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CZNC Citizens & Northern

Filed: 8 Nov 21, 10:45am
0000810958us-gaap:FairValueInputsLevel3Memberus-gaap:FairValueMeasurementsNonrecurringMember2021-09-30

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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, 2021

or

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)

15,751,005 Shares Outstanding on November 3, 2021

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, 

2021

2020

ASSETS

 

  

 

  

Cash and due from banks:

 

  

 

  

Noninterest-bearing

$

26,589

$

24,780

Interest-bearing

 

172,406

 

77,077

Total cash and due from banks

 

198,995

 

101,857

Available-for-sale debt securities, at fair value

 

437,857

 

349,332

Loans receivable

 

1,575,708

 

1,644,209

Allowance for loan losses

 

(12,700)

 

(11,385)

Loans, net

 

1,563,008

 

1,632,824

Bank-owned life insurance

 

30,530

 

30,096

Accrued interest receivable

 

7,307

 

8,293

Bank premises and equipment, net

 

20,526

 

21,526

Foreclosed assets held for sale

 

1,374

 

1,338

Deferred tax asset, net

 

5,128

 

2,705

Goodwill

 

52,505

 

52,505

Core deposit intangibles, net

 

3,450

 

3,851

Other assets

 

34,216

 

34,773

TOTAL ASSETS

$

2,354,896

$

2,239,100

LIABILITIES

 

 

Deposits:

 

 

Noninterest-bearing

$

521,561

$

465,332

Interest-bearing

 

1,418,580

 

1,355,137

Total deposits

 

1,940,141

 

1,820,469

Short-term borrowings

 

1,875

 

20,022

Long-term borrowings - FHLB advances

 

38,680

 

54,608

Senior notes, net

14,685

0

Subordinated debt, net

 

32,988

 

16,553

Accrued interest and other liabilities

 

27,125

 

27,692

TOTAL LIABILITIES

 

2,055,494

 

1,939,344

STOCKHOLDERS' EQUITY

 

 

Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation

 

 

preference per share; 0 shares issued

 

0

 

0

Common stock, par value $1.00 per share; authorized 20,000,000 shares;

 

 

issued 16,030,172 and outstanding 15,750,250 at September 30, 2021;

 

 

issued 15,982,815 and outstanding 15,911,984 at December 31, 2020

 

16,030

 

15,983

Paid-in capital

 

144,172

 

143,644

Retained earnings

 

139,715

 

129,703

Treasury stock, at cost; 279,922 shares at September 30, 2021 and 70,831

 

 

shares at December 31, 2020

 

(6,920)

 

(1,369)

Accumulated other comprehensive income

 

6,405

 

11,795

TOTAL STOCKHOLDERS' EQUITY

 

299,402

 

299,756

TOTAL LIABILITIES & STOCKHOLDERS' EQUITY

$

2,354,896

$

2,239,100

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

3

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income

(In Thousands Except Per Share Data) (Unaudited)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

2021

2020

2021

2020

INTEREST INCOME

 

  

 

  

  

 

  

Interest and fees on loans:

 

  

 

  

  

 

  

Taxable

$

18,529

$

19,158

$

56,095

$

47,745

Tax-exempt

 

450

 

450

 

1,300

 

1,348

Income from available-for-sale debt securities:

 

 

 

 

Taxable

 

1,304

 

1,483

 

3,604

 

4,451

Tax-exempt

 

668

 

561

 

1,973

 

1,505

Other interest and dividend income

 

122

 

99

 

283

 

252

Total interest and dividend income

 

21,073

 

21,751

 

63,255

 

55,301

INTEREST EXPENSE

 

  

 

 

  

 

Interest on deposits

 

1,063

 

1,787

 

3,558

 

5,726

Interest on short-term borrowings

 

0

 

73

 

22

 

335

Interest on long-term borrowings - FHLB advances

 

87

 

362

 

330

 

970

Interest on senior notes, net

 

118

0

175

0

Interest on subordinated debt, net

 

346

 

247

 

947

 

460

Total interest expense

 

1,614

 

2,469

 

5,032

 

7,491

Net interest income

 

19,459

 

19,282

 

58,223

 

47,810

Provision for loan losses

 

1,530

 

1,941

 

2,533

 

3,293

Net interest income after provision for loan losses

 

17,929

 

17,341

 

55,690

 

44,517

NONINTEREST INCOME

 

  

 

  

 

  

 

  

Trust revenue

 

1,821

 

1,595

 

5,254

 

4,639

Brokerage and insurance revenue

 

560

 

382

 

1,392

 

1,121

Service charges on deposit accounts

 

1,249

 

1,045

 

3,337

 

3,126

Interchange revenue from debit card transactions

 

975

 

828

 

2,854

 

2,277

Net gains from sale of loans

 

797

 

2,052

 

2,786

 

3,931

Loan servicing fees, net

 

153

 

(87)

 

547

 

(259)

Increase in cash surrender value of life insurance

 

139

 

159

 

434

 

361

Other noninterest income

 

665

 

996

 

2,837

 

2,583

Sub-total

6,359

6,970

19,441

17,779

Realized gains on available-for-sale debt securities, net

23

25

25

25

Total noninterest income

 

6,382

 

6,995

 

19,466

 

17,804

NONINTEREST EXPENSE

 

 

 

  

 

  

Salaries and employee benefits

9,427

8,703

27,821

23,064

Net occupancy and equipment expense

1,217

1,189

3,740

3,267

Data processing and telecommunications expense

1,475

1,482

4,342

3,959

Automated teller machine and interchange expense

 

357

 

340

 

1,049

 

912

Pennsylvania shares tax

 

482

 

422

 

1,463

 

1,267

Professional fees

 

538

 

422

 

1,683

 

1,265

Merger-related expenses

 

0

 

6,402

 

0

 

7,526

Other noninterest expense

 

1,850

 

2,090

 

6,356

 

6,100

Total noninterest expense

 

15,346

 

21,050

 

46,454

 

47,360

Income before income tax provision

 

8,965

 

3,286

 

28,702

 

14,961

Income tax provision

 

1,566

 

438

 

5,456

 

2,509

NET INCOME

$

7,399

$

2,848

$

23,246

$

12,452

EARNINGS PER COMMON SHARE - BASIC

$

0.47

$

0.18

$

1.46

$

0.86

EARNINGS PER COMMON SHARE - DILUTED

$

0.47

$

0.18

$

1.46

$

0.86

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

4

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income

(In Thousands) (Unaudited)

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

 

2021

    

2020

2021

    

2020

Net income

$

7,399

$

2,848

$

23,246

$

12,452

Available-for-sale debt securities:

Unrealized holding (losses) gains on available-for-sale debt securities

(3,608)

(95)

(6,781)

9,980

Reclassification adjustment for (gains) realized in income

(23)

(25)

(25)

(25)

Other comprehensive (loss) income on available-for-sale debt securities

(3,631)

(120)

(6,806)

9,955

Unfunded pension and postretirement obligations:

 

 

 

 

Changes from plan amendments and actuarial gains and losses

 

0

 

0

 

(5)

 

88

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

 

(5)

 

(8)

 

(13)

 

(22)

Other comprehensive (loss) income on unfunded retirement obligations

 

(5)

 

(8)

 

(18)

 

66

Other comprehensive (loss) income before income tax

 

(3,636)

 

(128)

 

(6,824)

 

10,021

Income tax related to other comprehensive loss (income)

 

765

 

26

 

1,434

 

(2,103)

Net other comprehensive (loss) income

 

(2,871)

 

(102)

 

(5,390)

 

7,918

Comprehensive income

$

4,528

$

2,746

$

17,856

$

20,370

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

5

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

    

Nine Months Ended

September 30, 

September 30, 

2021

    

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

 

  

 

  

Net income

$

23,246

$

12,452

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

Provision for loan losses

 

2,533

 

3,293

Realized gains on available-for-sale debt securities, net

 

(25)

 

(25)

Net amortization of securities

1,554

1,020

Increase in cash surrender value of life insurance

 

(434)

 

(361)

Depreciation and amortization of bank premises and equipment

 

1,602

 

1,429

Net accretion of purchase accounting adjustments

 

(1,827)

 

(1,547)

Stock-based compensation

 

970

 

672

Deferred income taxes

 

(989)

 

649

Decrease in fair value of servicing rights

 

9

 

617

Gains on sales of loans, net

 

(2,786)

 

(3,931)

Origination of loans held for sale

 

(86,428)

 

(123,547)

Proceeds from sales of loans held for sale

 

87,483

 

126,268

Decrease (increase) in accrued interest receivable and other assets

 

295

 

(1,194)

Decrease in accrued interest payable and other liabilities

 

(50)

 

(856)

Other

 

(18)

 

(339)

Net Cash Provided by Operating Activities

 

25,135

 

14,600

CASH FLOWS FROM INVESTING ACTIVITIES:

 

 

  

Net cash and cash equivalents provided by business combination

0

75,955

Purchase of certificates of deposit

(3,000)

(2,500)

Proceeds from maturities of certificates of deposit

 

0

 

250

Proceeds from sales of available-for-sale debt securities

 

2,027

 

20,535

Proceeds from calls and maturities of available-for-sale debt securities

 

48,262

 

71,009

Purchase of available-for-sale debt securities

 

(145,445)

 

(65,853)

Redemption of Federal Home Loan Bank of Pittsburgh stock

 

1,934

 

5,712

Purchase of Federal Home Loan Bank of Pittsburgh stock

 

(1,614)

 

(4,571)

Net decrease (increase) in loans

 

68,018

 

(45,564)

Proceeds from bank owned life insurance

 

287

 

0

Proceeds from sales of premises and equipment

 

575

 

0

Purchase of premises and equipment

 

(1,173)

 

(2,550)

Proceeds from sale of foreclosed assets

 

303

 

1,347

Other

 

176

 

178

Net Cash (Used in) Provided by Investing Activities

 

(29,650)

 

53,948

CASH FLOWS FROM FINANCING ACTIVITIES:

 

 

  

Net increase in deposits

 

120,386

 

137,543

Net decrease in short-term borrowings

 

(18,082)

 

(79,213)

Proceeds from long-term borrowings - FHLB advances

 

0

 

25,891

Repayments of long-term borrowings - FHLB advances

 

(15,571)

 

(5,136)

Proceeds from issuance of senior notes, net of issuance costs

14,663

0

Proceeds from issuance of subordinated debt, net of issuance costs

24,437

0

Redemption of subordinated debt

(8,000)

0

Sale of treasury stock

 

212

 

124

Purchases of treasury stock

 

(7,412)

 

(163)

Common dividends paid

 

(11,980)

 

(10,568)

Net Cash Provided by Financing Activities

 

98,653

 

68,478

INCREASE IN CASH AND CASH EQUIVALENTS

 

94,138

 

137,026

CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD

 

96,017

 

31,122

CASH AND CASH EQUIVALENTS, END OF PERIOD

$

190,155

$

168,148

6

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands) (Unaudited)

(Continued)

    

Nine Months Ended

September 30, 

September 30, 

2021

    

2020

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

 

 

Increase in accrued purchase of available-for-sale debt securities

$

1,704

$

287

Accrued sale of available-for-sale securities

$

0

$

488

Accrued income from life insurance claim

$

0

$

279

Assets acquired through foreclosure of real estate loans

$

317

$

0

Leased assets obtained in exchange for new operating lease liabilities

$

739

$

167

Interest paid

$

6,063

$

7,635

Income taxes paid

$

8,076

$

2,975

NONCASH INVESTING ASSETS ACQUIRED IN BUSINESS COMBINATION:

Available-for-sale debt securities

$

0

$

10,754

Loans receivable

$

0

$

464,236

Bank-owned life insurance

$

0

$

11,170

Foreclosed assets held for sale

$

0

$

860

NONCASH FINANCING ACTIVITY RELATED TO BUSINESS COMBINATION:

Common stock issued

$

0

$

41,429

Liabilities assumed:

Deposits

$

0

$

481,796

Short-term borrowings

$

0

$

33,950

Long-term borrowings

$

0

$

30,025

Subordinated debt

$

0

$

10,091

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

7

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders’ Equity

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

 

Accumulated

 

Other

 

Common

 

Treasury

 

Common

 

Paid-in

 

Retained

 

Comprehensive

 

Treasury

Three Months Ended September 30, 2021

 

Shares

 

Shares

 

Stock

 

Capital

 

Earnings

 

Income

 

Stock

 

Total

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 and redeemed 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

Three Months Ended September 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, June 30, 2020

 

13,934,996

 

127,839

$

13,935

$

103,954

$

128,661

$

11,711

$

(2,470)

$

255,791

Net income

 

 

 

 

 

2,848

 

 

 

2,848

Other comprehensive loss, net

 

 

 

 

 

 

(102)

 

 

(102)

Cash dividends declared on common stock, $.27 per share

 

 

 

 

 

(4,285)

 

 

 

(4,285)

Shares issued for dividend reinvestment plan

 

 

(21,949)

 

 

(36)

 

 

 

423

 

387

Restricted stock granted

 

 

(15,076)

 

 

(291)

 

 

 

291

 

0

Forfeiture of restricted stock

 

 

1,648

 

 

30

 

 

 

(30)

 

0

Stock-based compensation expense

 

 

 

 

248

 

 

 

 

248

Shares issued for acquisition of Covenant Financial, Inc., net of equity issuance costs

2,047,819

2,048

39,381

41,429

Balance, September 30, 2020

 

15,982,815

 

92,462

$

15,983

$

143,286

$

127,224

$

11,609

$

(1,786)

$

296,316

8

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, 2021

Shares

Shares

Stock

Capital

Earnings

Income

Stock

Total

Balance, December 31, 2020

 

15,982,815

 

70,831

$

15,983

$

143,644

$

129,703

$

11,795

$

(1,369)

$

299,756

Net income

 

 

 

  

 

  

 

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 and redeemed 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

Nine Months Ended September 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Balance, December 31, 2019

 

13,934,996

 

218,551

$

13,935

$

104,519

$

126,480

$

3,691

$

(4,173)

$

244,452

Net income

 

 

 

  

 

  

 

12,452

 

  

 

  

 

12,452

Other comprehensive income, net

 

 

 

  

 

  

 

  

 

7,918

 

  

 

7,918

Cash dividends declared on common stock, $.81 per share

 

 

 

  

 

  

 

(11,708)

 

  

 

  

 

(11,708)

Shares issued for dividend reinvestment plan

 

 

(56,649)

 

 

46

 

  

 

  

 

1,094

 

1,140

Shares issued from treasury and redeemed related to exercise of stock options

 

 

(9,652)

 

 

(62)

 

  

 

  

 

186

 

124

Restricted stock granted

 

 

(70,940)

 

 

(1,370)

 

  

 

  

 

1,370

 

0

Forfeiture of restricted stock

 

 

5,290

 

 

100

 

  

 

  

 

(100)

 

0

Stock-based compensation expense

 

 

 

  

 

672

 

  

 

  

 

  

 

672

Purchase of restricted stock for tax withholding

 

 

5,862

 

 

  

 

  

 

  

 

(163)

 

(163)

Shares issued for acquisition of Covenant Financial, Inc., net of equity issuance costs

 

2,047,819

2,048

39,381

  

 

41,429

Balance, September 30, 2020

 

15,982,815

 

92,462

$

15,983

$

143,286

$

127,224

$

11,609

$

(1,786)

$

296,316

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

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

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

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

RECENT ACCOUNTING PRONOUNCEMENTS

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

Recently Issued But Not Yet Effective Accounting Pronouncements

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

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

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

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

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

2. BUSINESS COMBINATIONS

Acquisition of Covenant Financial, Inc.

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

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

Merger-related expenses related to the acquisition of Covenant totaled $6,402,000 in the third quarter 2020 and $7,526,000 in the nine months ended September 30, 2020. There were 0 merger-related expenses in the nine months ended September 30, 2021.

3. 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.

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(In Thousands, Except Share and Per Share Data)

Three Months Ended

    

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Basic

  

 

  

 

  

 

  

Net income

$

7,399

$

2,848

$

23,246

$

12,452

Less: Dividends and undistributed earnings allocated to participating securities

 

(63)

 

(18)

 

(189)

 

(74)

Net income attributable to common shares

$

7,336

$

2,830

$

23,057

$

12,378

Basic weighted-average common shares outstanding

 

15,703,932

 

15,778,391

 

15,806,897

 

14,388,797

Basic earnings per common share (a)

$

0.47

$

0.18

$

1.46

$

0.86

Diluted

 

  

 

  

 

  

 

  

Net income attributable to common shares

$

7,336

$

2,830

$

23,057

$

12,378

Basic weighted-average common shares outstanding

 

15,703,932

 

15,778,391

 

15,806,897

 

14,388,797

Dilutive effect of potential common stock arising from stock options

 

6,413

 

1,330

 

6,232

 

4,632

Diluted weighted-average common shares outstanding

 

15,710,345

 

15,779,721

 

15,813,129

 

14,393,429

Diluted earnings per common share (a)

$

0.47

$

0.18

$

1.46

$

0.86

Weighted-average nonvested restricted shares outstanding

 

133,053

 

102,629

 

129,456

 

85,611

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

Anti-dilutive stock options are excluded from earnings per share calculations. There were 0 anti-dilutive instruments in the three-month and nine month periods ended September 30, 2021. Weighted-average common shares available from anti-dilutive instruments totaled 39,012 shares in the three-month period ended September 30, 2020 and 19,506 shares in the nine-month period ended September 30, 2020.

4. COMPREHENSIVE INCOME

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

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended 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)

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(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Three Months Ended September 30, 2020

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding losses on available-for-sale debt securities

$

(95)

$

19

$

(76)

Reclassification adjustment for (gains) realized in income

 

(25)

 

5

 

(20)

Other comprehensive loss from available-for-sale debt securities

 

(120)

 

24

 

(96)

Unfunded pension and postretirement obligations,

 

  

 

  

 

  

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

 

(8)

 

2

 

(6)

Total other comprehensive loss

$

(128)

$

26

$

(102)

(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)

(In Thousands)

    

Before-Tax

    

Income Tax

    

Net-of-Tax

Amount

Effect

Amount

Nine Months Ended September 30, 2020

 

  

 

  

 

  

Available-for-sale debt securities:

Unrealized holding gains on available-for-sale debt securities

$

9,980

$

(2,095)

$

7,885

Reclassification adjustment for (gains) realized in income

(25)

5

(20)

Other comprehensive income from available-for-sale debt securities

9,955

(2,090)

7,865

Unfunded pension and postretirement obligations:

 

  

 

  

 

  

Changes from plan amendments and actuarial gains and losses

 

88

 

(18)

 

70

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

 

(22)

 

5

 

(17)

Other comprehensive income on unfunded retirement obligations

 

66

 

(13)

 

53

Total other comprehensive income

$

10,021

$

(2,103)

$

7,918

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

Affected Line Item in the

Description

 

Consolidated Statements of Income

Reclassification adjustment for (gains) realized in income (before-tax)

Realized gains on available-for-sale debt securities, net

Amortization of prior service cost and net actuarial loss included in net periodic benefit cost (before-tax)

 

Other noninterest expense

Income tax effect

Income tax provision

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

(In Thousands)

    

    

    

    

Accumulated

Unrealized

Unfunded

Other

Losses

Retirement

Comprehensive

on Securities

Obligations

Income

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

Three Months Ended September 30, 2020

 

  

 

  

 

  

Balance, beginning of period

$

11,472

$

239

$

11,711

Other comprehensive loss during three months ended September 30, 2020

 

(96)

 

(6)

 

(102)

Balance, end of period

$

11,376

$

233

$

11,609

(In Thousands)

    

Unrealized

    

    

Accumulated

Gains

Unfunded

Other

 

(Losses)

 

Retirement

 

Comprehensive

 

on Securities

 

Obligations

 

Income

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

Nine Months Ended September 30, 2020

 

  

 

  

 

  

Balance, beginning of period

$

3,511

$

180

$

3,691

Other comprehensive income during nine months ended September 30, 2020

 

7,865

 

53

 

7,918

Balance, end of period

$

11,376

$

233

$

11,609

5. CASH AND DUE FROM BANKS

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

(In Thousands)

    

September 30, 

    

December 31, 

2021

2020

Cash and cash equivalents

$

190,155

$

96,017

Certificates of deposit

 

8,840

 

5,840

Total cash and due from banks

$

198,995

$

101,857

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

Historically, C&N Bank has been required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. In March 2020, the Federal Reserve Board reduced reserve requirements for U.S. banks to 0%. Accordingly, C&N Bank had 0 required reserves at September 30, 2021 and December 31, 2020.

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

6. SECURITIES

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

(In Thousands)

    

September 30, 2021

Gross

Gross

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of the U.S. Treasury

$

25,088

$

60

$

(80)

$

25,068

Obligations of U.S. Government agencies

23,935

666

(289)

24,312

Obligations of states and political subdivisions:

 

 

 

 

  

Tax-exempt

 

135,362

 

4,390

 

(508)

 

139,244

Taxable

 

69,426

 

1,516

 

(449)

 

70,493

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

 

  

 

  

 

  

 

  

Residential pass-through securities

 

59,920

 

978

 

(269)

 

60,629

Residential collateralized mortgage obligations

 

43,811

 

820

 

(38)

 

44,593

Commercial mortgage-backed securities

 

72,341

 

1,963

 

(786)

 

73,518

Total available-for-sale debt securities

$

429,883

$

10,393

$

(2,419)

$

437,857

(In Thousands)

    

December 31, 2020

Gross

Gross

 

 

Unrealized

Unrealized

 

Amortized

 

Holding

 

Holding

 

Fair

    

Cost

    

Gains

    

Losses

    

Value

Obligations of the U.S. Treasury

$

12,184

$

0

$

(2)

$

12,182

Obligations of U.S. Government agencies

25,349

1,003

(8)

26,344

Obligations of states and political subdivisions:

 

  

 

 

 

  

Tax-exempt

 

116,427

 

6,000

 

(26)

 

122,401

Taxable

 

45,230

 

2,246

 

(24)

 

47,452

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

 

  

 

  

 

  

 

  

Residential pass-through securities

 

36,853

 

1,323

 

0

 

38,176

Residential collateralized mortgage obligations

 

56,048

 

1,428

 

(9)

 

57,467

Commercial mortgage-backed securities

 

42,461

 

2,849

 

0

 

45,310

Total available-for-sale debt securities

$

334,552

$

14,849

$

(69)

$

349,332

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

September 30, 2021

    

Less Than 12 Months

    

12 Months or More

    

Total

(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Obligations of the U.S. Treasury

$

11,001

$

(80)

$

0

$

0

$

11,001

$

(80)

Obligations of U.S. Government agencies

12,210

(289)

0

0

12,210

(289)

Obligations of states and political subdivisions:

Tax-exempt

41,145

(508)

0

0

41,145

(508)

Taxable

 

25,561

 

(365)

 

2,200

 

(84)

 

27,761

 

(449)

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

 

  

 

  

 

 

  

 

  

 

  

Residential pass-through securities

36,651

(269)

0

0

36,651

(269)

Residential collateralized mortgage obligations

 

4,745

 

(38)

 

0

 

0

 

4,745

 

(38)

Commercial mortgage-backed securities

 

34,931

 

(786)

 

0

 

0

 

34,931

 

(786)

Total temporarily impaired available-for-sale debt securities

$

166,244

$

(2,335)

$

2,200

$

(84)

$

168,444

$

(2,419)

December 31, 2020

    

Less Than 12 Months

    

12 Months or More

    

Total

(In Thousands)

Fair

Unrealized

Fair

Unrealized

Fair

Unrealized

 

Value

 

Losses

 

Value

 

Losses

 

Value

 

Losses

Obligations of the U.S. Treasury

$

9,159

$

(2)

$

0

$

0

$

9,159

$

(2)

Obligations of U.S. Government agencies

4,992

(8)

0

0

4,992

(8)

Obligations of states and political subdivisions:

 

 

  

 

  

 

  

 

  

 

  

Tax-exempt

3,811

(26)

0

0

3,811

(26)

Taxable

 

5,235

 

(24)

 

0

 

0

 

5,235

 

(24)

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

 

  

 

 

 

 

 

Residential collateralized mortgage obligations

 

2,861

 

(9)

 

0

 

0

 

2,861

 

(9)

Total temporarily impaired available-for-sale debt securities

$

26,058

$

(69)

$

0

$

0

$

26,058

$

(69)

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

(In Thousands)

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

    

2020

    

2021

    

2020

Gross realized gains from sales

$

23

$

26

$

27

$

78

Gross realized losses from sales

 

0

 

(1)

 

(2)

 

(53)

Net realized gains

$

23

$

25

$

25

$

25

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

(In Thousands)

September 30, 2021

Amortized

Fair

    

Cost

    

Value

Due in one year or less

$

15,531

$

15,641

Due from one year through five years

 

51,151

 

52,150

Due from five years through ten years

 

65,651

 

67,498

Due after ten years

 

121,478

 

123,828

Sub-total

 

253,811

 

259,117

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

 

  

 

  

Residential pass-through securities

 

59,920

 

60,629

Residential collateralized mortgage obligations

 

43,811

 

44,593

Commercial mortgage-backed securities

 

72,341

 

73,518

Total

$

429,883

$

437,857

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

Investment securities carried at $254,062,000 at September 30, 2021 and $247,373,000 at December 31, 2020 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 9 for information concerning securities pledged to secure borrowing arrangements and Note 12 for information related to securities pledged against interest rate swap obligations.

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

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

Debt Securities

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

Equity Securities

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheets, was $9,400,000 at September 30, 2021 and $9,720,000 at December 31, 2020. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at September 30, 2021 and December 31, 2020. In making this determination, management concluded that

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

The Corporation has a marketable equity security included in other assets in the consolidated balance sheets with a carrying value of $981,000 at September 30, 2021 and $1,000,000 at December 31, 2020, consisting exclusively of 1 mutual fund. There was an unrealized loss on the mutual fund of $19,000 at September 30, 2021 and 0 unrealized gain or loss on the mutual fund at December 31, 2020. Changes in the unrealized gains or losses on this security are included in other noninterest income in the consolidated statements of income.

7. LOANS

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

Summary of Loans by Type

(In Thousands)

    

September 30, 

    

December 31, 

2021

2020

Commercial:

 

  

 

  

Commercial loans secured by real estate

$

553,389

$

531,810

Commercial and industrial

 

152,244

 

159,577

Paycheck Protection Program - 1st Draw

5,747

132,269

Paycheck Protection Program - 2nd Draw

56,981

0

Political subdivisions

 

73,503

 

53,221

Commercial construction and land

 

53,267

 

42,874

Loans secured by farmland

 

10,812

 

11,736

Multi-family (5 or more) residential

 

52,962

 

55,811

Agricultural loans

 

3,092

 

3,164

Other commercial loans

 

17,312

 

17,289

Total commercial

 

979,309

 

1,007,751

Residential mortgage:

 

  

 

  

Residential mortgage loans - first liens

494,376

532,947

Residential mortgage loans - junior liens

 

24,303

 

27,311

Home equity lines of credit

 

38,465

 

39,301

1-4 Family residential construction

 

21,719

 

20,613

Total residential mortgage

 

578,863

 

620,172

Consumer

 

17,536

 

16,286

Total

 

1,575,708

 

1,644,209

Less: allowance for loan losses

 

(12,700)

 

(11,385)

Loans, net

$

1,563,008

$

1,632,824

In the table above, outstanding loan balances are presented net of deferred loan origination fees, net, of $5,719,000 at September 30, 2021 and $6,286,000 at December 31, 2020.

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in northcentral Pennsylvania, the southern tier of New York State, 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. The CARES Act is a $2 trillion stimulus package designed to provide relief to U.S. businesses and consumers struggling as a result of the pandemic. A

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

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

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

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

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

The Corporation began accepting and processing applications for loans under the PPP on April 3, 2020. Covenant also engaged in PPP lending starting in early April 2020. As of September 30, 2021, the recorded investment in 1st Draw PPP loans was $5,747,000, including contractual principal balances of $5,982,000, increased by a market rate adjustment on PPP loans acquired from Covenant of $2,000 and reduced by net deferred origination fees of $237,000.  The recorded investment in 2nd Draw PPP loans was $56,981,000, including contractual principal balances of $59,190,000 reduced by net deferred origination fees of $2,208,000. Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $1,409,000 in the three-month period ended September 30, 2021 and $467,000 in the three-month period ended September 30, 2020. Accretion of fees received on PPP loans, net of amortization of the market rate adjustment on PPP loans acquired from Covenant, was $3,975,000 in the nine-month period ended September 30, 2021 and $804,000 in the nine-month period ended September 30, 2020.

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To work with clients impacted by COVID-19, the Corporation offers short-term loan modifications on a case-by-case basis to borrowers who were current in their payments at the inception of the loan modification program. Prior to the merger, Covenant had a similar program in place, and these modified loans have been incorporated into the Corporation’s program. These efforts have been designed to assist borrowers as they deal with the crisis and help the Corporation mitigate credit risk. For loans subject to the program, each borrower is required to resume making regularly scheduled loan payments at the end of the modification period and the deferred amounts will be moved to the end of the loan term. Consistent with Section 4013 of the CARES Act, the modified loans have not been reported as past due, nonaccrual  or as TDRs at September 30, 2021. Most of the initial modifications under the program became effective in 2020 and provided a deferral of interest or principal and interest for 90-to-180 days. At September 30, 2021, there were 0 loans in deferral status under the program. At December 31, 2020, there were 45 loans with a total recorded investment of $37,397,000, in deferral status under the program.

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

(In Thousands)

    

    

    

    

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

2021

2020

2021

2020

Market Rate Adjustment

 

  

 

  

 

  

 

  

Adjustments to gross amortized cost of loans at beginning of period

$

(5)

$

(1,103)

$

718

$

(1,415)

Market rate adjustment recorded in acquisition

0

2,909

0

2,909

Amortization recognized in interest income

(368)

(452)

(1,091)

(140)

Adjustments to gross amortized cost of loans at end of period

$

(373)

$

1,354

$

(373)

$

1,354

Credit Adjustment on Non-impaired Loans

Adjustments to gross amortized cost of loans at beginning of period

$

(4,502)

$

(878)

$

(5,979)

$

(1,216)

Credit adjustment recorded in acquisition

0

(7,219)

0

(7,219)

Accretion recognized in interest income

 

666

 

970

 

2,143

 

1,308

Adjustments to gross amortized cost of loans at end of period

$

(3,836)

$

(7,127)

$

(3,836)

$

(7,127)

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

(In Thousands)

September 30, 

December 31, 

    

2021

    

2020

Outstanding balance

$

10,064

$

10,316

Carrying amount

 

6,624

 

6,841

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of September 30, 2021 and December 31, 2020, management determined that 0 allowance for credit losses related to unfunded loan commitments was required.

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

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

Three Months Ended September 30, 2020

June 30, 2020

    

    

    

    

    

    

    

September 30, 2020

(In Thousands)

    

Balance

    

 Charge-offs 

    

 Recoveries 

    

 Provision (Credit) 

    

Balance

Allowance for Loan Losses:

 

  

  

  

  

  

Commercial:

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

2,426

$

0

$

0

$

(40)

$

2,386

Commercial and industrial

 

2,496

 

(2,219)

 

0

 

1,974

 

2,251

Commercial construction and land

 

420

 

0

 

0

 

20

 

440

Loans secured by farmland

 

146

 

0

 

0

 

(25)

 

121

Multi-family (5 or more) residential

 

163

 

0

 

0

 

64

 

227

Agricultural loans

 

40

 

0

 

0

 

(3)

 

37

Other commercial loans

 

167

 

0

 

0

 

0

 

167

Total commercial

 

5,858

 

(2,219)

 

0

 

1,990

 

5,629

Residential mortgage:

 

  

  

  

  

  

Residential mortgage loans - first liens

3,531

0

26

(92)

3,465

Residential mortgage loans - junior liens

 

365

 

0

 

0

 

(7)

 

358

Home equity lines of credit

 

287

 

0

 

1

 

1

 

289

1-4 Family residential construction

 

137

 

0

 

0

 

32

 

169

Total residential mortgage

 

4,320

 

0

 

27

 

(66)

 

4,281

Consumer

 

263

 

(30)

 

8

 

17

 

258

Unallocated

 

585

 

0

 

0

 

0

 

585

Total Allowance for Loan Losses

$

11,026

$

(2,249)

$

35

$

1,941

$

10,753

For the three months ended September 30, 2021, the provision for loan losses was $1,530,000, a decrease in expense of $411,000 as compared to $1,941,000 for the three months ended September 30, 2020. 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. The

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partial charge-off amount exceeded the specific allowance of $583,000 that had been established on this loan at June 30, 2021. The provision for loan losses in the third quarter 2020 included the net impact of a charge-off of $2,219,000 on a commercial loan of $3,500,000 for which the previously-established allowance had been $1,193,000.

    

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

    

December 31, 

    

    

    

    

September 30, 

Nine Months Ended September 30, 2020

2019

Provision

2020

(In Thousands)

Balance

Charge-offs

Recoveries

(Credit)

Balance

Allowance for Loan Losses:

  

  

  

  

  

Commercial:

 

 

 

 

 

  

Commercial loans secured by real estate

$

1,921

$

0

$

0

$

465

$

2,386

Commercial and industrial

 

1,391

 

(2,236)

 

0

 

3,096

 

2,251

Commercial construction and land

 

966

 

(107)

 

0

 

(419)

 

440

Loans secured by farmland

 

158

 

0

 

0

 

(37)

 

121

Multi-family (5 or more) residential

 

156

 

0

 

0

 

71

 

227

Agricultural loans

 

41

 

0

 

0

 

(4)

 

37

Other commercial loans

 

155

 

0

 

0

 

12

 

167

Total commercial

 

4,788

 

(2,343)

 

0

 

3,184

 

5,629

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

3,405

0

28

32

3,465

Residential mortgage loans - junior liens

 

384

 

0

 

1

 

(27)

 

358

Home equity lines of credit

 

276

 

0

 

3

 

10

 

289

1-4 Family residential construction

 

117

 

0

 

0

 

52

 

169

Total residential mortgage

 

4,182

 

0

 

32

 

67

 

4,281

Consumer

 

281

 

(100)

 

35

 

42

 

258

Unallocated

 

585

 

0

 

0

 

0

 

585

Total Allowance for Loan Losses

$

9,836

$

(2,443)

$

67

$

3,293

$

10,753

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For the nine months ended September 30, 2021, the provision for loan losses was $2,533,000, a decrease in expense of $760,000 as compared to $3,293,000 recorded for the nine months ended September 30, 2020. The provision for the nine months ended September 30, 2021, includes the impact of a charge-off of $1,194,000 on a commercial loan with an ouststanding balance of $3,496,000, as previously discussed. In comparison, the provision for loan losses in the first nine months of 2020 included the impact of the $2,219,000 charge-off of a commercial loan of $3,500,000.

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

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

September 30, 2021

    

    

    

    

    

Purchased

    

(In Thousands)

Special

Credit

Pass

Mention

Substandard

Doubtful

Impaired

Total

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

519,673

$

15,055

$

14,473

$

0

$

4,188

$

553,389

Commercial and Industrial

 

136,858

 

8,578

 

6,028

 

0

 

780

 

152,244

Paycheck Protection Program - 1st Draw

5,747

0

0

0

0

5,747

Paycheck Protection Program - 2nd Draw

56,981

0

0

0

0

56,981

Political subdivisions

 

73,503

 

0

 

0

 

0

 

0

 

73,503

Commercial construction and land

 

52,504

 

715

 

48

 

0

 

0

 

53,267

Loans secured by farmland

 

9,639

 

194

 

979

 

0

 

0

 

10,812

Multi-family (5 or more) residential

 

48,154

 

2,352

 

878

 

0

 

1,578

 

52,962

Agricultural loans

 

2,533

 

0

 

559

 

0

 

0

 

3,092

Other commercial loans

 

17,307

 

5

 

0

 

0

 

0

 

17,312

Total commercial

 

922,899

 

26,899

 

22,965

 

0

 

6,546

 

979,309

Residential Mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

482,710

5,066

6,528

0

72

494,376

Residential mortgage loans - junior liens

 

23,676

 

107

 

514

 

0

 

6

 

24,303

Home equity lines of credit

 

37,889

 

59

 

517

 

0

 

0

 

38,465

1-4 Family residential construction

 

21,719

 

0

 

0

 

0

 

0

 

21,719

Total residential mortgage

 

565,994

 

5,232

 

7,559

 

0

 

78

 

578,863

Consumer

 

17,505

 

0

 

31

 

0

 

0

 

17,536

Totals

$

1,506,398

$

32,131

$

30,555

$

0

$

6,624

$

1,575,708

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December 31, 2020

    

    

    

    

    

Purchased

    

(In Thousands)

Special

Credit

Pass

Mention

Substandard

Doubtful

Impaired

Total

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

494,876

$

17,374

$

15,262

$

0

$

4,298

$

531,810

Commercial and Industrial

 

143,500

 

8,025

 

7,268

 

0

 

784

 

159,577

Paycheck Protection Program - 1st Draw

132,269

0

0

0

0

132,269

Political subdivisions

 

53,221

 

0

 

0

 

0

 

0

 

53,221

Commercial construction and land

 

42,110

 

715

 

49

 

0

 

0

 

42,874

Loans secured by farmland

 

10,473

 

405

 

858

 

0

 

0

 

11,736

Multi-family (5 or more) residential

 

50,563

 

2,405

 

1,229

 

0

 

1,614

 

55,811

Agricultural loans

 

2,569

 

0

 

595

 

0

 

0

 

3,164

Other commercial loans

 

17,289

 

0

 

0

 

0

 

0

 

17,289

Total commercial

 

946,870

 

28,924

 

25,261

 

0

 

6,696

 

1,007,751

Residential Mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential Mortgage loans - first liens

516,685

6,192

9,994

0

76

532,947

Residential Mortgage loans - junior liens

 

26,480

 

141

 

621

 

0

 

69

 

27,311

Home equity lines of credit

 

38,529

 

59

 

713

 

0

 

0

 

39,301

1-4 Family residential construction

 

20,613

 

0

 

0

 

0

 

0

 

20,613

Total residential mortgage

 

602,307

 

6,392

 

11,328

 

0

 

145

 

620,172

Consumer

 

16,172

 

0

 

114

 

0

 

0

 

16,286

Totals

$

1,565,349

$

35,316

$

36,703

$

0

$

6,841

$

1,644,209

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

September 30, 2021

    

Loans:

Allowance for Loan Losses:

(In Thousands)

Individually

Collectively

Individually

Collectively

  

    

Evaluated

    

Evaluated

    

Totals

    

Evaluated

    

Evaluated

    

Totals

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

11,303

$

542,086

$

553,389

$

672

$

3,148

$

3,820

Commercial and industrial

 

3,598

 

148,646

 

152,244

 

72

 

2,468

 

2,540

Paycheck Protection Program - 1st Draw

 

0

 

5,747

 

5,747

 

0

 

0

 

0

Paycheck Protection Program - 2nd Draw

0

56,981

56,981

0

0

0

Political subdivisions

 

0

 

73,503

 

73,503

 

0

 

0

 

0

Commercial construction and land

 

0

 

53,267

 

53,267

 

0

 

559

 

559

Loans secured by farmland

 

84

 

10,728

 

10,812

 

0

 

112

 

112

Multi-family (5 or more) residential

 

1,578

 

51,384

 

52,962

 

0

 

196

 

196

Agricultural loans

 

0

 

3,092

 

3,092

 

0

 

33

 

33

Other commercial loans

 

0

 

17,312

 

17,312

 

0

 

173

 

173

Total commercial

 

16,563

 

962,746

 

979,309

 

744

 

6,689

 

7,433

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

1,134

493,242

494,376

0

3,566

3,566

Residential mortgage loans - junior liens

 

317

 

23,986

 

24,303

 

139

 

182

 

321

Home equity lines of credit

 

0

 

38,465

 

38,465

 

0

 

283

 

283

1-4 Family residential construction

 

0

 

21,719

 

21,719

 

0

 

189

 

189

Total residential mortgage

 

1,451

 

577,412

 

578,863

 

139

 

4,220

 

4,359

Consumer

 

0

 

17,536

 

17,536

 

0

 

237

 

237

Unallocated

 

 

 

 

 

 

671

Total

$

18,014

$

1,557,694

$

1,575,708

$

883

$

11,146

$

12,700

24

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2020

    

Loans:

Allowance for Loan Losses:

(In Thousands)

Individually

Collectively

Individually

Collectively

  

    

Evaluated

    

Evaluated

    

Totals

    

Evaluated

    

Evaluated

    

Totals

Commercial:

 

 

 

 

 

 

Commercial loans secured by real estate

$

11,962

$

519,848

$

531,810

$

692

$

2,359

$

3,051

Commercial and industrial

 

1,359

 

158,218

 

159,577

 

71

 

2,174

 

2,245

Paycheck Protection Program - 1st Draw

 

0

 

132,269

 

132,269

 

0

 

0

 

0

Political subdivisions

 

0

 

53,221

 

53,221

 

0

 

0

 

0

Commercial construction and land

 

0

 

42,874

 

42,874

 

0

 

454

 

454

Loans secured by farmland

 

84

 

11,652

 

11,736

 

0

 

120

 

120

Multi-family (5 or more) residential

 

1,614

 

54,197

 

55,811

 

0

 

236

 

236

Agricultural loans

 

0

 

3,164

 

3,164

 

0

 

34

 

34

Other commercial loans

 

0

 

17,289

 

17,289

 

0

 

168

 

168

Total commercial

 

15,019

 

992,732

 

1,007,751

 

763

 

5,545

 

6,308

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

2,385

530,562

532,947

9

3,515

3,524

Residential mortgage loans - junior liens

 

414

 

26,897

 

27,311

 

153

 

196

 

349

Home equity lines of credit

 

0

 

39,301

 

39,301

 

0

 

281

 

281

1-4 Family residential construction

 

0

 

20,613

 

20,613

 

0

 

99

 

99

Total residential mortgage

 

2,799

 

617,373

 

620,172

 

162

 

4,091

 

4,253

Consumer

 

0

 

16,286

 

16,286

 

0

 

239

 

239

Unallocated

 

 

 

 

 

 

585

Total

$

17,818

$

1,626,391

$

1,644,209

$

925

$

9,875

$

11,385

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

(In Thousands)

September 30, 2021

December 31, 2020

Unpaid

Unpaid

Principal

Recorded

Related

Principal

Recorded

Related

    

Balance

    

Investment

    

Allowance

    

Balance

    

Investment

    

Allowance

With no related allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

7,068

$

4,823

$

0

$

7,168

$

5,398

$

0

Commercial and industrial

 

5,930

 

3,526

 

0

 

1,781

 

1,287

 

0

Residential mortgage loans - first liens

786

760

0

1,248

1,248

0

Residential mortgage loans - junior liens

 

65

 

18

 

0

 

160

 

105

 

0

Loans secured by farmland

 

84

 

84

 

0

 

84

 

84

 

0

Multi-family (5 or more) residential

2,734

1,578

0

2,770

1,614

0

Total with no related allowance recorded

 

16,667

 

10,789

 

0

 

13,211

 

9,736

 

0

With a related allowance recorded:

 

 

 

 

 

 

Commercial loans secured by real estate

6,480

6,480

672

6,501

6,501

691

Commercial and industrial

 

72

 

72

 

72

 

72

 

72

 

72

Residential mortgage loans - first liens

 

374

 

374

 

0

 

1,200

 

1,200

 

9

Residential mortgage loans - junior liens

 

299

 

299

 

139

 

309

 

309

 

153

Total with a related allowance recorded

 

7,225

 

7,225

 

883

 

8,082

 

8,082

 

925

Total

$

23,892

$

18,014

$

883

$

21,293

$

17,818

$

925

25

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

In the table immediately above, loans to 2 borrowers are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. Each of these loans is collateralized by 1 property, and the allowance associated with each of these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property. The total allowance related to these 2 borrowers was $139,000 at September 30, 2021 and $153,000 at December 31, 2020.

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

(In Thousands)

Interest Income Recognized on

Average Investment in Impaired Loans

Impaired Loans on a Cash Basis

Three Months Ended

Nine Months Ended

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

September 30, 

September 30, 

    

2021

2020

2021

    

2020

2021

2020

2021

    

2020

Commercial:

 

 

 

 

Commercial loans secured by real estate

$

11,252

$

7,298

$

11,811

$

3,779

$

172

$

65

$

401

$

81

Commercial and industrial

3,844

2,235

 

2,566

 

3,178

4

1

 

25

 

21

Commercial construction and land

48

49

 

48

 

678

2

1

 

2

 

14

Loans secured by farmland

84

253

 

84

 

397

0

2

 

1

 

26

Multi-family (5 or more) residential

1,578

0

1,584

0

31

0

122

0

Agricultural loans

66

76

 

67

 

76

0

2

 

3

 

4

Other commercial loans

0

0

 

0

 

25

0

0

 

0

 

1

Total commercial

16,872

9,911

 

16,160

 

8,133

209

71

 

554

 

147

Residential mortgage:

 

  

 

  

  

 

  

Residential mortgage loans - first lien

1,322

2,159

1,830

1,579

11

27

68

70

Residential mortgage loans - junior lien

386

384

 

417

 

386

1

5

 

10

 

18

Home equity lines of credit

0

65

 

0

 

65

0

0

 

0

 

2

Total residential mortgage

1,708

2,608

 

2,247

 

2,030

12

32

 

78

 

90

Total

$

18,580

$

12,519

$

18,407

$

10,163

$

221

$

103

$

632

$

237

26

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(In Thousands)

September 30, 2021

December 31, 2020

Past Due

Past Due

90+ Days and

90+ Days and

    

Accruing

    

Nonaccrual

    

Accruing

    

Nonaccrual

Commercial:

 

 

 

  

 

  

Commercial loans secured by real estate

$

752

$

11,205

$

395

$

11,550

Commercial and industrial

 

99

 

3,232

 

142

 

970

Commercial construction and land

 

0

 

48

 

0

 

49

Loans secured by farmland

 

30

 

84

 

188

 

84

Multi-family (5 or more) residential

0

1,578

0

1,614

Agricultural loans

66

0

0

0

Other commercial

 

0

 

0

 

71

 

0

Total commercial

 

947

 

16,147

 

796

 

14,267

Residential mortgage:

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

832

4,569

838

6,387

Residential mortgage loans - junior liens

 

71

 

305

 

52

 

378

Home equity lines of credit

 

64

 

289

 

233

 

299

Total residential mortgage

 

967

 

5,163

 

1,123

 

7,064

Consumer

 

10

 

31

 

56

 

85

Totals

$

1,924

$

21,341

$

1,975

$

21,416

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual. PCI loans with a total recorded investment of $6,624,000 at September 30, 2021 and $6,841,000 at December 31, 2020 are classified as nonaccrual.

27

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(In Thousands)

As of September 30, 2021

As of December 31, 2020

    

Current &

    

    

    

    

Current &

    

    

    

Past Due

Past Due

Past Due

Past Due

Past Due

Past Due

Less than

30-89

90+

Less than

30-89

90+

30 Days

Days

Days

Total

30 Days

Days

Days

Total

Commercial:

 

 

 

 

 

  

 

  

 

  

 

  

Commercial loans secured by real estate

$

547,885

$

142

$

5,362

$

553,389

$

529,998

$

66

$

1,746

$

531,810

Commercial and industrial

 

151,119

 

218

 

907

 

152,244

 

158,523

 

55

 

999

 

159,577

Paycheck Protection Program - 1st Draw

5,747

0

0

5,747

132,269

0

0

132,269

Paycheck Protection Program - 2nd Draw

56,981

0

0

56,981

0

0

0

0

Political subdivisions

 

73,503

 

0

 

0

 

73,503

 

53,221

 

0

 

0

 

53,221

Commercial construction and land

 

53,125

 

142

 

0

 

53,267

 

42,590

 

284

 

0

 

42,874

Loans secured by farmland

 

10,667

 

31

 

114

 

10,812

 

11,419

 

95

 

222

 

11,736

Multi-family (5 or more) residential

 

52,962

 

0

 

0

 

52,962

 

53,860

 

1,951

 

0

 

55,811

Agricultural loans

 

3,026

 

0

 

66

 

3,092

 

3,091

 

2

 

71

 

3,164

Other commercial loans

 

17,312

 

0

 

0

 

17,312

 

17,289

 

0

 

0

 

17,289

Total commercial

 

972,327

 

533

 

6,449

 

979,309

 

1,002,260

 

2,453

 

3,038

 

1,007,751

Residential mortgage:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Residential mortgage loans - first liens

489,339

2,212

2,825

494,376

523,191

5,703

4,053

532,947

Residential mortgage loans - junior liens

 

24,200

 

32

 

71

 

24,303

 

27,009

 

111

 

191

 

27,311

Home equity lines of credit

 

38,059

 

342

 

64

 

38,465

 

38,919

 

101

 

281

 

39,301

1-4 Family residential construction

 

21,719

 

0

 

0

 

21,719

 

20,457

 

156

 

0

 

20,613

Total residential mortgage

 

573,317

 

2,586

 

2,960

 

578,863

 

609,576

 

6,071

 

4,525

 

620,172

Consumer

 

17,447

 

48

 

41

 

17,536

 

16,063

 

83

 

140

 

16,286

Totals

$

1,563,091

$

3,167

$

9,450

$

1,575,708

$

1,627,899

$

8,607

$

7,703

$

1,644,209

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(In Thousands)

Current &

 

Past Due

Past Due

Past Due

 

Less than

30-89

90+

 

    

30 Days

    

Days

    

Days

    

Total

September 30, 2021 Nonaccrual Totals

$

12,787

$

1,028

$

7,526

$

21,341

December 31, 2020 Nonaccrual Totals

$

12,999

$

2,689

$

5,728

$

21,416

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

(In Thousands)

Current &

 

 

Past Due

Past Due

Past Due

 

 

Less than

30-89

90+

 

 

    

30 Days

    

Days

    

Days

    

Nonaccrual

    

Total

September 30, 2021 Totals

$

144

$

88

$

134

$

5,457

$

5,823

December 31, 2020 Totals

$

166

$

0

$

418

$

6,867

$

7,451

At September 30, 2021 and December 31, 2020, there were 0 commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

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

(Balances in Thousands)

Three Months Ended

Three Months Ended

September 30, 2021

September 30, 2020

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

    

1

    

$

70

    

0

    

$

0

Commercial loans secured by real estate,

Principal and interest payment deferral non-COVID related

0

0

2

4,831

Multi-family (5 or more) residential,

Principal and interest payment deferral non-COVID related

0

0

3

2,170

Total

    

1

    

$

70

    

5

    

$

7,001

29

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CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(Balances in Thousands)

Nine Months Ended

Nine Months Ended

September 30, 2021

September 30, 2020

    

    

Post-

    

    

Post-

Number

Modification

Number

Modification

of

Recorded

of

Recorded

Loans

Investment

Loans

Investment

Residential mortgage - first liens:

 

  

 

  

 

  

 

  

Reduced monthly payments and extended maturity date

 

1

$

12

 

0

$

0

Reduced monthly payments for a fifteen-month period

1

116

0

0

Residential mortgage - junior liens,

 

  

  

 

  

  

New loan at lower than risk-adjusted market rate to borrower from whom short sale of other collateral was accepted

 

0

 

0

 

1

 

30

Home equity lines of credit:

Reduced monthly payments and extended maturity date

1

24

0

0

Reduced monthly payments for an eighteen-month period

1

70

0

0

Commercial loans secured by real estate:

Interest only payments for a nine-month period

0

0

1

240

Principal and interest payment deferral non-COVID related

0

0

2

4,831

Multi-family (5 or more) residential,

Principal and interest payment deferral non-COVID related

0

0

3

2,170

Total

 

4

$

222

 

7

$

7,271

In the three-month and nine-month periods ended September 30, 2020, the Corporation recorded a specific allowance for loan losses of $134,000 related to a loan secured by commercial real estate for which a TDR concession was also made in the third quarter 2020 and included in the table above. At December 31, 2020, the Corporation increased the specific allowance for loan losses related to this credit to $416,000, where it remains at September 30, 2021. The other loans for which TDRs were granted in the three-month and nine-month periods ended September 30, 2021 and 2020 had 0 specific impact on the provision or allowance for loan losses.

In the three-month and nine-month periods ended September 30, 2021 and 2020, defaults on loans for which modifications that were considered to be TDR and were entered into within the previous 12 months are summarized as follows:

(Balances in Thousands)

Three Months Ended