~~0000810958us-gaap:DebtInstrumentRedemptionPeriodTwoMembercznc:ThreePointTwoFivePercentSubordinatedDebtMaturingInJune2031AndRedeemableAtParInJune2026Member2021-05-192021-05-19~~

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, ~~2022~~2023

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

For the transition period from _______________ to _________________________.

Commission file number: 000-16084

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)


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

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

570-724-3411

(Registrant’s telephone number including area code)

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


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

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

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

Yes ⌧ No ◻

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

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

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

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

Yes ☐ No ⌧

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


Common Stock ($1.00 par value)	~~15,500,416~~15,274,766 Shares Outstanding on November 2, ~~2022~~2023

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index


Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited) ~~– September~~–September 30, ~~2022~~2023 and December 31, ~~2021~~2022			Page 3

Consolidated Statements of Income (Unaudited) – Three-month and Nine-month Periods Ended September 30, ~~2022~~2023 and ~~2021~~2022			Page 4

Consolidated Statements of Comprehensive Income (Loss) ~~Income~~ (Unaudited) – Three-month and Nine-month Periods Ended September 30, ~~2022~~2023 and ~~2021~~2022			Page 5

Consolidated Statements of Cash Flows (Unaudited) – Nine-month Periods Ended September 30, ~~2022~~2023 and ~~2021~~2022			Page 6

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) – Three-month and Nine-month Periods Ended September 30, ~~2022~~2023 and ~~2021~~2022			~~Pages~~Page 7 ~~– 8~~

Notes to Unaudited Consolidated Financial Statements			Pages 98 – 3739

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			Pages 3840 – 6365

Item 3. Quantitative and Qualitative Disclosures About Market Risk			Pages 6366 – 6568

Item 4. Controls and Procedures			Page 6568

Part II. Other Information			Pages 6569 – 6771

Signatures			Page 6872

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

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


	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
ASSETS
Cash and due from banks:
Noninterest-bearing	$	30,959	$	16,729	$	25,775	$	25,811
Interest-bearing		33,085		88,219		26,883		29,237
Total cash and due from banks		64,044		104,948		52,658		55,048
Available-for-sale debt securities, at fair value		487,980		517,679		429,138		498,033

Loans receivable		1,690,246		1,564,849		1,830,670		1,740,040
Allowance for loan losses		(16,170)		(13,537)
Allowance for credit losses on loans						(18,085)		(16,615)
Loans, net		1,674,076		1,551,312		1,812,585		1,723,425

Bank-owned life insurance		31,074		30,669		31,557		31,214
Accrued interest receivable		8,425		7,235		9,311		8,653
Bank premises and equipment, net		21,881		20,683		21,267		21,574
Foreclosed assets held for sale		454		684		633		275
Deferred tax asset, net		22,327		5,887		23,731		20,884
Goodwill		52,505		52,505		52,505		52,505
Core deposit intangibles, net		2,987		3,316		2,571		2,877
Other assets		34,427		32,730		47,993		39,819
TOTAL ASSETS	$	2,400,180	$	2,327,648	$	2,483,949	$	2,454,307

LIABILITIES
Deposits:
Noninterest-bearing	$	557,769	$	521,206	$	495,829	$	563,843
Interest-bearing		1,481,826		1,403,854		1,529,168		1,433,750
Total deposits		2,039,595		1,925,060		2,024,997		1,997,593
Short-term borrowings		2,457		1,803		23,253		80,062
Long-term borrowings - FHLB advances		55,463		28,042		125,276		62,347
Senior notes, net		14,749		14,701		14,814		14,765
Subordinated debt, net		24,580		33,009		24,689		24,607
Accrued interest and other liabilities		24,547		23,628		30,715		25,608
TOTAL LIABILITIES		2,161,391		2,026,243		2,243,744		2,204,982

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation
preference per share; no shares issued		0		0		0		0
Common stock, par value $1.00 per share; authorized 30,000,000 shares;
issued 16,030,172 and outstanding 15,500,416 at September 30, 2022;
issued 16,030,172 and outstanding 15,759,090 at December 31, 2021		16,030		16,030
issued 16,030,172 and outstanding 15,275,686 at September 30, 2023;
issued 16,030,172 and outstanding 15,518,819 at December 31, 2022						16,030		16,030
Paid-in capital		143,894		144,453		143,972		143,950
Retained earnings		148,304		142,612		157,044		151,743
Treasury stock, at cost; 529,756 shares at September 30, 2022 and 271,082
shares at December 31, 2021		(12,970)		(6,716)
Accumulated other comprehensive (loss) income		(56,469)		5,026
Treasury stock, at cost; 754,486 shares at September 30, 2023 and 511,353
shares at December 31, 2022						(17,015)		(12,520)
Accumulated other comprehensive loss						(59,826)		(49,878)
TOTAL STOCKHOLDERS' EQUITY		238,789		301,405		240,205		249,325
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	2,400,180	$	2,327,648	$	2,483,949	$	2,454,307

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income

(In Thousands Except Per Share Data) (Unaudited)


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
INTEREST INCOME
Interest and fees on loans:
Taxable	$	20,085	$	18,529	$	56,561	$	56,095	$	25,529	$	20,085	$	72,322	$	56,561
Tax-exempt		505		450		1,426		1,300		552		505		1,687		1,426
Income from available-for-sale debt securities:
Taxable		2,138		1,304		6,143		3,604		2,077		2,138		6,440		6,143
Tax-exempt		768		668		2,258		1,973		597		768		1,847		2,258
Other interest and dividend income		214		122		404		283		363		214		972		404
Total interest and dividend income		23,710		21,073		66,792		63,255		29,118		23,710		83,268		66,792
INTEREST EXPENSE
Interest on deposits		1,972		1,063		4,012		3,558		7,264		1,972		15,593		4,012
Interest on short-term borrowings		179		0		302		22		677		179		2,918		302
Interest on long-term borrowings - FHLB advances		332		87		436		330		1,164		332		2,901		436
Interest on senior notes, net		119		118		357		175		120		119		359		357
Interest on subordinated debt, net		229		346		849		947		230		229		691		849
Total interest expense		2,831		1,614		5,956		5,032		9,455		2,831		22,462		5,956
Net interest income		20,879		19,459		60,836		58,223		19,663		20,879		60,806		60,836
Provision for loan losses		3,794		1,530		4,993		2,533
Net interest income after provision for loan losses		17,085		17,929		55,843		55,690
(Credit) provision for credit losses										(1,225)		3,794		(765)		4,993
Net interest income after (credit) provision for credit losses										20,888		17,085		61,571		55,843
NONINTEREST INCOME
Trust revenue		1,744		1,821		5,245		5,254		1,919		1,744		5,500		5,245
Brokerage and insurance revenue		696		560		1,784		1,392		394		696		1,189		1,784
Service charges on deposit accounts		1,105		1,249		3,662		3,337		1,443		1,105		4,121		3,662
Interchange revenue from debit card transactions		1,031		975		3,050		2,854		1,098		1,031		3,115		3,050
Net gains from sale of loans		131		797		733		2,786		237		131		450		733
Loan servicing fees, net		189		153		757		547		154		189		466		757
Increase in cash surrender value of life insurance		133		139		405		434		160		133		450		405
Other noninterest income		622		665		2,666		2,837		1,084		622		3,442		2,666
Realized gains on available-for-sale debt securities, net		20		23		21		25		0		20		6		21
Total noninterest income		5,671		6,382		18,323		19,466		6,489		5,671		18,739		18,323
NONINTEREST EXPENSE
Salaries and employee benefits		10,826		9,427		31,698		27,821		10,878		10,826		33,082		31,698
Net occupancy and equipment expense		1,498		1,217		4,217		3,740		1,268		1,498		3,993		4,217
Data processing and telecommunications expense		1,719		1,475		5,062		4,342		1,823		1,719		5,659		5,062
Automated teller machine and interchange expense		397		357		1,128		1,049		504		397		1,374		1,128
Pennsylvania shares tax		487		482		1,463		1,463		403		487		1,210		1,463
Professional fees		521		538		1,490		1,683		487		521		1,988		1,490
Other noninterest expense		1,995		1,850		6,310		6,356		2,577		1,995		8,443		6,310
Total noninterest expense		17,443		15,346		51,368		46,454		17,940		17,443		55,749		51,368
Income before income tax provision		5,313		8,965		22,798		28,702		9,437		5,313		24,561		22,798
Income tax provision		858		1,566		3,959		5,456		1,846		858		4,674		3,959
NET INCOME	$	4,455	$	7,399	$	18,839	$	23,246	$	7,591	$	4,455	$	19,887	$	18,839
EARNINGS PER COMMON SHARE - BASIC	$	0.29	$	0.47	$	1.21	$	1.46	$	0.50	$	0.29	$	1.29	$	1.21
EARNINGS PER COMMON SHARE - DILUTED	$	0.29	$	0.47	$	1.21	$	1.46	$	0.50	$	0.29	$	1.29	$	1.21

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income (Loss) ~~Income~~

(In Thousands) (Unaudited)


	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Net income	$	4,455	$	7,399	$	18,839	$	23,246	$	7,591	$	4,455	$	19,887	$	18,839

Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities		(25,880)		(3,608)		(77,923)		(6,781)		(14,865)		(25,880)		(12,535)		(77,923)
Reclassification adjustment for gains realized in income		(20)		(23)		(21)		(25)		0		(20)		(6)		(21)
Other comprehensive loss on available-for-sale debt securities		(25,900)		(3,631)		(77,944)		(6,806)		(14,865)		(25,900)		(12,541)		(77,944)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		0		0		133		(5)		0		0		(8)		133
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(9)		(5)		(31)		(13)		(14)		(9)		(42)		(31)
Other comprehensive (loss) income on pension and postretirement obligations		(9)		(5)		102		(18)		(14)		(9)		(50)		102

Other comprehensive loss before income tax		(25,909)		(3,636)		(77,842)		(6,824)		(14,879)		(25,909)		(12,591)		(77,842)
Income tax related to other comprehensive loss		5,442		765		16,347		1,434		3,126		5,442		2,643		16,347

Net other comprehensive loss		(20,467)		(2,871)		(61,495)		(5,390)		(11,753)		(20,467)		(9,948)		(61,495)

Comprehensive (loss) income	$	(16,012)	$	4,528	$	(42,656)	$	17,856	$	(4,162)	$	(16,012)	$	9,939	$	(42,656)

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

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)


	Nine Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2022		2021		2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	18,839	$	23,246	$	19,887	$	18,839
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		4,993		2,533
(Credit) provision for credit losses						(765)		4,993
Realized gains on available-for-sale debt securities, net		(21)		(25)		(6)		(21)
Net amortization of securities		2,174		1,554		1,556		2,174
Increase in cash surrender value of life insurance		(405)		(434)		(450)		(405)
Depreciation and amortization of bank premises and equipment		1,780		1,602		1,633		1,780
Net accretion of purchase accounting adjustments		(1,017)		(1,827)		(198)		(1,017)
Stock-based compensation		1,169		970		1,015		1,169
Deferred income taxes		(93)		(989)		235		(93)
(Increase) decrease in fair value of servicing rights		(128)		9
Decrease (increase) in fair value of servicing rights						136		(128)
Gains on sales of loans, net		(733)		(2,786)		(450)		(733)
Origination of loans held for sale		(25,003)		(86,428)		(14,568)		(25,003)
Proceeds from sales of loans held for sale		26,752		87,483		14,341		26,752
(Increase) decrease in accrued interest receivable and other assets		(1,562)		295
Decrease in accrued interest payable and other liabilities		(352)		(50)
Increase in accrued interest receivable and other assets						(1,175)		(1,562)
Increase (decrease) in accrued interest payable and other liabilities						4,588		(352)
Other		148		(18)		22		148
Net Cash Provided by Operating Activities		26,541		25,135		25,801		26,541
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificates of deposit		(250)		(3,000)		0		(250)
Proceeds from maturities of certificates of deposit		750		0		3,000		750
Proceeds from sales of available-for-sale debt securities		4,100		2,027		18,357		4,100
Proceeds from calls and maturities of available-for-sale debt securities		50,263		48,262		44,208		50,263
Purchase of available-for-sale debt securities		(104,601)		(145,445)		(8,215)		(104,601)
Redemption of Federal Home Loan Bank of Pittsburgh stock		10,765		1,934		19,503		10,765
Purchase of Federal Home Loan Bank of Pittsburgh stock		(12,009)		(1,614)		(19,905)		(12,009)
Net (increase) decrease in loans		(126,792)		68,018
Purchase of Federal Reserve Bank stock						(6,243)		0
Net increase in loans						(89,998)		(126,792)
Proceeds from bank owned life insurance		0		287		147		0
Proceeds from sales of premises and equipment		0		575
Purchase of premises and equipment		(2,986)		(1,173)		(1,381)		(2,986)
Proceeds from sale of foreclosed assets		351		303		62		351
Other		161		176		109		161
Net Cash Used in Investing Activities		(180,248)		(29,650)		(40,356)		(180,248)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		114,667		120,386		27,425		114,667
Net increase (decrease) in short-term borrowings		654		(18,082)
Net (decrease) increase in short-term borrowings						(56,809)		654
Proceeds from long-term borrowings - FHLB advances		39,041		0		70,049		39,041
Repayments of long-term borrowings - FHLB advances		(11,430)		(15,571)		(7,078)		(11,430)
Proceeds from issuance of senior notes, net of issuance costs		0		14,663
Proceeds from issuance of subordinated debt, net of issuance costs		0		24,437
Redemption of subordinated debt		(8,500)		(8,000)		0		(8,500)
Sale of treasury stock		141		212		0		141
Purchases of treasury stock		(9,349)		(7,412)		(6,719)		(9,349)
Common dividends paid		(11,921)		(11,980)		(11,703)		(11,921)
Net Cash Provided by Financing Activities		113,303		98,653		15,165		113,303
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(40,404)		94,138
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS						610		(40,404)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD		95,848		96,017		47,698		95,848
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	55,444	$	190,155	$	48,308	$	55,444
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Increase in accrued purchase of available-for-sale debt securities	$	160	$	1,704
(Decrease) increase in accrued purchase of available-for-sale debt securities					$	(454)	$	160
Assets acquired through foreclosure of real estate loans	$	51	$	317	$	390	$	51
Leased assets obtained in exchange for new operating lease liabilities	$	904	$	739	$	0	$	904
Interest paid	$	5,729	$	6,063	$	21,392	$	5,729
Income taxes paid	$	3,835	$	8,076	$	4,667	$	3,835

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

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


									Accumulated														Accumulated
									Other														Other
															Common	Treasury	Common		Paid-in		Retained		Comprehensive		Treasury
Three Months Ended September 30, 2023															Shares	Shares	Stock		Capital		Earnings		Loss		Stock		Total
Balance, June 30, 2023															16,030,172	762,076	$	16,030	$	143,661	$	153,725	$	(48,073)	$	(17,226)	$	248,117
Net income																						7,591						7,591
Other comprehensive loss, net																								(11,753)				(11,753)
Cash dividends declared on common stock, $.28 per share																						(4,272)						(4,272)
Shares issued for dividend reinvestment plan																(20,184)				(36)						457		421
Forfeiture of restricted stock																1,073				27						(27)		0
Stock-based compensation expense																				320								320
Purchase of restricted stock for tax withholding																838										(16)		(16)
Treasury stock purchases																10,683										(203)		(203)
Balance, September 30, 2023															16,030,172	754,486	$	16,030	$	143,972	$	157,044	$	(59,826)	$	(17,015)	$	240,205
	Common	Treasury	Common		Paid-in		Retained		Comprehensive		Treasury
Three Months Ended September 30, 2022	Shares	Shares	Stock		Capital		Earnings		(Loss) Income		Stock		Total
Balance, June 30, 2022	16,030,172	530,958	$	16,030	$	143,417	$	148,187	$	(36,002)	$	(13,013)	$	258,619	16,030,172	530,958	$	16,030	$	143,417	$	148,187	$	(36,002)	$	(13,013)	$	258,619
Net income								4,455						4,455								4,455						4,455
Other comprehensive loss, net										(20,467)				(20,467)										(20,467)				(20,467)
Cash dividends declared on common stock, $.28 per share								(4,338)						(4,338)								(4,338)						(4,338)
Shares issued for dividend reinvestment plan		(16,019)				8						392		400		(16,019)				8						392		400
Forfeiture of restricted stock		3,638				81						(81)		0		3,638				81						(81)		0
Stock-based compensation expense						388								388						388								388
Purchase of restricted stock for tax withholding		910										(22)		(22)		910										(22)		(22)
Treasury stock purchases		10,269										(246)		(246)		10,269										(246)		(246)
Balance, September 30, 2022	16,030,172	529,756	$	16,030	$	143,894	$	148,304	$	(56,469)	$	(12,970)	$	238,789	16,030,172	529,756	$	16,030	$	143,894	$	148,304	$	(56,469)	$	(12,970)	$	238,789

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

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

~~Consolidated Statements of Changes in Stockholders’ Equity~~

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

~~(Continued)~~

Accumulated




Other

Common

Treasury

Common

Paid-in

Retained

Comprehensive

Treasury

Nine Months Ended September 30, 2022

Shares

Shares

Stock

Capital

Earnings

(Loss) Income

Stock

Total
Balance, December 31, 2021

16,030,172

271,082

$
16,030

$
144,453

$
142,612

$
5,026

$
(6,716)

$
301,405
Net income





18,839





18,839
Other comprehensive loss, net







(61,495)



(61,495)
Cash dividends declared on common stock, $.84 per share





(13,147)





(13,147)
Shares issued for dividend reinvestment plan

(49,221)

10

1,216

1,226
Shares issued from treasury related to exercise of stock options

(7,024)

(34)





175

141
Restricted stock granted

(78,243)

(1,932)





1,932

0
Forfeiture of restricted stock

10,782

228





(228)

0
Stock-based compensation expense



1,169







1,169
Purchase of restricted stock for tax withholding

6,964







(175)

(175)
Treasury stock purchases

375,416

(9,174)

(9,174)
Balance, September 30, 2022

16,030,172

529,756

$
16,030

$
143,894

$
148,304

$
(56,469)

$
(12,970)

$
238,789

Nine Months Ended September 30, 2021
















Balance, December 31, 2020

15,982,815

70,831

$
15,983

$
143,644

$
129,703

$
11,795

$
(1,369)

$
299,756
Net income





23,246





23,246
Other comprehensive loss, net







(5,390)



(5,390)
Cash dividends declared on common stock, $.83 per share





(13,234)





(13,234)
Shares issued for dividend reinvestment plan

36,368

(16,833)

36

803





415

1,254
Shares issued from treasury related to exercise of stock options

(12,414)

(28)





240

212
Restricted stock granted

10,989

(67,402)

11

(1,319)





1,308

0
Forfeiture of restricted stock

5,290

102





(102)

0
Stock-based compensation expense



970







970
Purchase of restricted stock for tax withholding

8,350







(174)

(174)
Treasury stock purchases

292,100

(7,238)

(7,238)
Balance, September 30, 2021

16,030,172

279,922

$
16,030

$
144,172

$
139,715

$
6,405

$
(6,920)

$
299,402


									Accumulated
									Other
	Common	Treasury	Common		Paid-in		Retained		Comprehensive		Treasury
Nine Months Ended September 30, 2023	Shares	Shares	Stock		Capital		Earnings		(Loss) Income		Stock		Total
Balance, December 31, 2022	16,030,172	511,353	$	16,030	$	143,950	$	151,743	$	(49,878)	$	(12,520)	$	249,325
Adoption of ASU 2016-13 (CECL)								(1,652)						(1,652)
Net income								19,887						19,887
Other comprehensive loss, net										(9,948)				(9,948)
Cash dividends declared on common stock, $.84 per share								(12,934)						(12,934)
Shares issued for dividend reinvestment plan		(60,871)				(182)						1,413		1,231
Restricted stock granted		(53,788)				(1,314)						1,314		0
Forfeiture of restricted stock		23,039				503						(503)		0
Stock-based compensation expense						1,015								1,015
Purchase of restricted stock for tax withholding		9,453										(219)		(219)
Treasury stock purchases		325,300										(6,500)		(6,500)
Balance, September 30, 2023	16,030,172	754,486	$	16,030	$	143,972	$	157,044	$	(59,826)	$	(17,015)	$	240,205

Nine Months Ended September 30, 2022
Balance, December 31, 2021	16,030,172	271,082	$	16,030	$	144,453	$	142,612	$	5,026	$	(6,716)	$	301,405
Net income								18,839						18,839
Other comprehensive loss, net										(61,495)				(61,495)
Cash dividends declared on common stock, $.84 per share								(13,147)						(13,147)
Shares issued for dividend reinvestment plan		(49,221)				10						1,216		1,226
Shares issued from treasury related to exercise of stock options		(7,024)				(34)						175		141
Restricted stock granted		(78,243)				(1,932)						1,932		0
Forfeiture of restricted stock		10,782				228						(228)		0
Stock-based compensation expense						1,169								1,169
Purchase of restricted stock for tax withholding		6,964										(175)		(175)
Treasury stock purchases		375,416										(9,174)		(9,174)
Balance, September 30, 2022	16,030,172	529,756	$	16,030	$	143,894	$	148,304	$	(56,469)	$	(12,970)	$	238,789

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION AND STATUS OF RECENT ACCOUNTING PRONOUNCEMENTS

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

The consolidated financial information included herein, except the consolidated balance sheet dated December 31, ~~2021,~~2022, is unaudited. Such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’ equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for a complete set of financial statements. Certain 2022 information has been reclassified for consistency with the 2023 presentation.

Operating results reported for the nine-month period ended September 30, ~~2022~~2023 might not be indicative of the results for the year ending December 31, ~~2022.~~2023. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

RECENT ACCOUNTING PRONOUNCEMENTS

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

Recent Accounting Pronouncements - Adopted

On January 1, 2023, the Corporation adopted ASU ~~2020-04, Reference Rate Reform~~2016-13 Financial Instruments – Credit Losses (Topic ~~848) provides temporary optional guidance~~326): Measurement of Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to ~~ease~~as the ~~potential burden in accounting~~current expected credit loss (“CECL”) methodology. CECL requires an estimate of credit losses for ~~reference rate reform. The amendments in ASU 2020-04 are elective~~the remaining estimated life of the financial asset using historical experience, current conditions, and ~~apply~~reasonable and supportable forecasts and generally applies to ~~all entities that have contracts, hedging relationships,~~financial assets measured at amortized cost, including loan receivables and ~~other transactions that reference LIBOR or another reference rate~~held-to-maturity debt securities, and some off-balance sheet credit exposures such as unfunded commitments to extend credit. Financial assets measured at amortized cost will be presented at the net amount expected to be ~~discontinued. The guidance includes a general principle~~collected by using an allowance for credit losses. Purchased credit deteriorated (“PCD”) loans will receive an initial allowance at the acquisition date that ~~permits~~represents an ~~entity~~adjustment to ~~consider contract modifications due~~the amortized cost basis of the loan, with no impact to ~~reference rate reform~~earnings.

In addition, CECL made changes to the accounting for available for sale debt securities. One such change is to require credit losses to be presented as an ~~event that~~allowance rather than as a write-down on available for sale debt securities if management does not ~~require contract remeasurement at the modification date or reassessment of a previous accounting determination. Some specific optional expedients are as follows:~~

●

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

●

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

intend to sell and does not believe that it is more likely than not, they will be required to sell. The Corporation ~~has elected~~adopted ASC 326 using the prospective transition approach for debt securities for which other-than-temporary impairment had been recognized prior to ~~apply~~January 1, 2023. As of December 31, 2022, the ~~optional expedients prospectively for applicable loan and other contracts, and implementation of this election~~Company did not have ~~a material effect on~~any other-than-temporarily impaired investment securities. Therefore, upon adoption of ASC 326, the ~~Corporation’s financial position or results of operations.~~

~~Recently Issued But Not Yet Effective Accounting Pronouncements~~

~~ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), as modified by subsequent ASUs, changes accounting~~Company determined that an allowance for credit losses on ~~loans receivable and~~available for sale debt securities from an incurred loss methodology to an expected credit loss methodology. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The effect of implementing this ASU is recorded through a cumulative-effect adjustment to retained earnings. In November 2019, the FASB approved a delay of the required implementation date of ASU 2016-13 for smaller reporting companies, including the Corporation, resulting in a required implementation date for the Corporation of January 1, 2023. The allowance for credit losses will be based on thewas not necessary.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~Corporation’s historical loss experience, borrower characteristics, forecasts of future economic conditions~~Effective January 1, 2023, the Corporation adopted ASC 326 using the modified retrospective approach for all financial assets measured at amortized cost and ~~other relevant factors. The Corporation will also apply qualitative factors to account~~off-balance sheet credit exposures. Results for information that may not be reflected in quantitatively derived results or other relevant factors to ensure the allowance reflects management’s best estimate of current expected credit losses. Preliminary expected loss estimates have been determined andreporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be ~~validated~~reported in accordance with previously applicable accounting standards (“Incurred Loss”). The following table illustrates the impact from the adoption of ASC 326:


	As Reported
	Under		Pre-ASC 326		Impact of
	ASC 326		Adoption		ASC 326
(In Thousands)	January 1, 2023		December 31, 2022		Adoption
Loans receivable	$	1,740,846	$	1,740,040	$	806
Allowance for credit losses on loans	$	18,719	$	16,615	$	2,104
Allowance for credit losses on off-balance sheet exposures (included in accrued interest and other liabilities)		1,218		425		793
Deferred tax asset, net		21,323		20,884		439
Retained earnings		150,091		151,743		(1,652)

The Corporation adopted ASC 326 using the prospective transition approach for PCD assets that were previously classified as purchased credit impaired (“PCI”) under ASC 310-30. In accordance with the standard, management did not reassess whether PCI assets met the criteria of PCD assets as of the date of adoption. On January 1, 2023, the amortized cost basis of PCD assets was adjusted to establish the allowance for credit losses. Essentially all of the PCD loans were reported as nonaccrual loans at January 1, 2023 and ~~reviewed. In the fourth quarter 2022, the Corporation will continue to refine its expected credit loss estimates and will finalize the operational and control structure supporting the process.~~September 30, 2023.

ASU 2022-02, Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. This update reduces the complexity of accounting for ~~TDRs~~Troubled Debt Restructurings (“TDRs”) by eliminating certain accounting guidance, enhancing disclosures and improving the consistency of vintage disclosures. The Corporation ~~will adopt~~adopted ASU 2022-02 on January 1, 2023. Changes in disclosure requirements in accordance with ASU 2022-02 are reflected in Note 6. The ~~Corporation does not expect the~~ adoption of ASU 2022-02 todid not have a material impact on ~~its~~the consolidated financial statements.

Accounting Policies

The Corporation’s significant accounting policies followed in the preparation of the unaudited consolidated financial statements are disclosed in Note 1 of the audited consolidated financial statements and notes for the year ended December 31, 2022 and are contained in the Corporation’s Annual Report on Form 10-K. There have been no significant changes to the application of significant accounting policies since December 31, 2022, except for the following:

Allowance for Credit Losses – Available-for-Sale Debt Securities

For available-for-sale debt securities, management evaluates all investments in an unrealized loss position on a quarterly basis, and more frequently when economic or market conditions warrant such evaluation. If the Corporation has the intent to sell the security or it is more likely than not that the Corporation will be required to sell the security, the security is written down to fair value and the entire loss is recorded in earnings.

If either of the above criteria is not met, the Corporation evaluates whether the decline in fair value is the result of credit losses or other factors. The Corporation has elected the practical expedient of zero credit loss estimates for securities issued or guaranteed by U.S. Government entities or agencies. In making the credit loss assessment of securities not issued or guaranteed by U.S. Government entities or agencies, the Corporation may consider various factors including the extent to which fair value is less than amortized cost, performance on any underlying collateral, downgrades in the ratings of the security by a rating agency, the failure of the issuer to make scheduled interest or principal payments and adverse conditions specifically related to the security. If the assessment indicates that a credit loss exists, the present value of cash flows expected to be collected are compared to the amortized cost basis of the security and any excess is recorded as an allowance for credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any amount of unrealized loss that has not been recorded through an allowance for credit loss is recognized in other comprehensive income (loss).

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Changes in the allowance for credit losses are recorded as provision for (or reversal of) credit loss expense. Losses are charged against the allowance for credit losses when management believes an available-for-sale debt security is confirmed to be uncollectible or when either of the criteria regarding intent or requirement to sell is met. At September 30, 2023, there was no allowance for credit losses related to the available-for-sale portfolio.

Accrued interest receivable on available-for-sale debt securities totaled $2,688,000 at September 30, 2023 and was excluded from the estimate of credit losses.

Allowance for Credit Losses on Loans

The allowance for credit losses is a valuation account that is deducted from the loans' amortized cost basis to present the net amount expected to be collected on the loans. Loans are charged off against the allowance when management believes the uncollectibility of a loan balance is confirmed. Expected recoveries do not exceed the aggregate of amounts previously charged-off and expected to be charged-off.

The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts.

Accrued interest receivable on loans totaled $6,590,000 at September 30, 2023 and was excluded from the estimate of credit losses.

The allowance for credit losses (“ACL”) includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses (collective basis), and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis).

Evaluation of Expected Losses on Individual Loans

Loans evaluated on an individual basis are identified based on a detailed assessment of certain larger loan relationships, and their related credit risk ratings, by a management committee referred to as the Watch List Committee. The allowance will be determined on an individual basis using the present value of expected cash flows or, for collateral-dependent loans, the fair value of the collateral as of the reporting date, less estimated selling costs, as applicable. If the fair value of the collateral is less than the amortized cost basis of the loan, the Corporation will charge off the difference between the fair value of the collateral, less costs to sell at the reporting date and the amortized cost basis of the loan.

The scope of loans reviewed individually for credit loss each quarter includes 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. Additionally, all PCD loans are evaluated individually for credit loss.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Collective Evaluation of Expected Losses – Pool Basis

The Corporation measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. The Corporation has identified the following portfolio segments and calculates the allowance for credit losses for each using the weighted-average remaining maturity (“WARM”) method:

Commercial real estate - nonowner occupied, further broken down into the following classes:

Nonowner occupied

Multi-family (5 or more) residential

1-4 Family - commercial purpose

Commercial real estate - owner occupied

All other commercial loans, further broken down into the following classes:

Commercial and industrial

Commercial lines of credit

Political subdivisions

Commercial construction and land

Other commercial loans

Residential mortgage loans, further broken down into the following classes:

1-4 Family – residential

1-4 Family residential construction and land

Consumer loans, further broken down into the following classes:

Consumer lines of credit (including HELOCs)

All other consumer

In determining the pools for collective evaluation, management uses a combination of loan purpose, collateral and payment type (for example, lines of credit vs. amortizing). The pools identified are similar to the loan classes used in the Corporation’s financial reporting for several years, with several exceptions including the following which are of the most significance:

●

Commercial real estate secured loans are broken out between non-owner occupied and owner-occupied

●

Loans secured by 1-4 family residential mortgages are broken out between consumer-purpose and commercial-purpose

●

Commercial lines of credit are broken out as an individual category

Each of these changes was made to better sort loans into pools with similar risk and cash flow characteristics.

Estimation Method - WARM (Weighted-Average Remaining Maturity Method)

In applying the WARM method, for each pool identified above, the Corporation determined the annual net charge-offs as a percentage of average total loan balances (net charge-off percentage). In the January 1, 2023 calculation, the Corporation used the annualized net charge-off percentage over the prior 5 calendar years. In the September 30, 2023 calculation, the Corporation used the net charge-off percentage for the 5.75-year period ended September 30, 2023. For each loan pool, the average annualized net charge-off percentage was multiplied by the estimated weighted-average remaining average life of the loans to calculate the loss rate.

The calculation of the estimated weighted-average remaining life of each loan pool was based on instrument-level data, with contractual principal payments adjusted for the estimated impact of prepayments. Commercial lines of credit and other revolving credit facilities were generally assumed to be repaid after 1 year. The estimated weighted-average remaining life of the entire portfolio was calculated to be 4.16 years at September 30, 2023 and 4.36 years at January 1, 2023. Management determined that use of the Corporation’s net charge-off experience over a 5.75-year period at September 30, 2023 and 5-year period at January 1, 2023 would provide a reasonable time period to include in the WARM expected loss rate calculations in relationship to the weighted-average life of the portfolio overall and to each of the pools.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Qualitative Factors

The allowance for credit losses calculation includes subjective adjustments for qualitative risk factors that are deemed likely to cause estimated credit losses to differ from historical experience. These qualitative adjustments generally increase allowance levels and include adjustments for factors deemed relevant, including: the nature and volume of portfolio changes, including loan portfolio growth; concentrations of credit based on loan type (such as non-owner occupied commercial real estate) or industry; the volume and severity of past due, nonaccrual or adversely classified loans; trends in real estate or other collateral values; lending policies and procedures, including changes in underwriting and collections practices; credit review function; lending, credit and other relevant management experience and risk tolerance; external factors and economic conditions not already captured.

Economic Forecast

ASC Topic 326 requires management to consider forward-looking information that is both reasonable and supportable and relevant to the collectability of cash flows. Reasonable and supportable forecasts may extend over the entire contractual term of a financial asset or a period shorter than the contractual term. In that regard, management has selected a forecast period of 2 years, which is shorter than the estimated weighted-average remaining life of the loan portfolio.

The Corporation calculated an additional expected credit loss based on establishing a correlation between past loss experience and an economic statistic. This additional credit loss is added to the allowance calculation, conceptually for the first 2 years of the weighted-average remaining life of the portfolio after which time the credit loss for each pool is determined based on the WARM historical loss rate as adjusted for qualitative factors.

Allowance for Credit Losses on Off-Balance Sheet Exposures

Financial instruments include off-balance sheet credit instruments, such as commitments to make loans, commercial letters of credit and credit enhancement obligations related to residential mortgage loans sold with recourse. The Corporation’s exposure to credit loss in the event of nonperformance by the other party to the financial instrument for off-balance sheet loan commitments is represented by the contractual amount of those instruments. Such financial instruments are recorded when they are funded.

The Corporation records an allowance for credit losses on off-balance sheet credit exposures, unless the commitments to extend credit are unconditionally cancelable, through a charge to provision for unfunded commitments in the Corporation’s statements of income. The allowance for credit losses on off-balance sheet credit exposures is estimated by loan segment at each balance sheet date under the current expected credit loss model using the same methodologies as portfolio loans, taking into consideration the likelihood that funding will occur as well as any third-party guarantees. The allowance for off-balance sheet exposures is included in accrued interest and other liabilities in the Corporation’s unaudited consolidated balance sheets and the related credit expense is recorded in the provision for credit losses in the unaudited consolidated statements of income.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

2. PER SHARE DATA

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

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


(In Thousands, Except Share and Per Share Data)	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Basic
Net income	$	4,455	$	7,399	$	18,839	$	23,246	$	7,591	$	4,455	$	19,887	$	18,839
Less: Dividends and undistributed earnings allocated to participating securities		(39)		(63)		(169)		(189)		(57)		(39)		(156)		(169)
Net income attributable to common shares	$	4,416	$	7,336	$	18,670	$	23,057	$	7,534	$	4,416	$	19,731	$	18,670
Basic weighted-average common shares outstanding		15,364,075		15,703,932		15,482,672		15,806,897		15,154,797		15,364,075		15,264,391		15,482,672
Basic earnings per common share (a)	$	0.29	$	0.47	$	1.21	$	1.46	$	0.50	$	0.29	$	1.29	$	1.21
Diluted
Net income attributable to common shares	$	4,416	$	7,336	$	18,670	$	23,057	$	7,534	$	4,416	$	19,731	$	18,670
Basic weighted-average common shares outstanding		15,364,075		15,703,932		15,482,672		15,806,897		15,154,797		15,364,075		15,264,391		15,482,672
Dilutive effect of potential common stock arising from stock options		3,114		6,413		3,276		6,232		0		3,114		4		3,276
Diluted weighted-average common shares outstanding		15,367,189		15,710,345		15,485,948		15,813,129		15,154,797		15,367,189		15,264,395		15,485,948
Diluted earnings per common share (a)	$	0.29	$	0.47	$	1.21	$	1.46	$	0.50	$	0.29	$	1.29	$	1.21
Weighted-average nonvested restricted shares outstanding		136,040		133,053		139,761		129,456		113,328		136,040		120,632		139,761

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

Anti-dilutive stock options are excluded from earnings per share calculations. The weighted-average number of anti-dilutive instruments outstanding was 8,934 in the three-month period ended September 30, 2023 and 0 in the nine-month period ended September 30, 2023. There were no anti-dilutive instruments outstanding in the three-month and nine-month periods ended September 30, ~~2022 and 2021.~~2022.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

~~3. COMPREHENSIVE (LOSS) INCOME~~

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

(In Thousands)

Before-Tax

Income Tax

Net-of-Tax

Amount

Effect

Amount
Three Months Ended September 30, 2022






Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$
(25,880)

$
5,437

$
(20,443)
Reclassification adjustment for (gains) realized in income

(20)

4

(16)
Other comprehensive loss from available-for-sale debt securities

(25,900)

5,441

(20,459)
Unfunded pension and postretirement obligations,






Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

(9)

1

(8)
Total other comprehensive loss

$
(25,909)

$
5,442

$
(20,467)

(In Thousands)

Before-Tax

Income Tax

Net-of-Tax

Amount

Effect

Amount
Three Months Ended September 30, 2021






Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$
(3,608)

$
759

$
(2,849)
Reclassification adjustment for (gains) realized in income

(23)

5

(18)
Other comprehensive loss from available-for-sale debt securities

$
(3,631)

$
764

$
(2,867)
Unfunded pension and postretirement obligations,






Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

(5)

1

(4)
Total other comprehensive loss

$
(3,636)

$
765

$
(2,871)

(In Thousands)

Before-Tax

Income Tax

Net-of-Tax

Amount

Effect

Amount
Nine Months Ended September 30, 2022






Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$
(77,923)

$
16,365

$
(61,558)
Reclassification adjustment for (gains) realized in income

(21)

4

(17)
Other comprehensive loss from available-for-sale debt securities

(77,944)

16,369

(61,575)
Unfunded pension and postretirement obligations:






Changes from plan amendments and actuarial gains and losses

133

(27)

106
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

(31)

5

(26)
Other comprehensive income on unfunded retirement obligations

102

(22)

80
Total other comprehensive loss

$
(77,842)

$
16,347

$
(61,495)

1113

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(In Thousands)

Before-Tax

Income Tax

Net-of-Tax

Amount

Effect

Amount
Nine Months Ended September 30, 2021






Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$
(6,781)

$
1,425

$
(5,356)
Reclassification adjustment for (gains) realized in income

(25)

5

(20)
Other comprehensive loss from available-for-sale debt securities

(6,806)

1,430

(5,376)
Unfunded pension and postretirement obligations:






Changes from plan amendments and actuarial gains and losses

(5)

1

(4)
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost

(13)

3

(10)
Other comprehensive loss on unfunded retirement obligations

(18)

4

(14)
Total other comprehensive loss

$
(6,824)

$
1,434

$
(5,390)

3. COMPREHENSIVE INCOME (LOSS)

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


(In Thousands)	Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount
Three Months Ended September 30, 2023
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(14,865)	$	3,123	$	(11,742)
Reclassification adjustment for gains realized in income		0		0		0
Other comprehensive loss from available-for-sale debt securities		(14,865)		3,123		(11,742)
Unfunded pension and postretirement obligations:
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(14)		3		(11)
Other comprehensive loss on unfunded retirement obligations		(14)		3		(11)
Total other comprehensive loss	$	(14,879)	$	3,126	$	(11,753)


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


(In Thousands)	Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount
Nine Months Ended September 30, 2023
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(12,535)	$	2,632	$	(9,903)
Reclassification adjustment for (gains) realized in income		(6)		1		(5)
Other comprehensive loss from available-for-sale debt securities		(12,541)		2,633		(9,908)
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		(8)		1		(7)
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(42)		9		(33)
Other comprehensive loss on unfunded retirement obligations		(50)		10		(40)
Total other comprehensive loss	$	(12,591)	$	2,643	$	(9,948)


(In Thousands)	Before-Tax		Income Tax		Net-of-Tax
	Amount		Effect		Amount
Nine Months Ended September 30, 2022
Available-for-sale debt securities:
Unrealized holding losses on available-for-sale debt securities	$	(77,923)	$	16,365	$	(61,558)
Reclassification adjustment for (gains) realized in income		(21)		4		(17)
Other comprehensive loss from available-for-sale debt securities		(77,944)		16,369		(61,575)
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses		133		(27)		106
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(31)		5		(26)
Other comprehensive income on unfunded retirement obligations		102		(22)		80
Total other comprehensive loss	$	(77,842)	$	16,347	$	(61,495)

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


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

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


(In Thousands)	Unrealized				Accumulated		Unrealized				Accumulated
	(Losses)		Unfunded		Other		(Losses)		Unfunded		Other
	Gains		Retirement		Comprehensive		Gains		Retirement		Comprehensive
	on Securities		Obligations		(Loss) Income		on Securities		Obligations		(Loss) Income
Three Months Ended September 30, 2023
Balance, beginning of period							$	(48,536)		463	$	(48,073)
Other comprehensive loss during three months ended September 30, 2023								(11,742)		(11)		(11,753)
Balance, end of period							$	(60,278)	$	452	$	(59,826)

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

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

(In Thousands)

Unrealized



Accumulated

(Losses)

Unfunded

Other

Gains

Retirement

Comprehensive

on Securities

Obligations

(Loss) Income
Nine Months Ended September 30, 2022






Balance, beginning of period

$
4,809

$
217

$
5,026
Other comprehensive loss during nine months ended September 30, 2022

(61,575)

80

(61,495)
Balance, end of period

$
(56,766)

$
297

$
(56,469)

Nine Months Ended September 30, 2021






Balance, beginning of period

$
11,676

$
119

$
11,795
Other comprehensive loss during nine months ended September 30, 2021

(5,376)

(14)

(5,390)
Balance, end of period

$
6,300

$
105

$
6,405


(In Thousands)	Unrealized				Accumulated
	(Losses)		Unfunded		Other
	Gains		Retirement		Comprehensive
	on Securities		Obligations		(Loss) Income
Nine Months Ended September 30, 2023
Balance, beginning of period	$	(50,370)	$	492	$	(49,878)
Other comprehensive loss during nine months ended September 30, 2023		(9,908)		(40)		(9,948)
Balance, end of period	$	(60,278)	$	452	$	(59,826)

Nine Months Ended September 30, 2022
Balance, beginning of period	$	4,809	$	217	$	5,026
Other comprehensive loss during nine months ended September 30, 2022		(61,575)		80		(61,495)
Balance, end of period	$	(56,766)	$	297	$	(56,469)

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

4. CASH AND DUE FROM BANKS

Cash and due from banks at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 include the following:


(In Thousands)	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Cash and cash equivalents	$	55,444	$	95,848	$	48,308	$	47,698
Certificates of deposit		8,600		9,100		4,350		7,350
Total cash and due from banks	$	64,044	$	104,948	$	52,658	$	55,048

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

Historically, C&N Bank has been required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, C&N Bank had no required reserves at September 30, 2022 or December 31, 2021.

~~5. SECURITIES~~

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

(In Thousands)

September 30, 2022

Gross

Gross

Unrealized

Unrealized

Amortized

Holding

Holding

Fair


Cost

Gains

Losses

Value

Obligations of the U.S. Treasury

$
35,155

$
0

$
(3,556)

$
31,599
Obligations of U.S. Government agencies

23,939

0

(2,550)

21,389
Bank holding company debt securities

28,944

0

(3,512)

25,432
Obligations of states and political subdivisions:


Tax-exempt

146,847

153

(20,290)

126,710
Taxable

69,902

0

(11,585)

58,317
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:








Residential pass-through securities

116,833

0

(14,094)

102,739
Residential collateralized mortgage obligations

44,075

0

(4,443)

39,632
Commercial mortgage-backed securities

89,349

0

(11,966)

77,383
Private label commercial mortgage-backed securities

4,793

0

(14)

4,779
Total available-for-sale debt securities

$
559,837

$
153

$
(72,010)

$
487,980

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

(In Thousands)

December 31, 2021

Gross

Gross

Unrealized

Unrealized

Amortized

Holding

Holding

Fair


Cost

Gains

Losses

Value

Obligations of the U.S. Treasury

$
25,058

$
52

$
(198)

$
24,912
Obligations of U.S. Government agencies

23,936

563

(408)

24,091
Bank holding company debt securities

18,000

18

(31)

17,987
Obligations of states and political subdivisions:


Tax-exempt

143,427

4,749

(148)

148,028
Taxable

72,182

1,232

(649)

72,765
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:








Residential pass-through securities

98,048

705

(572)

98,181
Residential collateralized mortgage obligations

44,015

437

(205)

44,247
Commercial mortgage-backed securities

86,926

1,548

(1,006)

87,468
Total available-for-sale debt securities

$
511,592

$
9,304

$
(3,217)

$
517,679

5. SECURITIES

Amortized cost and fair value of available-for-sale debt securities at September 30, 2023 and December 31, 2022 are summarized as follows:


(In Thousands)	September 30, 2023
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding		Fair
	Cost		Gains		Losses		Value

Obligations of the U.S. Treasury	$	33,938	$	0	$	(3,381)	$	30,557
Obligations of U.S. Government agencies		21,372		0		(2,576)		18,796
Bank holding company debt securities		28,950		0		(6,639)		22,311
Obligations of states and political subdivisions:
Tax-exempt		123,598		114		(19,259)		104,453
Taxable		65,408		0		(11,951)		53,457
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		109,102		0		(14,633)		94,469
Residential collateralized mortgage obligations		38,267		0		(4,870)		33,397
Commercial mortgage-backed securities		76,627		0		(12,955)		63,672
Private label commercial mortgage-backed securities		8,178		0		(152)		8,026
Total available-for-sale debt securities	$	505,440	$	114	$	(76,416)	$	429,138


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

Obligations of the U.S. Treasury	$	35,166	$	0	$	(3,330)	$	31,836
Obligations of U.S. Government agencies		25,938		0		(2,508)		23,430
Bank holding company debt securities		28,945		0		(3,559)		25,386
Obligations of states and political subdivisions:
Tax-exempt		146,149		319		(13,845)		132,623
Taxable		68,488		0		(11,676)		56,812
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		112,782		0		(12,841)		99,941
Residential collateralized mortgage obligations		44,868		0		(4,572)		40,296
Commercial mortgage-backed securities		91,388		0		(11,702)		79,686
Private label commercial mortgage-backed securities		8,070		2		(49)		8,023
Total available-for-sale debt securities	$	561,794	$	321	$	(64,082)	$	498,033

The following table presents gross unrealized losses and fair value of available-for-sale debt securities with unrealized loss positions ~~that are not deemed to be other-than-temporarily impaired,~~ aggregated by length of time that individual securities have been in a continuous unrealized loss position at September 30, ~~2022~~2023 and December 31, ~~2021:~~2022:

September 30, 2022

Less Than 12 Months

12 Months or More

Total
(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses
Obligations of the U.S. Treasury

$
20,913

$
(2,195)

$
10,686

$
(1,361)

$
31,599

$
(3,556)
Obligations of U.S. Government agencies

8,486

(454)

12,903

(2,096)

21,389

(2,550)
Bank holding company debt securities

25,432

(3,512)

0

0

25,432

(3,512)
Obligations of states and political subdivisions:

Tax-exempt

107,565

(16,818)

13,122

(3,472)

120,687

(20,290)
Taxable

37,480

(6,189)

20,837

(5,396)

58,317

(11,585)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:










Residential pass-through securities

66,747

(7,746)

35,992

(6,348)

102,739

(14,094)
Residential collateralized mortgage obligations

31,957

(2,763)

7,675

(1,680)

39,632

(4,443)
Commercial mortgage-backed securities

47,633

(4,214)

29,750

(7,752)

77,383

(11,966)
Private label commercial mortgage-backed securities

4,779

(14)

0

0

4,779

(14)
Total temporarily impaired available-for-sale debt securities

$
350,992

$
(43,905)

$
130,965

$
(28,105)

$
481,957

$
(72,010)

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

September 30, 2023	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	$	0		0	$	30,557		(3,381)	$	30,557	$	(3,381)
Obligations of U.S. Government agencies		1,850		(8)		16,946		(2,568)		18,796		(2,576)
Bank holding company debt securities		0		0		22,311		(6,639)		22,311		(6,639)
Obligations of states and political subdivisions:
Tax-exempt		4,172		(268)		96,600		(18,991)		100,772		(19,259)
Taxable		0		0		53,457		(11,951)		53,457		(11,951)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		9,304		(412)		83,619		(14,221)		92,923		(14,633)
Residential collateralized mortgage obligations		2,662		(130)		30,735		(4,740)		33,397		(4,870)
Commercial mortgage-backed securities		2,211		(130)		61,461		(12,825)		63,672		(12,955)
Private label commercial mortgage-backed securities		8,026		(152)		0		0		8,026		(152)
Total temporarily impaired available-for-sale debt securities	$	28,225	$	(1,100)	$	395,686	$	(75,316)	$	423,911	$	(76,416)

1417

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2021

Less Than 12 Months

12 Months or More

Total
(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

Value

Losses

Value

Losses

Value

Losses
Obligations of the U.S. Treasury

$
18,886

$
(198)

$
0

$
0

$
18,886

$
(198)
Obligations of U.S. Government agencies

9,735

(264)

4,856

(144)

14,591

(408)
Bank holding company debt securities

12,969

(31)

0

0

12,969

(31)
Obligations of states and political subdivisions:

Tax-exempt

17,852

(141)

549

(7)

18,401

(148)
Taxable

31,261

(517)

3,277

(132)

34,538

(649)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:










Residential pass-through securities

71,451

(572)

0

0

71,451

(572)
Residential collateralized mortgage obligations

15,117

(205)

0

0

15,117

(205)
Commercial mortgage-backed securities

52,867

(1,006)

0

0

52,867

(1,006)
Total temporarily impaired available-for-sale debt securities

$
230,138

$
(2,934)

$
8,682

$
(283)

$
238,820

$
(3,217)


December 31, 2022	Less Than 12 Months				12 Months or More				Total
(In Thousands)	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
	Value		Losses		Value		Losses		Value		Losses
Obligations of the U.S. Treasury	$	20,192	$	(1,939)	$	11,644	$	(1,391)	$	31,836	$	(3,330)
Obligations of U.S. Government agencies		8,509		(430)		12,921		(2,078)		21,430		(2,508)
Bank holding company debt securities		14,248		(1,697)		11,138		(1,862)		25,386		(3,559)
Obligations of states and political subdivisions:
Tax-exempt		106,204		(11,023)		15,153		(2,822)		121,357		(13,845)
Taxable		28,901		(4,739)		27,761		(6,937)		56,662		(11,676)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		45,410		(4,226)		54,531		(8,615)		99,941		(12,841)
Residential collateralized mortgage obligations		28,670		(2,042)		11,626		(2,530)		40,296		(4,572)
Commercial mortgage-backed securities		40,408		(2,585)		39,278		(9,117)		79,686		(11,702)
Private label commercial mortgage-backed securities		4,762		(49)		0		0		4,762		(49)
Total temporarily impaired available-for-sale debt securities	$	297,304	$	(28,730)	$	184,052	$	(35,352)	$	481,356	$	(64,082)

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


(In Thousands)	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Gross realized gains from sales	$	44	$	23	$	48	$	27	$	0	$	44	$	89	$	48
Gross realized losses from sales		(24)		0		(27)		(2)		0		(24)		(83)		(27)
Net realized gains	$	20	$	23	$	21	$	25	$	0	$	20	$	6	$	21

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of September 30, ~~2022.~~2023. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.


(In Thousands)	September 30, 2022				September 30, 2023
	Amortized		Fair		Amortized		Fair
	Cost		Value		Cost		Value
Due in one year or less	$	12,648	$	12,490	$	10,899	$	10,672
Due from one year through five years		71,702		66,612		70,095		64,235
Due from five years through ten years		92,119		81,106		80,423		66,554
Due after ten years		128,318		103,239		111,849		88,113
Sub-total		304,787		263,447		273,266		229,574
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		116,833		102,739		109,102		94,469
Residential collateralized mortgage obligations		44,075		39,632		38,267		33,397
Commercial mortgage-backed securities		89,349		77,383		76,627		63,672
Private label commercial mortgage-backed securities		4,793		4,779		8,178		8,026
Total	$	559,837	$	487,980	$	505,440	$	429,138

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Investment securities carried at ~~$281,096,000~~$242,190,000 at September 30, ~~2022~~2023 and ~~$241,428,000~~$277,302,000 at December 31, ~~2021~~2022 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 8 for information concerning securities pledged to secure borrowing arrangements and Note 11 for information related to securities pledged against interest rate swap obligations.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

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

A summary of information management considered in evaluating debt and equity securities for ~~OTTI~~credit losses at September 30, 2023 and December 31, 2022 is provided below.

Debt Securities

As reflected in the table above, gross unrealized holding losses on available-for-sale debt securities totaled $76,416,000 at September 30, 2023 and $64,082,000 at December 31, 2022. At September 30, 2023, the Corporation does not have the intent to sell, nor is it more likely than not it will be required to sell, these securities before it is able to recover the amortized cost basis. The unrealized holding losses were consistent with significant increases in market interest rates that occurred in 2022 and 2023.

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, management performed an assessment for possible ~~OTTI~~credit losses 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~~At September 30, 2023 and December 31, 2022, all of the Corporation’s ~~investment, as well as management’s perception~~holdings of ~~the credit risk associated with each security. As reflected in the table above, the fair value of available-for-sale~~bank holding company debt securities, asobligations of September 30, 2022 was lower than the amortized cost basis by $71,857,000, or 12.8%. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, 2021. The unrealized decrease in fair value of the portfolio in the first nine months of 2022 was consistent with the significant increase in market interest rates that occurred during the period. states and political subdivisions and private label commercial mortgage-backed securities were investment grade and there have been no payment defaults.

Based on the results of the assessment, ~~management believes~~ there ~~were~~was no ~~credit-related declines in fair value and that impairment of~~ACL required on available-for-sale debt securities in an unrealized loss position at September 30, ~~2022~~2023 and December 31, ~~2021 is temporary.~~2022.

Equity Securities

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in other assets in the consolidated balance sheets, was ~~$10,557,000~~$14,570,000 at September 30, ~~2022~~2023 and ~~$9,313,000~~$14,168,000 at December 31, ~~2021.~~2022. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at September 30, ~~2022~~2023 and December 31, ~~2021.~~2022. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

In July 2023, C&N Bank became a member of the Federal Reserve System. As a member, C&N Bank is required to purchase and maintain stock in the Federal Reserve Bank of Philadelphia. There is no active market for Federal Reserve Bank stock, and it must ordinarily be redeemed by the Federal Reserve Bank of Philadelphia in order to be liquidated. C&N Bank’s investment in Federal Reserve Bank stock, included in other assets in the consolidated balance sheets, was $6,243,000 at September 30, 2023.

The Corporation has a marketable equity security included in other assets in the consolidated balance sheets with a carrying value of ~~$857,000~~$832,000 at September 30, ~~2022~~2023 and ~~$971,000 at~~$859,000 December 31, ~~2021,~~2022, consisting exclusively of one mutual fund. There was an unrealized loss on the mutual fund of ~~$143,000~~$168,000 at September 30, ~~2022~~2023 and ~~$29,000~~$141,000 at December 31, ~~2021.~~2022. Changes in the unrealized gains or losses on this security, which are included in other noninterest income in the consolidated statements of ~~income.~~income, were a loss of $27,000 in the third quarter 2023 and for the nine-month period ended September 30, 2023, a loss of $38,000 in the third quarter 2022 and a loss of $114,000 in the nine-month period ended September 30, 2022.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

6. LOANS AND ALLOWANCE FOR CREDIT LOSSES

~~The loans~~Loans receivable ~~portfolio is segmented into commercial, residential mortgage and consumer loans. Loans outstanding~~ at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 are summarized ~~by segment, and by classes within each segment,~~ as follows:

Summary of Loans by Type

(In Thousands)

September 30,

December 31,

2022

2021
Commercial:




Commercial loans secured by real estate

$
658,861

$
569,840
Commercial and industrial

172,258

159,073
Paycheck Protection Program - 1st Draw

24

1,356
Paycheck Protection Program - 2nd Draw

2,011

25,508
Political subdivisions

83,725

81,301
Commercial construction and land

76,194

60,579
Loans secured by farmland

12,839

11,121
Multi-family (5 or more) residential

59,315

50,089
Agricultural loans

2,492

2,351
Other commercial loans

14,636

17,153
Total commercial

1,082,355

978,371
Residential mortgage:




Residential mortgage loans - first liens

492,854

483,629
Residential mortgage loans - junior liens

24,208

23,314
Home equity lines of credit

42,972

39,252
1-4 Family residential construction

29,950

23,151
Total residential mortgage

589,984

569,346
Consumer

17,907

17,132
Total

1,690,246

1,564,849
Less: allowance for loan losses

(16,170)

(13,537)
Loans, net

$
1,674,076

$
1,551,312


	September 30,		December 31,
	2023		2022 (1)
Commercial real estate - non-owner occupied	$	737,287	$	675,597
Commercial real estate - owner occupied		231,112		205,910
All other commercial loans		395,703		410,077
Residential mortgage loans		410,013		393,582
Consumer loans		56,555		54,874
Total		1,830,670		1,740,040
Less: allowance for credit losses on loans		(18,085)		(16,615)
Loans, net	$	1,812,585	$	1,723,425

(1) Total loans at December 31, 2022 include purchased credit impaired loans of $1,027,000.

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of ~~$4,221,000~~$4,456,000 at September 30, ~~2022~~2023 and ~~$4,247,000~~$4,725,000 at December 31, ~~2021.~~2022.

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

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

On December 27, 2020, the President of the United States signed into law the Consolidated Appropriations Act, 2021 (the “CAA”), which includes provisions that broadly address additional COVID-19 responses and relief. Among the additional relief measures included are certain extensions to elements of the CARES Act, including extension of relief from troubled debt restructurings reporting established under Section 4013 of the CARES Act to 60 days after the date on which the national COVID-19 emergency terminates.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

The CAA also includes additional funding for the PPP with additional eligibility requirements for borrowers with generally the same loan terms as provided under the CARES Act. Information related to PPP loans advanced pursuant to the CAA are labeled “2nd Draw” within the tables.

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

As of September 30, 2022, the recorded investment in 1st Draw PPP loans was $24,000, including contractual principal balances of $26,000, reduced by net deferred origination fees of $2,000. The recorded investment in 2nd Draw PPP loans was $2,011,000, including contractual principal balances of $2,093,000 reduced by net deferred origination fees of $82,000. Interest and fees on PPP loans which are included in taxable interest and fees on loans in the unaudited consolidated statements of income totaled $118,000 in the third quarter 2022 and $1,639,000 in the third quarter 2021, and $899,000 in the nine-month period ended September 30, 2022 and $4,886,000 in the nine-month period ended September 30, 2021.

Acquired loans were initially recorded at fair value, with adjustments made to gross amortized cost based on movements in interest rates (market rate adjustment) and based on credit fair value adjustments on non-impaired loans and impaired loans. Subsequently, the Corporation has recognized amortization and accretion of a portion of the market rate adjustments and credit adjustments on ~~non-impaired (performing) loans, and a partial recovery of purchased credit impaired (PCI)~~performing loans. For the three-month and nine-month periods ended September 30, ~~2022~~2023 and ~~2021,~~2022, adjustments to the initial market rate and credit fair value adjustments of performing loans were recognized as follows:


(In Thousands)	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Market Rate Adjustment
Adjustments to gross amortized cost of loans at beginning of period	$	(866)	$	(5)	$	(637)	$	718	$	(1,000)	$	(866)	$	(916)	$	(637)
Accretion (amortization) recognized in interest income		5		(368)		(224)		(1,091)
(Amortization) accretion recognized in interest income										(16)		5		(100)		(224)
Adjustments to gross amortized cost of loans at end of period	$	(861)	$	(373)	$	(861)	$	(373)	$	(1,016)	$	(861)	$	(1,016)	$	(861)
Credit Adjustment on Non-impaired Loans
Adjustments to gross amortized cost of loans at beginning of period	$	(2,403)	$	(4,502)	$	(3,335)	$	(5,979)	$	(1,446)	$	(2,403)	$	(1,840)	$	(3,335)
Accretion recognized in interest income		308		666		1,240		2,143		147		308		541		1,240
Adjustments to gross amortized cost of loans at end of period	$	(2,095)	$	(3,836)	$	(2,095)	$	(3,836)	$	(1,299)	$	(2,095)	$	(1,299)	$	(2,095)

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

(In Thousands)

September 30,

December 31,

2022

2021
Outstanding balance

$
5,564

$
9,802
Carrying amount

3,783

6,558

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

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents an analysis of ~~the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective~~past due loans as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of September 30, ~~2022 and December 31, 2021, management determined that no allowance for credit losses related to unfunded loan commitments was required.~~

~~Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and nine-month periods ended September 30, 2022 and 2021 were as follows:~~2023:

Three Months Ended September 30, 2022

June 30, 2022










September 30, 2022
(In Thousands)

Balance

Charge-offs

Recoveries

Provision (Credit)

Balance
Allowance for Loan Losses:










Commercial:










Commercial loans secured by real estate

$
4,982

$
(2,160)

$
0

$
3,225

$
6,047
Commercial and industrial

2,792

0

0

31

2,823
Commercial construction and land

515

0

0

169

684
Loans secured by farmland

112

0

0

1

113
Multi-family (5 or more) residential

339

0

0

88

427
Agricultural loans

23

0

0

(1)

22
Other commercial loans

131

0

0

(9)

122
Total commercial

8,894

(2,160)

0

3,504

10,238
Residential mortgage:










Residential mortgage loans - first liens

3,689

0

1

229

3,919
Residential mortgage loans - junior liens

180

0

0

14

194
Home equity lines of credit

308

0

0

25

333
1-4 Family residential construction

215

0

0

36

251
Total residential mortgage

4,392

0

1

304

4,697
Consumer

261

(36)

24

(14)

235
Unallocated

1,000

0

0

0

1,000
Total Allowance for Loan Losses

$
14,547

$
(2,196)

$
25

$
3,794

$
16,170

Three Months Ended September 30, 2021

June 30, 2021










September 30, 2021
(In Thousands)

Balance

Charge-offs

Recoveries

Provision (Credit)

Balance
Allowance for Loan Losses:










Commercial:










Commercial loans secured by real estate

$
3,452

$
0

$
0

$
368

$
3,820
Commercial and industrial

2,781

(1,194)

6

947

2,540
Commercial construction and land

452

0

0

107

559
Loans secured by farmland

113

0

0

(1)

112
Multi-family (5 or more) residential

150

0

0

46

196
Agricultural loans

25

0

0

8

33
Other commercial loans

145

0

0

28

173
Total commercial

7,118

(1,194)

6

1,503

7,433
Residential mortgage:










Residential mortgage loans - first liens

3,536

0

1

29

3,566
Residential mortgage loans - junior liens

327

0

0

(6)

321
Home equity lines of credit

294

0

0

(11)

283
1-4 Family residential construction

198

0

0

(9)

189
Total residential mortgage

4,355

0

1

3

4,359
Consumer

231

(26)

8

24

237
Unallocated

671

0

0

0

671
Total Allowance for Loan Losses

$
12,375

$
(1,220)

$
15

$
1,530

$
12,700

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

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


(In Thousands)	As of September 30, 2023
	Past Due		Past Due
	30-89		90+		Nonaccrual		Current		Total
	Days		Days		Loans		Loans		Loans
Commercial real estate - non-owner occupied	$	4	$	132	$	9,031	$	728,120	$	737,287
Commercial real estate - owner occupied		151		0		1,586		229,375		231,112
All other commercial loans		1,438		162		1,390		392,713		395,703
Residential mortgage loans		1,569		892		3,244		404,308		410,013
Consumer loans		513		106		250		55,686		56,555
Total	$	3,675	$	1,292	$	15,501	$	1,810,202	$	1,830,670

The ~~third quarter 2021 provision included a net charge~~following table presents an analysis of ~~$611,000 related to specific~~past due loans ~~(net charge-offs~~as of $1,205,000 offset by a net decrease in specific allowances on loans of $594,000), and an increase of $919,000 in the collectively determined portion of the allowance. In the third quarter 2021, the Corporation recorded a partial charge-off of $1,194,000 on a commercial loan with an outstanding balance of $3,496,000 at the time of the charge-off. At September 30, 2022, the recorded investment in this loan was $196,000. In addition, there is a PPP loan to this borrower with a balance of $727,000 at September 30, 2022 that is in the process of collection. At September 30, 2022, there was no specific allowance related to loans to this borrower.December 31, 2022:


(In Thousands)	As of December 31, 2022
	Past Due		Past Due
	30-89		90+		Nonaccrual		Current		Total
	Days		Days		Loans		Loans		Loans
Commercial real estate - non-owner occupied	$	644	$	947	$	6,350	$	667,656	$	675,597
Commercial real estate - owner occupied		723		141		19		204,099		204,982
All other commercial loans		537		151		11,528		397,762		409,978
Residential mortgage loans		4,540		866		3,974		384,202		393,582
Consumer loans		635		132		187		53,920		54,874
Purchased credit impaired		0		0		1,027		0		1,027
Total	$	7,079	$	2,237	$	23,085	$	1,707,639	$	1,740,040

December 31,







September 30,
Nine Months Ended September 30, 2022

2021

Provision

2022
(In Thousands)

Balance

Charge-offs

Recoveries

(Credit)

Balance
Allowance for Loan Losses:











Commercial:










Commercial loans secured by real estate

$
4,405

$
(2,160)

$
0

$
3,802

$
6,047
Commercial and industrial

2,723

(150)

0

250

2,823
Commercial construction and land

637

0

0

47

684
Loans secured by farmland

115

0

0

(2)

113
Multi-family (5 or more) residential

215

0

0

212

427
Agricultural loans

25

0

0

(3)

22
Other commercial loans

173

0

0

(51)

122
Total commercial

8,293

(2,310)

0

4,255

10,238
Residential mortgage:










Residential mortgage loans - first liens

3,650

0

3

266

3,919
Residential mortgage loans - junior liens

184

0

0

10

194
Home equity lines of credit

302

0

15

16

333
1-4 Family residential construction

202

0

0

49

251
Total residential mortgage

4,338

0

18

341

4,697
Consumer

235

(107)

39

68

235
Unallocated

671

0

0

329

1,000
Total Allowance for Loan Losses

$
13,537

$
(2,417)

$
57

$
4,993

$
16,170

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

December 31,







September 30,
Nine Months Ended September 30, 2021

2020

Provision

2021
(In Thousands)

Balance

Charge-offs

Recoveries

(Credit)

Balance
Allowance for Loan Losses:











Commercial:


Commercial loans secured by real estate

$
3,051

$
0

$
2

$
767

$
3,820
Commercial and industrial

2,245

(1,194)

20

1,469

2,540
Commercial construction and land

454

0

0

105

559
Loans secured by farmland

120

0

0

(8)

112
Multi-family (5 or more) residential

236

0

0

(40)

196
Agricultural loans

34

0

0

(1)

33
Other commercial loans

168

0

0

5

173
Total commercial

6,308

(1,194)

22

2,297

7,433
Residential mortgage:










Residential mortgage loans - first liens

3,524

(11)

3

50

3,566
Residential mortgage loans - junior liens

349

0

0

(28)

321
Home equity lines of credit

281

0

2

0

283
1-4 Family residential construction

99

0

0

90

189
Total residential mortgage

4,253

(11)

5

112

4,359
Consumer

239

(73)

33

38

237
Unallocated

585

0

0

86

671
Total Allowance for Loan Losses

$
11,385

$
(1,278)

$
60

$
2,533

$
12,700

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

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

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

~~The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of September 30, 2022 and December 31, 2021:~~

September 30, 2022









Purchased


(In Thousands)

Special

Credit

Pass

Mention

Substandard

Doubtful

Impaired

Total
Commercial:

Commercial loans secured by real estate

$
637,390

$
5,938

$
11,789

$
0

$
3,744

$
658,861
Commercial and Industrial

159,735

9,085

3,399

0

39

172,258
Paycheck Protection Program - 1st Draw

24

0

0

0

0

24
Paycheck Protection Program - 2nd Draw

2,011

0

0

0

0

2,011
Political subdivisions

83,725

0

0

0

0

83,725
Commercial construction and land

75,433

714

47

0

0

76,194
Loans secured by farmland

10,903

618

1,318

0

0

12,839
Multi-family (5 or more) residential

58,458

0

857

0

0

59,315
Agricultural loans

1,875

29

588

0

0

2,492
Other commercial loans

14,636

0

0

0

0

14,636
Total commercial

1,044,190

16,384

17,998

0

3,783

1,082,355
Residential Mortgage:












Residential mortgage loans - first liens

478,768

7,398

6,688

0

0

492,854
Residential mortgage loans - junior liens

23,739

164

305

0

0

24,208
Home equity lines of credit

42,424

59

489

0

0

42,972
1-4 Family residential construction

29,950

0

0

0

0

29,950
Total residential mortgage

574,881

7,621

7,482

0

0

589,984
Consumer

17,844

0

63

0

0

17,907
Totals

$
1,636,915

$
24,005

$
25,543

$
0

$
3,783

$
1,690,246

December 31, 2021









Purchased


(In Thousands)

Special

Credit

Pass

Mention

Substandard

Doubtful

Impaired

Total
Commercial:

Commercial loans secured by real estate

$
538,966

$
10,510

$
16,220

$
0

$
4,144

$
569,840
Commercial and Industrial

142,775

10,841

4,694

0

763

159,073
Paycheck Protection Program - 1st Draw

1,356

0

0

0

0

1,356
Paycheck Protection Program - 2nd Draw

25,508

0

0

0

0

25,508
Political subdivisions

81,301

0

0

0

0

81,301
Commercial construction and land

59,816

715

48

0

0

60,579
Loans secured by farmland

10,011

186

924

0

0

11,121
Multi-family (5 or more) residential

47,638

0

873

0

1,578

50,089
Agricultural loans

1,802

0

549

0

0

2,351
Other commercial loans

17,150

3

0

0

0

17,153
Total commercial

926,323

22,255

23,308

0

6,485

978,371
Residential Mortgage:












Residential mortgage loans - first liens

469,044

7,981

6,534

0

70

483,629
Residential mortgage loans - junior liens

22,914

114

283

0

3

23,314
Home equity lines of credit

38,652

59

541

0

0

39,252
1-4 Family residential construction

23,151

0

0

0

0

23,151
Total residential mortgage

553,761

8,154

7,358

0

73

569,346
Consumer

17,092

0

40

0

0

17,132
Totals

$
1,497,176

$
30,409

$
30,706

$
0

$
6,558

$
1,564,849

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of September 30, 2022 and December 31, 2021.

September 30, 2022

Loans:

Allowance for Loan Losses:
(In Thousands)

Individually

Collectively

Individually

Collectively




Evaluated

Evaluated

Totals

Evaluated

Evaluated

Totals
Commercial:

Commercial loans secured by real estate

$
12,080

$
646,781

$
658,861

$
427

$
5,620

$
6,047
Commercial and industrial

369

171,889

172,258

0

2,823

2,823
Paycheck Protection Program - 1st Draw

0

24

24

0

0

0
Paycheck Protection Program - 2nd Draw

0

2,011

2,011

0

0

0
Political subdivisions

0

83,725

83,725

0

0

0
Commercial construction and land

47

76,147

76,194

0

684

684
Loans secured by farmland

78

12,761

12,839

0

113

113
Multi-family (5 or more) residential

0

59,315

59,315

0

427

427
Agricultural loans

60

2,432

2,492

0

22

22
Other commercial loans

0

14,636

14,636

0

122

122
Total commercial

12,634

1,069,721

1,082,355

427

9,811

10,238
Residential mortgage:












Residential mortgage loans - first liens

576

492,278

492,854

0

3,919

3,919
Residential mortgage loans - junior liens

31

24,177

24,208

0

194

194
Home equity lines of credit

68

42,904

42,972

0

333

333
1-4 Family residential construction

0

29,950

29,950

0

251

251
Total residential mortgage

675

589,309

589,984

0

4,697

4,697
Consumer

0

17,907

17,907

0

235

235
Unallocated

1,000

Total

$
13,309

$
1,676,937

$
1,690,246

$
427

$
14,743

$
16,170

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

December 31, 2021

Loans:

Allowance for Loan Losses:
(In Thousands)

Individually

Collectively

Individually

Collectively




Evaluated

Evaluated

Totals

Evaluated

Evaluated

Totals
Commercial:

Commercial loans secured by real estate

$
10,926

$
558,914

$
569,840

$
669

$
3,736

$
4,405
Commercial and industrial

2,503

156,570

159,073

71

2,652

2,723
Paycheck Protection Program - 1st Draw

0

1,356

1,356

0

0

0
Paycheck Protection Program - 2nd Draw

0

25,508

25,508

0

0

0
Political subdivisions

0

81,301

81,301

0

0

0
Commercial construction and land

0

60,579

60,579

0

637

637
Loans secured by farmland

83

11,038

11,121

0

115

115
Multi-family (5 or more) residential

1,578

48,511

50,089

0

215

215
Agricultural loans

0

2,351

2,351

0

25

25
Other commercial loans

0

17,153

17,153

0

173

173
Total commercial

15,090

963,281

978,371

740

7,553

8,293
Residential mortgage:












Residential mortgage loans - first liens

630

482,999

483,629

0

3,650

3,650
Residential mortgage loans - junior liens

14

23,300

23,314

0

184

184
Home equity lines of credit

0

39,252

39,252

0

302

302
1-4 Family residential construction

0

23,151

23,151

0

202

202
Total residential mortgage

644

568,702

569,346

0

4,338

4,338
Consumer

0

17,132

17,132

0

235

235
Unallocated

671

Total

$
15,734

$
1,549,115

$
1,564,849

$
740

$
12,126

$
13,537

~~Summary information related to impaired loans at September 30, 2022 and December 31, 2021 is provided in the table immediately below.~~

(In Thousands)

September 30, 2022

December 31, 2021

Unpaid

Unpaid

Principal

Recorded

Related

Principal

Recorded

Related


Balance

Investment

Allowance

Balance

Investment

Allowance
With no related allowance recorded:












Commercial loans secured by real estate

$
12,680

$
8,684

$
0

$
6,600

$
4,458

$
0
Commercial and industrial

2,135

369

0

5,213

2,431

0
Residential mortgage loans - first liens

601

576

0

656

630

0
Residential mortgage loans - junior liens

71

31

0

124

14

0
Home equity lines of credit

68

68

0

0

0

0
Loans secured by farmland

78

78

0

83

83

0
Agricultural loans

60

60

0

0

0

0
Construction and other land loans

47

47

0

0

0

0
Multi-family (5 or more) residential

0

0

0

2,734

1,578

0
Total with no related allowance recorded

15,740

9,913

0

15,410

9,194

0

With a related allowance recorded:

Commercial loans secured by real estate

3,396

3,396

427

6,468

6,468

668
Commercial and industrial

0

0

0

72

72

72
Total with a related allowance recorded

3,396

3,396

427

6,540

6,540

740
Total

$
19,136

$
13,309

$
427

$
21,950

$
15,734

$
740

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

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

(In Thousands)

Interest Income Recognized on

Average Investment in Impaired Loans

Impaired Loans on a Cash Basis

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,


2022

2021

2022

2021

2022

2021

2022

2021
Commercial:

Commercial loans secured by real estate

$
9,710

$
11,252

$
9,804

$
11,811

$
143

$
172

$
483

$
401
Commercial and industrial

371

3,844

839

2,566

4

4

207

25
Commercial construction and land

47

48

47

48

0

2

1

2
Loans secured by farmland

79

84

81

84

0

0

0

1
Multi-family (5 or more) residential

0

1,578

263

1,584

0

31

1,156

122
Agricultural loans

59

66

61

67

0

0

2

3
Total commercial

10,266

16,872

11,095

16,160

147

209

1,849

554
Residential mortgage:








Residential mortgage loans - first lien

612

1,322

587

1,830

5

11

17

68
Residential mortgage loans - junior lien

31

386

33

417

0

1

6

10
Home equity lines of credit

68

0

34

0

1

0

3

0
Total residential mortgage

711

1,708

654

2,247

6

12

26

78
Total

$
10,977

$
18,580

$
11,749

$
18,407

$
153

$
221

$
1,875

$
632

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

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

(In Thousands)

September 30, 2022

December 31, 2021

Past Due

Past Due

90+ Days and

90+ Days and


Accruing

Nonaccrual

Accruing

Nonaccrual
Commercial:




Commercial loans secured by real estate

$
1,898

$
12,079

$
738

$
10,885
Commercial and industrial

248

304

30

2,299
Commercial construction and land

25

47

0

48
Loans secured by farmland

0

78

28

83
Multi-family (5 or more) residential

0

0

0

1,578
Agricultural loans

59

0

65

0
Total commercial

2,230

12,508

861

14,893
Residential mortgage:








Residential mortgage loans - first liens

985

4,271

1,144

4,005
Residential mortgage loans - junior liens

55

0

69

3
Home equity lines of credit

186

132

102

82
Total residential mortgage

1,226

4,403

1,315

4,090
Consumer

43

48

43

16
Totals

$
3,499

$
16,959

$
2,219

$
18,999

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual. PCI loans with a total recorded investment of $3,783,000 at September 30, 2022 and $6,558,000 at December 31, 2021 are classified as nonaccrual.

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

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

(In Thousands)

As of September 30, 2022

As of December 31, 2021


Current &







Current &






Past Due

Past Due

Past Due

Past Due

Past Due

Past Due

Less than

30-89

90+

Less than

30-89

90+

30 Days

Days

Days

Total

30 Days

Days

Days

Total
Commercial:








Commercial loans secured by real estate

$
655,851

$
0

$
3,010

$
658,861

$
563,658

$
762

$
5,420

$
569,840
Commercial and industrial

171,819

129

310

172,258

158,188

72

813

159,073
Paycheck Protection Program - 1st Draw

24

0

0

24

1,339

17

0

1,356
Paycheck Protection Program - 2nd Draw

1,062

949

0

2,011

25,508

0

0

25,508
Political subdivisions

83,725

0

0

83,725

81,301

0

0

81,301
Commercial construction and land

75,925

197

72

76,194

60,509

70

0

60,579
Loans secured by farmland

12,675

86

78

12,839

11,010

0

111

11,121
Multi-family (5 or more) residential

59,315

0

0

59,315

48,532

0

1,557

50,089
Agricultural loans

2,433

0

59

2,492

2,279

7

65

2,351
Other commercial loans

14,636

0

0

14,636

17,153

0

0

17,153
Total commercial

1,077,465

1,361

3,529

1,082,355

969,477

928

7,966

978,371

Residential mortgage:
















Residential mortgage loans - first liens

487,629

1,934

3,291

492,854

475,637

5,038

2,954

483,629
Residential mortgage loans - junior liens

24,106

47

55

24,208

23,229

16

69

23,314
Home equity lines of credit

42,465

227

280

42,972

38,830

279

143

39,252
1-4 Family residential construction

29,950

0

0

29,950

23,151

0

0

23,151
Total residential mortgage

584,150

2,208

3,626

589,984

560,847

5,333

3,166

569,346
Consumer

17,674

142

91

17,907

17,001

72

59

17,132
Totals

$
1,679,289

$
3,711

$
7,246

$
1,690,246

$
1,547,325

$
6,333

$
11,191

$
1,564,849

Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at September 30, 2022 and December 31, 2021 is as follows:

(In Thousands)

Current &

Past Due

Past Due

Past Due

Less than

30-89

90+


30 Days

Days

Days

Total
September 30, 2022 Nonaccrual Totals

$
12,542

$
670

$
3,747

$
16,959
December 31, 2021 Nonaccrual Totals

$
8,800

$
1,227

$
8,972

$
18,999

2621

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~Loans whose terms are modified are classified~~The following table presents the recorded investment in loans by credit quality indicators by year of origination as troubled debt restructurings (TDRs) if the Corporation grants such borrowers concessions, and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of ~~loans subject to TDRs, as well as contractual aging information at~~ September 30, ~~2022 and December 31, 2021 is as follows:~~2023:


(In Thousands)	Current &										Term Loans by Year of Origination
	Past Due		Past Due		Past Due						2023		2022		2021		2020		2019		Prior		Revolving		Total
Commercial real estate - non-owner occupied
Pass											$	83,002	$	188,426	$	91,246	$	55,618	$	80,858	$	211,778	$	0	$	710,928
Special Mention												0		0		2,475		0		119		8,147		0		10,741
Substandard												0		0		0		2,577		610		12,431		0		15,618
Doubtful												0		0		0		0		0		0		0		0
Total commercial real estate - non-owner occupied											$	83,002	$	188,426	$	93,721	$	58,195	$	81,587	$	232,356	$	0	$	737,287
	Less than		30-89		90+
Year-to-date gross charge-offs											$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0
	30 Days		Days		Days		Nonaccrual		Total
September 30, 2022 Totals	$	211	$	20	$	92	$	3,868	$	4,191
December 31, 2021 Totals	$	248	$	40	$	65	$	5,452	$	5,805
Commercial real estate - owner occupied
Pass											$	28,058	$	37,306	$	52,680	$	13,245	$	17,722	$	75,113	$	0	$	224,124
Special Mention												0		0		2,617		0		0		1,301		0		3,918
Substandard												0		0		0		0		0		3,070		0		3,070
Doubtful												0		0		0		0		0		0		0		0
Total commercial real estate - owner occupied											$	28,058	$	37,306	$	55,297	$	13,245	$	17,722	$	79,484	$	0	$	231,112

Year-to-date gross charge-offs											$	0	$	0	$	0	$	0	$	0	$	0	$	0	$	0

All other commercial loans
Pass											$	39,638	$	94,942	$	53,556	$	29,097	$	17,364	$	25,489	$	112,698	$	372,784
Special Mention												0		0		4,642		0		0		805		400		5,847
Substandard												0		3,091		1,250		435		2,151		1,121		9,024		17,072
Doubtful												0		0		0		0		0		0		0		0
Total all other commercial loans											$	39,638	$	98,033	$	59,448	$	29,532	$	19,515	$	27,415	$	122,122	$	395,703

Year-to-date gross charge-offs											$	0	$	0	$	0	$	0	$	0	$	0	$	12	$	12

Residential mortgage loans
Pass											$	44,449	$	88,378	$	57,166	$	40,943	$	33,257	$	140,684	$	0	$	404,877
Special Mention												0		0		0		0		0		0		0		0
Substandard												0		0		0		289		369		4,478		0		5,136
Doubtful												0		0		0		0		0		0		0		0
Total residential mortgage loans											$	44,449	$	88,378	$	57,166	$	41,232	$	33,626	$	145,162	$	0	$	410,013

Year-to-date gross charge-offs											$	0	$	0	$	0	$	0	$	0	$	33	$	0	$	33

Consumer loans
Pass											$	5,216	$	5,070	$	2,227	$	1,372	$	238	$	991	$	40,512	$	55,626
Special Mention												0		0		0		0		0		0		0		0
Substandard												0		0		1		12		5		78		833		929
Doubtful												0		0		0		0		0		0		0		0
Total consumer loans											$	5,216	$	5,070	$	2,228	$	1,384	$	243	$	1,069	$	41,345	$	56,555

Year-to-date gross charge-offs											$	0	$	134	$	0	$	18	$	3	$	3	$	96	$	254

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents the recorded investment in loans by credit quality indicators as of December 31, 2022:



			Special
(In Thousands)	Pass		Mention		Substandard		Doubtful		Total
Commercial real estate - non-owner occupied	$	654,430	$	9,486	$	11,681	$	0	$	675,597
Commercial real estate - owner occupied		202,702		1,909		371		0		204,982
All other commercial loans		383,846		2,516		23,616		0		409,978
Residential mortgage loans		387,944		0		5,638		0		393,582
Consumer loans		54,353		0		521		0		54,874
Purchased credit impaired		0		0		1,027		0		1,027
Total	$	1,683,275	$	13,911	$	42,854	$	0	$	1,740,040

AtThe following table is a summary of the Corporation’s nonaccrual loans by major categories for the periods indicated.


	September 30, 2023						December 31, 2022
	Nonaccrual Loans with		Nonaccrual Loans		Total Nonaccrual
(In Thousands)	No Allowance		with an Allowance		Loans		Nonaccrual Loans
Commercial real estate - non-owner occupied	$	1,669	$	7,362	$	9,031	$	6,350
Commercial real estate - owner occupied		1,283		303		1,586		19
All other commercial loans		1,194		196		1,390		11,528
Residential mortgage loans		3,244		0		3,244		3,974
Consumer loans		250		0		250		187
Purchased credit impaired		0		0		0		1,027
Total	$	7,640	$	7,861	$	15,501	$	23,085

The Corporation recognized $317,000 and $744,000 of interest income on nonaccrual loans during the three months and nine months ended September 30, ~~2022 and December 31, 2021, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.~~2023, respectively.

~~TDRs that occurred~~The following table represents the accrued interest receivable written off by reversing interest income during the three-month and nine-month periods ended September 30, 2023:


	Three Months Ended		Nine Months Ended
(In Thousands)	September 30, 2023		September 30, 2023
Commercial real estate - non-owner occupied	$	22	$	48
Residential mortgage loans		11		17
Consumer loans		0		2
Total	$	33	$	67

Table of Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation has certain loans for which repayment is dependent upon the operation or sale of collateral, as the borrower is experiencing financial difficulty. The underlying collateral can vary based upon the type of loan. The following provides more detail about the types of collateral that secure collateral dependent loans:

●

Commercial real estate loans can be secured by either owner occupied commercial real estate or non-owner occupied investment commercial real estate. Typically, owner occupied commercial real estate loans are secured by office buildings, warehouses, manufacturing facilities and other commercial and industrial properties occupied by operating companies. Non-owner occupied commercial real estate loans are generally secured by office buildings and complexes, retail facilities, multifamily complexes, land under development, industrial properties, as well as other commercial or industrial real estate.

●

All other commercial loans are typically secured by business assets including inventory, equipment and receivables.

●

Residential mortgage loans are typically secured by first mortgages, and in some cases could be secured by a second mortgage.

●

Consumer loans are generally secured by automobiles, motorcycles, recreational vehicles and other personal property. Some consumer loans are unsecured and have no underlying collateral.

The following table details the amortized cost of collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related allowance for credit losses on loans allocated to these loans:


	September 30, 2023
	Amortized
(In Thousands)	Cost		Allowance
Commercial real estate - non-owner occupied	$	9,031	$	664
Commercial real estate - owner occupied		1,586		61
All other commercial loans		1,390		95
Total	$	12,007	$	820

The following table summarizes the activity related to the ACL for the three and nine months ended September 30, 2023 under the CECL methodology.


	Commercial		Commercial		All
	real estate -		real estate -		other		Residential
	nonowner		owner		commercial		mortgage		Consumer
(In Thousands)	occupied		occupied		loans		loans		loans		Unallocated		Total
Balance, June 30, 2023	$	10,603	$	2,025	$	3,686	$	2,464	$	278	$	0	$	19,056
Charge-offs		0		0		(7)		0		(91)		0		(98)
Recoveries		0		0		34		8		18		0		60
(Credit) provision for credit losses on loans		(268)		(161)		(161)		(479)		136		0		(933)
Balance, September 30, 2023	$	10,335	$	1,864	$	3,552	$	1,993	$	341	$	0	$	18,085


	Commercial		Commercial		All
	real estate -		real estate -		other		Residential
	nonowner		owner		commercial		mortgage		Consumer
(In Thousands)	occupied		occupied		loans		loans		loans		Unallocated		Total
Balance, December 31, 2022	$	6,305	$	1,942	$	4,142	$	2,751	$	475	$	1,000	$	16,615
Adoption of ASU 2016-13 (CECL)		3,763		7		(88)		(344)		(234)		(1,000)		2,104
Charge-offs		0		0		(12)		(33)		(254)		0		(299)
Recoveries		0		0		34		10		30		0		74
(Credit) provision for credit losses on loans		267		(85)		(524)		(391)		324		0		(409)
Balance, September 30, 2023	$	10,335	$	1,864	$	3,552	$	1,993	$	341	$	0	$	18,085

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Prior to the adoption of ASC 326 on January 1, 2023, the Corporation calculated the allowance for loan losses under the incurred loss methodology. The following tables are disclosed related to the allowance for loan losses in prior periods.


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


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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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, 2022.


December 31, 2022	Loans:						Allowance for Loan Losses:
(In Thousands)
	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Commercial:
Commercial loans secured by real estate	$	7,154	$	675,095	$	682,249	$	427	$	6,647	$	7,074
Commercial and industrial		11,223		167,048		178,271		26		2,883		2,909
Paycheck Protection Program - 1st Draw		0		5		5		0		0		0
Paycheck Protection Program - 2nd Draw		0		163		163		0		0		0
Political subdivisions		0		90,719		90,719		0		0		0
Commercial construction and land		244		73,719		73,963		0		647		647
Loans secured by farmland		76		12,874		12,950		0		112		112
Multi-family (5 or more) residential		0		55,886		55,886		0		411		411
Agricultural loans		57		2,378		2,435		0		21		21
Other commercial loans		0		14,857		14,857		0		124		124
Total commercial		18,754		1,092,744		1,111,498		453		10,845		11,298
Residential mortgage:
Residential mortgage loans - first liens		506		509,276		509,782		0		3,413		3,413
Residential mortgage loans - junior liens		30		24,919		24,949		0		167		167
Home equity lines of credit		68		43,730		43,798		0		282		282
1-4 Family residential construction		0		30,577		30,577		0		211		211
Total residential mortgage		604		608,502		609,106		0		4,073		4,073
Consumer		0		19,436		19,436		0		244		244
Unallocated												1,000

Total	$	19,358	$	1,720,682	$	1,740,040	$	453	$	15,162	$	16,615

Prior to the adoption of ASU 2016-13, loans were classified as impaired when, based on current information and events, it was probable that the Corporation would 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 included payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experienced insignificant payment delays and payment shortfalls generally were not classified as impaired. Management determined 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 was measured on a loan-by-loan basis for commercial loans by the fair value of the collateral (if the loan is collateral dependent), by future cash flows discounted at the loan’s effective rate or by the loan’s observable market price.

The scope of loans reviewed individually each quarter to determine if they were impaired included all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there was at least one extension of credit graded Special Mention, Substandard or Doubtful. 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, were individually evaluated for impairment.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)	December 31, 2022
	Unpaid
	Principal		Recorded		Related
	Balance		Investment		Allowance
With no related allowance recorded:
Commercial loans secured by real estate	$	8,563	$	3,754	$	0
Commercial and industrial		12,926		11,163		0
Residential mortgage loans - first liens		506		506		0
Residential mortgage loans - junior liens		68		30		0
Home equity lines of credit		68		68		0
Loans secured by farmland		76		76		0
Agricultural loans		57		57		0
Construction and other land loans		244		244		0
Total with no related allowance recorded		22,508		15,898		0

With a related allowance recorded:
Commercial loans secured by real estate		3,400		3,400		427
Commercial and industrial		60		60		26
Total with a related allowance recorded		3,460		3,460		453
Total	$	25,968	$	19,358	$	453

The average balance of impaired loans and ~~2021 are~~interest income recognized on these impaired loans is as follows:

(Balances in Thousands)

Three Months Ended

Three Months Ended

September 30, 2022

September 30, 2021

Post-

Post-

Number

Modification

Number

Modification

of

Recorded

of

Recorded

Loans

Investment

Loans

Investment
Home equity lines of credit,

Reduced monthly payments for an eighteen-month period

0

$
0

1

$
70
Total

0

$
0

1

$
70


	Nine Months Ended			Nine Months Ended
(Balances in Thousands)	September 30, 2022			September 30, 2021
(In Thousands)											Interest Income Recognized on
		Post-			Post-		Average Investment in Impaired Loans				Impaired Loans on a Cash Basis
	Number	Modification		Number	Modification		Three Months Ended		Nine Months Ended		Three Months Ended		Nine Months Ended
	of	Recorded		of	Recorded		September 30,		September 30,		September 30,		September 30,
	Loans	Investment		Loans	Investment		2022		2022		2022		2022
Residential mortgage - first liens:
Reduced monthly payments and extended maturity date	0	$	0	1	$	12
Reduced monthly payments for a fifteen-month period	0		0	1		116
Home equity lines of credit:
Reduced monthly payments and extended maturity date	0		0	1		24
Reduced monthly payments for an eighteen-month period	0		0	1		70
Commercial:
Commercial loans secured by real estate							$	9,710	$	9,804	$	143	$	483
Commercial and industrial								371		839		4		207
Commercial construction and land								47		47		0		1
Loans secured by farmland								79		81		0		0
Multi-family (5 or more) residential								0		263		0		1,156
Agricultural loans								59		61		0		2
Total commercial								10,266		11,095		147		1,849
Residential mortgage:
Residential mortgage loans - first lien								612		587		5		17
Residential mortgage loans - junior lien								31		33		0		6
Home equity lines of credit								68		34		1		3
Total residential mortgage								711		654		6		26
Total	0	$	0	4	$	222	$	10,977	$	11,749	$	153	$	1,875

InThe allowance for credit losses incorporates an estimate of lifetime expected credit losses and is recorded on each asset upon asset origination or acquisition. The starting point for the ~~third quarters~~estimate of ~~2022 and 2021, there were no defaults~~the allowance for credit losses is historical loss information, which includes losses from modifications of receivables to borrowers experiencing financial difficulty. An assessment of whether a borrower is experiencing financial difficulty is made on ~~loans for which TDRs were entered into within~~ the previous 12 months. In the nine-month periods ended September 30, 2022 and 2021, defaults on loans for which modifications that were considered to be TDR and were entered into within the previous 12 months are summarized as follows:date of a modification.

(Balances in Thousands)

Nine Months Ended

Nine Months Ended

September 30, 2022

September 30, 2021

Number

Number

of

Recorded

of

Recorded

Loans

Investment

Loans

Investment
Commercial loans secured by real estate

0

$
0

1

$
3,392
Total

0

$
0

1

$
3,392

Because the effect of most modifications made to borrowers experiencing financial difficulty, such as extensions of terms, insignificant payment delays and interest rate reductions, is already included in the allowance for credit losses because of the measurement methodologies used to estimate the allowance, a change to the allowance for credit losses is generally not recorded upon modification.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Occasionally, the Corporation modifies loans by providing principal forgiveness on certain of its real estate loans. When principal forgiveness is provided, the amortized cost basis of the asset is written off against the allowance for credit losses. The amount of the principal forgiveness is deemed to be uncollectible; therefore, that portion of the loan is written off, resulting in a reduction of the amortized cost basis and a corresponding adjustment to the allowance for credit losses.

There were no loans modified to borrowers experiencing financial difficulty in the three-month and nine-month periods ended September 30, 2023.

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


(In Thousands)	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Foreclosed residential real estate	$	179	$	256	$	202	$	0

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


(In Thousands)	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Residential real estate in process of foreclosure	$	1,306	$	1,260	$	1,049	$	1,229

The Corporation maintains an allowance for off-balance sheet credit exposures such as unfunded balances for existing lines of credit, commitments to extend future credit, commercial letters of credit and credit enhancement obligations related to residential mortgage loans sold with recourse, when there is a contractual obligation to extend credit and when this extension of credit is not unconditionally cancellable (i.e. commitment cannot be canceled at any time). The allowance for off-balance sheet credit exposures is adjusted as a provision for credit loss expense. The estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over their estimated lives. The allowance for credit losses for off-balance sheet exposures of $900,000 at September 30, 2023 and $425,000 at December 31, 2022, is included in accrued interest and other liabilities on the unaudited consolidated balance sheets.

The following table presents the balance and activity in the allowance for credit losses for off-balance sheet exposures for the three and nine months ended September 30, 2023.


	Three Months		Nine Months
	Ended		Ended
(In Thousands)	September 30, 2023		September 30, 2023
Beginning Balance	$	1,154	$	425
Adjustment to allowance for off-balance sheet exposures for adoption of ASU 2016-13		0		793
Recoveries		38		38
Credit for unfunded commitments		(292)		(356)
Balance, September 30, 2023	$	900	$	900

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At September 30, 2023 and December 31, 2022, the net carrying value of goodwill was $52,505,000.

Information related to core deposit intangibles is as follows:


(In Thousands)	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Gross amount	$	6,639	$	6,639	$	6,639	$	6,639
Accumulated amortization		(3,652)		(3,323)		(4,068)		(3,762)
Net	$	2,987	$	3,316	$	2,571	$	2,877

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


(In Thousands)	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,		September 30,
	2022		2021		2022		2021		2023		2022		2023		2022
Amortization expense	$	110	$	133	$	329	$	401	$	102	$	110	$	306	$	329

Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. At September 30, 2022 and December 31, 2021, the net carrying value of goodwill was $52,505,000.

8. BORROWED FUNDS

SHORT-TERM BORROWINGS

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


(In Thousands)	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
FHLB-Pittsburgh borrowings	$	0	$	0	$	21,500	$	77,000
Customer repurchase agreements		2,457		1,803		1,753		3,062
Total short-term borrowings	$	2,457	$	1,803	$	23,253	$	80,062

The Corporation had available credit with other correspondent banks totaling $95,000,000 at September 30, ~~2022~~2023 and ~~$45,000,000 at~~ December 31, ~~2021.~~2022. These lines of credit are primarily unsecured. No amounts were outstanding at September 30, ~~2022~~2023 or December 31, ~~2021.~~2022.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At September 30, 2023, the Corporation had available credit in the amount of $20,766,000 on this line with no outstanding advances. At December 31, 2022, the Corporation had available credit in the amount of ~~$22,376,000 on this line with no outstanding advances. At December 31, 2021, the Corporation had available credit in the amount of $13,642,000~~$23,107,000 on this line with no outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with a carrying value of ~~$23,420,000~~$21,731,000 at September 30, ~~2022~~2023 and ~~$14,034,000~~$24,113,000 at December 31, ~~2021.~~2022.

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average rate paid by the Corporation on customer repurchase agreements was 0.10% at September 30, ~~2022~~2023 and December 31, ~~2021.~~2022. The carrying value of the underlying securities was ~~$2,480,000~~$1,770,000 at September 30, ~~2022~~2023 and ~~$1,820,000~~$3,080,000 at December 31, ~~2021.~~2022.

The FHLB-Pittsburgh loan facility is collateralized by qualifying loans secured by real estate with a book value totaling ~~$1,182,945,000~~$1,321,417,000 at September 30, ~~2022~~2023 and ~~$1,046,242,000~~$1,209,179,000 at December 31, ~~2021.~~2022. Also, the FHLB-Pittsburgh loan facility requires the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in other assets in the consolidated balance sheets) were ~~$10,557,000~~$14,570,000 at September 30, ~~2022~~2023 and ~~$9,313,000~~$14,168,000 at December 31, ~~2021.~~2022. The Corporation’s total credit facility with FHLB-Pittsburgh was ~~$821,608,000~~$918,798,000 at September 30, ~~2022,~~2023, including an unused

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(available) amount of ~~$754,743,000.~~$752,847,000. At December 31, ~~2021,~~2022, the Corporation’s total credit facility with FHLB-Pittsburgh was ~~$756,868,000,~~$839,378,000, including an unused (available) amount of ~~$723,557,000.~~$689,279,000.

At September 30, ~~2022~~2023, short-term borrowings included an overnight borrowing from FHLB-Pittsburgh of $6,500,000 at an interest rate of 5.68% and an advance of $15,000,000 maturing in October 2023 with an interest rate of 5.61%. At December 31, ~~2021, there were~~2022, the overnight borrowing from FHLB-Pittsburgh was $77,000,000 at an interest rate of 4.45% with no ~~overnight borrowings or~~other short-term ~~advances from FHLB-Pittsburgh.~~advances.

LONG-TERM BORROWINGS – FHLB ADVANCES

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


(In Thousands)	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Loans maturing in 2022 with a weighted-average rate of 0.61%	$	4,013	$	15,452
Loans maturing in 2023 with a weighted-average rate of 1.35%		9,330		7,119
Loan maturing in 2023 with a rate of 3.25%					$	2,290	$	9,303
Loans maturing in 2024 with a weighted-average rate of 2.89%		29,822		5,099		29,784		29,813
Loans maturing in 2025 with a weighted-average rate of 3.38%		12,298		372
Loans maturing in 2025 with a weighted-average rate of 4.12%						35,653		23,231
Loans maturing in 2026 with a weighted-average rate of 4.44%						31,518		0
Loans maturing in 2027 with a weighted-average rate of 4.00%						24,031		0
Loan maturing in 2028 with a rate of 3.72%						2,000		0
Total long-term FHLB-Pittsburgh borrowings	$	55,463	$	28,042	$	125,276	$	62,347

Note: Weighted-average rates are presented as of September 30, ~~2022.~~2023.

SENIOR NOTES

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

The Senior Notes were recorded, net of debt issuance costs of $337,000, at an initial carrying amount of $14,663,000. Debt issuance costs are amortized over the term of the Senior Notes as an adjustment of the effective interest rate. Amortization of debt issuance costs associated with the Senior Notes totaling $16,000 in the third quarter ~~2022~~2023 and ~~$48,000~~$49,000 in the nine-month period ended September 30, ~~2022,~~2023, and ~~$15,000~~$16,000 in the third quarter ~~2021~~2022 and ~~$22,000~~$48,000 in the ~~nine-month period~~nine month-period ended September 30, ~~2021,~~2022, was included in interest expense in the unaudited consolidated statements of income.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, outstanding Senior Notes are as follows:


(In Thousands)	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Senior Notes with an aggregate par value of $15,000,000; bearing interest at 2.75% with an effective interest rate of 3.23%; maturing in June 2026	$	14,749	$	14,701	$	14,814	$	14,765
Total carrying value	$	14,749	$	14,701	$	14,814	$	14,765

SUBORDINATED DEBT

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

The Subordinated Notes were recorded, net of debt issuance costs of $563,000, at an initial carrying amount of $24,437,000. Debt issuance costs are amortized through June 1, 2026 as an adjustment of the effective interest rate. Amortization of debt issuance costs associated with the Subordinated Notes totaling $28,000 in the third quarter 2023 and $82,000 in the nine-month period ended September 30, 2023, and $27,000 in the third quarter 2022 and $79,000 in the nine-month period ended September 30, 2022, ~~and $25,000 in the third quarter 2021 and $38,000 in the nine-month period ended September 30, 2021,~~ was included in interest expense in the unaudited consolidated statements of income.

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, the carrying amounts of subordinated debt agreements are as follows:


(In Thousands)	September 30,		December 31,		September 30,		December 31,
	2022		2021		2023		2022
Agreements with an aggregate par value of $6,500,000; bearing interest at 6.50%; maturing in April 2027 and redeemed at par in April 2022	$	0	$	6,500
Agreement with a par value of $2,000,000; bearing interest at 6.50% with an effective interest rate of 5.60%; maturing in July 2027 and redeemed at par in June 2022		0		2,008
Agreements with a par value of $25,000,000; bearing interest at 3.25% with an effective interest rate of 3.74%; maturing in June 2031 and redeemable at par in June 2026		24,580		24,501	$	24,689	$	24,607
Total carrying value	$	24,580	$	33,009	$	24,689	$	24,607

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

9. STOCK-BASED COMPENSATION PLANS

The Corporation ~~has~~had a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. The ~~2022~~2023 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and the ~~2022~~2023 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. There were no restricted stock awards granted in the three-month periods ended September 30, 2023 and June 30, 2023. Following is a summary of restricted stock awards granted in the ~~nine-month~~three-month period ended ~~September 30, 2022, all of which were granted~~March 31, 2023:


(Dollars in Thousands)		Aggregate
		Grant
		Date
	Number of	Fair
	Shares	Value
1st quarter 2023 awards:
Time-based awards to independent directors	11,000	$	257
Time-based awards to employees	31,684		740
Performance-based awards to employees	11,104		259
Total	53,788	$	1,256

Effective April 20, 2023, the Corporation’s shareholders approved a new plan, the Citizens & Northern Corporation 2023 Equity Incentive Plan (the “2023 Equity Incentive Plan”). New awards to employees and independent directors will be governed under the 2023 Equity Incentive Plan, while outstanding awards under the prior plans (including the awards made in the first ~~quarter:~~

(Dollars in Thousands)

Aggregate

Grant

Date

Number of

Fair

Shares

Value
1st quarter 2022 awards:

Time-based awards to independent directors

9,588

$
240
Time-based awards to employees

51,638

1,293
Performance-based awards to employees

17,017

426
Total

78,243

$
1,959

quarter 2023) will be governed under the prior plans.

Compensation cost related to restricted stock is recognized based on the fair value of the stock at the grant date over the vesting period, adjusted for estimated and actual forfeitures. Total annual stock-based compensation for the year ending December 31, ~~2022~~2023 is estimated to total ~~between $1,228,000 and $1,574,000, depending on whether applicable performance-based awards vest based on annual 2022 earnings performance criteria as defined in the grant documents.~~$1,340,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $320,000 in the third quarter 2023 and $388,000 in the third quarter ~~2022 and $345,000 in the third quarter 2021.~~2022. Total stock-based compensation expense attributable to restricted stock awards ~~amounted~~amount to $1,015,000 in the nine-month period ended September 30, 2023 and $1,169,000 in the nine-month period ended September 30, ~~2022 and $970,000 in the nine-month period ended September 30, 2021.~~2022.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

10. CONTINGENCIES

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

11. DERIVATIVE FINANCIAL INSTRUMENTS

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

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

The aggregate notional amount of interest rate swaps was ~~$111,364,000~~$152,536,000 at September 30, ~~2022~~2023 and ~~$123,094,000~~$155,214,000 at December 31, ~~2021.~~2022. There were no interest rate swaps originated in the three or nine-month periods ended September 30, ~~2022~~2023 and ~~2021.~~2022. There were no gross amounts of interest rate swap-related assets and liabilities not offset in the consolidated balance sheets at September 30, ~~2022.~~2023. The net impact on the consolidated statements of income from interest rate swaps was an increase in interest income on loans of $502,000 in the third quarter 2023 and $1,286,000 in the nine-month period ended September 30, 2023 as compared to a reduction in interest income on loans of $4,000 in ~~the~~ third quarter 2022 and $541,000 in the nine months ended September 30, ~~2022~~2022.

The Corporation has entered into an RPA with another institution as ~~compared~~a means to assume a ~~reduction~~portion of the credit risk associated with a loan structure which includes a derivative instrument, in exchange for fee income commensurate with the risk assumed. This type of derivative is referred to as an “RPA In.” In addition, in an effort to reduce the credit risk associated with an interest rate swap agreement with a borrower for whom the Corporation has provided a loan structured with a derivative, the Corporation purchased an RPA from an institution participating in the facility in exchange for a fee commensurate with the risk shared. This type of derivative is referred to as an “RPA Out.” The net impact on the consolidated statements of income ~~on loans~~from RPAs was an increase in other noninterest income of ~~$335,000~~$1,000 in the third quarter ~~2021~~2023 and ~~$1,013,000~~$19,000 in the nine-month period ended September 30, 2023 with no comparable amount in the third quarter 2022 and in the nine months ended September 30, ~~2021.~~2022.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

The table below presents the fair value of the Corporation’s derivative financial instruments as well as their classification on the consolidated balance sheets at September 30, ~~2022~~2023 and December 31, ~~2021:~~2022:


(In Thousands)	At June 30, 2022								At December 31, 2021								At September 30, 2023								At December 31, 2022
	Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives				Asset Derivatives				Liability Derivatives
	Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair		Notional		Fair
	Amount		Value (1)		Amount		Value (2)		Amount		Value (1)		Amount		Value (2)		Amount		Value (1)		Amount		Value (2)		Amount		Value (1)		Amount		Value (2)
Interest rate swap agreements	$	55,682	$	3,795	$	55,682	$	3,795	$	61,547	$	3,104	$	61,547	$	3,104	$	76,268	$	4,545	$	76,268	$	4,545	$	77,607	$	3,638	$	77,607	$	3,638
RPA Out																		7,111		6		0		0		7,200		0		0		0
RPA In																		0		0		10,000		6		0		0		10,000		19

(1)	Included in other assets in the consolidated balance sheets.

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation’s ~~agreement~~agreements with its derivative ~~counterparty provides~~counterparties provide 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~~counterparties could terminate the derivative positions and the Corporation would be required to settle its obligations under the agreements. Available-for-sale securities with a carrying value of ~~$2,242,000~~$2,251,000 were pledged as collateral against the Corporation’s obligations related to the interest rate swaps at September 30, ~~2022.~~2023.

12. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

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

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

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, assets and liabilities measured at fair value and the valuation methods used are as follows:


	September 30, 2022								September 30, 2023
	Quoted								Quoted
	Prices		Other						Prices		Other
	in Active		Observable		Unobservable		Total		in Active		Observable		Unobservable		Total
	Markets		Inputs		Inputs		Fair		Markets		Inputs		Inputs		Fair
(In Thousands)	(Level 1)		(Level 2)		(Level 3)		Value		(Level 1)		(Level 2)		(Level 3)		Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury	$	31,599	$	0	$	0	$	31,599	$	30,557	$	0	$	0	$	30,557
Obligations of U.S. Government agencies		0		21,389		0		21,389		0		18,796		0		18,796
Bank holding company debt securities		0		25,432		0		25,432		0		22,311		0		22,311
Obligations of states and political subdivisions:
Tax-exempt		0		126,710		0		126,710		0		104,453		0		104,453
Taxable		0		58,317		0		58,317		0		53,457		0		53,457
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		102,739		0		102,739		0		94,469		0		94,469
Residential collateralized mortgage obligations		0		39,632		0		39,632		0		33,397		0		33,397
Commercial mortgage-backed securities		0		77,383		0		77,383		0		63,672		0		63,672
Private label commercial mortgage-backed securities		0		4,779		0		4,779		0		8,026		0		8,026
Total available-for-sale debt securities		31,599		456,381		0		487,980		30,557		398,581		0		429,138
Marketable equity security		857		0		0		857		832		0		0		832
Servicing rights		0		0		2,649		2,649		0		0		2,630		2,630
RPA Out										0		6		0		6
Interest rate swap agreements, assets		0		3,795		0		3,795		0		4,545		0		4,545
Total recurring fair value measurements, assets	$	32,456	$	460,176	$	2,649	$	495,281	$	31,389	$	403,132	$	2,630	$	437,151

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities	$	0	$	3,795	$	0	$	3,795	$	0	$	4,545	$	0	$	4,545

Nonrecurring fair value measurements, assets:
Impaired loans, net	$	0	$	0	$	2,969	$	2,969
Loans individually evaluated for credit loss, net									$	0	$	0	$	7,041	$	7,041
Foreclosed assets held for sale		0		0		454		454		0		0		633		633
Total nonrecurring fair value measurements, assets	$	0	$	0	$	3,423	$	3,423	$	0	$	0	$	7,674	$	7,674

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2021


Quoted






Prices

Other

in Active

Observable

Unobservable

Total

Markets

Inputs

Inputs

Fair
(In Thousands)

(Level 1)

(Level 2)

(Level 3)

Value
Recurring fair value measurements, assets:








AVAILABLE-FOR-SALE DEBT SECURITIES:








Obligations of the U.S. Treasury

$
24,912

$
0

$
0

$
24,912
Obligations of U.S. Government agencies

0

24,091

0

24,091
Bank holding company debt securities

0

17,987

0

17,987
Obligations of states and political subdivisions:





Tax-exempt

0

148,028

0

148,028
Taxable

0

72,765

0

72,765
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:








Residential pass-through securities

0

98,181

0

98,181
Residential collateralized mortgage obligations

0

44,247

0

44,247
Commercial mortgage-backed securities

0

87,468

0

87,468
Total available-for-sale debt securities

24,912

492,767

0

517,679
Marketable equity security

971

0

0

971
Servicing rights

0

0

2,329

2,329
Interest rate swap agreements, assets

0

3,104

0

3,104
Total recurring fair value measurements, assets

$
25,883

$
495,871

$
2,329

$
524,083

Recurring fair value measurements, liabilities,

Interest rate swap agreements, liabilities

$
0

$
3,104

$
0

$
3,104

Nonrecurring fair value measurements, assets:








Impaired loans, net

$
0

$
0

$
5,800

$
5,800
Foreclosed assets held for sale

0

0

684

684
Total nonrecurring fair value measurements, assets

$
0

$
0

$
6,484

$
6,484


	December 31, 2022
	Quoted
	Prices		Other
	in Active		Observable		Unobservable		Total
	Markets		Inputs		Inputs		Fair
(In Thousands)	(Level 1)		(Level 2)		(Level 3)		Value
Recurring fair value measurements, assets:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of the U.S. Treasury	$	31,836	$	0	$	0	$	31,836
Obligations of U.S. Government agencies		0		23,430		0		23,430
Bank holding company debt securities		0		25,386		0		25,386
Obligations of states and political subdivisions:
Tax-exempt		0		132,623		0		132,623
Taxable		0		56,812		0		56,812
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		99,941		0		99,941
Residential collateralized mortgage obligations		0		40,296		0		40,296
Commercial mortgage-backed securities		0		79,686		0		79,686
Private label commercial mortgage-backed securities		0		8,023		0		8,023
Total available-for-sale debt securities		31,836		466,197		0		498,033
Marketable equity security		859		0		0		859
Servicing rights		0		0		2,653		2,653
Interest rate swap agreements, assets		0		3,638		0		3,638
Total recurring fair value measurements, assets	$	32,695	$	469,835	$	2,653	$	505,183

Recurring fair value measurements, liabilities,
Interest rate swap agreements, liabilities	$	0	$	3,638	$	0	$	3,638

Nonrecurring fair value measurements, assets:
Impaired loans, net	$	0	$	0	$	3,007	$	3,007
Foreclosed assets held for sale		0		0		275		275
Total nonrecurring fair value measurements, assets	$	0	$	0	$	3,282	$	3,282

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

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At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, quantitative information regarding valuation techniques and the significant unobservable inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:


	Fair Value at								Fair Value at
	9/30/2022		Valuation	Unobservable				Method or Value As of	9/30/2023		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				9/30/2022	(In Thousands)		Technique	Input(s)				9/30/2023
Servicing rights	$	2,649	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period	$	2,630	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		141.00	%	Weighted-average PSA				Loan prepayment speeds		129.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late						4.00	%	of payments are late
						5.00	%	late fees assessed						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent						1.50	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs						3.00	%	annual increase in servicing costs


	Fair Value at								Fair Value at
	12/31/2021		Valuation	Unobservable				Method or Value As of	12/31/2022		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				12/31/2021	(In Thousands)		Technique	Input(s)				12/31/2022
Servicing rights	$	2,329	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period	$	2,653	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		209.00	%	Weighted-average PSA				Loan prepayment speeds		133.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late						4.00	%	of payments are late
						5.00	%	late fees assessed						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent						1.50	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs						3.00	%	annual increase in servicing costs

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

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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


(In Thousands)	Three Months Ended				Nine Months Ended				Three Months Ended				Nine Months Ended
	September 30, 2022		September 30, 2021		September 30, 2022		September 30, 2021		September 30, 2023		September 30, 2022		September 30, 2023		September 30, 2022
Servicing rights balance, beginning of period	$	2,640	$	2,116	$	2,329	$	1,689	$	2,607	$	2,640	$	2,653	$	2,329
Originations of servicing rights		33		176		192		567		64		33		113		192
Unrealized (loss) gain included in earnings		(24)		(45)		128		(9)		(41)		(24)		(136)		128
Servicing rights balance, end of period	$	2,649	$	2,247	$	2,649	$	2,247	$	2,630	$	2,649	$	2,630	$	2,649

Loans are individually evaluated for credit loss when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For individually evaluated 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.

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Loans are classified as impaired when, based on current information and events, it is probable that the Corporation will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Foreclosed assets held for sale consist of real estate acquired by foreclosure. For impaired commercial loans secured by real estate and foreclosed assets held for sale, estimated fair values are determined primarily using values from third-party appraisals. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include estimated costs to sell the property.

At September 30, ~~2022~~2023 and December 31, ~~2021,~~2022, quantitative information regarding valuation techniques and the significant unobservable inputs used for nonrecurring fair value measurements using Level 3 methodologies are as follows:


(Dollars In Thousands)									Weighted										Weighted
			Valuation						Average				Valuation						Average
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at		Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at
Asset	9/30/2022		9/30/2022		9/30/2022		Technique	Inputs	9/30/2022		9/30/2023		9/30/2023		9/30/2023		Technique	Inputs	9/30/2023

Impaired loans:
Commercial:
Commercial loans secured by real estate	$	3,396	$	427	$	2,969	Sales comparison	Discount to appraised value	25	%
Total impaired loans	$	3,396	$	427	$	2,969
Loans individually evaluated for credit loss:
Commercial real estate - nonowner occupied											$	7,362	$	664	$	6,698	Sales comparison	Discount to appraised value	25	%
Commercial real estate - owner occupied												303		61		242	Sales comparison & SBA guaranty	Discount to appraised value	57	%
All other commercial loans												196		95		101	Liquidation & SBA guaranty	Discount to appraised value	18	%
Total loans individually evaluated for credit loss											$	7,861	$	820	$	7,041
Foreclosed assets held for sale - real estate:
Residential (1-4 family)											$	202	$	0	$	202	Sales comparison	Discount to appraised value	38	%
Commercial real estate	$	275	$	0	$	275	Sales comparison	Discount to appraised value	50	%		431		0		431	Sales comparison	Discount to appraised value	45	%
Residential (1-4 family)		179		0		179	Sales comparison	Discount to appraised value	52	%
Total foreclosed assets held for sale	$	454	$	0	$	454					$	633	$	0	$	633


(Dollars In Thousands)									Weighted										Weighted
			Valuation						Average				Valuation						Average
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at		Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at
Asset	12/31/2021		12/31/2021		12/31/2021		Technique	Inputs	12/31/2021		12/31/2022		12/31/2022		12/31/2022		Technique	Inputs	12/31/2022

Impaired loans:
Commercial:
Commercial loans secured by real estate	$	6,468	$	668	$	5,800	Sales comparison	Discount to appraised value	27	%	$	3,400	$	427	$	2,973	Sales comparison	Discount to appraised value	25	%
Commercial and industrial		72		72		0	Liquidation of assets	Discount to appraised value	100	%		60		26		34	Liquidation of assets	Discount to appraised value	33	%
Total impaired loans	$	6,540	$	740	$	5,800					$	3,460	$	453	$	3,007
Foreclosed assets held for sale - real estate:
Commercial real estate	$	428	$	0	$	428	Sales comparison	Discount to appraised value	50	%	$	275	$	0	$	275	Sales comparison	Discount to appraised value	50	%
Residential (1-4 family)		256		0		256	Sales comparison	Discount to appraised value	53	%
Total foreclosed assets held for sale	$	684	$	0	$	684					$	275	$	0	$	275

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

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


(In Thousands)	Fair Value	September 30, 2022				December 31, 2021				Fair Value	September 30, 2023				December 31, 2022
	Hierarchy	Carrying		Fair		Carrying		Fair		Hierarchy	Carrying		Fair		Carrying		Fair
	Level	Amount		Value		Amount		Value		Level	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	55,444	$	55,444	$	95,848	$	95,848	Level 1	$	48,308	$	48,308	$	47,698	$	47,698
Certificates of deposit	Level 2		8,600		8,184		9,100		9,142	Level 2		4,350		4,033		7,350		6,956
Restricted equity securities (included in Other Assets)	Level 2		10,807		10,807		9,562		9,562
Restricted equity securities (included in other assets)										Level 2		21,062		21,062		14,418		14,418
Loans, net	Level 3		1,674,076		1,643,468		1,551,312		1,573,955	Level 3		1,812,585		1,732,232		1,723,425		1,674,002
Accrued interest receivable	Level 2		8,425		8,425		7,235		7,235	Level 2		9,311		9,311		8,653		8,653

Financial liabilities:
Deposits with no stated maturity	Level 2		1,745,817		1,745,817		1,639,167		1,639,167	Level 2		1,603,033		1,603,033		1,702,404		1,702,404
Time deposits	Level 2		293,778		292,703		285,893		286,962	Level 2		421,964		419,686		295,189		293,814
Short-term borrowings	Level 2		2,457		1,849		1,803		1,603	Level 2		23,253		23,253		80,062		80,062
Long-term borrowings	Level 2		55,463		54,129		28,042		28,347	Level 2		125,276		123,056		62,347		60,944
Senior debt	Level 2		14,749		10,492		14,701		15,016	Level 2		14,814		12,870		14,765		9,712
Subordinated debt	Level 2		24,580		17,567		33,009		33,171	Level 2		24,689		20,184		24,607		16,186
Accrued interest payable	Level 2		635		635		205		205	Level 2		1,464		1,464		461		461

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

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

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

●	changes in monetary and fiscal policies of the Federal Reserve Board and the U.S. Government, particularly related to changes in interest rates

●	changes in general economic conditions

●

recent adverse developments in the banking industry highlighted by high-profile bank failures and the potential impact of such developments on customer confidence, sources of liquidity and capital funding, and regulatory responses to these developments (including potential increases in the cost of deposit insurance assessments)

●	the Corporation’s credit standards and its on-going credit assessment processes might not protect it from significant credit losses

●	~~the effect of the novel coronavirus (COVID-19) and related events~~

●	legislative or regulatory changes

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

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

●	technological changes and increased technology-related costs

●	information security breach or other technology difficulties or failures

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

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

●	the effect of the novel coronavirus (COVID-19) and related events

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

EARNINGS OVERVIEW

Third Quarter ~~2022~~2023 as Compared to Third Quarter ~~2021~~2022

Third quarter ~~2022~~2023 net income was $7,591,000, or $0.50 per diluted share, as compared to $4,455,000, or $0.29 per diluted ~~share. In comparison,~~share, in the third quarter ~~2021 net income was $7,399,000, or $0.47 per diluted share.~~2022. Significant variances were as follows:

●

~~Third quarter 2022 net~~Net interest income of ~~$20,879,000~~$19,663,000 in the third quarter 2023 was ~~$1,420,000 higher~~$1,216,000 lower than the third quarter ~~2021 total.~~2022 reflecting an increase in interest expense of $6,624,000 (includes $5,292,000 interest on deposits and $1,332,000 interest on borrowings) and an increase of $5,408,000 in interest and dividend income. The ~~net~~ interest rate spread ~~remained unchanged at 3.46%~~decreased 0.73%, as the average rate on interest-bearing liabilities increased 1.49%, while the average yield on earning assets increased ~~0.29% to 4.18%, and the average rate on interest-bearing liabilities increased 0.29% to 0.72%~~0.76%. The net interest margin was 3.35% in the third quarter 2023, down from 3.69% in the third quarter ~~2022, up from 3.59%~~2022.

●

The credit for credit losses was $1,225,000 in the third quarter ~~2021. Total interest and fees from loans excluding loans originated under the U.S. Small Business Administration (SBA) Paycheck Protection Program (PPP) were $20,602,000~~2023, as compared to a provision for credit losses of $3,794,000 in the third quarter ~~2022, an increase of $3,144,000 from the third quarter 2021 total of $17,458,000. Total interest and fees from SBA PPP loans were $118,000~~2022. The credit in the third quarter ~~2022, a decrease~~2023 included the impact of ~~$1,521,000 from the third quarter 2021 total of $1,639,000. Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, increased $939,000~~reductions in the third quarter 2022 as compared to the third quarter 2021, as the average balance (at amortized cost) of available-for-sale debt securities increased $173.8 million. Accretion and amortization of purchase accounting adjustments had a net positive impact on net interest income of $400,000 in the third quarter 2022 as compared to a net positive impact of $563,000 in the third quarter 2021. Average outstanding loans increased $82.4 million, despiteallowance for credit losses (ACL) from a reduction in ~~average PPP loans~~estimated future net charge-offs related to an economic forecast, qualitative adjustments in concentrations of ~~$83.0 million. Average loans, excluding PPP loans, were up $165.5 million~~credit based on loan type, lending policies and procedures and changes in external indexes, and a reduction in the Corporation’s average net charge-off experience. The third quarter 2022 ~~over the third quarter 2021, an increase of 11.0%. Average total deposits increased $61.8 million (3.2%).~~

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●

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

●

Noninterest income ~~for~~of $6,489,000 in the third quarter 2023 increased $818,000 from the third quarter 2022 ~~was down $711,000 from the third quarter 2021 total.~~amount. Significant variances included the following:

~~Net gains from sales~~Other noninterest income of ~~loans of $131,000 decreased $666,000~~$1,084,000 increased $462,000 from the third quarter ~~2021, reflecting~~2022, including dividends on FHLB-Pittsburgh stock totaling $323,000, an increase of $163,000 from the third quarter 2022 and dividends on Federal Reserve Bank stock of $63,000 with no comparable amount in 2022. Additionally, in the third quarter 2023, the Corporation recognized income of $64,000, with no comparable amount in 2022, from a ~~reduction~~conversion assistance payment received related to a change in ~~volume of residential mortgage loans sold.~~wealth management platform for providing brokerage and investment advisory services.

Service charges on deposit accounts of ~~$1,105,000 decreased $144,000~~$1,443,000 increased $338,000 from the third quarter ~~2021.~~2022. In the third quarter 2022, ~~the Corporation recorded accrued~~income was reduced by $290,000 related to refunds of consumer overdraft fees ~~totaling $290,000~~ as the result of updated regulatory guidance on certain overdraft ~~fees.~~fees with no comparable amount in 2023.

Trust revenue of $1,919,000 increased $175,000, consistent with recent appreciation in the trading prices of many U.S. equity securities and includes an increase in fees from services provided to estates.

Net gains from sale of loans of $237,000 increased $106,000 from the third quarter 2022, reflecting an increase in the volume of residential mortgage loans sold.

Brokerage and insurance revenue of ~~$696,000 increased $136,000~~$394,000 decreased $302,000 from the third quarter ~~2021,~~2022, due to ~~commissions on higher transaction~~a reduction in sales volume.

●

Noninterest expense ~~increased $2,097,000~~of $17,940,000 in the third quarter ~~2022 over~~2023 increased $497,000 from the third quarter ~~2021~~2022 amount. Significant variances included the following:

Other noninterest expense of $2,577,000 increased $582,000 from the third quarter 2022. Within this category, significant variances included the following:

o●

~~Salaries and employee benefits~~Other operational losses included $127,000 of ~~$10,826,000 increased $1,399,000 from the third quarter 2021 total, including an increase in base salaries expense of $992,000. In addition~~expenses related to the impact of merit-based salary increases, the number of employees increased, reflecting expansion of the Southcentral PA market with the opening of an office in Lancaster as well as additions to staffing for information technology (IT), human resources and other functions. In total, the number of full-time equivalent employees (FTEs) increased by 21 (5.4%) to 412check fraud in the third quarter ~~2022 as compared to~~2023 with no comparable amount in the third quarter ~~2021. Also within this category, there was an increase in health care expense of $220,000 due to higher claims on the Corporation’s partially self-insured plan.~~

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

Data processing and telecommunications of $1,719,000 increased $244,000 from the third quarter 2021 total, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

●

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

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

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

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

●

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

●

~~For~~FDIC insurance expense increased $124,000 from the ~~first nine months~~third quarter of 2022, reflecting the ~~provision for loan losses was $4,993,000,~~impact of an increase in ~~expense of $2,460,000 as compared~~base deposit insurance assessment rate applicable to $2,533,000 recorded in the first nine months of 2021. The provision for the first nine months of 2022 includes $2,047,000 related to specific loans (net decrease in specific allowances on loans of $313,000 and net charge-offs of $2,360,000), an increase of $2,617,000 in the collectively determined portion of the allowance and a $329,000 increase in the unallocated portion. In comparison, the provision for loan losses in the first nine months of 2021 includes $1,176,000 related to specific loans (net charge-offs of $1,218,000 and a decrease in specific allowances on loans of $42,000), an increase of $1,271,000 in the collectively determined portion of the allowance and an $86,000 increase in the unallocated portion.all FDIC-insured banks.

●

~~Noninterest income~~In the third quarter 2023, there was no adjustment to the allowance for disallowed SBA claims compared to a decrease of ~~$18,323,000~~$77,000 in the allowance for ~~the first nine months~~disallowed SBA claims in third quarter of 2022, ~~decreased $1,143,000 from~~resulting in a net increase in expense of $77,000.

●

Legal fees totaled $187,000 in the third quarter 2023, an increase of $66,000 over the third quarter 2022 total, ~~for~~mainly due to fees incurred related to non-litigation-related corporate matters.

●

Net recoveries of previously incurred collection expenses were $70,000 in the ~~first nine months~~third quarter 2023 as compared to net collection expense of ~~2021. Significant variances included~~$16,000 in the ~~following:~~third quarter 2022, a net decrease in expense of $86,000.

~~Net gains~~Automated teller machine and interchange expense of $504,000 increased $107,000 from ~~sales of loans of $733,000 decreased $2,053,000 reflecting a reduction in volume of residential mortgage loans sold.~~

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

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

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

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

●

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

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

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Data processing and telecommunications expense of ~~$5,062,000~~$1,823,000 increased ~~$720,000,~~$104,000 from the third quarter 2022, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

Pennsylvania shares tax expense of $403,000 is lower by $84,000 from the third quarter 2022, consistent with a reduction in C&N Bank’s equity that provides the base for determining the annual tax.

Net occupancy and equipment expense of ~~$4,217,000 increased $477,000, including computer supplies and repairs and maintenance related to IT and Digital departments and increases related to a new branch location in Lancaster, PA~~$1,268,000 decreased $230,000 from the third quarter 2022 total, as ~~well as~~2022 included accelerated depreciation expense of $205,000 related to planned closures of two branches in November 2022.

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

●

The income tax provision of ~~$3,959,000,~~$1,846,000, or ~~17.4%~~19.6% of pre-tax income for the third quarter 2023 increased $988,000 from $858,000, or 16.1% of pre-tax income for the third quarter 2022. The higher provision in 2023 reflects the increase in pre-tax income of $4,124,000. The higher effective tax rate in the third quarter 2023 as compared to the third quarter 2022 reflects the impact of an increase in nondeductible interest expense associated with funding for tax-exempt securities and loans.

Nine Months Ended September 30, 2023 as Compared to Nine Months Ended September 30, 2022

Net income for the nine-month period ended September 30, 2023 was $19,887,000, or $1.29 per diluted share, as compared to $18,839,000, or $1.21 per diluted share, for the first nine months of 2022. Significant variances were as follows:

●

Net interest income totaled $60,806,000 in the nine months ended September 30, 2023, $30,000 lower than 2022, reflecting an increase in interest expense of $16,506,000 (includes $11,581,000 interest on deposits and $4,925,000 interest on borrowings) and an increase of $16,476,000 in interest and dividend income (includes $16,022,000 in interest and fees on loans). The interest rate spread decreased ~~$1,497,000~~0.56%, as the average rate on interest-bearing liabilities was higher by 1.29% while the average yield on earning assets increased 0.73%. The net interest margin was 3.53% for the first nine months of 2023, down from ~~$5,456,000, or 19.0%~~3.72% in the corresponding period of ~~pre-tax income for~~2022.

●

For the nine months ended September 30, ~~2021.~~2023, there was a credit for credit losses (reduction in expense) of $765,000 compared to a provision of $4,993,000 for the first nine months of 2022, resulting in a net decrease in expense of $5,758,000. The ~~lower provision~~credit for the first nine months of 2023 included a credit related to loans receivable of $409,000 and a credit related to off-balance sheet exposures of $356,000. The credit related to loans receivable and off-balance sheet exposures was mainly attributable to qualitative adjustments in ~~2022 includes the impact~~concentrations of credit based on loan type, lending policies and procedures and changes in external indexes, as well as a reduction in ~~pre-tax income.~~the Corporation’s average net charge-off experience, used in the calculation of the ACL. The ~~lower effective tax rate in 2022 includes the impact of higher tax-exempt interest~~ACL as a percentage of ~~pre-tax~~gross loans receivable was 0.99% at September 30, 2023 as compared to 1.08% at January 1, 2023 upon the initial adoption of CECL.

●

Noninterest income totaled $18,739,000 in the first nine months of 2023, up $416,000 from the total for the first nine months of 2022. Significant variances included the following:

Other noninterest income of $3,442,000 increased $776,000 as dividends on FHLB-Pittsburgh stock totaled $830,000, an increase of $442,000. Additionally, in the first nine months of 2023, the Corporation recognized income of $63,000 from dividends on Federal Reserve Bank stock with no comparable amount in 2022 and income of $160,000, with no comparable amount in 2022, from a ~~larger permanent difference (deduction)~~conversion assistance payment received related to ~~restricted stock compensation~~a change in wealth management platform for providing brokerage and investment advisory services.

Service charges on deposit accounts of $4,121,000 increased $459,000 as the ~~benefit~~volume of consumer and business overdraft activity increased and included in first nine months of 2022 there was a ~~$301,000~~ reduction in ~~expense from~~income of $290,000 related to refunds of consumer overdraft fees as the ~~reversal~~result of ~~tax penalties being non-taxable.~~updated regulatory guidance on certain overdraft fees.

~~TABLE I – QUARTERLY FINANCIAL DATA~~

(Dollars In Thousands,

For the Three Months Ended :
Except Per Share Data)

September 30,

June 30,

March 31,

December 31,

September 30,

June 30,

March 31,
(Unaudited)

2022

2022

2022

2021

2021

2021

2021
Interest income

$
23,710

$
21,309

$
21,773

$
21,246

$
21,073

$
20,428

$
21,754
Interest expense

2,831

1,684

1,441

1,530

1,614

1,747

1,671
Net interest income

20,879

19,625

20,332

19,716

19,459

18,681

20,083
Provision for loan losses

3,794

308

891

1,128

1,530

744

259
Net interest income after provision for loan losses

17,085

19,317

19,441

18,588

17,929

17,937

19,824
Noninterest income

5,671

6,829

5,823

6,415

6,382

6,302

6,782
Noninterest expense

17,443

17,039

16,886

16,018

15,346

15,399

15,709
Income before income tax provision

5,313

9,107

8,378

8,985

8,965

8,840

10,897
Income tax provision

858

1,618

1,483

1,677

1,566

1,780

2,110
Net income

$
4,455

$
7,489

$
6,895

$
7,308

$
7,399

$
7,060

$
8,787
Net income attributable to common shares

$
4,416

$
7,419

$
6,835

$
7,256

$
7,336

$
6,999

$
8,722
Basic earnings per common share

$
0.29

$
0.48

$
0.44

$
0.46

$
0.47

$
0.44

$
0.55
Diluted earnings per common share

$
0.29

$
0.48

$
0.44

$
0.46

$
0.47

$
0.44

$
0.55

~~NONINTEREST INCOME~~

~~TABLE II – COMPARISON OF NONINTEREST INCOME~~

(Dollars in Thousands)

Three Months Ended

September 30,

$

%

2022

2021

Change

Change

Trust revenue

$
1,744

$
1,821

$
(77)

(4.2)
%
Brokerage and insurance revenue

696

560

136

24.3
%
Service charges on deposit accounts

1,105

1,249

(144)

(11.5)
%
Interchange revenue from debit card transactions

1,031

975

56

5.7
%
Net gains from sales of loans

131

797

(666)

(83.6)
%
Loan servicing fees, net

189

153

36

23.5
%
Increase in cash surrender value of life insurance

133

139

(6)

(4.3)
%
Other noninterest income

622

665

(43)

(6.5)
%
Realized gains on available-for-sale debt securities, net

20

23

(3)

(13.0)
%
Total noninterest income

$
5,671

$
6,382

$
(711)

(11.1)
%

Trust revenue of $5,500,000 increased $255,000 reflecting an increase consistent with recent appreciation in the trading prices of many U.S. equity securities and an increase in fees from services provided to estates.

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(Dollars in Thousands)

Nine Months Ended

September 30,

$

%

2022

2021

Change

Change

Trust revenue

$
5,245

$
5,254

$
(9)

(0.2)
%
Brokerage and insurance revenue

1,784

1,392

392

28.2
%
Service charges on deposit accounts

3,662

3,337

325

9.7
%
Interchange revenue from debit card transactions

3,050

2,854

196

6.9
%
Net gains from sales of loans

733

2,786

(2,053)

(73.7)
%
Loan servicing fees, net

757

547

210

38.4
%
Increase in cash surrender value of life insurance

405

434

(29)

(6.7)
%
Other noninterest income

2,666

2,837

(171)

(6.0)
%
Realized gains on available-for-sale debt securities, net

21

25

(4)

(16.0)
%
Total noninterest income

$
18,323

$
19,466

$
(1,143)

(5.9)
%

Brokerage and insurance revenue of $1,189,000 decreased $595,000 due to a reduction in sales volume.

Loan servicing fees, net, of $466,000 decreased $291,000, as the fair value of servicing rights decreased $136,000 in the first nine months of 2023 as compared to an increase of $128,000 in the first nine months of 2022.

Net gains from sale of loans of $450,000 decreased $283,000, reflecting a reduction in volume of residential mortgage loans sold.

●

Noninterest expense totaled $55,749,000 for the first nine months of 2023, an increase of $4,381,000 from the total for the first nine months of 2022. Significant variances included the following:

Other noninterest expense of $8,443,000 increased $2,133,000. Within this category, significant variances included the following:

●

Other operational losses included $168,000 of expense related to check fraud losses in 2023 with no corresponding amount in 2022 as well as a net increase in expense of $263,000 to $32,000 in other losses in the first month nine months of 2023 from a net reduction in expense of $231,000 in the first nine months of 2022. Most of the reduction in other losses in 2022 was from recoveries or reversals of previously recorded charges related to Trust Department tax compliance matters.

●

FDIC insurance expense increased $366,000, reflecting the impact of the increase in base deposit insurance assessment rate previously described.

●

Legal fees totaled $700,000 in the first nine months of 2023, an increase of $359,000, mainly due to fees incurred related to non-litigation-related corporate matters.

●

In the nine-month period ended September 30, 2023, the allowance for disallowed SBA claims decreased $35,000, resulting in a reduction in expense of the same amount, reflecting better than previously estimated claims experience. In comparison, the reduction in expense in the first nine months of 2022 was $367,000. At September 30, 2023, the allowance for disallowed SBA claims, which was included in other liabilities, was $55,000.

Salaries and employee benefits expense of $33,082,000 increased $1,384,000, including an increase in base salaries expense of $1,363,000, or 6.5%.

Data processing and telecommunications expense of $5,659,000 increased $597,000, including the impact of increases in software licensing and maintenance costs as well as costs related to enhancements of data management capabilities.

Professional fees of $1,988,000 increased $498,000, including $389,000 of conversion costs related to a change in wealth management platform for providing brokerage and investment advisory services.

Pennsylvania shares tax expense of $1,210,000 for the first nine months of 2023 is lower by $253,000, consistent with a reduction in C&N Bank’s equity that provides the base for determining the annual tax.

●

The income tax provision of $4,674,000, or 19.0% of pre-tax income for the nine months ended September 30, 2023 increased $715,000 from $3,959,000, or 17.4% of pre-tax income for the nine months ended September 30, 2022. The higher provision in 2023 reflects the increase in pre-tax income of $1,763,000. The higher effective rate in 2023 includes: (1) the impact of the permanent difference related to stock-based compensation resulting in an increase in taxable income in 2023 as compared to a deduction in 2022 due to the reduction in the Corporation’s stock price; and (2) an increase in nondeductible interest expense.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE I – QUARTERLY FINANCIAL DATA


(Dollars In Thousands,	For the Three Months Ended :
Except Per Share Data)	September 30,		June 30,		March 31,		December 31,		September 30,
(Unaudited)	2023		2023		2023		2022		2022
Interest income	$	29,118	$	28,011	$	26,139	$	25,855	$	23,710
Interest expense		9,455		7,649		5,358		3,563		2,831
Net interest income		19,663		20,362		20,781		22,292		20,879
(Credit) provision for credit losses		(1,225)		812		(352)		2,262		3,794
Net interest income after (credit) provision for credit losses		20,888		19,550		21,133		20,030		17,085
Noninterest income		6,489		6,634		5,616		6,109		5,671
Noninterest expense		17,940		18,722		19,087		16,587		17,443
Income before income tax provision		9,437		7,462		7,662		9,552		5,313
Income tax provision		1,846		1,419		1,409		1,773		858
Net income	$	7,591	$	6,043	$	6,253	$	7,779	$	4,455
Net income attributable to common shares	$	7,534	$	5,996	$	6,201	$	7,711	$	4,416
Basic earnings per common share	$	0.50	$	0.39	$	0.40	$	0.50	$	0.29
Diluted earnings per common share	$	0.50	$	0.39	$	0.40	$	0.50	$	0.29

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST INCOME

TABLE II – COMPARISON OF NONINTEREST INCOME


(Dollars in Thousands)	Three Months Ended
	September 30,					$	%
	2023		2022			Change	Change
Trust revenue	$	1,919	$	1,744	$	175	10.0	%
Brokerage and insurance revenue		394		696		(302)	(43.4)	%
Service charges on deposit accounts		1,443		1,105		338	30.6	%
Interchange revenue from debit card transactions		1,098		1,031		67	6.5	%
Net gains from sales of loans		237		131		106	80.9	%
Loan servicing fees, net		154		189		(35)	(18.5)	%
Increase in cash surrender value of life insurance		160		133		27	20.3	%
Other noninterest income		1,084		622		462	74.3	%
Realized gains on available-for-sale debt securities, net		0		20		(20)	(100.0)	%
Total noninterest income	$	6,489	$	5,671	$	818	14.4	%


(Dollars in Thousands)	Nine Months Ended
	September 30,					$	%
	2023		2022			Change	Change
Trust revenue	$	5,500	$	5,245	$	255	4.9	%
Brokerage and insurance revenue		1,189		1,784		(595)	(33.4)	%
Service charges on deposit accounts		4,121		3,662		459	12.5	%
Interchange revenue from debit card transactions		3,115		3,050		65	2.1	%
Net gains from sales of loans		450		733		(283)	(38.6)	%
Loan servicing fees, net		466		757		(291)	(38.4)	%
Increase in cash surrender value of life insurance		450		405		45	11.1	%
Other noninterest income		3,442		2,666		776	29.1	%
Realized gains on available-for-sale debt securities, net		6		21		(15)	(71.4)	%
Total noninterest income	$	18,739	$	18,323	$	416	2.3	%

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST EXPENSE

TABLE III - COMPARISON OF NONINTEREST EXPENSE


(Dollars in Thousands)	Three Months Ended								Three Months Ended
	September 30,				$		%		September 30,				$		%
	2022		2021		Change		Change		2023		2022		Change		Change
Salaries and employee benefits	$	10,826	$	9,427	$	1,399	14.8	%	$	10,878	$	10,826	$	52	0.5	%
Net occupancy and equipment expense		1,498		1,217		281	23.1	%		1,268		1,498		(230)	(15.4)	%
Data processing and telecommunications expense		1,719		1,475		244	16.5	%		1,823		1,719		104	6.1	%
Automated teller machine and interchange expense		397		357		40	11.2	%		504		397		107	27.0	%
Pennsylvania shares tax		487		482		5	1.0	%		403		487		(84)	(17.2)	%
Professional fees		521		538		(17)	(3.2)	%		487		521		(34)	(6.5)	%
Other noninterest expense		1,995		1,850		145	7.8	%		2,577		1,995		582	29.2	%
Total noninterest expense	$	17,443	$	15,346	$	2,097	13.7	%	$	17,940	$	17,443	$	497	2.8	%


(Dollars in Thousands)	Nine Months Ended								Nine Months Ended
	September 30,				$		%		September 30,				$		%
	2022		2021		Change		Change		2023		2022		Change		Change
Salaries and employee benefits	$	31,698	$	27,821	$	3,877	13.9	%	$	33,082	$	31,698	$	1,384	4.4	%
Net occupancy and equipment expense		4,217		3,740		477	12.8	%		3,993		4,217		(224)	(5.3)	%
Data processing and telecommunications expense		5,062		4,342		720	16.6	%		5,659		5,062		597	11.8	%
Automated teller machine and interchange expense		1,128		1,049		79	7.5	%		1,374		1,128		246	21.8	%
Pennsylvania shares tax		1,463		1,463		0	0.0	%		1,210		1,463		(253)	(17.3)	%
Professional fees		1,490		1,683		(193)	(11.5)	%		1,988		1,490		498	33.4	%
Other noninterest expense		6,310		6,356		(46)	(0.7)	%		8,443		6,310		2,133	33.8	%
Total noninterest expense	$	51,368	$	46,454	$	4,914	10.6	%	$	55,749	$	51,368	$	4,381	8.5	%

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

CRITICAL ACCOUNTING POLICIES

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

Allowance for ~~Loan~~Credit Losses on Loans – A material estimate that is particularly susceptible to significant change is the determination of the allowance for ~~loan losses.~~credit losses (ACL) on loans. The Corporation maintains an ~~allowance for loan losses that~~ACL on loans which represents management’s estimate of expected net charge-offs over the life of the loans. The ACL includes two primary components: (i) an allowance established on loans which share similar risk characteristics collectively evaluated for credit losses ~~inherent~~(collective basis), and (ii) an allowance established on loans which do not share similar risk characteristics with any loan segment and which are individually evaluated for credit losses (individual basis). Management considers the determination of the ACL on loans to be critical because it requires significant judgment regarding estimates of expected credit losses based on the Corporation’s historical loss experience, current conditions and economic forecasts. Management’s evaluation is based upon a continuous review of the Corporation’s loans, with consideration given to evaluations resulting from examinations performed by regulatory authorities. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for determining the ACL, and additional discussion of the ACL is provided in a separate section of Management’s Discussion and Analysis.

The ACL may increase or decrease due to changes in economic conditions affecting borrowers and macroeconomic variables, including new information regarding existing problem loans, identification of additional problem loans, changes in the ~~loan portfolio~~fair value of underlying collateral, unforeseen events such as ~~of the balance sheet date~~natural disasters and ~~recorded as a reduction of the investment in loans. Management believes~~pandemics, and other factors. Because current economic conditions and

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

forecasts can change and future events are inherently difficult to predict, the ~~allowance for loan losses is adequate and reasonable. Note 6 to the unaudited consolidated financial statements provides an overview~~anticipated amount 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 recognizeestimated credit losses on loans, ~~changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part~~and therefore the appropriateness 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.ACL, could change significantly.

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

NET INTEREST INCOME

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables IV, V and VI include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, ~~2022~~2023 and ~~2021.~~2022. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. The Corporation believes presentation of net interest income on a fully taxable-equivalent basis provides investors with meaningful information for purposes of comparing returns on tax-exempt securities and loans with returns on taxable securities and loans. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.

Three-Month Periods Ended September 30, ~~2022~~2023 and ~~2021~~2022

For the three-month periods, fully taxable equivalent net interest income (a non-GAAP measure) of $19,875,000 in 2023 was ~~$21,188,000 in 2022, which was $1,437,000 (7.3%~~$1,313,000 (6.2%) ~~higher~~lower than in ~~2021. Interest~~2022. The decrease in net interest income reflected an increase in interest expense of $6,624,000 (includes $5,292,000 interest on deposits and $1,332,000 in interest on borrowings) and an increase of $5,311,000 in total interest income. As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income in the third quarter ~~2022 was $24,019,000 which was $2,654,000 higher~~2023 as compared to ~~2021. Interest expense~~third quarter 2022 by $255,000, while the net impact of ~~$2,831,000~~changes in ~~2022 was $1,217,000 higher than in 2021.~~interest rates (primarily increases) decreased net interest income by $1,568,000. As presented in Table V, the Net Interest Margin was ~~3.69%~~3.35% in ~~2022~~the third quarter 2023 as compared to ~~3.59%~~3.69% in ~~2021,~~the third quarter 2022, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) ~~remained unchanged at~~decreased to 2.73% in 2023 from 3.46%. in 2022. The average yield on earning assets of ~~4.18%~~4.94% was ~~0.29%~~0.76% higher in ~~2022~~2023 as compared to ~~2021,~~2022, and the average rate on interest-bearing liabilities of ~~0.72%~~2.21% in ~~2022~~2023 was ~~0.29%~~1.49% higher.

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

INTEREST INCOME AND EARNING ASSETS

Interest income totaled ~~$24,019,000~~$29,330,000 in ~~2022,~~2023, an increase of ~~$2,654,000~~$5,311,000, or 22.1% from ~~2021.~~2022.

Interest and fees from loans receivable increased ~~$1,623,000~~$5,489,000 in ~~2022~~2023 as compared to ~~2021. Total interest and fees~~2022. The fully taxable equivalent yield on loans in 2023 increased to 5.72% from ~~loans excluding PPP loans increased $3,144,000~~4.91% in 2022, ~~as compared~~reflecting the effects of rising interest rates on the loan portfolio. Average outstanding loans receivable increased $142,728,000 (8.5%) to ~~2021. Interest~~$1,816,998,000 in 2023 from $1,674,270,000 in 2022. The Corporation has experienced growth in commercial real estate and ~~fees on PPP~~residential mortgage loans over the last three quarters of 2022 and first nine months of 2023.

Income from interest-bearing due from banks totaled ~~$118,000~~$345,000 in ~~the third quarter 2022, a decrease~~2023, an increase of ~~$1,521,000~~$169,000 from the ~~third quarter 2021,~~total for 2022. The average yield on interest-bearing due from banks was 4.31% in 2023, up from 2.03% in 2022. The average balance of interest-bearing due from banks was $31,729,000 in 2023, down from $34,465,000 in 2022. Within this category, the largest asset balance in 2023 and 2022 has been interest-bearing deposits held with the Federal Reserve.

Interest income from available-for-sale debt securities, on a fully taxable-equivalent basis, totaled $2,758,000 in 2023, down $327,000 from 2022, as ~~previously deferred fees were recognized~~the average balance (at amortized cost) of available-for-sale debt securities decreased $60,776,000. The average yield on available-for-sale debt securities was 2.17% in ~~income upon the SBA’s repayment of loans based on forgiveness of the underlying borrowers.~~2023 and 2022.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense increased $6,624,000 to $9,455,000 in 2023 from $2,831,000 in 2022.

Interest expense on deposits increased $5,292,000, as the average rate on interest-bearing deposits increased to 1.93% in 2023 from 0.54% in 2022. Average total deposits (interest-bearing and noninterest-bearing) amounted to $1,990,092,000 for the third quarter 2023, down $8,491,000 (0.4%) from the third quarter 2022. Within average total deposits, average brokered deposits (primarily time and money market) were $60,829,000 with an average interest rate of 4.98% in the third quarter 2023, up from $39,074,000 with an average interest rate of 2.51% in the third quarter 2022. The deposit mix has changed significantly over the past several months as businesses and consumers have become more interest-rate sensitive in light of higher market rates. Average time deposits increased $107,808,000 and average interest checking deposits increased $69,427,000, while the average total balance of money market accounts decreased $98,152,000, average noninterest-bearing demand deposits decreased $58,392,000 and average savings deposits decreased $29,182,000.

Interest expense on borrowed funds increased $1,332,000 in 2023 as compared to 2022, as the Corporation utilized higher levels of short-term and long-term FHLB borrowings to help provide funding for loan growth. Interest expense on short-term borrowings was $677,000 in 2023, up from $179,000 in 2022. The average balance of short-term borrowings increased to $49,157,000 in 2023 from $33,970,000 in 2022. The average rate on short-term borrowings was 5.46% in 2023 compared to 2.09% in 2022. Interest expense on long-term borrowings (FHLB advances) increased $832,000 to $1,164,000 in 2023 from $332,000 in 2022. The average balance of long-term borrowings was $119,395,000 at an average rate of 3.87% in 2023, up from an average balance of $51,628,000 at an average rate of 2.55% in 2022. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on total borrowed funds was 4.18% in 2023 compared to 2.73% in 2022.

Nine-Month Periods Ended September 30, 2023 and 2022

For the nine-month periods, fully taxable equivalent net interest income was $61,526,000 in 2023, which was $233,000 (0.4%) lower than in 2022. Similar to the discussion for the third quarter 2023, the decrease in net interest income reflected an increase in interest expense of $16,506,000 (includes $11,581,000 interest on deposits and $4,925,000 in interest on borrowings) and an increase of $16,273,000 in total interest income. As presented in Table VI, the net impact of changes in volume of earning assets and interest-bearing liabilities increased net interest income for the nine months ended September 30, 2023 over the nine months ended September 30, 2022 by $2,482,000, while the net impact of changes in interest rates (primarily increases) decreased net interest income by $2,715,000. As presented in Table V, the Net Interest Margin was 3.53% in the first nine months of 2023 as compared to 3.72% in the first nine months of 2022, 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 2.99% in 2023 from 3.55% in 2022. The average yield on earning assets of 4.81% was 0.73% higher in 2023 as compared to 2022, while the average rate on interest-bearing liabilities of 1.82% in 2023 was 1.29% higher as compared to 2022.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $83,988,000 in 2023, an increase of $16,273,000 from 2022.

Interest and fees from loans receivable increased $16,058,000 in 2023 as compared to 2022. In the nine-month period ended September 30, 2023, the fully taxable equivalent yield on loans was 5.60%, up from 4.86% in the first nine months of 2022, reflecting the effects of rising interest rates on the loan portfolio. Average outstanding loans receivable increased ~~$82,413,000 (5.2%~~$173,103,000 (10.8%) to ~~$1,674,270,000~~$1,777,238,000 in 2023 from $1,604,135,000 in 2022. As noted above, the Corporation has experienced growth in outstanding commercial real estate and residential mortgage loans over the last three quarters of 2022 and first nine months of 2023.

Income from ~~$1,591,857,000~~interest-bearing due from banks was $932,000 in ~~2021, despite a reduction in average PPP loans~~2023, an increase of ~~$83,038,000. Average total loans outstanding, excluding PPP loans, increased $165,451,000 (11.0%).~~

$597,000 from 2022. The average yield on ~~loans~~interest-bearing due from banks was 4.01% in ~~the third quarter 2022 was 4.91%,~~2023, up from ~~4.76%~~0.81% in ~~the third quarter 2021. Excluding PPP loans, the~~2022. The average ~~yield on loans~~balance of interest-bearing due from banks was ~~4.90%~~$31,076,000 in ~~the third quarter 2022, up~~2023, down from ~~4.60% excluding PPP loans~~$55,154,000 in ~~the third quarter 2021.~~2022. The ~~increase~~reduction in ~~loan yields~~interest-bearing due from bank balances reflects the ~~impact~~use of ~~higher interest rates on loans originated~~funds to help support loan growth. Within this category, the largest asset balance in 2023 and 2022 ~~and higher yields on floating-rate loans. Floating-rate loans totaled approximately 18%~~has been interest-bearing deposits held with the Federal Reserve.

Table of ~~gross loans receivable at September 30, 2022.~~Contents

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Interest income from available-for-sale debt securities ~~increased $939,000~~decreased $353,000 in ~~2022~~2023 from ~~2021.~~2022. The average balance of available-for-sale debt securities (at amortized cost) ~~increased~~decreased to ~~$564,920,000~~$522,600,000 in 2023 from $557,155,000 in 2022, as net proceeds from ~~$391,148,000 in 2021. The increase in available-for-sale debt~~maturities and sales of securities ~~reflects the investment of funds, primarily in the fourth quarter 2021 and first quarter 2022, that would otherwise~~ have ~~represented excess cash.~~been used to help fund loan growth. The average yield on available-for-sale debt securities was ~~2.17%~~2.20% for ~~2022, down slightly from 2.18%~~2023 as compared to 2.15% in ~~2021.~~

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

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

For the ~~three-month~~nine-month periods, interest expense increased ~~$1,217,000~~$16,506,000 to ~~$2,831,000~~$22,462,000 in ~~2022~~2023 from ~~$1,614,000~~$5,956,000 in ~~2021.~~ 2022.

Interest expense on deposits increased ~~$909,000,~~$11,581,000, as the average rate on interest-bearing deposits increased to ~~0.54%~~1.45% in ~~2022~~2023 from ~~0.30%~~0.38% in 2021. The increase in average rate on deposits includes increases of 0.40% on time deposits, 0.34% on money market accounts and 0.22% on interest checking accounts. The Corporation’s deposit rates have increased in response to the impact on market rates of increases in the Fed Funds Target Rate. The Fed Funds Target Rate ranged from 0% to 0.25% throughout 2021, while the Federal Reserve implemented a series of rate increases in March, May, June, July, and September 2022 resulting in a Fed Funds Target Rate ranging from 3% to 3.25% at September 30, 2022.

Average total deposits ~~increased $61,825,000 (3.2%~~(interest-bearing and noninterest-bearing) amounted to $1,956,757,000 for the first nine months of 2023, down $7,906,000 (0.4%) from the first nine months of 2022. Within average deposits, average brokered deposits were $40,910,000 at an average rate of 4.56% for the first nine months of 2023 as compared to ~~$1,998,583,000~~$35,423,000 at an average rate of 1.36% in the ~~third quarter 2022 from $1,936,758,000 in~~first nine months of 2022. As noted above, the ~~third quarter 2021.~~deposit mix has changed significantly over the last several months. Average time deposits ~~decreased $14,351,000~~increased $83,501,000 and average ~~money market accounts decreased $7,615,000,~~interest checking deposits increased $46,407,000, while the average total balance of ~~other categories~~money market accounts decreased $103,850,000, the average balances of ~~noninterest-bearing~~noninterest bearing demand deposits decreased $24,014,000 and ~~other~~average savings deposits decreased $9,950,000.

Interest expense on borrowed funds increased ~~$83,791,000. The increase~~$4,925,000 in ~~average deposits includes the impact of funding received by consumers, businesses and municipal entities from government stimulus programs~~2023 as ~~well as growth in commercial deposits from new business.~~

compared to 2022. Interest expense on short-term borrowings of $2,918,000 in ~~the third quarter~~2023 was up from $302,000 in 2022 ~~was $179,000~~ as ~~compared to less than $1,000 in 2021. The~~the average balance of short-term borrowings increased to ~~$33,970,000~~$75,978,000 in ~~2022~~2023 from ~~$2,185,000~~$24,306,000 in ~~2021 reflecting an increase in overnight borrowings to provide temporary funding to support loan growth.~~2022. The average rate on short-term borrowings was ~~2.09%~~5.13% in 2023 compared to 1.66% in 2022.

Interest expense on long-term borrowings (FHLB advances) increased ~~$245,000~~$2,465,000 to ~~$332,000~~$2,901,000 in ~~2022~~2023 from ~~$87,000~~$436,000 in ~~2021.~~2022. The average balance of long-term borrowings was ~~$51,628,000~~$103,817,000 in ~~2022,~~2023, up from an average balance of ~~$41,083,000~~$32,509,000 in ~~2021.~~2022. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was ~~2.55%~~3.74% in ~~2022~~2023 compared to ~~0.84%~~1.79% in ~~2021.~~

2022. Interest expense on subordinated debt decreased ~~$117,000~~$158,000 to ~~$229,000~~$691,000 in ~~2022~~2023 from ~~$346,000~~$849,000 in ~~2021.~~2022. The average balance of subordinated debt decreased to ~~$24,566,000~~$24,648,000 in 2023 from $27,966,000 in 2022, ~~from $32,978,000 in 2021. The~~and the average rate on subordinated debt decreased to ~~3.70%~~3.75% in ~~2022~~2023 from ~~4.16%~~4.06% in ~~2021. In the second quarter 2022, the Corporation redeemed subordinated debt with aggregate par values of $8.5 million and a weighted average interest rate of 6.29%.~~

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

2022.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~Nine-Month Periods Ended September 30, 2022 and 2021~~

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

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

~~INTEREST INCOME AND EARNING ASSETS~~

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

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

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

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

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

Income from interest-bearing due from banks totaled $335,000 in 2022, an increase of $105,000 from 2021. The average yield on interest-bearing due from banks was 0.81% in 2022 and 0.20% in 2021. The average balance of interest-bearing due from banks was $55,154,000 in 2022 as compared to $157,231,000 in 2021. Within this category, the largest asset balance in 2022 and 2021 has been interest-bearing deposits held with the Federal Reserve.

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

~~INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES~~

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

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

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

Interest expense on long-term borrowings (FHLB advances) increased $106,000 to $436,000 in 2022 from $330,000 in 2021. The average balance of long-term borrowings was $32,509,000 in 2022, down from an average balance of $46,863,000 in 2021. Borrowings are classified as long-term within the Tables based on their term at origination or assumption in business combinations. The average rate on long-term borrowings was 1.79% in 2022 compared to 0.94% in 2021.

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

Interest expense on subordinated debt decreased $98,000 to $849,000 in 2022 from $947,000 in 2021. The average balance of subordinated debt increased to $27,966,000 in 2022 from $25,539,000 in 2021. The average rate on subordinated debt decreased to 4.06% in 2022 from 4.96% in 2021 including the net impact of a new issue of subordinated debt of $24,437,000, net, at an effective rate of 3.74% in May 2021 and the redemption of subordinated notes totaling $8,000,000 in the second quarter 2021 and $8,500,000 in the second quarter 2022.

~~Table of Contents~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

TABLE IV - ANALYSIS OF INTEREST INCOME AND EXPENSE


	Three Months Ended							Nine Months Ended						Three Months Ended							Nine Months Ended
	September 30,				Increase/		.	September 30,				Increase/		September 30,				Increase/		.	September 30,				Increase/
(In Thousands)	2022		2021		(Decrease)			2022		2021		(Decrease)		2023		2022		(Decrease)			2023		2022		(Decrease)
INTEREST INCOME
Interest-bearing due from banks	$	176	$	106	$	70		$	335	$	230	$	105	$	345	$	176	$	169		$	932	$	335	$	597
Available-for-sale debt securities:
Taxable		2,138		1,304		834			6,143		3,604		2,539		2,077		2,138		(61)			6,440		6,143		297
Tax-exempt		947		842		105			2,811		2,467		344		681		947		(266)			2,161		2,811		(650)
Total available-for-sale debt securities		3,085		2,146		939			8,954		6,071		2,883		2,758		3,085		(327)			8,601		8,954		(353)
Loans receivable:
Taxable		19,967		16,890		3,077			55,662		51,209		4,453		25,526		19,967		5,559			72,314		55,662		16,652
Paycheck Protection Program - 1st Draw		4		618		(614)			53		3,289		(3,236)
Paycheck Protection Program - 2nd Draw		114		1,021		(907)			846		1,597		(751)
Paycheck Protection Program															3		118		(115)			8		899		(891)
Tax-exempt		635		568		67			1,796		1,639		157		680		635		45			2,093		1,796		297
Total loans receivable		20,720		19,097		1,623			58,357		57,734		623		26,209		20,720		5,489			74,415		58,357		16,058
Other earning assets		38		16		22			69		53		16		18		38		(20)			40		69		(29)
Total Interest Income		24,019		21,365		2,654			67,715		64,088		3,627		29,330		24,019		5,311			83,988		67,715		16,273

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		487		230		257			989		686		303		2,360		487		1,873			4,859		989		3,870
Money market		639		269		370			1,270		895		375		1,669		639		1,030			3,654		1,270		2,384
Savings		66		58		8			191		170		21		60		66		(6)			186		191		(5)
Time deposits		780		506		274			1,562		1,807		(245)		3,175		780		2,395			6,894		1,562		5,332
Total interest-bearing deposits		1,972		1,063		909			4,012		3,558		454		7,264		1,972		5,292			15,593		4,012		11,581
Borrowed funds:
Short-term		179		0		179			302		22		280		677		179		498			2,918		302		2,616
Long-term - FHLB advances		332		87		245			436		330		106		1,164		332		832			2,901		436		2,465
Senior notes, net		119		118		1			357		175		182		120		119		1			359		357		2
Subordinated debt, net		229		346		(117)			849		947		(98)		230		229		1			691		849		(158)
Total borrowed funds		859		551		308			1,944		1,474		470		2,191		859		1,332			6,869		1,944		4,925
Total Interest Expense		2,831		1,614		1,217			5,956		5,032		924		9,455		2,831		6,624			22,462		5,956		16,506

Net Interest Income	$	21,188	$	19,751	$	1,437		$	61,759	$	59,056	$	2,703	$	19,875	$	21,188	$	(1,313)		$	61,526	$	61,759	$	(233)

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


(In Thousands)	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,				Increase/		September 30,				Increase/		September 30,				Increase/		September 30,				Increase/
	2022		2021		(Decrease)		2022		2021		(Decrease)		2023		2022		(Decrease)		2023		2022		(Decrease)
Net Interest Income Under U.S. GAAP	$	20,879	$	19,459	$	1,420	$	60,836	$	58,223	$	2,613	$	19,663	$	20,879	$	(1,216)	$	60,806	$	60,836	$	(30)
Add: fully taxable-equivalent interest income adjustment from tax-exempt securities		179		173		6		553		494		59		84		179		(95)		314		553		(239)
Add: fully taxable-equivalent interest income adjustment from tax-exempt loans		130		119		11		370		339		31		128		130		(2)		406		370		36
Net Interest Income as adjusted to a fully taxable-equivalent basis	$	21,188	$	19,751	$	1,437	$	61,759	$	59,056	$	2,703	$	19,875	$	21,188	$	(1,313)	$	61,526	$	61,759	$	(233)

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE V - Analysis of Average Daily Balances and Rates


(Dollars in Thousands)	Three Months				Three Months				Nine Months				Nine Months				Three Months				Three Months				Nine Months				Nine Months
	Ended		Rate of		Ended		Rate of		Ended		Rate of		Ended		Rate of		Ended		Rate of		Ended		Rate of		Ended		Rate of		Ended		Rate of
	9/30/2022		Return/		9/30/2021		Return/		9/30/2022		Return/		9/30/2021		Return/		9/30/2023		Return/		9/30/2022		Return/		9/30/2023		Return/		9/30/2022		Return/
	Average		Cost of		Average		Cost of		Average		Cost of		Average		Cost of		Average		Cost of		Average		Cost of		Average		Cost of		Average		Cost of
	Balance		Funds %		Balance		Funds %		Balance		Funds %		Balance		Funds %		Balance		Funds %		Balance		Funds %		Balance		Funds %		Balance		Funds %
EARNING ASSETS
Interest-bearing due from banks	$	34,465	2.03	%	$	195,359	0.22	%	$	55,154	0.81	%	$	157,231	0.20	%	$	31,729	4.31	%	$	34,465	2.03	%	$	31,076	4.01	%	$	55,154	0.81	%
Available-for-sale debt securities, at amortized cost:
Taxable		414,147	2.05	%		263,682	1.96	%		408,178	2.01	%		241,716	1.99	%		379,709	2.17	%		414,147	2.05	%		395,070	2.18	%		408,178	2.01	%
Tax-exempt		150,773	2.49	%		127,466	2.62	%		148,977	2.52	%		122,736	2.69	%		124,435	2.17	%		150,773	2.49	%		127,530	2.27	%		148,977	2.52	%
Total available-for-sale debt securities		564,920	2.17	%		391,148	2.18	%		557,155	2.15	%		364,452	2.23	%		504,144	2.17	%		564,920	2.17	%		522,600	2.20	%		557,155	2.15	%
Loans receivable:
Taxable		1,582,245	5.01	%		1,426,503	4.70	%		1,507,756	4.94	%		1,424,457	4.81	%		1,729,835	5.85	%		1,582,245	5.01	%		1,687,444	5.73	%		1,507,756	4.94	%
Paycheck Protection Program - 1st Draw		34	46.68	%		19,625	12.49	%		593	11.95	%		58,900	7.47	%
Paycheck Protection Program - 2nd Draw		4,661	9.70	%		68,108	5.95	%		10,294	10.99	%		58,173	3.67	%
Paycheck Protection Program																		137	8.69	%		4,695	9.97	%		149	7.18	%		10,887	11.04	%
Tax-exempt		87,330	2.88	%		77,621	2.90	%		85,492	2.81	%		69,502	3.15	%		87,026	3.10	%		87,330	2.88	%		89,645	3.12	%		85,492	2.81	%
Total loans receivable		1,674,270	4.91	%		1,591,857	4.76	%		1,604,135	4.86	%		1,611,032	4.79	%		1,816,998	5.72	%		1,674,270	4.91	%		1,777,238	5.60	%		1,604,135	4.86	%
Other earning assets		3,925	3.84	%		2,355	2.70	%		2,750	3.35	%		2,556	2.77	%		1,468	4.86	%		3,925	3.84	%		1,332	4.02	%		2,750	3.35	%
Total Earning Assets		2,277,580	4.18	%		2,180,719	3.89	%		2,219,194	4.08	%		2,135,271	4.01	%		2,354,339	4.94	%		2,277,580	4.18	%		2,332,246	4.81	%		2,219,194	4.08	%
Cash		23,731				24,436				22,527				24,564				22,068				23,731				22,475				22,527
Unrealized (loss) gain on securities		(44,559)				12,411				(28,068)				11,831
Allowance for loan losses		(14,914)				(12,688)				(14,406)				(12,143)
Unrealized loss on securities																		(63,110)				(44,559)				(59,921)				(28,068)
Allowance for credit losses																		(19,540)				(14,914)				(18,472)				(14,406)
Bank-owned life insurance		30,991				30,445				30,857				30,301				31,559				30,991				31,413				30,857
Bank premises and equipment		21,874				20,620				21,494				20,860				21,132				21,874				21,262				21,494
Intangible assets		55,547				56,021				55,655				56,153				55,125				55,547				55,227				55,655
Other assets		57,012				43,947				52,610				43,694				74,483				57,012				70,369				52,610
Total Assets	$	2,407,262			$	2,355,911			$	2,359,863			$	2,310,531			$	2,476,056			$	2,407,262			$	2,454,599			$	2,359,863

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	$	442,647	0.44	%	$	423,371	0.22	%	$	431,344	0.31	%	$	389,349	0.24	%	$	512,074	1.83	%	$	442,647	0.44	%	$	477,751	1.36	%	$	431,344	0.31	%
Money market		438,770	0.58	%		446,385	0.24	%		448,377	0.38	%		428,985	0.28	%		340,618	1.94	%		438,770	0.58	%		344,527	1.42	%		448,377	0.38	%
Savings		261,422	0.10	%		231,093	0.10	%		255,433	0.10	%		224,050	0.10	%		232,240	0.10	%		261,422	0.10	%		245,483	0.10	%		255,433	0.10	%
Time deposits		298,628	1.04	%		312,979	0.64	%		281,673	0.74	%		339,558	0.71	%		406,436	3.10	%		298,628	1.04	%		365,174	2.52	%		281,673	0.74	%
Total interest-bearing deposits		1,441,467	0.54	%		1,413,828	0.30	%		1,416,827	0.38	%		1,381,942	0.34	%		1,491,368	1.93	%		1,441,467	0.54	%		1,432,935	1.45	%		1,416,827	0.38	%
Borrowed funds:
Short-term		33,970	2.09	%		2,185	0.00	%		24,306	1.66	%		7,648	0.38	%		49,157	5.46	%		33,970	2.09	%		75,978	5.13	%		24,306	1.66	%
Long-term - FHLB advances		51,628	2.55	%		41,083	0.84	%		32,509	1.79	%		46,863	0.94	%		119,395	3.87	%		51,628	2.55	%		103,817	3.74	%		32,509	1.79	%
Senior notes, net		14,741	3.20	%		14,674	3.19	%		14,725	3.24	%		7,255	3.23	%		14,808	3.22	%		14,741	3.20	%		14,790	3.25	%		14,725	3.24	%
Subordinated debt, net		24,566	3.70	%		32,978	4.16	%		27,966	4.06	%		25,539	4.96	%		24,676	3.70	%		24,566	3.70	%		24,648	3.75	%		27,966	4.06	%
Total borrowed funds		124,905	2.73	%		90,920	2.40	%		99,506	2.61	%		87,305	2.26	%		208,036	4.18	%		124,905	2.73	%		219,233	4.19	%		99,506	2.61	%
Total Interest-bearing Liabilities		1,566,372	0.72	%		1,504,748	0.43	%		1,516,333	0.53	%		1,469,247	0.46	%		1,699,404	2.21	%		1,566,372	0.72	%		1,652,168	1.82	%		1,516,333	0.53	%
Demand deposits		557,116				522,930				547,836				514,081				498,724				557,116				523,822				547,836
Other liabilities		23,588				25,386				22,565				25,729				30,749				23,588				28,091				22,565
Total Liabilities		2,147,076				2,053,064				2,086,734				2,009,057				2,228,877				2,147,076				2,204,081				2,086,734
Stockholders' equity, excluding accumulated other comprehensive (loss) income		295,086				292,936				295,019				292,017
Accumulated other comprehensive (loss) income		(34,900)				9,911				(21,890)				9,457
Stockholders' equity, excluding accumulated other comprehensive loss																		296,577				295,086				297,386				295,019
Accumulated other comprehensive loss																		(49,398)				(34,900)				(46,868)				(21,890)
Total Stockholders' Equity		260,186				302,847				273,129				301,474				247,179				260,186				250,518				273,129
Total Liabilities and Stockholders' Equity	$	2,407,262			$	2,355,911			$	2,359,863			$	2,310,531			$	2,476,056			$	2,407,262			$	2,454,599			$	2,359,863
Interest Rate Spread			3.46	%			3.46	%			3.55	%			3.55	%			2.73	%			3.46	%			2.99	%			3.55	%
Net Interest Income/Earning Assets			3.69	%			3.59	%			3.72	%			3.70	%			3.35	%			3.69	%			3.53	%			3.72	%

Total Deposits (Interest-bearing and Demand)	$	1,998,583			$	1,936,758			$	1,964,663			$	1,896,023			$	1,990,092			$	1,998,583			$	1,956,757			$	1,964,663

(1)	Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.

(2)	Nonaccrual loans have been included with loans for the purpose of analyzing net interest earnings.

(3)	Rates of return on earning assets and costs of funds are presented on an annualized basis.

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TABLE VI - ANALYSIS OF VOLUME AND RATE CHANGES


(In Thousands)	Three Months Ended 9/30/22 vs. 9/30/21						.	Nine Months Ended 9/30/22 vs. 9/30/21						Three Months Ended 9/30/2023 vs. 9/30/2022						.	Nine Months Ended 9/30/2023 vs. 9/30/2022
	Change in		Change in		Total			Change in		Change in		Total		Change in		Change in		Total			Change in		Change in		Total
	Volume		Rate		Change			Volume		Rate		Change		Volume		Rate		Change			Volume		Rate		Change
EARNING ASSETS
Interest-bearing due from banks	$	(138)	$	208	$	70		$	(229)	$	334	$	105	$	(76)	$	245	$	169		$	(203)	$	800	$	597
Available-for-sale debt securities:
Taxable		779		55		834			2,505		34		2,539		(180)		119		(61)			(202)		499		297
Tax-exempt		147		(42)		105			502		(158)		344		(154)		(112)		(266)			(380)		(270)		(650)
Total available-for-sale debt securities		926		13		939			3,007		(124)		2,883		(334)		7		(327)			(582)		229		(353)
Loans receivable:
Taxable		1,922		1,155		3,077			3,050		1,403		4,453		1,985		3,574		5,559			7,088		9,564		16,652
Paycheck Protection Program - 1st Draw		(796)		182		(614)			(4,473)		1,237		(3,236)
Paycheck Protection Program - 2nd Draw		(1,371)		464		(907)			(2,080)		1,329		(751)
Paycheck Protection Program															(113)		(2)		(115)			(658)		(233)		(891)
Tax-exempt		68		(1)		67			349		(192)		157		(2)		47		45			90		207		297
Total loans receivable		(177)		1,800		1,623			(3,154)		3,777		623		1,870		3,619		5,489			6,520		9,538		16,058
Other earning assets		11		11		22			4		12		16		(26)		6		(20)			(41)		12		(29)
Total Interest Income		622		2,032		2,654			(372)		3,999		3,627		1,434		3,877		5,311			5,694		10,579		16,273

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		16		241		257			80		223		303		73		1,800		1,873			117		3,753		3,870
Money market		(5)		375		370			42		333		375		(175)		1,205		1,030			(357)		2,741		2,384
Savings		7		1		8			23		(2)		21		(8)		2		(6)			(8)		3		(5)
Time deposits		(56)		330		274			(318)		73		(245)		332		2,063		2,395			585		4,747		5,332
Total interest-bearing deposits		(38)		947		909			(173)		627		454		222		5,070		5,292			337		11,244		11,581
Borrowed funds:
Short-term		81		98		179			111		169		280		151		347		498			1,319		1,297		2,616
Long-term - FHLB advances		0		245		245			(124)		230		106		802		30		832			1,650		815		2,465
Senior notes, net		(1)		2		1			181		1		182		1		0		1			2		0		2
Subordinated debt, net		(102)		(15)		(117)			85		(183)		(98)		3		(2)		1			(96)		(62)		(158)
Total borrowed funds		(22)		330		308			253		217		470		957		375		1,332			2,875		2,050		4,925
Total Interest Expense		(60)		1,277		1,217			80		844		924		1,179		5,445		6,624			3,212		13,294		16,506

Net Interest Income	$	682	$	755	$	1,437		$	(452)	$	3,155	$	2,703	$	255	$	(1,568)	$	(1,313)		$	2,482	$	(2,715)	$	(233)

(1)	Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21%.

(2)	The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.

INCOME TAXES

The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. ~~The~~Due to higher levels of pre-tax income in 2023, the income tax provision for the third quarter 2023 of $1,846,000 was $988,000 higher than the provision for the third quarter 2022 and the provision for the nine months ended September 30, 2023 of $4,674,000 was $715,000 higher than the amount for the first nine months of ~~2022 was $3,959,000, which was $1,497,000 lower than the provision for the first nine months of 2021.~~2022. The effective tax rate (tax provision as a percentage of pre-tax income) was ~~17.4%~~19.6% in the third quarter 2023 compared to 16.1% in the third quarter 2022 and 19.0% for the first nine months of ~~2022~~2023 as compared to ~~19.0% in~~17.4% for the first nine months of ~~2021.~~2022. The Corporation’s effective tax rates differ from the statutory rate of 21% ~~in the first nine months of 2022 and 2021~~ principally because of the effects of tax-exempt interest income, nondeductible interest expense, state income taxes and other permanent differences. The lower provision in 2022 includes the impact of a reduction in pre-tax income. The lower effective tax rate in 2022 includes the impact of higher tax-exempt interest income as a percentage of pre-tax income, a larger permanent difference

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

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. The net deferred tax asset at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 represents the following temporary difference components:


	September 30,		December 31,		September 30,		December 31,
(In Thousands)	2022		2021		2023		2022
Deferred tax assets:
Unrealized holding losses on securities	$	15,089	$	0	$	16,024	$	13,391
Allowance for loan losses		3,540		2,935
Allowance for credit losses on loans						3,982		3,648
Purchase accounting adjustments on loans		1,037		1,621		510		938
Deferred compensation		1,112		965		1,300		1,149
Operating leases liability		897		821		818		907
Deferred loan origination fees						715		779
Net operating loss carryforward		689		778		571		659
Accrued incentive compensation		340		529		390		354
Other deferred tax assets		1,778		1,766		1,308		1,115
Total deferred tax assets		24,482		9,415		25,618		22,940

Deferred tax liabilities:
Unrealized holding gains on securities		0		1,278
Defined benefit plans - ASC 835		79		57		119		129
Bank premises and equipment		323		460		280		298
Core deposit intangibles		654		725		566		633
Right-of-use assets from operating leases		897		821		818		907
Other deferred tax liabilities		202		187		104		89
Total deferred tax liabilities		2,155		3,528		1,887		2,056
Deferred tax asset, net	$	22,327	$	5,887	$	23,731	$	20,884

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

Management believes the recorded net deferred tax asset at September 30, ~~2022~~2023 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

SECURITIES

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

parameters.

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The composition of the available-for-sale debt securities portfolio at September 30, 2023, December 31, 2022 and December 31, 2021 ~~and December 31, 2020~~ is as follows:


(Dollars In Thousands)	September 30, 2022					December 31, 2021					December 31, 2020					September 30, 2023					December 31, 2022					December 31, 2021
	Amortized		Fair			Amortized		Fair			Amortized		Fair			Amortized		Fair			Amortized		Fair			Amortized		Fair
	Cost		Value			Cost		Value			Cost		Value			Cost		Value			Cost		Value			Cost		Value
Obligations of the U.S. Treasury	$	35,155	$	31,599		$	25,058	$	24,912		$	12,184	$	12,182		$	33,938	$	30,557		$	35,166	$	31,836		$	25,058	$	24,912
Obligations of U.S. Government agencies		23,939		21,389			23,936		24,091			25,349		26,344			21,372		18,796			25,938		23,430			23,936		24,091
Bank holding company debt securities		28,944		25,432			18,000		17,987			0		0			28,950		22,311			28,945		25,386			18,000		17,987
Obligations of states and political subdivisions:
Tax-exempt		146,847		126,710			143,427		148,028			116,427		122,401			123,598		104,453			146,149		132,623			143,427		148,028
Taxable		69,902		58,317			72,182		72,765			45,230		47,452			65,408		53,457			68,488		56,812			72,182		72,765
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		116,833		102,739			98,048		98,181			36,853		38,176			109,102		94,469			112,782		99,941			98,048		98,181
Residential collateralized mortgage obligations		44,075		39,632			44,015		44,247			56,048		57,467			38,267		33,397			44,868		40,296			44,015		44,247
Commercial mortgage-backed securities		89,349		77,383			86,926		87,468			42,461		45,310			76,627		63,672			91,388		79,686			86,926		87,468
Private label commercial mortgage-backed securities		4,793		4,779			0		0			0		0			8,178		8,026			8,070		8,023			0		0
Total Available-for-Sale Debt Securities	$	559,837	$	487,980		$	511,592	$	517,679		$	334,552	$	349,332		$	505,440	$	429,138		$	561,794	$	498,033		$	511,592	$	517,679

Aggregate Unrealized (Loss) Gain			$	(71,857)				$	6,087				$	14,780				$	(76,302)				$	(63,761)				$	6,087
Aggregate Unrealized (Loss) Gain as a % of Amortized Cost				(12.8)	%				1.2	%				4.4	%				(15.1)	%				(11.3)	%				1.2	%
Market Yield on 5-Year U.S. Treasury Obligations (a)				4.06	%				1.26	%				0.36	%				4.60	%				3.99	%				1.26	%

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

The amortized cost of available-for-sale debt securities increased to $559,837,000 at September 30, 2022 from $511,592,000 at December 31, 2021 and $334,552,000 at December 31, 2020. The increase in the securities portfolio resulted from management’s decision to invest excess funds available from the fast growth in deposits and loan repayments throughout most of 2020, 2021 and the first quarter 2022.

As reflected in the table above, the fair value of available-for-sale securities ~~as of September 30, 2022~~ was lower than the amortized cost basis by ~~$71,857,000,~~$76,302,000, or ~~12.8%.~~15.1% at September 30, 2023 and $63,761,000 (11.3%) at December 31, 2022. In comparison, the aggregate unrealized gain position was $6,087,000 (1.2%) at December 31, ~~2021 and $14,780,000 (4.4%) at December 31, 2020.~~2021. The ~~unrealized decrease~~volatility in the fair value of the portfolio, including the significant reduction in ~~the first nine months of 2022 and in 2021~~fair value, resulted from ~~an increase~~changes in interest rates. As shown above, the market yield on the 5-year U.S. Treasury Note was ~~2.80%~~0.61% higher at September 30, ~~2022~~2023 in comparison to December 31, ~~2021,~~2022, and ~~3.70%~~3.34% higher than at December 31, ~~2020.~~

Management reviewed the Corporation’s holdings as of September 30, 2022 and concluded there were no credit-related declines in fair value and that the unrealized losses on all of the securities in an unrealized loss position are considered temporary. In assessing whether there were other-than-temporary impairment losses, management considered (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis.2021.

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

As described in Note 5 to the unaudited consolidated financial statements, management determined the Corporation does not have the intent to sell, nor is it more likely than not that it will be required to sell, available-for-sale debt securities in an unrealized loss position at September 30, 2023 before it is able to recover the amortized cost basis. Further, management reviewed the Corporation’s holdings as of September 30, 2023 and concluded there were no credit-related declines in fair value. Additional information related to the types of securities held at September 30, 2023, other than securities issued or guaranteed by U.S. Government entities or agencies, is as follows:

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●

Bank holding company debt securities – All of the Corporation’s holdings of bank holding company debt securities were investment grade and there have been no payment defaults. There were seven securities with face amounts ranging from $3 million to $5 million, including one senior security and six subordinated securities. All of the issuers have publicly traded common stock. At September 30, 2023, the securities have external ratings ranging from BBB-/Baa3 to A-.

●

Obligations of states and political subdivisions (municipal bonds) – All of the Corporation’s holdings of municipal bonds were investment grade and there have been no payment defaults. Summary ratings information at September 30, 2023, based on the amortized cost basis and reflecting the lowest enhanced or underlying rating by Moody’s, Standard & Poors or Fitch, is as follows: AAA or pre-refunded – 23% of the portfolio; AA – 71%; A – 6%.

●

Private label commercial mortgage-backed securities (PLCMBS) – There were two PLCMBS securities, both of which were from the most senior payment (subordination) classes of their respective issuances. These securities were investment grade (rated Aaa), and there have been no payment defaults on these securities.

Based on the results of management’s assessment, there was no ACL required on available-for-sale debt securities in an unrealized loss position at September 30, 2023.

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~~credit losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. ~~There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding letters of credit at September 30, 2022, and management~~Management does not expect the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition in ~~2022.~~2023.

Table VII shows the composition of the loan portfolio at September 30, ~~2022~~2023 and at year-end from ~~2017~~2018 through ~~2021.~~2022. The ~~significant loan growth~~segments presented in ~~2019 and 2020 reflects~~Table VII have been revised from those used in prior year disclosures to be consistent with the ~~impact~~pools used in determining the collectively evaluated portion of ~~acquisitions. Also,~~ the ~~Corporation increased~~allowance for credit losses based on the ~~proportion of residential mortgage loans sold into the secondary market, particularly~~CECL methodology in ~~2020 and 2021 when mortgage refinancings and other originations were at historically high volumes, contributing to a reduction of $30,188,000~~2023.

As presented in ~~residential mortgage~~Table VII, total loans outstanding at September 30, ~~2022 compared to~~2023 of $1,830,670,000 was more than double the corresponding total at December 31, 2018. The increase in loans outstanding includes the impact of acquisitions of banks located in Southeastern Pennsylvania in 2019 and 2020. Primarily as a result of the acquisitions, as well as expansion by opening two offices in Southcentral Pennsylvania, the mix of the loan portfolio has changed to become predominantly commercial in nature. At September 30, ~~2022,~~2023, commercial loans represented ~~approximately 64%~~75% of the portfolio while residential ~~mortgage~~ loans totaled ~~35%~~22% of the ~~portfolio.~~portfolio; in comparison, commercial loans totaled 48% and residential loans totaled 47% of the portfolio at December 31, 2018.

Table VII shows an increase in commercial and industrial loans to $222,923,000 at December 31, 2020 followed by reductions in 2021, 2022 and the first nine months of 2023. The elevated balance of commercial and industrial loans at December 31, 2020 included Paycheck Protection Program (PPP) loans of $132,269,000, a substantial portion of which were subsequently repaid. The outstanding balance of PPP loans was $130,000 at September 30, 2023.

At September 30, ~~2022,~~2023, gross loans outstanding ~~totaled $1,690,246,000, an increase of $125,397,000~~increased $90,630,000 from December 31, ~~2021, despite a reduction in PPP~~2022. Gross loans ~~of $24,829,000 due to repayments. Excluding PPP loans, total commercial loans~~outstanding at ~~September 30, 2022 were up $128,813,000 from~~ December 31, ~~2021. Commercial lending activity was particularly robust in~~2022 increased $175,191,000, or 11.2%, from the second and third quarters of 2022 as commercial real estate investors and other business borrowers generally displayed a sense of urgency to execute transactions prior to potential additional increases in interest rates.total at December 31, 2021. The pace of loan growth in the fourth quarter ~~2022~~of 2023 and in ~~2023~~future periods will depend on the impact of the increases in interest rates that have occurred in 2022 and 2023, potential further increases in interest rates, potential deterioration in economic conditions and other factors.

While the Corporation’s lending activities are primarily concentrated in its market areas, a portion of the Corporation’s commercial loan segment consists of participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the “Commercial and industrial”, “Commercial loans secured by real estate”, “Political subdivisions” and “Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to ~~$41,451,000~~$38,995,000 at September 30, ~~2022,~~2023, down from ~~$54,372,000~~$44,723,000 at December 31, ~~2021. As described~~2022.

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At September 30, 2023, the total recorded investment in ~~more detail in the Provision and Allowance for Loan Losses section of Management’s Discussion and Analysis, in the third quarter 2022 the Corporation recorded a partial charge-off of $2,160,000 on a~~non-owner occupied commercial real estate ~~secured participation loan~~loans for which the primary purpose is utilization of office space by third parties was $94,729,000, or 5.2% of total gross loans receivable. Within this segment, at September 30, 2023, there were two loans with a recorded investment of ~~$4,740,000~~$3,963,000 risk rated as substandard and nonaccrual with specific allowance for credit losses totaling $540,000. The remainder of the non-owner occupied commercial real estate loans for the primary purpose of office space utilization totaling $90,766,000 were accruing interest and risk rated Pass at September 30, 2022. At September 30, 2022, the balance of participation loans outstanding includes a total of $13,667,000 to businesses located outside of the Corporation’s market areas. Also, included within participation loans are “leveraged loans,” meaning loans to businesses with minimal tangible book equity and for which the extent of collateral available is limited, though typically at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. Leveraged participation loans totaled $6,600,000 at September 30, 2022 and $7,469,000 at December 31, 2021.2023.

The Corporation originates and sells residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a quasi-government entity. The Corporation also originates and sells residential mortgage loans to the secondary market through the MPF Original program, administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. In late 2019, the Corporation began to originate and sell larger-balance, nonconforming mortgages under the MPF Direct Program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation does not retain servicing rights for loans sold under the MPF Direct Program. Through September 30, ~~2022,~~2023, the Corporation’s activity under the MPF Direct Program has been minimal.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

For loan sales originated under the MPF programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At September 30, ~~2022,~~2023, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to ~~$1,529,000,~~$1,472,000, and the corresponding total outstanding balance of repurchased loans at December 31, ~~2021~~2022 was ~~$1,571,000.~~$1,515,000.

At September 30, ~~2022,~~2023, outstanding balances of loans sold and serviced through the MPF Xtra and Original programs totaled ~~$331,495,000,~~$318,526,000, including loans sold through the MPF Xtra program of ~~$158,612,000~~$151,094,000 and loans sold through the Original program of ~~$172,883,000.~~$167,432,000. At December 31, ~~2021,~~2022, outstanding balances of loans sold and serviced through the two programs totaled ~~$334,741,000,~~$325,677,000, including loans sold through the MPF Xtra program of ~~$165,668,000~~$155,506,000 and loans sold through the Original Program of ~~$169,073,000.~~$170,171,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of September 30, ~~2022~~2023 and December 31, ~~2021.~~

For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At September 30, 2022, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $9,090,000, and the Corporation has recorded a related allowance for credit losses in the amount of $500,000 which is included in accrued interest and other liabilities in the accompanying consolidated balance sheets. At December 31, 2021, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $8,656,000, and the related allowance for credit losses was $635,000. Income related to providing the credit enhancement (included in other noninterest income in the consolidated statements of income) totaled $251,000 for the nine months ended September 30, 2022 and $265,000 for the nine months ended September 30, 2021. A credit for losses related to the credit enhancement obligation (included in other noninterest expense in the consolidated statements of income) of $97,000 was recorded in the nine months ended September 30, 2022 with a provision for losses of $50,000 in the nine months ended September 30, 2021. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

The Corporation is a participating SBA lender. Under the terms of its arrangements with the SBA, the Corporation may originate loans to commercial borrowers, with full-or-partial guarantees by the SBA, subject to the SBA’s underwriting and documentation requirements. Pursuant to an acquisition, the Corporation acquired loans with partial SBA guarantees, or in some cases, loans where the SBA-guaranteed portion of the loans had been sold back to the SBA subject to ongoing compliance with SBA underwriting and documentation requirements. As part of its due diligence, the Corporation reviewed all the purchased loans originated through the various SBA loan programs as of July 1, 2020 and recorded an allowance for SBA claim adjustments. Determination of the allowance was subjective in nature and was based on the Corporation’s assessment of the credit quality of the loans and the quality of the documentation supporting compliance with SBA requirements. The Corporation’s total exposure related to SBA guarantees on purchased loans was $5,992,000 at September 30, 2022 and $12,856,000 at December 31, 2021 with an allowance for SBA claim adjustments (included in accrued interest and other liabilities in the consolidated balance sheets) of $90,000 at September 30, 2022 and $457,000 at December 31, 2021. In the nine months ended September 30, 2022, the Corporation recorded a reduction in other noninterest expense of $367,000 representing amounts realized on SBA claims in excess of prior estimates, as compared to a reduction of $208,000 in the nine months ended September 30, 2021.2022.

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TABLE VII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type

(In Thousands)

September 30,

December 31,


2022

2021

2020

2019

2018

2017
Commercial:










Commercial loans secured by real estate

$
658,861

$
569,840

$
531,810

$
301,227

$
162,611

$
159,266
Commercial and industrial

172,258

159,073

159,577

126,374

91,856

88,276
Paycheck Protection Program - 1st Draw

24

1,356

132,269

0

0

0
Paycheck Protection Program - 2nd Draw

2,011

25,508

0

0

0

0
Political subdivisions

83,725

81,301

53,221

53,570

53,263

59,287
Commercial construction and land

76,194

60,579

42,874

33,555

11,962

14,527
Loans secured by farmland

12,839

11,121

11,736

12,251

7,146

7,255
Multi-family (5 or more) residential

59,315

50,089

55,811

31,070

7,180

7,713
Agricultural loans

2,492

2,351

3,164

4,319

5,659

6,178
Other commercial loans

14,636

17,153

17,289

16,535

13,950

10,986
Total commercial

1,082,355

978,371

1,007,751

578,901

353,627

353,488
Residential mortgage:












Residential mortgage loans - first liens

492,854

483,629

532,947

510,641

372,339

$
359,987
Residential mortgage loans - junior liens

24,208

23,314

27,311

27,503

25,450

25,325
Home equity lines of credit

42,972

39,252

39,301

33,638

34,319

35,758
1-4 Family residential construction

29,950

23,151

20,613

14,798

24,698

26,216
Total residential mortgage

589,984

569,346

620,172

586,580

456,806

447,286
Consumer

17,907

17,132

16,286

16,741

17,130

14,939
Total

1,690,246

1,564,849

1,644,209

1,182,222

827,563

815,713
Less: allowance for loan losses

(16,170)

(13,537)

(11,385)

(9,836)

(9,309)

(8,856)
Loans, net

$
1,674,076

$
1,551,312

$
1,632,824

$
1,172,386

$
818,254

$
806,857


(In Thousands)	September 30,		December 31,
	2023		2022		2021		2020		2019		2018
Commercial real estate - non-owner occupied:
Non-owner occupied	$	503,434	$	454,386	$	358,352	$	328,662	$	208,579	$	115,128
Multi-family (5 or more) residential		61,061		55,406		49,054		54,893		30,474		7,104
1-4 Family - commercial purpose		172,792		165,805		175,027		198,918		147,121		35,176
Total commercial real estate - non-owner occupied		737,287		675,597		582,433		582,473		386,174		157,408
Commercial real estate - owner occupied		231,112		205,910		196,083		191,075		78,729		38,478
All other commercial loans:
Commercial and industrial		80,960		95,368		118,488		222,923		67,288		49,947
Commercial lines of credit		122,189		141,444		106,338		105,802		92,509		65,492
Political subdivisions		80,415		86,663		75,401		46,295		46,054		49,037
Commercial construction and land		91,014		60,892		59,505		41,000		32,717		11,126
Other commercial loans		21,125		25,710		26,498		29,310		28,735		23,130
Total all other commercial loans		395,703		410,077		386,230		445,330		267,303		198,732
Residential mortgage loans:
1-4 Family - residential		385,777		363,005		327,593		356,532		388,415		360,195
1-4 Family residential construction		24,236		30,577		23,151		18,736		14,640		24,698
Total residential mortgage		410,013		393,582		350,744		375,268		403,055		384,893
Consumer loans:
Consumer lines of credit (including HELOCs)		37,736		36,650		33,522		34,566		30,810		31,955
All other consumer		18,819		18,224		15,837		15,497		16,151		16,097
Total consumer		56,555		54,874		49,359		50,063		46,961		48,052
Total		1,830,670		1,740,040		1,564,849		1,644,209		1,182,222		827,563
Less: allowance for credit losses on loans		(18,085)		(16,615)		(13,537)		(11,385)		(9,836)		(9,309)
Loans, net	$	1,812,585	$	1,723,425	$	1,551,312	$	1,632,824	$	1,172,386	$	818,254

~~PROVISION AND ALLOWANCE FOR LOAN LOSSES~~

~~The Corporation maintains an allowance for loan losses that represents management’s estimate~~Additional details regarding the composition of the ~~losses inherent in the~~non-owner occupied commercial real estate loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Note 6 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses.

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

~~The allowance for loan losses was $16,170,000~~ at September 30, 2022, up from $13,537,000 at December 31, 2021. Table IX shows total specific allowances on impaired loans of $427,000 at September 30, 2022, down from $740,000 at December 31, 2021. Table IX also shows the increase in the allowance in 20222023 is ~~mainly related to commercial loans,~~ as ~~the collectively evaluated portion of the allowance related to the commercial segment increased to $9,811,000 at September 30, 2022 from $7,553,000 at December 31, 2021.~~follows:

Table X shows the allowance for loan losses totaled 0.96% of gross loans outstanding at September 30, 2022, up from 0.87% at December 31, 2021 and down from levels in excess of 1.00% from 2017 and 2018. Table X also shows that the total of the allowance and the credit adjustment on purchased non-impaired loans, as a percentage of total loans plus the credit adjustment, was 1.08% at September 30, 2022, in line with ratios from the previous years.

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,
(In Thousands)

2022

2021

2022

2021
Commercial

$
3,504

$
1,503

$
4,255

$
2,297
Residential mortgage

304

3

341

112
Consumer

(14)

24

68

38
Unallocated

0

0

329

86
Total

$
3,794

$
1,530

$
4,993

$
2,533

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

Commercial segment

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,
(In Thousands)

2022

2021

2022

2021
Net change in total specific allowance on impaired loans, adjusted for the effect of net charge-offs

$
2,160

$
596

$
1,997

$
1,154
Increase (decrease) in collectively determined portion of the allowance attributable to:




Changes in loan volume

515

568

2,604

1,061
Changes in historical loss experience factors

705

339

730

82
Changes in qualitative factors

124

0

(1,076)

0
Total provision for loan losses - Commercial segment

$
3,504

$
1,503

$
4,255

$
2,297

Residential mortgage segment

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,
(In Thousands)

2022

2021

2022

2021
Net change in total specific allowance on impaired loans, adjusted for the effect of net charge-offs

$
(1)

$
(2)

$
(18)

$
(17)
Increase (decrease) in collectively determined portion of the allowance attributable to:




Changes in loan volume

256

11

564

222
Changes in historical loss experience factors

(2)

(6)

(56)

(48)
Changes in qualitative factors

51

0

(149)

(45)
Total provision for loan losses - Residential mortgage segment

$
304

$
3

$
341

$
112

Consumer segment

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,
(In Thousands)

2022

2021

2022

2021
Net change in total specific allowance on impaired loans, adjusted for the effect of net charge-offs

$
12

$
17

$
68

$
39
(Decrease) increase in collectively determined portion of the allowance attributable to:




Changes in loan volume

(14)

9

12

13
Changes in historical loss experience factors

(16)

(7)

(11)

(15)
Changes in qualitative factors

4

5

(1)

1
Total (credit) provision for loan losses - Consumer segment

$
(14)

$
24

$
68

$
38


(In Thousands)	September 30,		% of Non-owner		% of
	2023		Occupied CRE		Total Loans
Industrial	$	107,268	21.3	%	5.9	%
Office		94,729	18.8	%	5.2	%
Retail		94,542	18.8	%	5.2	%
Hotels		73,511	14.6	%	4.0	%
Mixed Use		59,702	11.9	%	3.3	%
Other		73,682	14.6	%	4.0	%
Total Non-owner Occupied CRE Loans	$	503,434
Total Gross Loans	$	1,830,670

55PROVISION AND ALLOWANCE FOR CREDIT LOSSES

~~Table~~On January 1, 2023, the Corporation adopted ASU 2016-13 Financial Instruments – Credit Losses (Topic 326): Measurement of ~~Contents~~Credit Losses on Financial Instruments (ASC 326). This standard replaced the incurred loss methodology with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. CECL requires an estimate of credit losses for the remaining estimated life of the financial asset using historical experience, current conditions, and reasonable and supportable forecasts. Note 1 to the unaudited consolidated financial statements provides a detailed explanation of the Corporation’s adopted accounting policies related to the application of CECL.

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

Total - All segments

Three Months Ended

Nine Months Ended

September 30,

September 30,

September 30,

September 30,
(In Thousands)

2022

2021

2022

2021
Net change in total specific allowance on impaired loans, adjusted for the effect of net charge-offs

$
2,171

$
611

$
2,047

$
1,176
Increase (decrease) in collectively determined portion of the allowance attributable to:




Changes in loan volume

757

588

3,180

1,296
Changes in historical loss experience factors

687

326

663

19
Changes in qualitative factors

179

5

(1,226)

(44)
Sub-total

3,794

1,530

4,664

2,447
Unallocated

0

0

329

86
Total provision for loan losses - All segments

$
3,794

$
1,530

$
4,993

$
2,533

AsEffective January 1, 2023, the Corporation adopted ASC 326 using the modified retrospective approach for all financial assets measured at amortized cost and off-balance sheet credit exposures. Results for reporting periods beginning after January 1, 2023 are presented under CECL while prior period amounts continue to be reported in accordance with previously applicable accounting standards (“Incurred Loss”). At January 1, 2023, the impact of adopting CECL included an increase in gross loans receivable of $806,000 as compared to December 31, 2022 and an increase in the ~~tables above,~~allowance for credit losses of $2,104,000 as compared to the ~~provision~~allowance for loan losses determined under the Incurred Loss method at December 31, 2022.

A summary of the credit for credit losses for the third quarter ~~2022 includes~~2023 and for the nine-month period ended September 30, 2023 is as follows:


(In Thousands)	3 Months		9 Months
	Ended		Ended
	September 30,		September 30,
	2023		2023
(Credit) for credit losses:
Loans receivable	$	(933)	$	(409)
Off-balance sheet exposures (1)		(292)		(356)
Total (credit) for credit losses	$	(1,225)	$	(765)

(1)	The (credit) provision for credit losses on off-balance sheet exposures prior to January 1, 2023 was included in other noninterest expense in the consolidated statements of income.

In the third quarter 2023, thecredit for credit losses included the impact of ~~a partial charge-off of $2,160,000 on a commercial real estate secured loan with a principal balance of $6,920,000 at the time of charge-off. This is a participation loan to a borrower~~reductions in the ~~health care industry. The charge-off resulted~~ACL from ~~the borrower’s default due to deterioration~~a reduction in financial performance accompanied by a significant decrease in the appraised value of property at a recently closed facility that had been one of the primary sources of collateral on the loan. Realization of the recorded investment in the loan of $4,760,000 at September 30, 2022 is principally dependent upon the amount of proceeds from sales of the real estate and, if necessary, payments of any shortfall by the guarantors. The third quarter 2022 provision also includes $687,000estimated future net charge-offs related to an economic forecast, qualitative adjustments in concentrations of credit based on loan type, lending policies and procedures and changes in historical loss factors, most of which resulted from the partial charge-off just described. Further, the third quarter 2022 provision includes $757,000 attributable to increases in loan volume resulting from significant loan growth, particularly for the commercial segment, as well as an increase in the collectively determined portion of the allowance related to management’s updated assessment of purchased performing loans.

~~Similar to the discussion of the third quarter 2022 above, the provision for the nine months ended September 30, 2022 includes the impact of the $2,160,000 partial charge-off~~external indexes, and related increase in the Corporation’s historical loss experience as well as $3,180,000 attributable to increases in loan volume. In the nine months ended September 30, 2022, changes in qualitative factors resulted in a reduction in the ~~provision~~Corporation’s average net charge-off experience. Similarly, the credit for credit losses for the first nine months of ~~$1,226,000. The~~2023 included the impact of reductions in the ACL related to the qualitative adjustments described above and a reduction in the provision related to changes in qualitative factors reflects management’s judgment that despite concerns related to the commercial loan described above, the credit quality of the portfolio has generally been improving over the past several quarters.

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

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

~~In the nine months ended September 30, 2022, net charge-offs were $2,360,000, including recoveries of $57,000 and charge-offs of $2,417,000. Table VIII shows the average rate of net charge-offs~~not significant. The ACL as a percentage of gross loans receivable was ~~0.15% in the nine months ended September 30, 2022, and annual average rates ranging from a high of 0.16% in 2020 to a low of 0.02% in 2018.~~

Table X presents information related to past due and impaired loans, and loans that have been modified under terms that are considered TDRs. At September 30, 2022, the recorded investment of $4,760,000 in the commercial loan with the partial charge-off referred to above was classified as nonperforming (nonaccrual) and impaired with no specific allowance. Total nonperforming loans of $20,458,0000.99% at September 30, ~~2022 was down from $21,218,000~~2023 and 1.05% at ~~December 31, 2021. Total nonperforming loans~~June 30, 2023 as ~~a percentage~~compared to 1.08% at January 1, 2023 upon initial adoption of outstanding loans was 1.21% at September 30, 2022, down from 1.36% at December 31, 2021, and nonperforming assets as a percentage of total assets was 0.87% at September 30, 2022, down from 0.94% at December 31, 2021. Table X presents data atCECL. Within the ~~end of each of the years ended December 31, 2017 through 2021. Table X shows that total nonperforming loans as a percentage of loans of 1.21% at September~~credit for

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~~30,~~credit losses on loans in the first nine months of 2023, the net provision related to specific loans was $294,000, including net charge-offs of $225,000 and a net increase in specific allowances on loans of $69,000. In comparison, the provision for loan losses in the first nine months of 2022 ~~though up from December 31, 2019, was lower than~~included $2,047,000 related to specific loans (net decrease in specific allowances on loans of $313,000 and net charge-offs of $2,360,000), an increase of $2,617,000 in the ~~corresponding year-end ratio for all other years presented. Similarly,~~collectively determined portion of the ~~September 30, 2022 ratio of~~allowance and a $329,000 increase in the unallocated portion.

Table X shows that total nonperforming assets as a percentage of total assets ~~of 0.87%~~ was ~~lower than the corresponding ratio for all years presented except December 31, 2019.~~

~~Total impaired loans of $13,309,000~~0.70% at September 30, ~~2022 are~~2023, down ~~$2,425,000~~ from ~~the corresponding amount~~1.04% at December 31, ~~2021~~2022 and lower than that at year-end 2018 through 2021. Total nonperforming assets were $17.4 million at September 30, 2023, down from $25.6 million at December 31, 2022. Similarly, total loans individually evaluated for credit loss decreased to $12.0 million at September 30, 2023 from $19.4 million at December 31, 2022. The net decrease in nonperforming assets at September 30, 2023 compared to December 31, 2022 included the impact of ~~$15,734,000. Although impaired loans without~~ a ~~valuation allowance increased $3,494,000, mainly due to the classification~~$10.0 million payoff in the ~~third~~first quarter ~~2022 as impaired of the~~2023 on a commercial loan ~~with~~relationship that was classified as nonaccrual at December 31, 2022. The reduction also included paydowns totaling $2,262,000 in the first nine months of 2023 on a commercial loan for which partial ~~charge-off described above,~~charge-offs totaling $3,942,000 were recorded in 2022. The remaining carrying value of this loan was $392,000 at September 30, 2023. These reductions were partially offset by the ~~balances~~addition to nonaccrual of ~~purchased credit impaired loans and impaired~~two commercial loan relationships totaling $4,512,000, including two commercial real estate loans with a ~~valuation allowance decreased. Purchased credit impaired loans totaled $3,783,000~~primary purpose of office space utilization totaling $3,963,000, at September 30, ~~2022, down from $6,558,000 at December 31, 2021.~~ 2023.

In the first nine months ~~ended September 30, 2022, the Corporation received pay-offs on~~of 2023, net charge-offs were low by historical standards, totaling $225,000, or 0.01% of average outstanding loans. Table VIII shows annual average net charge-off rates ranging from a ~~few purchased credit impaired loans and recognized interest income~~high of $1,585,000 for the excess received over previous carrying amounts. Total impaired loans with a valuation allowance was $3,396,000 at September 30, 2022, down from $6,540,000 at December 31, 2021. At September 30, 2022, there was one commercial real estate secured loan within this category with a related valuation allowance of $427,000. This loan was also classified as impaired at December 31, 2021, when the balance was $3,409,000 and the allowance was $427,000. There were two other commercial loans classified as impaired at December 31, 2021, with balances totaling $3,136,000 and specific allowances totaling $313,000, that were removed from that classification with the allowances reversed0.26% in 2022 ~~because~~to a low of ~~improved circumstances.~~0.02% in 2018.

Over the period ~~2017-2021~~2018-2022 and the first nine months of ~~2022,~~2023, 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~~individual loans and may significantly impact the provision for ~~loan~~credit losses and the amount of total charge-offs reported in any one period.

Management believes it has been conservative in its decisions concerning identification of ~~impaired~~ loans requiring individual evaluation for credit loss, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of September 30, ~~2022.~~2023. Management continues to closely monitor its commercial loan relationships for possible credit losses and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

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

TABLE VIII - ANALYSIS OF THE ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

(Dollars In Thousands)

Nine Months Ended

September 30,

September 30,

Years Ended December 31,


2022

2021


2021

2020

2019

2018

2017

Balance, beginning of year

$
13,537

$
11,385

$
11,385

$
9,836

$
9,309

$
8,856

$
8,473

Charge-offs:











Commercial

(2,310)

(1,194)

(1,464)

(2,343)

(6)

(165)

(132)

Residential mortgage

0

(11)

(11)

0

(190)

(158)

(197)

Consumer

(107)

(73)

(100)

(122)

(183)

(174)

(150)

Total charge-offs

(2,417)

(1,278)

(1,575)

(2,465)

(379)

(497)

(479)

Recoveries:











Commercial

0

22

22

16

6

317

4

Residential mortgage

18

5

6

44

12

8

19

Consumer

39

33

38

41

39

41

38

Total recoveries

57

60

66

101

57

366

61

Net charge-offs

(2,360)

(1,218)

(1,509)

(2,364)

(322)

(131)

(418)

Provision for loan losses

4,993

2,533

3,661

3,913

849

584

801

Balance, end of period

$
16,170

$
12,700

$
13,537

$
11,385

$
9,836

$
9,309

$
8,856

Net charge-offs as a % of average loans

0.15
%

0.08
%

0.09
%

0.16
%

0.03
%

0.02
%

0.05
%


(Dollars In Thousands)	Nine Months Ended
	September 30,			September 30,			Years Ended December 31,
	2023			2022			2022			2021			2020			2019			2018
Balance, beginning of year	$	16,615		$	13,537		$	13,537		$	11,385		$	9,836		$	9,309		$	8,856
Increase due to adoption of CECL		2,104			0			0			0			0			0			0
Charge-offs		(299)			(2,417)			(4,245)			(1,575)			(2,465)			(379)			(497)
Recoveries		74			57			68			66			101			57			366
Net charge-offs		(225)			(2,360)			(4,177)			(1,509)			(2,364)			(322)			(131)
(Credit) provision for credit losses		(409)			4,993			7,255			3,661			3,913			849			584
Balance, end of period	$	18,085		$	16,170		$	16,615		$	13,537		$	11,385		$	9,836		$	9,309
Net charge-offs as a % of average loans		0.01	%		0.15	%		0.26	%		0.09	%		0.16	%		0.03	%		0.02	%

5759

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IX - COMPONENTS OF THE ALLOWANCE FOR ~~LOAN~~CREDIT LOSSES

(In Thousands)

September 30,

As of December 31,


2022

2021

2020

2019

2018

2017
ASC 310 - Impaired loans - individually evaluated

$
427

$
740

$
925

$
1,051

$
1,605

$
1,279
ASC 450 - Collectively evaluated:












Commercial

9,811

7,553

5,545

3,913

3,102

3,078
Residential mortgage

4,697

4,338

4,091

4,006

3,870

3,841
Consumer

235

235

239

281

233

159
Unallocated

1,000

671

585

585

499

499
Total Allowance

$
16,170

$
13,537

$
11,385

$
9,836

$
9,309

$
8,856

UPON ADOPTION OF CECL


(In Thousands)	September 30,		January 1,
	2023		2023
Loans individually evaluated	$	820	$	751
Loans collectively evaluated:
Commercial real estate - nonowner occupied		9,671		9,641
Commercial real estate - owner occupied		1,803		1,765
All other commercial loans		3,457		3,914
Residential mortgage		1,993		2,407
Consumer		341		241
Total Allowance	$	18,085	$	18,719

PRIOR TO CECL ADOPTION


(In Thousands)	As of December 31,
	2022		2021		2020		2019		2018
ASC 310 - Impaired loans - individually evaluated	$	453	$	740	$	925	$	1,051	$	1,605
ASC 450 - Collectively evaluated:
Commercial		10,845		7,553		5,545		3,913		3,102
Residential mortgage		4,073		4,338		4,091		4,006		3,870
Consumer		244		235		239		281		233
Unallocated		1,000		671		585		585		499
Total Allowance	$	16,615	$	13,537	$	11,385	$	9,836	$	9,309

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TABLE X - PAST DUE LOANS AND ~~IMPAIRED LOANS,~~ NONPERFORMING ASSETS

~~AND TROUBLED DEBT RESTRUCTURINGS (TDRs)~~


(Dollars In Thousands)	September 30,			As of December 31,															September 30,			As of December 31,
	2022			2021			2020			2019			2018			2017			2023			2022			2021			2020			2019			2018
Impaired loans with a valuation allowance	$	3,396		$	6,540		$	8,082		$	3,375		$	4,851		$	4,100
Impaired loans without a valuation allowance		6,130			2,636			2,895			1,670			4,923			5,411
Loans individually evaluated with a valuation allowance																			$	7,861		$	3,460		$	6,540		$	8,082		$	3,375		$	4,851
Loans individually evaluated without a valuation allowance																				4,146			14,871			2,636			2,895			1,670			4,923
Purchased credit impaired loans		3,783			6,558			6,841			441			0			0			0			1,027			6,558			6,841			441			0
Total impaired loans	$	13,309		$	15,734		$	17,818		$	5,486		$	9,774		$	9,511
Total individually evaluated loans																			$	12,007		$	19,358		$	15,734		$	17,818		$	5,486		$	9,774
Total loans past due 30-89 days and still accruing	$	3,041		$	5,106		$	5,918		$	8,889		$	7,142		$	9,449		$	3,675		$	7,079		$	5,106		$	5,918		$	8,889		$	7,142
Nonperforming assets:
Purchased credit impaired loans	$	3,783		$	6,558		$	6,841		$	441		$	0		$	0		$	0		$	1,027		$	6,558		$	6,841		$	441		$	0
Other nonaccrual loans		13,176			12,441			14,575			8,777			13,113			13,404			15,501			22,058			12,441			14,575			8,777			13,113
Total nonaccrual loans		16,959			18,999			21,416			9,218			13,113			13,404			15,501			23,085			18,999			21,416			9,218			13,113
Total loans past due 90 days or more and still accruing		3,499			2,219			1,975			1,207			2,906			3,724			1,292			2,237			2,219			1,975			1,207			2,906
Total nonperforming loans		20,458			21,218			23,391			10,425			16,019			17,128			16,793			25,322			21,218			23,391			10,425			16,019
Foreclosed assets held for sale (real estate)		454			684			1,338			2,886			1,703			1,598			633			275			684			1,338			2,886			1,703
Total nonperforming assets	$	20,912		$	21,902		$	24,729		$	13,311		$	17,722		$	18,726		$	17,426		$	25,597		$	21,902		$	24,729		$	13,311		$	17,722
Loans subject to troubled debt restructurings (TDRs):
Performing	$	231		$	288		$	166		$	889		$	655		$	636
Nonperforming		3,960			5,517			7,285			1,737			2,884			3,027
Total TDRs	$	4,191		$	5,805		$	7,451		$	2,626		$	3,539		$	3,663

Total nonperforming loans as a % of loans		1.21	%		1.36	%		1.42	%		0.88	%		1.94	%		2.10	%		0.92	%		1.46	%		1.36	%		1.42	%		0.88	%		1.94	%
Total nonperforming assets as a % of assets		0.87	%		0.94	%		1.10	%		0.80	%		1.37	%		1.47	%		0.70	%		1.04	%		0.94	%		1.10	%		0.80	%		1.37	%
Allowance for loan losses as a % of total loans		0.96	%		0.87	%		0.69	%		0.83	%		1.12	%		1.09	%
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (a)		1.08	%		1.08	%		1.05	%		0.93	%		1.12	%		1.09	%
Allowance for loan losses as a % of nonperforming loans		79.04	%		63.80	%		48.67	%		94.35	%		58.11	%		51.70	%

(a) Credit adjustment on purchased non-impaired loans at end of period	$	2,095		$	3,335		$	5,979		$	1,216		$	0		$	0
Allowance for loan losses		16,170			13,537			11,385			9,836			9,309			8,856
Total credit adjustment on purchased non-impaired loans at end of period and allowance for loan losses (1)	$	18,265		$	16,872		$	17,364		$	11,052		$	9,309		$	8,856
Total loans receivable	$	1,690,246		$	1,564,849		$	1,644,209		$	1,182,222		$	827,563		$	815,713
Credit adjustment on purchased non-impaired loans at end of period		2,095			3,335			5,979			1,216			0			0
Total (2)	$	1,692,341		$	1,568,184		$	1,650,188		$	1,183,438		$	827,563		$	815,713
Credit adjustment on purchased non-impaired loans and allowance for loan losses as a % of total loans and the credit adjustment (1)/(2)		1.08	%		1.08	%		1.05	%		0.93	%		1.12	%		1.09	%
Allowance for credit losses as a % of total loans																				0.99	%		0.95	%		0.87	%		0.69	%		0.83	%		1.12	%

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

LIQUIDITY

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. ~~At September 30, 2022, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $24,485,000.~~

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

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale debt securities with a carrying value of ~~$23,420,000~~$21,731,000 at September 30, ~~2022.~~2023.

The Corporation’s outstanding, available, and total credit facilities at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 are as follows:


	Outstanding				Available				Total Credit				Outstanding				Available				Total Credit
(In Thousands)	September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,		September 30,		December 31,
	2022		2021		2022		2021		2022		2021		2023		2022		2023		2022		2023		2022
Federal Home Loan Bank of Pittsburgh	$	66,865	$	33,311	$	754,743	$	723,557	$	821,608	$	756,868	$	165,951	$	150,099	$	752,847	$	689,279	$	918,798	$	839,378
Federal Reserve Bank Discount Window		0		0		22,376		13,642		22,376		13,642		0		0		20,766		23,107		20,766		23,107
Other correspondent banks		0		0		95,000		45,000		95,000		45,000		0		0		95,000		95,000		95,000		95,000
Total credit facilities	$	66,865	$	33,311	$	872,119	$	782,199	$	938,984	$	815,510	$	165,951	$	150,099	$	868,613	$	807,386	$	1,034,564	$	957,485

At September 30, 2023, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight and short-term advances of $21,500,000, long-term borrowings of $125,243,000 and letters of credit totaling $19,208,000. At December 31, 2022, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowing of $77,000,000, long-term borrowings of ~~$55,338,000~~$62,272,000 and letters of credit totaling $11,527,000. At December 31, 2021, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings of $27,727,000 and letters of credit totaling $5,584,000.$10,827,000. Additional information regarding borrowed funds is included in Note 8 to the unaudited consolidated financial statements.

Additionally, the Corporation uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. In light of the unrealized loss at September 30, ~~2022~~2023 resulting from increases in interest rates, ~~in 2022,~~ as described in more detail in the Securities section of Management’s Discussion and Analysis, management would be more likely in the near term to utilize securities as collateral for borrowings than to sell securities in such an emergency situation. At September 30, ~~2022,~~2023, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was ~~$218,473,000.~~$227,667,000.

~~Management~~Deposits totaled $2,024,997,000 at September 30, 2023, up $27,404,000 (1.4%) from $1,997,593,000 at December 31, 2022. Excluding brokered deposits, adjusted total deposits at September 30, 2023 were lower by $14,125,000 (0.7%) as compared to December 31, 2022. Brokered deposits, consisting mainly of short-term certificates of deposit, totaled $62,512,000 at September 30, 2023, an increase of $41,529,000 from December 31, 2022. The reduction in total deposits, excluding brokered deposits, included a reduction in the estimated amount of deposits in excess of FDIC insurance levels (uninsured deposit balances) of $86.4 million as compared to December 31, 2022. The net reduction in uninsured deposits resulted from several factors, including the impact of customer funds transferred to higher-yielding investment alternatives and increased use of reciprocal deposits that allow C&N Bank to place customer funds in excess of the FDIC insurance limit with other financial institutions through a deposit placement network in exchange for a matching amount of deposits from other network financial institutions. Reciprocal deposits totaled $220.6 million at September 30, 2023, up $120.8 million from December 31, 2022.

As shown in the table below, at September 30, 2023, estimated uninsured deposits totaled $603.0 million, or 29.5% of total deposits, down from $689.4 million or 34.2% of total deposits at December 31, 2022. Included in uninsured deposits are deposits collateralized by securities (almost exclusively municipal deposits) totaling $188.9 million at September 30, 2023. As shown in the table below, total

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

uninsured and uncollateralized deposits amounted to 20.3% of total deposits at September 30, 2023, down from 24.0% at December 31, 2022.

As summarized in the table that immediately follows, the Corporation’s highly liquid sources of available funds described above, including unused borrowing capacity with the Federal Home Loan Bank of Pittsburgh, unused availability on the Federal Reserve Bank of Philadelphia’s discount window, available federal funds lines with other banks and unencumbered available-for-sale debt securities totaled $1.1 billion at September 30, 2023. Available funding from these sources totaled 181.8% of uninsured deposits and 264.8% of total uninsured and uncollateralized deposits at September 30, 2023.


Uninsured Deposits Information	September 30,			December 31,
	2023			2022
Total Deposits - C&N Bank	$	2,040,506		$	2,016,666

Estimated Total Uninsured Deposits	$	602,957		$	689,435
Portion of Uninsured Deposits that are
Collateralized		188,927			205,886
Uninsured and Uncollateralized Deposits	$	414,030		$	483,549

Uninsured and Uncollateralized Deposits as
a % of Total Deposits		20.3	%		24.0	%

Available Funding from Credit Facilities	$	868,613		$	807,386
Fair Value of Available-for-sale Debt
Securities in Excess of Pledging Obligations		227,667			272,475
Highly Liquid Available Funding	$	1,096,280		$	1,079,861

Highly Liquid Available Funding as a % of
Uninsured Deposits		181.8	%		156.6	%

Highly Liquid Available Funding as a % of
Uninsured and Uncollateralized Deposits		264.8	%		223.3	%

Despite the reduction in deposits, excluding brokered deposits, in the first nine months of 2023, based on the ample sources of highly liquid funds as described above, management believes the Corporation is well-positioned to meet its short-term and long-term funding obligations.

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

In August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at September 30, ~~2022;~~2023; however, C&N Bank remains subject to regulatory capital requirements administered by the federal banking agencies.

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Details concerning capital ratios at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 are presented below. Management believes, as of September 30, ~~2022,~~2023, that C&N Bank meets all capital adequacy requirements to which it is subject and maintains a capital conservation buffer (described in more detail below) that allows the Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at September 30, ~~2022~~2023 and December 31, ~~2021~~2022 exceed the Corporation’s Board policy threshold levels.


(Dollars in Thousands)											Minimum To Be																	Minimum To Be
								Minimum To Maintain			Well														Minimum To Maintain			Well
					Minimum			Capital Conservation			Capitalized Under			Minimum To Meet								Minimum			Capital Conservation			Capitalized Under			Minimum To Meet
					Capital			Buffer at Reporting			Prompt Corrective			the Corporation's								Capital			Buffer at Reporting			Prompt Corrective			the Corporation's
	Actual				Requirement			Date			Action Provisions			Policy Thresholds				Actual				Requirement			Date			Action Provisions			Policy Thresholds
	Amount		Ratio		Amount	Ratio		Amount	Ratio		Amount	Ratio		Amount		Ratio		Amount		Ratio		Amount	Ratio		Amount	Ratio		Amount	Ratio		Amount		Ratio
September 30, 2022:
September 30, 2023:
Total capital to risk-weighted assets:
Consolidated	$	280,928	15.80	%	N/A	N/A		N/A	N/A		N/A	N/A		$	186,683	≥10.5	%	$	288,587	15.81	%	N/A	N/A		N/A	N/A		N/A	N/A		$	200,756	≥11	%
C&N Bank		261,440	14.74	%	141,875	≥8	%	186,211	≥10.5	%	177,344	≥10	%		186,211	≥10.5	%		274,474	15.07	%	145,695	≥8	%	191,225	≥10.5	%	182,119	≥10	%		200,331	≥11	%
Tier 1 capital to risk-weighted assets:
Consolidated		239,678	13.48	%	N/A	N/A		N/A	N/A		N/A	N/A			151,124	≥8.5	%		244,913	13.42	%	N/A	N/A		N/A	N/A		N/A	N/A			164,255	≥9	%
C&N Bank		244,770	13.80	%	106,406	≥6	%	150,742	≥8.5	%	141,875	≥8	%		150,742	≥8.5	%		255,489	14.03	%	109,271	≥6	%	154,801	≥8.5	%	145,695	≥8	%		163,907	≥9	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		239,678	13.48	%	N/A	N/A		N/A	N/A		N/A	N/A			124,455	≥7	%		244,913	13.42	%	N/A	N/A		N/A	N/A		N/A	N/A			136,879	≥7.5	%
C&N Bank		244,770	13.80	%	79,805	≥4.5	%	124,141	≥7.0	%	115,273	≥6.5	%		124,141	≥7	%		255,489	14.03	%	81,954	≥4.5	%	127,483	≥7.0	%	118,377	≥6.5	%		136,589	≥7.5	%
Tier 1 capital to average assets:
Consolidated		239,678	10.04	%	N/A	N/A		N/A	N/A		N/A	N/A			190,977	≥8	%		244,913	9.91	%	N/A	N/A		N/A	N/A		N/A	N/A			197,691	≥8	%
C&N Bank		244,770	10.32	%	94,844	≥4	%	N/A	N/A		118,555	≥5	%		189,688	≥8	%		255,489	10.40	%	98,244	≥4	%	N/A	N/A		122,805	≥5	%		196,488	≥8	%

December 31, 2021:
December 31, 2022:
Total capital to risk-weighted assets:
Consolidated	$	287,614	18.21	%	N/A	N/A		N/A	N/A		N/A	N/A		$	165,846	≥10.5	%	$	285,397	15.72	%	N/A	N/A		N/A	N/A		N/A	N/A		$	190,590	≥10.5	%
C&N Bank		252,606	16.04	%	126,012	≥8	%	165,390	≥10.5	%	157,514	≥10	%		165,390	≥10.5	%		265,784	14.68	%	144,873	≥8	%	190,145	≥10.5	%	181,091	≥10	%		190,145	≥10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated		240,433	15.22	%	N/A	N/A		N/A	N/A		N/A	N/A			134,256	≥8.5	%		243,750	13.43	%	N/A	N/A		N/A	N/A		N/A	N/A			154,287	≥8.5	%
C&N Bank		238,434	15.14	%	94,509	≥6	%	133,887	≥8.5	%	126,012	≥8	%		133,887	≥8.5	%		248,744	13.74	%	108,654	≥6	%	153,927	≥8.5	%	144,873	≥8	%		153,927	≥8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		240,433	15.22	%	N/A	N/A		N/A	N/A		N/A	N/A			110,564	≥7	%		243,750	13.43	%	N/A	N/A		N/A	N/A		N/A	N/A			127,060	≥7	%
C&N Bank		238,434	15.14	%	70,881	≥4.5	%	110,260	≥7.0	%	102,384	≥6.5	%		110,260	≥7	%		248,744	13.74	%	81,491	≥4.5	%	126,764	≥7.0	%	117,709	≥6.5	%		126,764	≥7	%
Tier 1 capital to average assets:
Consolidated		240,433	10.53	%	N/A	N/A		N/A	N/A		N/A	N/A			182,683	≥8	%		243,750	10.11	%	N/A	N/A		N/A	N/A		N/A	N/A			192,941	≥8	%
C&N Bank		238,434	10.52	%	90,688	≥4	%	N/A	N/A		113,360	≥5	%		181,376	≥8	%		248,744	10.38	%	95,826	≥4	%	N/A	N/A		119,783	≥5	%		191,652	≥8	%

In February 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation iswas authorized to repurchase up to 1,000,000 shares of its common stock. InOn July 11, 2023, C&N announced that it had completed the ~~third quarter 2022, 10,269~~treasury stock repurchase program that began in February 2021. Cumulatively, C&N repurchased 1,000,000 shares of common stock for a total cost of $23,086,000, at an average price of $23.09 per share. For the three months ended September 30, 2023, 10,683 shares were repurchased for a total cost of ~~$246,000,~~$203,000, at an average price of ~~$23.97~~$19.01 per share. ~~Cumulatively through~~For the nine months ended September 30, ~~2022, 674,700~~2023, 325,300 shares ~~have been~~were repurchased for a total cost of ~~$16,587,000,~~$6,500,000, at an average price of ~~$24.58~~$19.98 per share.

On September 25, 2023, the Corporation announced a new treasury stock repurchase program. Under the newly approved program, the Corporation is authorized to repurchase up to 750,000 shares of the Corporation’s common stock, or slightly less than 5% of the Corporation’s issued and outstanding shares at August 4, 2023. The new program was effective when publicly announced and will continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion. 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 Plans and its equity compensation program. Through September 30, 2023, no shares were repurchased under the new program.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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To avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization subject to the rule must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. At September 30, ~~2022,~~2023, the minimum risk-based capital ratios, and the capital ratios including the capital conservation buffer, are as follows:


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

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


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

At September 30, ~~2022,~~2023, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was ~~6.74%~~7.07%.

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive (loss) income within stockholders’ equity. Accumulated other comprehensive (loss) income is excluded from the Bank’s and Corporation’s regulatory capital ratios. The balance in accumulated other comprehensive loss related to unrealized losses on available-for-sale debt securities, net of deferred income tax, amounted to ~~$56,766,000~~$60,278,000 at September 30, ~~2022 as compared to the balance in accumulated other comprehensive income related to unrealized gains on available-for-sale debt securities, net of deferred income tax of $4,809,000~~2023 and $50,370,000 at December 31, ~~2021.~~2022. The decrease in stockholders’ equity in the first nine months of ~~2022~~2023 from the change in accumulated other comprehensive ~~(loss) income~~loss resulted from an increase in interest rates. Changes in accumulated other comprehensive ~~(loss) income~~loss are excluded from earnings and directly increase or decrease stockholders’ equity. IfTo the extent unrealized losses on available-for-sale debt securities ~~are deemed to be other-than-temporarily impaired,~~result from credit losses, unrealized losses are recorded as a charge against ~~earnings, and amortized cost for the affected securities is reduced.~~earnings. The securities section of Management’s Discussion and Analysis and ~~Note~~Notes 1 and 5 to the unaudited consolidated financial statements ~~provides~~provide additional information concerning management’s evaluation of available-for-sale debt securities for ~~other-than-temporary impairment~~credit losses at September 30, ~~2022.~~2023.

~~INFLATION~~

Inflation affects the cost of labor, supplies and services used to provide banking services as well as interest rates. After many years of low inflation, disruptions to labor markets and supply chains triggered by the COVID-19 pandemic, government policies and the Russia-Ukraine war, have led to high inflation. The annual inflation rate for the 12-month period ended September 30, 2022, based on changes in the Consumer Price Index, was 8.2%, significantly higher than the Federal Reserve’s 2% objective.

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

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

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

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

INTEREST RATE RISK

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

The projected results based on the model includes the impact of estimates, at each level of interest rate change, regarding cash flows from principal repayments on loans and mortgage-backed securities and call activity on other investment securities. Further, the projected results are impacted by assumptions regarding the run-off and the extent of sensitivity to interest rate changes of deposits with no stated maturity (checking, savings and money market accounts). Actual results could vary significantly from these estimates, which could result in significant differences in the calculations of projected changes in net interest income and economic value of equity. Also, the model does not make estimates related to changes in the composition of the deposit portfolio that could occur due to rate competition, and the table does not necessarily reflect changes that management would make to realign the portfolio as a result of changes in interest rates.

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

Table XI, which follows this discussion, is based on the results of calculations performed using the simulation model as of September 30, ~~2022~~2023 and December 31, ~~2021. The table shows~~2022. In the ~~Corporation is asset-sensitive, meaning~~analysis based on September 30, 2023 data, the amounts of net interest income decrease, as compared to the amounts based on current interest rates, in both the upward and

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

downward rate scenarios. Further, the economic value of equity ~~increase~~is modeled to decrease in the ~~upward~~rising rate scenarios and ~~decrease~~in all of the falling rate scenarios except -200 basis points for which the economic value of equity is modeled to increase 0.2%. The results based on September 30, 2023 data as presented in Table XI are significantly different from the results based on the modeling performed using December 31, 2022 data which showed the net interest income profile to be asset-sensitive. In the analysis based on September 30, 2023 data, management assumed that, in rising rate scenarios, the average rate to be paid on interest checking, savings and money market accounts would increase by a higher percentage of the baseline scenario as compared to the assumptions used in the December 31, 2022 analysis. This change reflects management’s assessment that, in light of significant increases in short-term interest rates that have occurred over the course of 2022 and year-to-date in 2023, the Corporation’s deposit rates would increase to a greater extent if such scenarios would occur. The change in results also reflects changes in deposit mix, as the carrying amount of total deposits without stated maturities was $99.4 million lower at September 30, 2023 as compared to December 31, 2022, while time deposits were higher by $126.8 million. Further, results in the downward rate ~~scenarios.~~scenarios reflect limitations on the benefit of falling rates on some deposit types due to a 0% assumed floor. The ~~table~~Table also shows that as of the respective dates, despite the impact of the modeling changes and changes in deposit mix, the changes in net interest income and changes in economic value were within the policy limits in all scenarios.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Under U.S. generally accepted accounting principles, available-for-sale debt securities are carried at fair value as of each balance sheet date. The difference between amortized cost and fair value of available-for-sale debt securities, net of deferred income tax, is included in accumulated other comprehensive income (loss) within stockholders’ equity. Increases in interest rates have caused the fair value of the Corporation’s available-for-sale debt securities to decrease, resulting in an accumulated other comprehensive loss of ~~$56.8~~$60.3 million at September 30, ~~2022.~~2023. In contrast, most of the Corporation’s other financial instruments, including loans receivable (held for investment), deposits and borrowed funds are carried on the balance sheet at historical cost without adjustment for the impact of changes in interest rates.

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

TABLE XI – THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES


September 30, 2022 Data
September 30, 2023 Data
(In Thousands)	Period Ending September 30, 2023												Period Ending September 30, 2024

Basis Point		Interest		Interest			Net Interest		NII		NII			Interest		Interest			Net Interest		NII		NII
Change in Rates		Income		Expense			Income (NII)		% Change		Risk Limit			Income		Expense			Income (NII)		% Change		Risk Limit
+400	$	122,856	$	25,997		$	96,859		11.9	%	25.0	%	$	145,051	$	78,526		$	66,525		(21.1)	%	25.0	%
+300		116,812		22,596			94,216		8.9	%	20.0	%		140,116		67,183			72,933		(13.5)	%	20.0	%
+200		111,011		19,194			91,817		6.1	%	15.0	%		135,219		57,108			78,111		(7.4)	%	15.0	%
+100		104,967		15,792			89,175		3.1	%	10.0	%		130,286		48,302			81,984		(2.8)	%	10.0	%
0		98,912		12,390			86,522		0.0	%	0.0	%		125,123		40,771			84,352		0.0	%	0.0	%
-100		92,780		9,709			83,071		(4.0)	%	10.0	%		119,799		35,837			83,962		(0.5)	%	10.0	%
-200		86,905		8,387			78,518		(9.3)	%	15.0	%		114,410		30,942			83,468		(1.0)	%	15.0	%
-300														108,555		26,543			82,012		(2.8)	%	20.0	%
-400														102,316		22,255			80,061		(5.1)	%	25.0	%

	Economic Value of Equity at September 30, 2022												Economic Value of Equity at September 30, 2023

		Present		Present			Present							Present		Present			Present
Basis Point		Value		Value			Value							Value		Value			Value
Change in Rates		Equity		% Change			Risk Limit							Equity		% Change			Risk Limit
+400	$	496,614		4.1	%		50.0	%					$	346,292		(23.8)	%		50.0	%
+300		491,836		3.1	%		45.0	%						379,784		(16.5)	%		45.0	%
+200		490,243		2.8	%		35.0	%						410,450		(9.7)	%		35.0	%
+100		483,666		1.4	%		25.0	%						436,196		(4.1)	%		25.0	%
0		477,023		0.0	%		0.0	%						454,742		0.0	%		0.0	%
-100		465,772		(2.4)	%		25.0	%						453,578		(0.3)	%		25.0	%
-200		449,662		(5.7)	%		35.0	%						455,691		0.2	%		35.0	%
-300														443,816		(2.4)	%		45.0	%
-400														428,885		(5.7)	%		50.0	%

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December 31, 2021 Data

(In Thousands)

Period Ending December 31, 2022

Basis Point

Interest

Interest

Net Interest

NII

NII

Change in Rates

Income

Expense

Income (NII)

% Change

Risk Limit

+400

$
98,839

$
18,142

$
80,697

19.1
%

25.0
%
+300

92,438

15,061

77,377

14.2
%

20.0
%
+200

86,112

11,981

74,131

9.4
%

15.0
%
+100

79,740

8,900

70,840

4.5
%

10.0
%
0

73,536

5,760

67,776

0.0
%

0.0
%
-100

70,118

4,820

65,298

(3.7)
%

10.0
%
-200

68,824

4,503

64,321

(5.1)
%

15.0
%

Economic Value of Equity at December 31, 2021

Present

Present

Present

Basis Point

Value

Value

Value

Change in Rates

Equity

% Change

Risk Limit

+400

$
471,951

14.1
%

50.0
%

+300

459,810

11.1
%

45.0
%

+200

447,354

8.1
%

35.0
%

+100

431,856

4.4
%

25.0
%

0

413,767

0.0
%

0.0
%

-100

388,721

(6.1)
%

25.0
%

-200

365,331

(11.7)
%

35.0
%


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

Basis Point		Interest		Interest			Net Interest		NII		NII
Change in Rates		Income		Expense			Income (NII)		% Change		Risk Limit
+400	$	131,145	$	34,767		$	96,378		8.9	%	25.0	%
+300		125,127		30,816			94,311		6.6	%	20.0	%
+200		119,561		26,864			92,697		4.8	%	15.0	%
+100		113,703		22,912			90,791		2.6	%	10.0	%
0		107,451		18,961			88,490		0.0	%	0.0	%
-100		101,048		15,516			85,532		(3.3)	%	10.0	%
-200		94,854		13,240			81,614		(7.8)	%	15.0	%
-300		89,405		11,325			78,080		(11.8)	%	20.0	%
-400		85,076		9,439			75,637		(14.5)	%	25.0	%

	Economic Value of Equity at December 31, 2022

		Present		Present			Present
Basis Point		Value		Value			Value
Change in Rates		Equity		% Change			Risk Limit
+400	$	498,368		0.3	%		50.0	%
+300		496,186		(0.1)	%		45.0	%
+200		501,422		1.0	%		35.0	%
+100		501,991		1.1	%		25.0	%
0		496,650		0.0	%		0.0	%
-100		485,332		(2.3)	%		25.0	%
-200		468,195		(5.7)	%		35.0	%
-300		445,129		(10.4)	%		45.0	%
-400		417,505		(15.9)	%		50.0	%

ITEM 4. CONTROLS AND PROCEDURES

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

There were no significant changes inmade to 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.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PART II – OTHER INFORMATION

Item 1. Legal Proceedings

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

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed ~~February 22, 2022.~~March 16, 2023 except for the following:

Risks Related to Recent Banking Industry Turmoil

The Corporation is exposed to the risk that when a bank or other financial institution experiences financial difficulties, there could be an adverse “contagion” impact on other banking institutions. The recent failures of Silicon Valley Bank in California, Signature Bank in New York and First Republic Bank in California during the first and second quarters of 2023 have caused an element of panic and uncertainty in the investor community and among bank customers generally, including, specifically, deposit customers. While the Corporation does not believe that the circumstances of these three failures are necessarily indicators of broader issues for concern with all other banks or with the banking system itself, the failures are likely to reduce customer confidence, affect sources of funding and liquidity, increase regulatory requirements and costs, adversely affect financial markets and/or have negative reputational ramifications for institutions in the banking industry, including, possibly, the Corporation. The Corporation will continue to closely monitor the ongoing events and volatility in the financial services industry, together with any responsive measures taken by the banking regulators to mitigate or manage the turmoil.

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

Issuer Purchases of Equity Securities

Effective February 18, 2021, the Corporation amended its treasury stock repurchase program. Under the amended program, the Corporation iswas authorized to repurchase up to 1,000,000 shares of the Corporation’s common stock, or 6.25% of the Corporation’s issued and outstanding shares at February 18, 2021. ~~As of September 30, 2022, 674,700~~On July 11, 2023, the Corporation announced that 1,000,000 shares ~~have~~had been repurchased ~~under the repurchase program. As permitted by securities laws~~ and other legal requirements and subject to market conditions and other factors, purchases may be made from time to time in the open market at prevailing prices, or through privately negotiated transactions.

~~Consistent with the previously approved program, the Board of Directors' February 18, 2021 approval provides that: (1)~~that it had completed the treasury stock repurchase program.

On September 25, 2023, the Corporation announced a new treasury stock repurchase program. Under the newly approved program, ~~as amended~~the Corporation is authorized to ~~increase~~repurchase up to 750,000 shares of the ~~repurchase authorization to 1,000,000~~Corporation’s common stock, or slightly less than 5% of the Corporation’s issued and outstanding shares ~~shall be~~at August 4, 2023. The new program was effective when publicly announced and ~~shall~~will continue thereafter until suspended or terminated by the Board of Directors, in its sole ~~discretion; and (2) all~~discretion. 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 ~~Company's~~Corporation’s Dividend Reinvestment and Stock Purchase ~~Plan~~Plans and its equity compensation program. As of September 30, 2023, no shares had been repurchased under this repurchase program.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table sets forth a summary of the purchases by the Corporation of its common stock during the ~~second~~third quarter ~~2022.~~2023.

Total Number of

Maximum

Total Number of

Maximum

Shares

Number of

Shares

Number of

Purchased

Shares that May

Purchased

Shares that May

as Part of

Yet

as Part of

Yet

Publicly

be Purchased

Publicly

be Purchased

Total Number

Average

Announced

Under

Total Number

Average

Announced

Under

of Shares

Price Paid

Plans

the Plans or

of Shares

Price Paid

Plans

the Plans or

Period

Purchased

per Share

or Programs

Programs

Purchased

per Share

or Programs

Programs

July 1 - 31, 2022

1,736

23.95

666,167

333,833

August 1 - 31, 2022

N/A

666,167

333,833

September 1 - 30, 2022

8,533

23.98

674,700

325,300

July 1 - 31, 2023

10,683

19.01

1,000,000

August 1 - 31, 2023

0.00

September 1 - 30, 2023

0.00

750,000

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

Item 5.Other Information

~~None~~During the three months ended September 30, 2023, no director or officer of the Corporation adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement”, as each term is defined in Item 408(a) of Regulation S-K.

On September 25, 2023, the Corporation entered into Rule 10b5-1 Issuer Repurchase Plan with a registered broker to effect repurchases of the Corporation’s common stock under the Corporation’s treasury stock repurchase program, which was announced on September 25, 2023 and which is described under Item 2 of this Form 10-Q. The 10b5-1 issuer repurchase plan will terminate upon the earlier of all 750,000 shares of common stock authorized for repurchase having been repurchased or September 22, 2026.

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Item 6. Exhibits

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

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

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

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

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

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

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

31.1	Certification of Chief Executive Officer	Filed herewith

31.2	Certification of Chief Financial Officer	Filed herewith

32.	Section 1350 certifications	Filed herewith

101.INS	Inline XBRL Instance Document.	Filed herewith

101.SCH	Inline XBRL Schema Document.	Filed herewith

101.CAL	Inline XBRL Calculation Linkbase Document.	Filed herewith

101.DEF	Inline XBRL Definition Linkbase Document.	Filed herewith

101.LAB	Inline XBRL Label Linkbase Document.	Filed herewith

101.PRE	Inline XBRL Presentation Linkbase Document.	Filed herewith

104	The cover page of the Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, ~~2022,~~2023, formatted in Inline XBRL (contained in Exhibit 101).	Filed herewith

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SIGNATURES

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


		CITIZENS & NORTHERN CORPORATION


November ~~7, 2022~~6, 2023		By: /s/ J. Bradley Scovill
Date		President and Chief Executive Officer



November ~~7, 2022~~6, 2023		By: /s/ Mark A. Hughes
Date		Treasurer and Chief Financial Officer

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


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


(In Thousands)	As of September 30, 2022								As of December 31, 2021
	Current &								Current &
	Past Due		Past Due		Past Due				Past Due		Past Due		Past Due
	Less than		30-89		90+				Less than		30-89		90+
	30 Days		Days		Days		Total		30 Days		Days		Days		Total
Commercial:
Commercial loans secured by real estate	$	655,851	$	0	$	3,010	$	658,861	$	563,658	$	762	$	5,420	$	569,840
Commercial and industrial		171,819		129		310		172,258		158,188		72		813		159,073
Paycheck Protection Program - 1st Draw		24		0		0		24		1,339		17		0		1,356
Paycheck Protection Program - 2nd Draw		1,062		949		0		2,011		25,508		0		0		25,508
Political subdivisions		83,725		0		0		83,725		81,301		0		0		81,301
Commercial construction and land		75,925		197		72		76,194		60,509		70		0		60,579
Loans secured by farmland		12,675		86		78		12,839		11,010		0		111		11,121
Multi-family (5 or more) residential		59,315		0		0		59,315		48,532		0		1,557		50,089
Agricultural loans		2,433		0		59		2,492		2,279		7		65		2,351
Other commercial loans		14,636		0		0		14,636		17,153		0		0		17,153
Total commercial		1,077,465		1,361		3,529		1,082,355		969,477		928		7,966		978,371

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


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


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


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


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


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

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

	Economic Value of Equity at December 31, 2021

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