknown, suspected or unsuspected, and that this constitutes an essential term of this Agreement. The Employee further understands and acknowledges the significance and consequences of this Agreement and of each specific release and waiver, and expressly consents that this Agreement shall be given full force and effect to each and all of its express terms and provisions, including those relating to unknown and uncompensated Claims, if any, as well as those relating to any other Claims specified herein.

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

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

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

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

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

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

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

11. Fees and Costs. The parties shall bear their own attorneys' fees and costs.

12. Counterparts. This Agreement may be executed in counterparts.

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

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

EMPLOYEE

By:
Name:	Blair T. Rush
Date:

CITIZENS & NORTHERN CORPORATION			CITlZENS & NORTHERN BANK
By:			By:
Name:			Name:
Title:			Title:
Date:			Date:

A-4

EXHIBIT 10.23

INDEMNIFICATION AGREEMENT

This Agreement made this 16^th^ day of February, 2021, between CITIZENS & NORTHERN CORPORATION, a bank holding company registered under the Bank Holding Company Act of 1956, as amended, and a Pennsylvania corporation (the “Company”) and Blair T. Rush**,** a director, officer or representative (as hereinafter defined) of the Company (the “Indemnitee”);

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

(1) is assessed a civil money penalty;

(2) is removed from office or prohibited from participating in the conduct of the affairs of the Company or its affiliates;

(3) is required to cease and desist from taking any affirmative action described under the Federal Deposit Insurance Act or other applicable banking laws with respect to the Company and its affiliates;

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

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

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

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

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

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

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

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

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

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

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

(a) If to the Company, to:

Citizens & Northern Corporation

90-92 Main Street

P.O. Box 58

Wellsboro, PA 16901

(b) If to Indemnitee, to:

Blair T. Rush

620 Cider Mill Road

Perkasie, PA 18944

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

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

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

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

INDEMNITEE		CITIZENS & NORTHERN CORPORATION

By:	/s/ Blair T. Rush	By:	/s/ J. Bradley Scovill

Title:	Executive Vice President and Region President	Title:	President and Chief Executive Officer

EXHIBIT 1

FORM OF UNDERTAKING

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

W I T N E S S E T H:

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

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

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

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

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

IN WITNESS WHEREOF, the undersigned has set his hand this _____ day of ______________, 20__.

	INDEMNITEE

	The Form Provided for Informational Purposes Only
	(In the event this form is needed, a blank to be signed and returned will be provided upon request.)

EXHIBIT 21

		Jurisdiction or	****
Name		State of Incorporation
Citizens & Northern Bank (A)		Pennsylvania
Bucktail Life Insurance Company (A)		Arizona
Citizens & Northern Investment Corporation (A)		Delaware
C&N Financial Services Corporation (B)		Pennsylvania
Northern Tier Holding LLC (B)		Pennsylvania

(A) Wholly-owned subsidiary of Citizens & Northern Corporation

(B) Wholly-owned subsidiary of Citizens & Northern Bank

EXHIBIT 23

Consent of Independent Registered Public Accounting Firm

We consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-162279 and 333-160682) and Form S-8 (No. 333-150517 and 333-138398) of Citizens & Northern Corporation and subsidiaries of our report dated March 5, 2021, relating to the consolidated financial statements and the effectiveness of Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting, which appears in this annual report on Form 10-K for the year ended December 31, 2020.


/s/ Baker Tilly US, LLP

Baker Tilly US, LLP (formerly known as Baker Tilly Virchow Krause, LLP)

Williamsport, Pennsylvania

March 5, 2021

EXHIBIT 31.1

CERTIFICATION

I, J. Bradley Scovill, certify that:

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

2.	Based on my knowledge, this annual 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 annual report;

3.	Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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.


March 5, 2021		By:	/s/ J. Bradley Scovill
Date			President and Chief Executive Officer

EXHIBIT 31.2

CERTIFICATION

I, Mark A. Hughes, certify that:

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

2.	Based on my knowledge, this annual 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 annual report;

3.	Based on my knowledge, the financial statements, and other financial information included in this annual 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 annual 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.


March 5, 2021		By:	/s/ Mark A. Hughes
Date			Treasurer and Chief Financial Officer

EXHIBIT 32

SECTION 1350 CERTIFICATIONS

In connection with the Annual Report of Citizens & Northern Corporation (the “Corporation”) on Form 10-K for the year ended December 31, 2020, 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.


March 5, 2021		By:	/s/ J. Bradley Scovill
Date			President and Chief Executive Officer


March 5, 2021		By:	/s/ Mark A. Hughes
Date			Treasurer and Chief Financial Officer

Exhibit 99.1

C&N ANNUAL REPORT<br> CREATING OUR FUTURE
TABLE OF CONTENTS<br>You&Us – Editor Introduction 4<br>Lead&Guide – C&N Leadership 6<br>President&CEO – Shareholder Letter 8<br>Dollars&Sense – C&N Financial Profile 11<br> Q uarterly Share Data<br> O perations Comparisons<br> E nd of Period Balances<br> C onsolidated Financial Data<br> C &N Wealth Management<br>Awards&Recognition 17<br>Community&Commitment 22<br>2
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At C&N, we’ve long known the value of togetherness. It’s at the heart<br>of what we do, from how we build relationships with every client to how<br>we become an integral part of the communities we call home. In 2020,<br>while our physical togetherness was limited, the hardships of the year<br>only served to reinforce our belief that the best way for everyone to<br>succeed is together. Business owners & lenders. Investors & planners.<br>You&Us, always.<br>Despite all of the challenges 2020 brought, we were able to accomplish<br>some amazing things. To keep clients abreast of seemingly ever-<br>changing information, we created timely communications.<br>And to continue to build personal, one-on-one relationships even<br>when social distancing was necessary, we connected with all of you in<br>unprecedented ways, including:<br>o 17,778 calls answered in our Client Care Center<br>o 606 online chat sessions<br>o 433,921 email communications to customers<br>To implement the newly created Paycheck Protection Program (PPP)<br>loans, we worked with local businesses to protect their companies<br>and employees. In all, we were able to fund over $168 Million in<br>PPP Loans to over 1,500 local businesses, saving the paychecks<br>of over 16,000 local workers. In addition, we celebrated other<br>accomplishments in the face of adversity, such as:<br>o W ysox remodel completed in June 2020<br>o New Towanda office completed in July 2020<br>o C losed on Covenant merger on July 1, 2020, transitioning thousands<br>of new customers to C&N<br>o C ontactless Debit cards kicked off in September 2020<br>o C lickSWITCH launch in October 2020<br>That’s what you call making the best of a challenging year.<br>That’s what’s possible when we all come together, and together we can<br>create our future. That’s C&N.<br>4
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LEAD GUIDE<br>We are grateful to our Board members for lending their expertise to<br>further the mission of C&N and for providing us with valuable insight<br>into the communities we serve.<br>EXECUTIVE TEAM<br>Mark A. Hughes, EVP and Director Financial Division<br>Deborah E. Scott, EVP and Director Trust Division<br>Janice Ward, EVP and Chief Wealth Management Officer<br>Stan R. Dunsmore, EVP and Chief Credit Officer<br>Tracy E. Watkins, EVP and Director of Human Resources<br>J. Bradley Scovill, President & CEO<br>Shelley L. D’Haene, EVP and Senior Operations Officer<br>Harold F. Hoose, III, EVP and Director of Lending<br>John M. Reber, EVP and Director of Risk Management<br>Thomas L. Rudy, Jr., EVP and Director of Branch Delivery<br>BOARD OF DIRECTORS<br>Robert G. Loughery, President, Nehemiah Development Company<br>Stephen M. Dorwart, CPA, Fischer Dorwart, P.C.<br>Terry L. Lehman, CPA - Retired Certified Public Accountant<br>Leonard Simpson, Attorney at Law & Sullivan County District Attorney<br>Timothy E. Schoener, VP & CIO, UPMC Pinnacle<br>Frank G. Pellegrino, Owner & Developer, Carlton Associates, LLC<br>Susan E. Hartley, Attorney at Law<br>Bobbi J. Kilmer, President & CEO, Claverack Rural Electric Cooperative<br>Aaron K. Singer, President & CEO, Metalkraft Industries, Inc.<br>Clark S. Frame, Retired Chairman of the Board, Monument Bank<br>Leo F. Lambert, Chairman, President/GM Fitzpatrick & Lambert, Inc.<br>J. Bradley Scovill, President & CEO, C&N<br>CORPOR ATE OFFICERS<br>Mark A. Hughes, Treasurer<br>Kimberly N. Battin, Corporate Secretary<br>J. Bradley Scovill, President & CEO<br>6
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Bradford & Sullivan Counties<br>Evan R. Barnes<br>Casandra K. Blaney<br>James A. Bowen<br>Krystle R. Bristol<br>Laura C. Cimino<br>Warren J. Croft<br>John M. Estep<br>Zachary R. Gates<br>Taunya Knolles Rosenbloom<br>J. Wesley Kocsis<br>Dr. Stephen D. Laudermilch<br>Kimberly J. Mastrantonio<br>Ryan D. Morales<br>Jeffrey B. Paul<br>Damian M. Rossettie<br>William B. Saxe<br>Eric Schoonover<br>Mark W. Smith<br>Andrew R. Wilcox<br>Cameron, McKean &<br>Potter Counties<br>John A. Abplanalp<br>David Mark Errick<br>Joseph R. Kightlinger<br>Lori J. Reed<br>Andrea F. Streich<br>Edwin W. Tompkins, III<br>Lycoming County<br>Robert T. Beiter<br>Thomas F. Charles<br>John M. Confer<br>Roger D. Jarrett<br>Daniel K. Mathers<br>Jeffrey M. Patterson<br>John F. Perrotto<br>Tyler L. Rhone<br>Camela A. Rooney<br>David A. Schall<br>Melissa M. Young<br>York County<br>Thomas K. Baughman<br>Matthew R. Doran<br>Nicholas E. Hauck<br>Ryan A. Myers<br>Alex E. Snyder<br>Bucks & Chester Counties<br>Glenda R. Childs<br>Carolina Cabrera DiGorgio<br>Joseph A. Fluehr, IV<br>Thomas Hebel<br>Linda J. Kilroy<br>Daniel Paul Marrazzo<br>Karen J. Miller<br>Louis Quattrocchi<br>Gary B. Rubin<br>Michael J. Rush<br>Irving N. Stein<br>David E. Thompson<br>James Watts<br>Tioga County<br>Brian A. Bicksler<br>Lawrence J. Connolly<br>Matthew S. DeCamp<br>Craig Eccher<br>Mark R. Howe<br>John C. Kenyon<br>Danielle M. Lee<br>Scott E. Lewis<br>Anthony L. Mosso<br>David C. Murdock<br>Mary C. Owlett<br>William W. Roosa<br>Ray E. Wheeland<br>John S. Johnston<br>ADVISORY BOARD<br>7
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Dear Shareholder,<br>The COVID-19 pandemic rocked the world in 2020 and was<br>the catalyst for changes that will impact life for many years.<br>The World Health Organization (WHO) declared the pandemic<br>on March 11, 2020 and the health emergency took over daily<br>life across the globe. In the U.S., federal and state authorities<br>implemented stay at home orders and passed a variety of<br>new laws and regulations designed to protect the health of<br>Americans. The potential financial consequences of these<br>restrictions were recognized and the Federal Reserve and U.S.<br>government took unprecedented actions to support American<br>households and businesses, as well as provide bankers with flexibility and tools to deliver<br>assistance.<br>While equity markets were hit hard late in the first quarter, certain sectors recovered<br>quickly and the major averages ended the year at record levels. The Federal Reserve<br>pumped liquidity into the system and reduced the fed funds rate target to 0% - .25%.<br>Longer-term rates followed this lead, flattening the yield curve at historically low levels.<br>Congress quickly passed the CARES Act making financial support and new lending<br>programs available at a massive scale. These efforts stabilized the economy and assisted<br>in substantially reducing the unemployment rate following the initial spike.<br>As the pandemic’s impact continued to wreak havoc on everyday life for many people<br>over the course of 2020, public uncertainty and frustration became serious issues. The<br>health and related economic issues were accompanied by election year political discord<br>and social and racial unrest. At year-end, optimism resulting from the start of widespread<br>vaccine distribution was muted by the second wave of the virus.<br>The C&N Team’s response to all these challenges has been quietly heroic. Our mission of<br>creating value through lifelong relationships and the strength of our values-based culture<br>passed all tests in 2020. We focused on the health and welfare of our Team, customers<br>and communities with a sense of calm, confidence, and persistence. Embedded in this<br>approach is an energy and urgency to create value as we perform our essential role of<br>assisting customers with their financial health through this period of crisis. This energy is<br>reflected in the origination of $515 million in loans during the year, including $166 million<br>of PPP loans closed with 1,500 customers and $250 million of residential mortgages.<br>In Towanda, we relocated to a new,<br>state-of-the-art facility and completed<br>a refresh of our branch in Wysox. We<br>continued to invest in our digital products<br>to enhance the customer experience in<br>an increasingly mobile world. We held<br>our Annual Shareholders, board and<br>committee, internal management, and<br>advisory board meetings, as well as all<br>employee Celebration events, virtually.<br>Our Giving Back, Giving Together focus on<br>feeding the community by supporting local food<br>PRESIDENT CEO<br>The C&N Team’s response to<br>all these challenges has been<br>quietly heroic. Our mission of<br>creating value through lifelong<br>relationships and the strength of<br>our values-based culture passed<br>all tests in 2020.<br>8
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OUR<br>CORE<br>VALUES<br>TEAMWORK<br>Together we<br>are stronger.<br>RESPECT<br>Value one another.<br>RESPONSIBILITY<br>& ACCOUNTABILITY<br>Work like you own it.<br>EXCELLENCE<br>Do your best.<br>Every day.<br>Every time.<br>INTEGRITY<br>Do the right thing<br>when no one is looking.<br>CLIENT-FOCUS<br>Consider your<br>customer in<br>everything you do.<br>HAVE FUN<br>Work hard!<br>Play hard!<br>WIN!<br>banks has provided over 500,000 meals to our friends<br>and neighbors since last April and we adopted a<br>corporate Diversity & Inclusion statement that will<br>serve to guide our D&I efforts moving forward. All<br>of this was accomplished while coordinating with<br>teammates in new, remote work locations.<br>On July 1st, we closed the acquisition of Covenant<br>Bank and completed the systems conversion later<br>in the third quarter. When combined with the 2019<br>addition of Monument Bank, we now enjoy a $900<br>million franchise in C&N’s southeast region with<br>results that exceeded our projections. Importantly,<br>the integration of our teams and culture has gone<br>very well and we are optimistic about the region’s<br>contribution to franchise growth and future earnings.<br>After adjusting for merger related expenses, gains<br>on the sale of securities and losses on prepayment<br>of borrowings for both 2020 and 2019, earnings<br>for the year ending December 31, 2020, grew by<br>17% and earnings per share by 5% compared to<br>2019, reflecting the benefits of growth related to the<br>Covenant and Monument acquisitions. Net interest<br>income for the year increased 24% due to the larger<br>balance sheet and despite a decline in the net<br>interest margin to 3.69% from 3.86% a year earlier.<br>The provision for loan losses increased $3.1 million<br>as compared to 2019, including the impact in 2020<br>of a $2.2 million charge-off on one commercial loan.<br>Total noninterest income grew by 26% compared to<br>2019 with gains on mortgage sales serving as the<br>primary driver, although a variety of other sources<br>contributed, as well. Noninterest expenses, excluding<br>merger related costs and losses on prepayment<br>of borrowings, increased 22%. This growth was<br>substantially due to the inclusion of the former<br>Monument for the full year in 2020 compared to<br>nine months in 2019 and Covenant expenses for the<br>second half of 2020. Increased data processing/IT<br>costs, professional fees and various other expenses<br>also contributed.<br>As reflected in this report, C&N entered 2020 in a<br>position of strength, sustained a strong risk profile<br>through the pandemic and executed on our business<br>model. This is especially evident in our capital<br>ratios following the two recent acquisitions and the<br>ongoing challenges relating to the pandemic. They<br>remain at levels that demonstrate the capacity to<br>absorb significant credit losses, if they arise, while<br>continuing to meet regulatory guidelines to remain “well<br>9
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capitalized.” Further, these levels, combined with our historically strong currency relative<br>to peers, enable us to pursue growth opportunities that will enhance franchise value<br>moving forward. While the stock price<br>was down significantly during the year,<br>the adjustment was consistent with the<br>overall banking sector. We were pleased<br>to continue the regular quarterly dividends<br>of $0.27 per share throughout the year, the<br>same level as 2019.<br>During 2020, Dennis F. Beardslee retired<br>from the Board of Directors after serving<br>for 21 years. Dennis provided C&N with leadership, advice and good counsel throughout<br>his tenure. We thank him and wish him well. We also welcomed Stephen M. Dorwart and<br>Robert G. Loughery to the Board as part of the Covenant acquisition. Stephen joined the<br>Covenant board in 2007 as an original member and is a CPA with 30 years of experience.<br>Rob is a real estate investor and developer and former Chair of the Bucks County Board<br>of Commissioners. Both gentlemen are active in the community and bring deep regional<br>knowledge and continuity to C&N.<br>Deborah E. Scott retired from her position as Director of the Trust Department at the<br>end of 2020, after 22 years as the leader of this important business line. Her unique<br>ability to build client relationships earned her respect across our markets as assets<br>under management and administration increased from $300 million to over $1.3 billion<br>during her tenure. Prior to her departure, Debbie worked with our new Chief Wealth<br>Management Officer, Janice E. Ward, to provide for a smooth transition. Jan is a Certified<br>Financial Planner, holds a law degree, and joined C&N in June from Berkshire Bank in<br>Lenox, Massachusetts where she served as SVP and Senior Fiduciary Officer for its<br>Wealth Management Group. We wish Debbie good health and happiness as she begins<br>her retirement and look forward to Jan’s leadership moving forward.<br>As we turn our attention to 2021, the Team at C&N is aligned and motivated to build on<br>the progress and lessons learned over the past year. This Team’s commitment to our<br>customers and communities, through their steadfast caring and support for one another,<br>has been inspiring and reflects the culture and strength of our relationships. These<br>relationships will remain important as we continue to follow through on integration efforts<br>and navigate the challenges of COVID<br>together. Their demonstrated commitment<br>to our mission, whether in the office or from<br>their homes, will continue to create long-<br>term value by positively impacting the lives<br>of everyone connected with C&N.<br>Thank you to our shareholders for your<br>confidence in this team<br>and support of your Company.<br>J. Bradley Scovill<br>President & CEO<br>....C&N entered 2020 in a<br>position of strength, sustained<br>a strong risk profile through the<br>pandemic and executed on our<br>business model.<br>As we turn our attention to 2021,<br>the Team at C&N is aligned<br>and motivated to build on the<br>progress and lessons learned<br>over the past year.<br>10
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DOLL AR S SENSE<br>Trades of the Corporation’s stock are executed through various brokers<br>who maintain a market in the Corporation’s stock. The Corporation’s stock<br>is listed on NASDAQ Capital Market Securities with the trading symbol<br>CZNC. The following tables show the approximate high and low sales<br>price of the common stock during 2020 and 2019.<br>2020 High Low<br>Cash<br>Dividends<br>Declared<br>2020 QUARTERLY<br>SHARE PRICE DATA<br>$30.00<br>$22.50<br>$15.00<br>$7.50<br>$0.00<br>First Quarter Third Quarter Fourth Quarter Second Quarter<br>High<br>Low<br>First quarter $29.06 $15.69 $0.27<br>Second quarter 22.89 16.20 0.27<br>Third quarter 20.76 14.92 0.27<br>Fourth quarter 20.84 16.05 0.27<br>2019 High Low<br>Cash<br>Dividends<br>Declared<br>First quarter $27.07 $23.60 $0.37<br>Second quarter 29.25 25.02 0.27<br>Third quarter 27.00 22.52 0.27<br>Fourth quarter 28.58 24.23 0.27<br>11
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FIVE-YEAR SUMMARY<br>Operations Comparison<br>INCOME STATEMENT (In Thousands) 2020 2019 2018 2017 2016<br>Interest and dividend income $77,160 $64,771 $50,328 $45,863 $44,098<br>Interest expense 9,595 10,283 4,625 3,915 3,693<br>Net interest income 67,565 54,488 45,703 41,948 40,405<br>Provision for loan losses 3,913 849 584 801 1,221<br>Net interest income after provision for loan losses 63,652 53,639 45,119 41,147 39,184<br>Noninterest income excluding securities gains 24,344 19,284 18,597 16,153 15,511<br>Net gains on securities 169 23 2,033 257 1,158<br>Loss on prepayment of borrowings 1,636 0 0 0 0<br>Merger-related expenses 7,708 4,099 328 0 0<br>Noninterest expense excluding loss on prepay-<br>ment of debt and merger-related expenses<br>55,609 45,438 39,158 36,967 34,744<br>Income before income tax provision 23,212 23,409 26,263 20,590 21,109<br>Income tax provision 3,990 3,905 4,250 7,156 5,347<br>Net income $19,222 $19,504 $22,013 $13,434 $15,762<br>Net income attributable to common shares $19,106 $19,404 $21,903 $13,365 $15,677<br>PER COMMON SHARE DATA 2020 2019 2018 2017 2016<br>Basic earnings per share $1.30 $1.46 $1.79 $1.10 $1.30<br>Diluted earnings per share $1.30 $1.46 $1.79 $1.10 $1.30<br>Cash dividends declared per share $1.08 $1.18 $1.08 $1.04 $1.04<br>Book value per common share at period-end $18.84 $17.82 $16.02 $15.43 $15.36<br>Tangible book value per common share<br>at period-end<br>15.30 $15.66 $15.05 $14.45 $14.37<br>Weighted average common shares<br>outstanding - basic<br>14,743,386 13,298,736 12,219,209 12,115,840 12,032,820<br>Weighted average common shares<br>outstanding - diluted<br>14,747,048 13,321,559 12,257,368 12,155,136 12,063,055<br>DILUTED EARNINGS PER SHARE<br>(In Thousands)<br>$1.80<br>$1.50<br>$1.20<br>$0.90<br>$0.60<br>$0.30<br>$0.00<br>2020 2019 2018 2017 2016<br>CASH DIVIDENDS DECLARED<br>PER SHARE<br>$1.20<br>$1.00<br>$0.80<br>$0.60<br>$0.40<br>$0.20<br>$0.00<br>2020 2019 2018 2017 2016<br>12
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FIVE-YEAR SUMMARY<br>End of Period Balances<br>2020 2019 2018 2017 2016<br>$1,700,000<br>$1,500,000<br>$1,300,000<br>$1,100,000<br>$900,000<br>$700,000<br>$500,000<br>GROSS LOANS<br>(In Thousands)<br>2020 2019 2018 2017 2016<br>$2,400,000<br>$2,000,000<br>$1,600,000<br>$1,200,000<br>$800,000<br>$400,000<br>$0<br>TOTAL ASSETS<br>(In Thousands)<br>END OF PERIOD BALANCES (In Thousands) 2020 2019 2018 2017 2016<br>Available-for-sale debt securities $349,332 $346,723 $363,273 $355,937 $394,106<br>Gross loans 1,644,209 1,182,222 827,563 815,713 751,835<br>Allowance for loan losses 11,385 9,836 9,309 8,856 8,473<br>Total assets 2,239,100 1,654,145 1,290,893 1,276,959 1,242,292<br>Deposits 1,820,469 1,252,660 1,033,772 1,008,449 983,843<br>Borrowings and subordinated debt 91,183 144,847 48,768 70,955 64,629<br>Stockholders’ equity 299,756 244,452 197,368 188,443 186,008<br>Common shares outstanding 15,911,984 13,716,445 12,319,330 12,214,525 12,113,228<br>AVERAGE BALANCES (In Thousands) 2020 2019 2018 2017 2016<br>Total assets 2,009,825 1,540,469 1,276,140 1,247,759 1,229,866<br>Earning assets 1,856,487 1,437,993 1,205,429 1,169,569 1,147,549<br>Gross loans 1,445,098 1,057,559 822,346 780,640 723,076<br>Deposits 1,586,409 1,213,687 1,027,831 990,917 970,447<br>Stockholders’ equity 273,351 229,446 187,895 188,958 188,373<br>13
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(1) Rates of return on tax-exempt securities and loans are calculated on a fully-taxable equivalent basis.<br>(2) The efficiency ratio is calculated by dividing: (a) total noninterest expense excluding merger-related expenses and losses from<br>prepayment of debt, by (b) the sum of net interest income (including income from tax-exempt securities and loans on a fully-taxable<br>equivalent basis) and noninterest income excluding securities gains or losses.<br>KEY RATIOS 2020 2019 2018 2017 2016<br>Return on average assets 0.96% 1.27% 1.72% 1.08% 1.28%<br>Return on average equity 7.03% 8.50% 11.72% 7.11% 8.37%<br>Average equity to average assets 13.60% 14.89% 14.72% 15.14% 15.32%<br>Net interest margin (1) 3.69% 3.86% 3.90% 3.82% 3.76%<br>Efficiency (2) 59.87% 60.73% 59.69% 60.74% 59.22%<br>Cash dividends as a % of diluted earnings per share 83.08% 80.82% 60.34% 94.55% 80.00%<br>Tier 1 leverage 10.09% 13.10% 14.78% 14.23% 14.27%<br>Tier 1 risk-based capital 15.63% 19.19% 23.24% 21.95% 22.48%<br>Total risk-based capital 17.55% 20.70% 24.42% 23.07% 23.60%<br>Tangible common equity/tangible assets 11.15% 13.22% 14.50% 13.95% 14.15%<br>Nonperforming assets/total assets 1.10% 0.80% 1.37% 1.47% 1.43%<br>Nonperforming loans/total loans 1.42% 0.88% 1.94% 2.10% 2.07%<br>Allowance for loan losses/total loans 0.69% 0.83% 1.12% 1.09% 1.13%<br>Credit adjustment on purchased non-impaired loans and<br>allowance for loan losses as a % of total loans and the<br>credit adjustment<br>1.05% 0.93% 1.12% 1.09% 1.13%<br>Net charge-offs/average loans 0.16% 0.03% 0.02% 0.05% 0.09%<br>FIVE-YEAR SUMMARY<br>End of Period Balances<br>$1,800,000<br>$1,500,000<br>$1,200,000<br>$900,000<br>$600,000<br>$300,000<br>0<br>2020 2019 2018 2017 2016<br>DEPOSITS<br>(In Thousands)<br>$300,000<br>$250,000<br>$200,000<br>$150,000<br>$100,000<br>$50,000<br>$0<br>2020 2019 2018 2017 2016<br>STOCKHOLDERS’ EQUITY<br>(In Thousands)<br>14
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QUARTERLY CONSOLIDATED FINANCIAL DATA<br>The following table presents summarized financial data for 2020 & 2019<br>2020 (In Thousands Except Per Share Data) (Unaudited)<br>1st quarter<br>Mar. 31<br>2nd quarter<br>June 30<br>3rd quarter<br>Sept. 30<br>4th quarter<br>Dec. 31<br>Interest income $17,037 $16,513 $21,751 $21,859<br>Interest expense 2,755 2,267 2,469 2,104<br>Net interest income 14,282 14,246 19,282 19,755<br>Provision (credit) for loan losses 1,528 (176) 1,941 620<br>Net interest income after provision (credit) for loan losses 12,754 14,422 17,341 19,135<br>Other income 5,281 5,528 6,970 6,565<br>Net gains on available-for-sale debt securities 0 0 25 144<br>Loss on prepayment of borrowings 0 0 0 1,636<br>Merger-related expenses 141 983 6,402 182<br>Other expenses 12,912 12,274 14,648 15,775<br>Income before income tax provision 4,982 6,693 3,286 8,251<br>Income tax provision 816 1,255 438 1,481<br>Net income $4,166 $5,438 $2,848 $6,770<br>Net income attributable to common shares $4,146 $5,405 $2,830 $6,727<br>Net income per share – basic $0.30 $0.39 $0.18 $0.43<br>Net income per share – diluted $0.30 $0.39 $0.18 $0.43<br>2019 (In Thousands Except Per Share Data) (Unaudited)<br>1st quarter<br>Mar. 31<br>2nd quarter<br>June 30<br>3rd quarter<br>Sept. 30<br>4th quarter<br>Dec. 31<br>Interest income $13,065 $17,139 $17,139 $17,290<br>Interest expense 1,350 2,934 3,000 2,999<br>Net interest income 11,715 14,205 14,277 14,291<br>(Credit) provision for loan losses (957) (4) 1,158 652<br>Net interest income after (credit) provision for loan losses 12,672 14,209 13,119 13,639<br>Other income 4,406 4,849 4,963 5,066<br>Net gains on available-for-sale debt securities 0 7 13 3<br>Merger-related expenses 311 3,301 206 281<br>Other expenses 10,696 11,422 11,486 11,834<br>Income before income tax provision 6,071 4,342 6,403 6,593<br>Income tax provision 981 693 1,096 1,135<br>Net income $5,090 $3,649 $5,307 $5,458<br>Net income attributable to common shares $5,063 $3,630 $5,281 $5,431<br>Net income per share – basic $0.41 $0.27 $0.39 $0.40<br>Net income per share – diluted $0.41 $0.27 $0.39 $0.40<br>15
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TRUST REVENUE<br>$6,000<br>$5,000<br>$4,000<br>$3,000<br>$2,000<br>$1,000<br>$0<br>$1,200,000<br>$1,000,000<br>$800,000<br>$600,000<br>$400,000<br>$200,000<br>$0<br>TRUST ASSETS UNDER<br>MANAGEMENT<br>Some products are not FDIC insured or guaranteed, not a deposit or other obligation of the bank, not guaranteed by the bank and<br>are subject to investment risk, including possible loss of the principal amount invested and are not insured by any other federal<br>government agency.<br>2020 2019 2018 2017 2016 2020 2019 2018 2017 2016<br>WEALTH MANAGEMENT<br>(In Thousands) 2020 2019 2018 2017 2016<br>Trust Assets Under Management $1,103,228 $1,007,113 $862,517 $916,580 $879,844<br>Trust Revenue $6,321 $6,106 $5,838 $5,399 $4,760<br>INVESTMENTS<br>(In Thousands) 2020 2019 2018 2017 2016<br>Mutual Funds $697,010 $611,539 $506,201 $536,731 $507,473<br>Stocks 223,543 207,847 172,695 194,099 179,345<br>Bonds 104,833 101,966 103,037 104,184 100,249<br>Savings and money market funds 63,069 71,936 68,129 69,659 80,860<br>Miscellaneous 7,873 7,346 6,798 6,069 6,864<br>Real Estate 6,797 6,349 5,517 5,681 4,876<br>Mortgages 103 130 140 157 177<br>Total $1,103,228 $1,007,113 $862,517 $916,580 $879,844<br>ACCOUNTS<br>(In Thousands) 2020 2019 2018 2017 2016<br>Pension/profit sharing $439,739 $402,062 $342,501 $374,499 $369,916<br>Investment management 344,688 307,068 256,430 256,348 223,737<br>Trusts 209,273 196,660 176,428 185,300 177,860<br>Custody 99,273 89,241 79,786 93,598 98,844<br>Estates 6,927 9,175 4,941 4,397 7,367<br>Guardianships 3,328 2,907 2,431 2,438 2,120<br>Total $1,103,228 $1,007,113 $862,517 $916,580 $879,844<br>WEALTH MANAGEMENT DATA<br>The following table presents summarized financial data for<br>C&N’s Wealth Management.<br>16
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AWARDS RECOGNITION<br>C&N CARES AWARD<br>Recognizes those who went the extra mile to support their<br>local communities.<br>Cindy Carll, Coudersport<br>Dalelyn Colquhoun, Doylestown<br>Ryan Satalin, Wellsboro<br>CULTUR AL EXCELLENCE AWARD<br>Recognizes those who embody C&N’s mission, vision & values.<br>Halle Niklaus, Williamsport<br>Nicole Wilson, Wellsboro<br>Jamie Butters, Wellsboro<br>Holly Young, Wellsboro<br>Chrissi Hume, Tioga<br>Royena Aragona, Doylestown<br>Halle Niklaus, Old Lycoming<br>SPIRIT OF SERVICE AWARD<br>Recognizes those who have a positive attitude and help their teammates.<br>Katelyn Ackley, Wellsboro<br>Teri Snyder, Sayre<br>David Nagle, Sayre<br>Brandy Allen, Wellsboro<br>Roxanne Criswell, Williamsport<br>Crystal Barrett, Mansfield<br>BEST TEAM PARTNER AWARD<br>Deposit Operations<br>TOP INDIVIDUAL PERFORMER AWARD<br>Felicia Crumb, Wellsboro<br>Rochelle Stack, Athens<br>Kelsey Harer, Liberty<br>Sarah Russell, Knoxville<br>C&N GROWTH AWARD<br>Thomas Howley, Doylestown<br>Crystal Bristol, Troy<br>Alyssa Higham, Wellsboro<br>Ashley Woods, Wellsboro<br>17
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TEAM CULTURAL EXCELLENCE AWARD<br>All of C&N<br>TOP PERFORMING TEAM<br>Mortgage Team<br>2020 MILLION DOLLAR CLUB<br>Lenders who closed $1,000,000 or more in loans in a calendar month:<br>JANUARY<br>Michelle Rae<br>Andee Bryan<br>Mike Wetzel<br>FEBRUARY<br>Michelle Rae<br>Linda Gordner<br>Courtney Cole<br>Ryan Satalin<br>MARCH<br>Michelle Rae<br>Linda Bowen<br>Rachel Brill<br>Courtney Cole<br>APRIL<br>Stacey Sickler<br>Linda Gordner<br>Patrick Davis<br>Andee Bryan<br>Rachel Brill<br>Linda Bowen<br>Tyler Sones<br>Michelle Rae<br>Kathi Heimbach<br>Ryan Satalin<br>Kevin Dougherty<br>Bruce Smithgall<br>Harold Hoose<br>Courtney Cole<br>Amy Van Blarcom-Lackey<br>Halle Niklaus<br>James Miller<br>Brian Collins<br>Lindsey Pickering<br>Daniel Miller<br>Robert Burns<br>Michael Kilgour<br>Clay Schuler<br>Chrissi Hume<br>Pat Ibach<br>Ben Crowley<br>Jill Pino<br>MAY<br>Rachel Brill<br>Patrick Davis<br>Linda Gordner<br>Kathi Heimbach<br>Michelle Rae<br>Stacey Sickler<br>Andee Bryan<br>Linda Bowen<br>Tyler Sones<br>Michael Kilgour<br>Kevin Dougherty<br>Brian Collins<br>Halle Niklaus<br>Ben Crowley<br>Chrissi Hume<br>Mike Wetzel<br>JUNE<br>Stacey Sickler<br>Linda Gordner<br>Patrick Davis<br>Linda Bowen<br>Tyler Sones<br>Michell Rae<br>Rachel Brill<br>Kathi Heimbach<br>Andee Bryan<br>Jeff Grove<br>Jill Pino<br>JULY<br>Patrick Davis<br>Rachel Brill<br>Linda Gordner<br>Andee Bryan<br>Michelle Rae<br>Kathi Heimbach<br>Linda Bowen<br>Tyler Sones<br>Jay Power<br>Kevin Dougherty<br>Greg Adamson<br>Bruce Smithgall<br>Bob Kile<br>Earl Clevenstine<br>Thomas Howley<br>AUGUST<br>Linda Gordner<br>Patrick Davis<br>Rachel Brill<br>Andee Bryan<br>Michelle Rae<br>Tyler Sones<br>Kathi Heimbach<br>Stacey Sickler<br>Linda Bowen<br>Ryan Satalin<br>Cynthia Zamroz<br>David Plummer<br>Robert Kile<br>Jill Pino<br>SEPTEMBER<br>Michelle Rae<br>Pat Davis<br>Rachel Brill<br>Linda Bowen<br>Stacey Sickler<br>Kathi Heimbach<br>Linda Gordner<br>Kim Whiting<br>Tyler Sones<br>Brian Collins<br>Bob Kile<br>Jill Pino<br>OCTOBER<br>Patrick Davis<br>Linda Gordner<br>Michelle Rae<br>Linda Bowen<br>18
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RAINMAKERS<br>Team members who referred over $100,000 in closed business to<br>C&N Wealth Management.<br>Rachel Brill<br>Tyler Sones<br>Kathi Heimbach<br>Kim Whiting<br>Dan Miller<br>Kevin Dougherty<br>Kate Shepherd<br>Brian Collins<br>Earl Clevenstine<br>Bob Kile<br>Bruce Smithgall<br>Jill Pino<br>NOVEMBER<br>Patrick Davis<br>Michelle Rae<br>Kathi Heimbach<br>Linda Gordner<br>Linda Bowen<br>Rachel Brill<br>Kim Whiting<br>Kate Shepherd<br>Jill Pino<br>DECEMBER<br>Patrick Davis<br>Michelle Rae<br>Jill Pino<br>Linda Bowen<br>Kathi Heimbach<br>Stacey Sickler<br>Linda Gordner<br>Kelly Fasse<br>Tyler Sones<br>Kim Whiting<br>Kevin Dougherty<br>Courtney Cole<br>Greg Adamson<br>Earl Clevenstine<br>JANUARY<br>Traci Spencer<br>Kerry Bliler<br>FEBRUARY<br>Kerry Bliler<br>Stacey Sickler<br>Kelly Latimer<br>MARCH<br>Ginger Reap<br>Leslie Raymond<br>Kelly Latimer<br>Kathy Wesneski<br>Crystal Barrett<br>APRIL<br>Dawn Shoemaker<br>Kerry Bliler<br>Ryan Satalin<br>Kelsey Harer<br>MAY<br>Diane Egly<br>Rhonda Washburn<br>Kerry Bliler<br>JUNE<br>Kelly Fasse<br>Chrissy Nolte<br>Amy Ward<br>JULY<br>Crystal Barrett<br>Wesley O’Neil<br>Elizabeth Loman<br>Tom Maclin<br>AUGUST<br>Melody Rosenberg<br>Tom Maclin<br>Chrissy Nolte<br>Mary D’Ottavio<br>Janette Frey<br>Dawn Shoemaker<br>SEPTEMBER<br>Phyllis Jensen<br>Quincy Fry<br>Dawn Shoemaker<br>OCTOBER<br>Dawn Shoemaker<br>Barb Yanchuck<br>Rhonda Washburn<br>Crystal Barrett<br>Chrissy Nolte<br>Tom Maclin<br>NOVEMBER<br>Ron Seymour<br>Jennifer Moyer<br>DECEMBER<br>Jill Pino<br>19
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2020 RETIREES<br>SERVICE AWARDS RECIPIENTS<br>Nola Gross, Coudersport 44<br>Nancy Tubbs, Wellsboro 33<br>Debra Topf, Wellsboro 32<br>Deborah Scott, Wellsboro 22<br>Melissa Peters, Troy 16<br>Donna Bowers, Tioga 16<br>Sheila Kingsley, Athens 15<br>Elaine Wagner, Wellsboro 14<br>Carolyn Jeanquart, Warminster 12<br>Candace Bower, Williamsport 12<br>Susan Evans, South Williamsport 10<br>John Hosey, Warminster 8<br>F. Neil Lindenfelser, Doylestown 4<br>40 Years of Service<br>Mark Miller<br>Joan Rohe<br>30 Years of Service<br>Kathleen Heimbach<br>Lynn Errico<br>25 Years of Service<br>Joanna Moore<br>Kimberlea Whiting<br>Karen Blackwell<br>20 Years of Service<br>Philip Prough<br>Thomas Rudy Jr.<br>Melanie Kellogg<br>Janice Wilcox<br>Michael Wetzel Jr.<br>Janelle Tombs<br>Mark Hughes<br>Ruth Wilkinson<br>Denise Mattison<br>Janis Bartlett<br>Dawn Shoemaker<br>Jennifer Schultz<br>Courtney Baker<br>15 Years of Service<br>Cody Bowen<br>Kevin Dougherty<br>Linda Macensky<br>Brandi Nowakowski<br>Brian Tevlin<br>Stacy Elliott<br>Samantha Pecynski<br>Sara Jennings<br>Christina Moyer<br>10 Years of Service<br>Lesley Clayton<br>Susan Evans<br>Crystal Barrett<br>Traci Spencer<br>5 Years of Service<br>Brad Scovill<br>Andrew Rendos<br>Kimberly Gardner<br>Brittany Rouse<br>Kristina Reynolds<br>Amy Johnson<br>Christopher Hume Jr.<br>Nicole Wilson<br>Halle Niklaus<br>Katelyn Ackley<br>Rachael Friese<br>Cory Snyder<br>Amy Ward<br>Diana Carson<br>Name/Office: Years of Service<br>20
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5 years ago, our team asked to do more for the people in our community. As a<br>company, C&N has always attracted teammates who have a strong sense of<br>giving. It was something we were already doing, but we thought that if we gave it<br>more structure and focused on one cause at a time, we could do more and make<br>a bigger impact. So, we rolled out Giving Back, Giving Together. In its first year,<br>we supported local food banks. We set the goal at $10,000, asking our teams<br>to get creative and have fun with it. It was our teams who took the initiative to<br>put together fundraisers and collect donations, breathing life into the program to<br>make it the success that it is. The first year, we quickly surpassed our $10,000<br>goal, raising $50,000. Since then, the program has continued to build momentum<br>and we are now averaging around $65,000 a year. We’ve supported several<br>great causes, including food banks, emergency services, children in need, public<br>libraries and, most recently, our military servicemembers. And best of all, every<br>dollar raised from this program stays local to help the people who live here.<br>From January 2019 to March 2020, our team members raised $87,133 for 17<br>organizations that have made it their mission to ensure local military members<br>have access to the care and support they need. The donations help in several<br>ways, including providing them with gas cards and rides to treatments, paying for<br>$415,507<br>Monetary Donations 30,226<br>Item Donations<br>Feeding our Community :: Volunteer Emergency Services :: Children in Need :: Literacy & Public Libraries :: Honoring Military Servicemembers :: Fighting Hunger<br>22
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Feeding our Community :: Volunteer Emergency Services :: Children in Need :: Literacy & Public Libraries :: Honoring Military Servicemembers :: Fighting Hunger<br>alterations to make homes more accessible, and helping them meet the basic<br>needs of military personnel and their families.<br>In 2020, C&N team members and community members voted to support<br>local food banks and backpack programs—a cause that’s become even more<br>important with the COVID-19 pandemic. Millions of people are out of work and<br>are now relying on food banks for their next meal. Meanwhile, food banks are<br>receiving fewer donations, the supply of many necessities is constrained and<br>volunteers, many of whom are seniors, are hesitant to volunteer in person. As<br>a result, the Central PA Food Bank reached out to C&N to ask for help to meet<br>the increased demand and C&N’s Board of Directors responded with a $40,000<br>donation to help with immediate needs. At that time, team members also began<br>fundraising efforts, collected donations and volunteered their time to help. Over<br>the last 9 months, C&N team members have raised $44,199. This, combined<br>with C&N’s corporate donation of $40,000 to the Central PA Food Bank, totals<br>$84,199, which will provide over 500,000 meals to local residents. C&N team<br>members have also donated 1,734 food items and volunteered 153 hours for our<br>local food bank partners.<br>1,031<br>Volunteer Hours<br>$84,199<br>Funds raised for<br>“Fighting Hunger”<br>50,000<br>25,000<br>75,000<br>100,000<br>23
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