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~~

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

For the quarterly period ended~~June~~September 30, 2016

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

¨ 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)

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.

YesxNo¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). YesxNo¨

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

Large accelerated filer¨ Accelerated filerx Non-accelerated filer¨ Smaller reporting company¨

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

Yes¨Nox

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)

~~12,068,583~~12,086,511 Shares Outstanding on ~~August 1,~~October 31, 2016

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

CITIZENS & NORTHERN CORPORATION

Index

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited) – ~~June~~September 30, 2016 and December 31, 2015		Page 3

Consolidated Statements of Income (Unaudited) – Three-month and ~~Six-month~~Nine-month Periods Ended ~~June~~September 30, 2016 and 2015		Page 4

Consolidated Statements of Comprehensive Income (Unaudited) - Three-month and ~~Six-month~~Nine-month Periods Ended ~~June~~September 30, 2016 and 2015		Page 5

Consolidated Statements of Cash Flows (Unaudited) – ~~Six~~Nine Months Ended ~~June~~September 30, 2016 and 2015		Page 6

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - ~~Six~~Nine Months Ended ~~June~~September 30, 2016 and 2015		Page 7

Notes to Unaudited Consolidated Financial Statements		Pages 8 – 39

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		Pages 40 – 5860

Item 3. Quantitative and Qualitative Disclosures About Market Risk		Pages 5961 – 6163

Item 4. Controls and Procedures		Page 6163

Part II. Other Information		Pages 6264 – 6365

Signatures		Page 6466

~~Exhibit 10.1. Restricted Stock Agreement~~

Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification - Chief Executive Officer

Exhibit 31.2. Rule 13a-14(a)/15d-14(a) Certification - Chief Financial Officer

Exhibit 32. Section 1350 Certifications

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

ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data) (Unaudited)	June 30,			December 31,			September 30,			December 31,
	2016			2015			2016			2015
ASSETS
Cash and due from banks:
Noninterest-bearing	$	14,567		$	14,710		$	20,482		$	14,710
Interest-bearing		12,869			21,351			13,588			21,351
Total cash and due from banks		27,436			36,061			34,070			36,061
Available-for-sale securities, at fair value		417,205			420,290			409,800			420,290
Loans held for sale		381			280			621			280

Loans receivable		727,842			704,880			742,338			704,880
Allowance for loan losses		(7,929	)		(7,889	)		(8,421	)		(7,889	)
Loans, net		719,913			696,991			733,917			696,991
Bank-owned life insurance		19,511			20,764			19,608			20,764
Accrued interest receivable		3,837			3,768			3,871			3,768
Bank premises and equipment, net		15,339			15,406			15,406			15,406
Foreclosed assets held for sale		2,052			1,260			2,321			1,260
Deferred tax asset, net		425			3,115			1,544			3,115
Intangible asset - Core deposit intangibles		24			30			21			30
Intangible asset - Goodwill		11,942			11,942			11,942			11,942
Other assets		12,953			13,510			12,212			13,510
TOTAL ASSETS	$	1,231,018		$	1,223,417		$	1,245,333		$	1,223,417

LIABILITIES
Deposits:
Noninterest-bearing	$	215,004		$	211,041		$	220,973		$	211,041
Interest-bearing		752,947			724,574			770,907			724,574
Total deposits		967,951			935,615			991,880			935,615
Short-term borrowings		25,702			53,496			14,590			53,496
Long-term borrowings		38,615			38,767			38,538			38,767
Accrued interest and other liabilities		8,220			8,052			9,722			8,052
TOTAL LIABILITIES		1,040,488			1,035,930			1,054,730			1,035,930

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued at June 30, 2016 and December 31, 2015		0			0
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2016 and 2015; issued 12,655,171 at June 30, 2016 and December 31, 2015; outstanding 12,070,195 at June 30, 2016 and 12,180,623 December 31, 2015		12,655			12,655
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued at September 30, 2016 and December 31, 2015								0			0
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2016 and 2015; issued 12,655,171 at September 30, 2016 and December 31, 2015; outstanding 12,087,223 at September 30, 2016 and 12,180,623 December 31, 2015								12,655			12,655
Paid-in capital		71,391			71,654			71,616			71,654
Retained earnings		110,677			109,454			111,664			109,454
Treasury stock, at cost; 584,976 shares at June 30, 2016 and 474,548 shares at December 31, 2015		(11,087	)		(8,804	)
Treasury stock, at cost; 567,948 shares at September 30, 2016 and 474,548 shares at December 31, 2015								(10,762	)		(8,804	)
Sub-total		183,636			184,959			185,173			184,959
Accumulated other comprehensive income:
Unrealized gain on available-for-sale securities		6,849			2,493			5,388			2,493
Defined benefit plans gain		45			35			42			35
Total accumulated other comprehensive income		6,894			2,528			5,430			2,528
TOTAL STOCKHOLDERS' EQUITY		190,530			187,487			190,603			187,487
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	1,231,018		$	1,223,417		$	1,245,333		$	1,223,417

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

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

Consolidated Statements of Income	3 Months Ended						6 Months Ended						3 Months Ended						9 Months Ended
(In Thousands Except Per Share Data) (Unaudited)	June 30,			June 30,			June 30,			June 30,			Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
	2016			2015			2016			2015			2016			2015			2016			2015
INTEREST INCOME
Interest and fees on loans	$	8,086		$	7,753		$	16,060		$	15,462		$	8,347		$	7,851		$	24,407		$	23,313
Interest on balances with depository institutions		36			25			60			51			29			22			89			73
Interest on loans to political subdivisions		452			391			900			740			457			470			1,357			1,210
Interest on mortgages held for sale		8			3			14			5			7			5			21			10
Income from available-for-sale securities:
Taxable		1,490			1,934			3,045			3,908			1,429			1,758			4,474			5,666
Tax-exempt		847			1,013			1,743			2,029			835			949			2,578			2,978
Dividends		5			67			39			154			27			79			66			233
Total interest and dividend income		10,924			11,186			21,861			22,349			11,131			11,134			32,992			33,483
INTEREST EXPENSE
Interest on deposits		522			479			1,001			965			549			487			1,550			1,452
Interest on short-term borrowings		41			5			103			6			30			9			133			15
Interest on long-term borrowings		362			692			725			1,418			365			630			1,090			2,048
Total interest expense		925			1,176			1,829			2,389			944			1,126			2,773			3,515
Net interest income		9,999			10,010			20,032			19,960			10,187			10,008			30,219			29,968
Provision for loan losses		318			221			686			224			538			302			1,224			526
Net interest income after provision for loan losses		9,681			9,789			19,346			19,736			9,649			9,706			28,995			29,442
OTHER INCOME
Service charges on deposit accounts		1,164			1,305			2,302			2,327			1,221			1,302			3,523			3,629
Service charges and fees		123			123			217			236			118			137			335			373
Trust and financial management revenue		1,251			1,241			2,395			2,355			1,172			1,123			3,567			3,478
Brokerage revenue		180			206			353			425			216			215			569			640
Insurance commissions, fees and premiums		27			23			48			63			26			24			74			87
Interchange revenue from debit card transactions		487			500			950			974			481			482			1,431			1,456
Net gains from sale of loans		295			183			463			330			236			243			699			573
Decrease in fair value of servicing rights		(108	)		(33	)		(179	)		(150	)
(Decrease) increase in fair value of servicing rights														(68	)		13			(247	)		(137	)
Increase in cash surrender value of life insurance		93			102			189			199			97			95			286			294
Net (loss) from premises and equipment														0			(1	)		0			(1	)
Other operating income		394			312			858			759			385			328			1,243			1,087
Sub-total		3,906			3,962			7,596			7,518			3,884			3,961			11,480			11,479
Realized gains on available-for-sale securities, net		122			932			505			1,006			584			79			1,089			1,085
Total other income		4,028			4,894			8,101			8,524			4,468			4,040			12,569			12,564
OTHER EXPENSES
Salaries and wages		3,913			3,603			7,800			7,090			3,901			3,744			11,701			10,834
Pensions and other employee benefits		1,002			935			2,439			2,320			1,060			1,016			3,499			3,336
Occupancy expense, net		560			640			1,169			1,362			601			623			1,770			1,985
Furniture and equipment expense		439			467			866			921			435			477			1,301			1,398
FDIC Assessments		155			148			297			299			151			155			448			454
Pennsylvania shares tax		323			317			645			635			287			311			932			946
Professional fees		282			140			571			296			245			141			816			437
Automated teller machine and interchange expense		267			255			516			501			291			234			807			735
Software subscriptions		251			211			492			408			237			209			729			617
Loss on prepayment of debt		0			910			0			910			0			0			0			910
Other operating expense		1,343			1,248			2,812			2,665			1,371			1,207			4,183			3,872
Total other expenses		8,535			8,874			17,607			17,407			8,579			8,117			26,186			25,524
Income before income tax provision		5,174			5,809			9,840			10,853			5,538			5,629			15,378			16,482
Income tax provision		1,303			1,452			2,396			2,681			1,451			1,395			3,847			4,076
NET INCOME	$	3,871		$	4,357		$	7,444		$	8,172		$	4,087		$	4,234		$	11,531		$	12,406
NET INCOME PER SHARE - BASIC	$	0.32		$	0.36		$	0.61		$	0.67		$	0.34		$	0.35		$	0.95		$	1.02
NET INCOME PER SHARE - DILUTED	$	0.32		$	0.36		$	0.61		$	0.67		$	0.34		$	0.35		$	0.95		$	1.01

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

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

Consolidated Statements of Comprehensive Income	3 Months Ended						Six Months Ended						3 Months Ended						9 Months Ended
(In Thousands)	June 30,						June 30,
(In Thousands) (Unaudited)													Sept. 30,						Sept. 30,
	2016			2015			2016			2015			2016			2015			2016			2015
Net income	$	3,871		$	4,357		$	7,444		$	8,172		$	4,087		$	4,234		$	11,531		$	12,406

Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) on available-for-sale securities		2,431			(4,572	)		7,205			(847	)
Unrealized (losses) gains on available-for-sale securities:
Unrealized holding (losses) gains on available-for-sale securities														(1,661	)		3,216			5,544			2,369
Reclassification adjustment for gains realized in income		(122	)		(932	)		(505	)		(1,006	)		(584	)		(79	)		(1,089	)		(1,085	)
Other comprehensive gain (loss) on available-for-sale securities		2,309			(5,504	)		6,700			(1,853	)
Other comprehensive (losses) gain on available-for-sale securities														(2,245	)		3,137			4,455			1,284

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive gain (loss)		0			0			26			(100	)		0			0			26			(100	)
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		(5	)		(5	)		(10	)		(8	)		(5	)		(3	)		(15	)		(11	)
Other comprehensive (loss) gain on unfunded retirement obligations		(5	)		(5	)		16			(108	)		(5	)		(3	)		11			(111	)

Other comprehensive income (loss) before income tax		2,304			(5,509	)		6,716			(1,961	)
Other comprehensive (loss) income before income tax														(2,250	)		3,134			4,466			1,173
Income tax related to other comprehensive income (loss)		(806	)		1,929			(2,350	)		687			786			(1,098	)		(1,564	)		(411	)

Net other comprehensive income (loss)		1,498			(3,580	)		4,366			(1,274	)
Net other comprehensive (loss) income														(1,464	)		2,036			2,902			762

Comprehensive income	$	5,369		$	777		$	11,810		$	6,898		$	2,623		$	6,270		$	14,433		$	13,168

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

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

CONSOLIDATED STATEMENTS OF CASH FLOWS	6 Months Ended						9 Months Ended
(In Thousands) (Unaudited)	June 30,			June 30,			Sept. 30,			Sept. 30,
	2016			2015			2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,444		$	8,172		$	11,531		$	12,406
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		686			224			1,224			526
Realized gains on available-for-sale securities, net		(505	)		(1,006	)		(1,089	)		(1,085	)
Loss on prepayment of debt		0			910			0			910
Realized loss (gain) on foreclosed assets		67			(61	)		86			(37	)
Loss on disposition of premises and equipment								0			1
Depreciation expense		787			958			1,188			1,442
Accretion and amortization on securities, net		660			791			1,065			1,204
Accretion and amortization on loans and deposits, net		(8	)		(10	)		(11	)		(16	)
Decrease in fair value of servicing rights		179			150			247			137
Increase in cash surrender value of life insurance		(189	)		(199	)		(286	)		(294	)
Stock-based compensation		325			307
Stock-based compensation and other expense								484			459
Amortization of core deposit intangibles		6			11			9			16
Deferred income taxes		340			424			7			495
Gains on sales of loans, net		(463	)		(330	)		(699	)		(573	)
Origination of loans for sale		(12,698	)		(10,029	)		(19,366	)		(16,613	)
Proceeds from sales of loans		12,953			10,089			19,565			16,975
Increase in accrued interest receivable and other assets		(708	)		(1,225	)		(305	)		(2,030	)
(Decrease) increase in accrued interest payable and other liabilities		(296	)		681
Increase in accrued interest payable and other liabilities								187			1,333
Net Cash Provided by Operating Activities		8,580			9,857			13,837			15,256
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposit		100			0			1,060			0
Purchase of certificates of deposit		(340	)		0			(2,280	)		0
Proceeds from sales of available-for-sale securities		19,387			11,255			21,573			25,972
Proceeds from calls and maturities of available-for-sale securities		37,009			41,777			54,472			65,261
Purchase of available-for-sale securities		(46,766	)		(35,200	)		(59,582	)		(35,200	)
Redemption of Federal Home Loan Bank of Pittsburgh stock		2,642			2,042			3,661			3,791
Purchase of Federal Home Loan Bank of Pittsburgh stock		(1,600	)		(2,960	)		(2,364	)		(4,674	)
Net increase in loans		(24,751	)		(34,153	)		(39,647	)		(52,273	)
Proceeds from bank owned life insurance		1,442			1,442			1,442			1,442
Purchase of premises and equipment		(720	)		(539	)		(1,188	)		(733	)
Return of principal on limited liability entity investments		82			99			115			133
Proceeds from sale of foreclosed assets		292			657			361			2,386
Net Cash Used in Investing Activities		(13,223	)		(15,580	)
Net Cash (Used in) Provided by Investing Activities								(22,377	)		6,105
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		32,336			10,460
Net increase (decrease) in deposits								56,265			(6,877	)
Net (decrease) increase in short-term borrowings		(27,794	)		14,269			(38,906	)		4,707
Repayments of long-term borrowings		(152	)		(11,054	)		(229	)		(11,128	)
Purchase of treasury stock		(3,723	)		(3,415	)		(3,723	)		(3,944	)
Sale of treasury stock		100			378			126			379
Tax benefit from compensation plans		88			78			129			117
Common dividends paid		(5,557	)		(5,635	)		(8,333	)		(8,441	)
Net Cash (Used in) Provided by Financing Activities		(4,702	)		5,081
Net Cash Provided by (Used in) Financing Activities								5,329			(25,187	)
DECREASE IN CASH AND CASH EQUIVALENTS		(9,345	)		(642	)		(3,211	)		(3,826	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		33,313			31,619			33,313			31,619
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	23,968		$	30,977		$	30,102		$	27,793

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Accrued purchase of certificates of deposit	$	480		$	0
Accrued purchase of available-for-sale securities							$	1,494		$	0
Assets acquired through foreclosure of real estate loans	$	1,151		$	630		$	1,508		$	2,523
Interest paid	$	1,826		$	2,404		$	2,764		$	3,525
Income taxes paid	$	1,485		$	1,645		$	3,185		$	3,295

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

~~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
Shares Shares Stock Capital Earnings Income Stock Total
Six Months Ended June 30, 2016
Balance, December 31, 2015 12,655,171 474,548 $ 12,655 $ 71,654 $ 109,454 $ 2,528 $ (8,804 ) $ 187,487
Net income 7,444 7,444
Other comprehensive income, net 4,366 4,366
Cash dividends declared on common stock, $0.52 per share (6,298 ) (6,298 )
Shares issued for dividend reinvestment plan (36,771 ) 48 693 741
Treasury stock purchased 187,075 (3,723 ) (3,723 )
Shares issued from treasury for exercise of stock options (5,556 ) (9 ) 109 100
Restricted stock granted (35,427 ) (658 ) 658 0
Forfeiture of restricted stock 1,107 20 (20 ) 0
Stock-based compensation expense 325 325
Tax effect of stock option exercises (1 ) (1 )
Tax benefit from dividends on restricted stock 12 12
Tax benefit from employee benefit plan 77 77
Balance, June 30, 2016 12,655,171 584,976 $ 12,655 $ 71,391 $ 110,677 $ 6,894 $ (11,087 ) $ 190,530

Six Months Ended June 30, 2015
Balance, December 31, 2014 12,655,171 375,191 $ 12,655 $ 71,541 $ 105,550 $ 5,360 $ (6,744 ) $ 188,362
Net income 8,172 8,172
Other comprehensive loss, net (1,274 ) (1,274 )
Cash dividends declared on common stock, $0.52 per share (6,373 ) (6,373 )
Shares issued for dividend reinvestment plan (37,758 ) 25 713 738
Treasury stock purchased 176,000 (3,415 ) (3,415 )
Shares issued from treasury for exercise of stock options (22,235 ) (26 ) 404 378
Restricted stock granted (34,800 ) (627 ) 627 0
Forfeiture of restricted stock 1,943 33 (33 ) 0
Stock-based compensation expense 307 307
Tax effect of stock option exercises (6 ) (6 )
Tax benefit from dividends on restricted stock 11 11
Tax benefit from employee benefit plan 73 73
Balance, June 30, 2015 12,655,171 458,341 $ 12,655 $ 71,258 $ 107,422 $ 4,086 $ (8,448 ) $ 186,973

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
	Shares		Shares			Stock		Capital			Earnings			Income		Stock			Total
Nine Months Ended September 30, 2016
Balance, December 31, 2015		12,655,171		474,548		$	12,655	$	71,654		$	109,454		$	2,528	$	(8,804	)	$	187,487
Net income												11,531								11,531
Other comprehensive income, net															2,902					2,902
Cash dividends declared on common stock, $0.78 per share												(9,435	)							(9,435	)
Shares issued for dividend reinvestment plan				(53,596	)				90								1,012			1,102
Treasury stock purchased				187,300													(3,723	)		(3,723	)
Shares issued from treasury for exercise of stock options				(7,371	)				(13	)							139			126
Restricted stock granted				(35,427	)				(658	)							658			0
Forfeiture of restricted stock				2,719					48								(48	)		0
Stock-based compensation expense									480											480
Other stock-based expense				(225	)												4			4
Tax effect of stock option exercises									(2	)										(2	)
Tax benefit from dividends on restricted stock									17											17
Tax benefit from employee benefit plan												114								114
Balance, September 30, 2016		12,655,171		567,948		$	12,655	$	71,616		$	111,664		$	5,430	$	(10,762	)	$	190,603

Nine Months Ended September 30, 2015
Balance, December 31, 2014		12,655,171		375,191		$	12,655	$	71,541		$	105,550		$	5,360	$	(6,744	)	$	188,362
Net income												12,406								12,406
Other comprehensive income, net															762					762
Cash dividends declared on common stock, $0.78 per share												(9,543	)							(9,543	)
Shares issued for dividend reinvestment plan				(55,795	)				56								1,046			1,102
Treasury stock purchased				203,100													(3,944	)		(3,944	)
Shares issued from treasury for exercise of stock options				(22,335	)				(26	)							405			379
Restricted stock granted				(34,800	)				(627	)							627			0
Forfeiture of restricted stock				2,777					47								(47	)		0
Stock-based compensation expense									459											459
Tax effect of stock option exercises									(6	)										(6	)
Tax benefit from dividends on restricted stock									16											16
Tax benefit from employee benefit plan												107								107
Balance, September 30, 2015		12,655,171		468,138		$	12,655	$	71,460		$	108,520		$	6,122	$	(8,657	)	$	190,100

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

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

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION

The consolidated financial information included herein, with the exception of the consolidated balance sheet dated December 31, 2015, 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 2015 information has been reclassified for consistency with the 2016 presentation.

Operating results reported for the three-month and ~~six-month~~nine-month periods ended ~~June~~September 30, 2016 might not be indicative of the results for the year ending December 31, 2016. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

2. PER SHARE DATA

Net income per share is based on the weighted-average number of shares of common stock outstanding. The following data show the amounts used in computing basic and diluted net income per share. As shown in the table that follows, diluted earnings per 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.

			Weighted-							Weighted-
			Average			Earnings				Average			Earnings
	Net		Common			Per		Net		Common			Per
	Income		Shares			Share		Income		Shares			Share
Six Months Ended June 30, 2016
Nine Months Ended September 30, 2016
Earnings per share – basic	$	7,444,000		12,108,743		$	0.61	$	11,531,000		12,098,554		$	0.95
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options				197,817							219,679
Hypothetical share repurchase at $20.11				(176,659	)
Hypothetical share repurchase at $20.48											(195,659	)
Earnings per share – diluted	$	7,444,000		12,129,901		$	0.61	$	11,531,000		12,122,574		$	0.95

Six Months Ended June 30, 2015
Nine Months Ended September 30, 2015
Earnings per share – basic	$	8,172,000		12,233,964		$	0.67	$	12,406,000		12,222,557		$	1.02
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options				218,115							213,511
Hypothetical share repurchase at $19.97				(196,407	)
Hypothetical share repurchase at $19.94											(192,322	)
Earnings per share – diluted	$	8,172,000		12,255,672		$	0.67	$	12,406,000		12,243,746		$	1.01

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

			Weighted-							Weighted-
			Average			Earnings				Average			Earnings
	Net		Common			Per		Net		Common			Per
	Income		Shares			Share		Income		Shares			Share
Three Months Ended June 30, 2016
Three Months Ended September 30, 2016
Earnings per share – basic	$	3,871,000		12,062,376		$	0.32	$	4,087,000		12,078,397		$	0.34
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options				196,646							215,154
Hypothetical share repurchase at $20.17				(175,106	)
Hypothetical share repurchase at $21.20											(185,355	)
Earnings per share – diluted	$	3,871,000		12,083,916		$	0.32	$	4,087,000		12,108,196		$	0.34

Three Months Ended June 30, 2015
Three Months Ended September 30, 2015
Earnings per share – basic	$	4,357,000		12,199,996		$	0.36	$	4,234,000		12,200,129		$	0.35
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options				205,024							204,449
Hypothetical share repurchase at $20.15				(182,494	)
Hypothetical share repurchase at $19.90											(184,248	)
Earnings per share – diluted	$	4,357,000		12,222,526		$	0.36	$	4,234,000		12,220,330		$	0.35

Stock options that were anti-dilutive were excluded from net income per share calculations. Weighted-average common shares available from anti-dilutive instruments totaled ~~47,224~~39,054 shares in the ~~six-month~~nine-month period ended ~~June~~September 30, 2016, ~~75,539~~66,351 shares in the ~~six-month~~nine-month period ended ~~June~~September 30, 2015, ~~47,139~~22,715 shares in the ~~second~~third quarter 2016 and 47,974 shares in the ~~second~~third quarter 2015.

3. 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. The components of other comprehensive income, and the related tax effects, are as follows:

(In Thousands)	Before-Tax			Income Tax			Net-of-Tax			Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount			Amount			Effect			Amount
Six Months Ended June 30, 2016
Nine Months Ended September 30, 2016
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities	$	7,205		$	(2,521	)	$	4,684		$	5,544		$	(1,941	)	$	3,603
Reclassification adjustment for (gains) realized in income		(505	)		177			(328	)		(1,089	)		381			(708	)
Other comprehensive income on available-for-sale securities		6,700			(2,344	)		4,356			4,455			(1,560	)		2,895

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income		26			(9	)		17			26			(9	)		17
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		(10	)		3			(7	)		(15	)		5			(10	)
Other comprehensive income on unfunded retirement obligations		16			(6	)		10			11			(4	)		7

Total other comprehensive income	$	6,716		$	(2,350	)	$	4,366		$	4,466		$	(1,564	)	$	2,902

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

(In Thousands)	Before-Tax			Income Tax		Net-of-Tax			Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect		Amount			Amount			Effect			Amount
Six Months Ended June 30, 2015
Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities	$	(847	)	$	297	$	(550	)
Nine Months Ended September 30, 2015
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities									$	2,369		$	(829	)	$	1,540
Reclassification adjustment for (gains) realized in income		(1,006	)		352		(654	)		(1,085	)		380			(705	)
Other comprehensive loss on available-for-sale securities		(1,853	)		649		(1,204	)
Other comprehensive income on available-for-sale securities										1,284			(449	)		835

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income		(100	)		35		(65	)		(100	)		35			(65	)
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		(8	)		3		(5	)		(11	)		3			(8	)
Other comprehensive loss on unfunded retirement obligations		(108	)		38		(70	)		(111	)		38			(73	)

Total other comprehensive loss	$	(1,961	)	$	687	$	(1,274	)
Total other comprehensive income									$	1,173		$	(411	)	$	762

(In Thousands)	Before-Tax			Income Tax			Net-of-Tax			Before-Tax			Income Tax		Net-of-Tax
	Amount			Effect			Amount			Amount			Effect		Amount
Three Months Ended June 30, 2016
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities	$	2,431		$	(850	)	$	1,581
Three Months Ended September 30, 2016
Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities										$	(1,661	)	$	580	$	(1,081	)
Reclassification adjustment for (gains) realized in income		(122	)		43			(79	)		(584	)		204		(380	)
Other comprehensive income on available-for-sale securities		2,309			(807	)		1,502
Other comprehensive loss on available-for-sale securities											(2,245	)		784		(1,461	)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income		0			0			0			0			0		0
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		(5	)		1			(4	)		(5	)		2		(3	)
Other comprehensive loss on unfunded retirement obligations		(5	)		1			(4	)		(5	)		2		(3	)

Total other comprehensive income	$	2,304		$	(806	)	$	1,498
Total other comprehensive loss										$	(2,250	)	$	786	$	(1,464	)

(In Thousands)	Before-Tax			Income Tax		Net-of-Tax			Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect		Amount			Amount			Effect			Amount
Three Months Ended June 30, 2015
Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities	$	(4,572	)	$	1,601	$	(2,971	)
Three Months Ended September 30, 2015
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities									$	3,216		$	(1,126	)	$	2,090
Reclassification adjustment for (gains) realized in income		(932	)		326		(606	)		(79	)		28			(51	)
Other comprehensive loss on available-for-sale securities		(5,504	)		1,927		(3,577	)		3,137			(1,098	)		2,039

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income		0			0		0			0			0			0
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		(5	)		2		(3	)		(3	)		0			(3	)
Other comprehensive loss on unfunded retirement obligations		(5	)		2		(3	)		(3	)		0			(3	)

Total other comprehensive loss	$	(5,509	)	$	1,929	$	(3,580	)
Total other comprehensive income									$	3,134		$	(1,098	)	$	2,036

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

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

(In Thousands)				Unfunded			Accumulated			Unrealized			Unfunded			Accumulated
	Unrealized			Pension and			Other			Holding Gains			Pension and			Other
	Holding Gains			Postretirement			Comprehensive			(Losses)			Postretirement			Comprehensive
	on Securities			Obligations			Income			on Securities			Obligations			Income
Six Months Ended June 30, 2016
Nine Months Ended September 30, 2016
Balance, beginning of period	$	2,493		$	35		$	2,528		$	2,493		$	35		$	2,528
Other comprehensive income before reclassifications		4,684			17			4,701			3,603			17			3,620
Amounts reclassified from accumulated other comprehensive income		(328	)		(7	)		(335	)		(708	)		(10	)		(718	)
Other comprehensive income		4,356			10			4,366			2,895			7			2,902
Balance, end of period	$	6,849		$	45		$	6,894		$	5,388		$	42		$	5,430

Six Months Ended June 30, 2015
Nine Months Ended September 30, 2015
Balance, beginning of period										$	5,281		$	79		$	5,360
Other comprehensive income before reclassifications											1,540			(65	)		1,475
Amounts reclassified from accumulated other comprehensive income											(705	)		(8	)		(713	)
Other comprehensive income											835			(73	)		762
Balance, end of period										$	6,116		$	6		$	6,122

Three Months Ended September 30, 2016
Balance, beginning of period	$	5,281		$	79		$	5,360		$	6,849		$	45		$	6,894
Other comprehensive loss before reclassifications		(550	)		(65	)		(615	)		(1,081	)		0			(1,081	)
Amounts reclassified from accumulated other comprehensive income		(654	)		(5	)		(659	)		(380	)		(3	)		(383	)
Other comprehensive loss		(1,204	)		(70	)		(1,274	)		(1,461	)		(3	)		(1,464	)
Balance, end of period	$	4,077		$	9		$	4,086		$	5,388		$	42		$	5,430

Three Months Ended June 30, 2016
Three Months Ended September 30, 2015
Balance, beginning of period	$	5,347		$	49		$	5,396		$	4,077		$	9		$	4,086
Other comprehensive income before reclassifications		1,581			0			1,581			2,090			0			2,090
Amounts reclassified from accumulated other comprehensive income		(79	)		(4	)		(83	)		(51	)		(3	)		(54	)
Other comprehensive income		1,502			(4	)		1,498			2,039			(3	)		2,036
Balance, end of period	$	6,849		$	45		$	6,894		$	6,116		$	6		$	6,122

Three Months Ended June 30, 2015
Balance, beginning of period	$	7,654		$	12		$	7,666
Other comprehensive loss before reclassifications		(2,971	)		0			(2,971	)
Amounts reclassified from accumulated other comprehensive income		(606	)		(3	)		(609	)
Other comprehensive loss		(3,577	)		(3	)		(3,580	)
Balance, end of period	$	4,077		$	9		$	4,086

Items reclassified out of each component of other comprehensive income are as follows:

For the Six Months Ended June 30, 2016
For the Nine Months Ended September 30, 2016
(In Thousands)
	Reclassified from				Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Consolidated	Accumulated Other			Affected Line Item in the Consolidated
Comprehensive Income Components	Comprehensive Income			Statements of Income	Comprehensive Income			Statements of Income
Unrealized gains and losses on available-for-sale securities	$	(505	)	Realized gains on available-for-sale securities, net
Unrealized gains and losses on available-for-sale								Realized gains on available-for-sale
securities					$	(1,089	)	securities, net
		177		Income tax provision		381		Income tax provision
		(328	)	Net of tax		(708	)	Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost		(15	)	Pensions and other employee benefits		(23	)	Pensions and other employee benefits
Actuarial loss		5		Pensions and other employee benefits		8		Pensions and other employee benefits
		(10	)	Total before tax		(15	)	Total before tax
		3		Income tax provision		5		Income tax provision
		(7	)	Net of tax		(10	)	Net of tax
Total reclassifications for the period	$	(335	)		$	(718	)

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

For the Nine Months Ended September 30, 2015
(In Thousands)
Reclassified from
Details about Accumulated Other Accumulated Other Affected Line Item in the Consolidated
Comprehensive Income Components Comprehensive Income Statements of Income
Unrealized gains and losses on available-for-sale Realized gains on available-for-sale
securities $ (1,085 ) securities, net
380 Income tax provision
(705 ) Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost (22 ) Pensions and other employee benefits
Actuarial loss 11 Pensions and other employee benefits
(11 ) Total before tax
3 Income tax provision
(8 ) Net of tax
Total reclassifications for the period $ (713 )

For the Six Months Ended June 30, 2015
(In Thousands)
Reclassified from
Details about Accumulated Other Accumulated Other Affected Line Item in the Consolidated
Comprehensive Income Components Comprehensive Income Statements of Income
Unrealized gains and losses on available-for-sale securities $ (1,006 ) Realized gains on available-for-sale securities, net
352 Income tax provision
(654 ) Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost (15 ) Pensions and other employee benefits
Actuarial loss 7 Pensions and other employee benefits
(8 ) Total before tax
3 Income tax provision
(5 ) Net of tax
Total reclassifications for the period $ (659 )
For the Three Months Ended June 30, 2016
(In Thousands)
Reclassified from
Details about Accumulated Other Accumulated Other Affected Line Item in the Consolidated
Comprehensive Income Components Comprehensive Income Statements of Income
Unrealized gains and losses on available-for-sale securities $ (122 ) Realized gains on available-for-sale securities, net
43 Income tax provision
(79 ) Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost (7 ) Pensions and other employee benefits
Actuarial loss 2 Pensions and other employee benefits
(5 ) Total before tax
1 Income tax provision
(4 ) Net of tax
Total reclassifications for the period $ (83 )
For the Three Months Ended June 30, 2015
For the Three Months Ended September 30, 2016
(In Thousands) (In Thousands)
Reclassified from Reclassified from
Details about Accumulated Other Accumulated Other Affected Line Item in the Consolidated Accumulated Other Affected Line Item in the Consolidated
Comprehensive Income Components Comprehensive Income Statements of Income Comprehensive Income Statements of Income
Unrealized gains and losses on available-for-sale securities $ (932 ) Realized gains on available-for-sale securities, net
Unrealized gains and losses on available-for-sale Realized gains on available-for-sale
securities $ (584 ) securities, net
326 Income tax provision 204 Income tax provision
(606 ) Net of tax (380 ) Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost (8 ) Pensions and other employee benefits (8 ) Pensions and other employee benefits
Actuarial loss 3 Pensions and other employee benefits 3 Pensions and other employee benefits
(5 ) Total before tax (5 ) Total before tax
2 Income tax provision 2 Income tax provision
(3 ) Net of tax (3 ) Net of tax
Total reclassifications for the period $ (609 ) $ (383 )

12
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
For the Three Months Ended September 30, 2015
(In Thousands)
Reclassified from
Details about Accumulated Other Accumulated Other Affected Line Item in the Consolidated
Comprehensive Income Components Comprehensive Income Statements of Income
Unrealized gains and losses on available-for-sale Realized gains on available-for-sale
securities $ (79 ) securities, net
28 Income tax provision
(51 ) Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost (7 ) Pensions and other employee benefits
Actuarial loss 4 Pensions and other employee benefits
(3 ) Total before tax
0 Income tax provision
(3 ) Net of tax
Total reclassifications for the period $ (54 )

4. CASH AND DUE FROM BANKS

Cash and due from banks at ~~June~~September 30, 2016 and December 31, 2015 include the following:

(In thousands) June 30, Dec. 31, Sept. 30, Dec. 31,
2016 2015 2016 2015
Cash and cash equivalents $ 23,968 $ 33,313 $ 30,102 $ 33,313
Certificates of deposit 3,468 2,748 3,968 2,748
Total cash and due from banks $ 27,436 $ 36,061 $ 34,070 $ 36,061

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.

The Corporation is 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. Required reserves were ~~$12,532,000~~$13,141,000 at ~~June~~September 30, 2016 and $15,327,000 at December 31, 2015.

5. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

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

13
Level 3 – Fair value is based on significant unobservable inputs. Examples of valuation methodologies that would result in Level 3 classification include option pricing models, discounted cash flows and other similar techniques.

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

13
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
At ~~June~~September 30, 2016 and December 31, 2015, assets measured at fair value and the valuation methods used are as follows:

June 30, 2016 September 30, 2016
Quoted Prices Other Quoted 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
AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies $ 0 $ 9,781 $ 0 $ 9,781 $ 0 $ 9,747 $ 0 $ 9,747
Obligations of states and political subdivisions:
Tax-exempt 0 116,056 0 116,056 0 121,283 0 121,283
Taxable 0 35,132 0 35,132 0 33,672 0 33,672
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities 0 65,407 0 65,407 0 62,187 0 62,187
Residential collateralized mortgage obligations 0 177,980 0 177,980 0 165,719 0 165,719
Commercial mortgage-backed securities 0 11,239 0 11,239 0 16,112 0 16,112
Collateralized debt obligations 0 1 0 1
Total debt securities 0 415,596 0 415,596 0 408,720 0 408,720
Marketable equity securities 1,609 0 0 1,609 1,080 0 0 1,080
Total available-for-sale securities 1,609 415,596 0 417,205 1,080 408,720 0 409,800
Servicing rights 0 0 1,224 1,224 0 0 1,208 1,208
Total recurring fair value measurements $ 1,609 $ 415,596 $ 1,224 $ 418,429 $ 1,080 $ 408,720 $ 1,208 $ 411,008

Nonrecurring fair value measurements
Impaired loans with a valuation allowance $ 0 $ 0 $ 1,275 $ 1,275 $ 0 $ 0 $ 3,621 $ 3,621
Valuation allowance 0 0 (253 ) (253 ) 0 0 (685 ) (685 )
Impaired loans, net 0 0 1,022 1,022 0 0 2,936 2,936
Foreclosed assets held for sale 0 0 2,052 2,052 0 0 2,321 2,321
Total nonrecurring fair value measurements $ 0 $ 0 $ 3,074 $ 3,074 $ 0 $ 0 $ 5,257 $ 5,257

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

December 31, 2015 December 31, 2015
Quoted Prices Other Quoted 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
AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies $ 0 $ 10,483 $ 0 $ 10,483 $ 0 $ 10,483 $ 0 $ 10,483
Obligations of states and political subdivisions:
Tax-exempt 0 107,757 0 107,757 0 107,757 0 107,757
Taxable 0 34,597 0 34,597 0 34,597 0 34,597
Mortgage-backed securities 0 73,343 0 73,343
Collateralized mortgage obligations, Issued by U.S. Government agencies 0 191,715 0 191,715
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities 0 73,343 0 73,343
Residential collateralized mortgage obligations 0 191,715 0 191,715
Collateralized debt obligations 0 9 0 9 0 9 0 9
Total debt securities 0 417,904 0 417,904 0 417,904 0 417,904
Marketable equity securities 2,386 0 0 2,386 2,386 0 0 2,386
Total available-for-sale securities 2,386 417,904 0 420,290 2,386 417,904 0 420,290
Servicing rights 0 0 1,296 1,296 0 0 1,296 1,296
Total recurring fair value measurements $ 2,386 $ 417,904 $ 1,296 $ 421,586 $ 2,386 $ 417,904 $ 1,296 $ 421,586

Nonrecurring fair value measurements
Impaired loans with a valuation allowance $ 0 $ 0 $ 1,933 $ 1,933 $ 0 $ 0 $ 1,933 $ 1,933
Valuation allowance 0 0 (820 ) (820 ) 0 0 (820 ) (820 )
Impaired loans, net 0 0 1,113 1,113 0 0 1,113 1,113
Foreclosed assets held for sale 0 0 1,260 1,260 0 0 1,260 1,260
Total nonrecurring fair value measurements $ 0 $ 0 $ 2,373 $ 2,373 $ 0 $ 0 $ 2,373 $ 2,373

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.

At ~~June~~September 30, 2016 and December 31, 2015, quantitative information regarding significant techniques and inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:

Fair Value at Fair Value at
6/30/16 Valuation Unobservable Method or Value As of 9/30/16 Valuation Unobservable Method or Value As of
Asset (In Thousands) Technique Input(s) 6/30/16 (In Thousands) Technique Input(s) 9/30/16
Servicing rights $ 1,224 Discounted cash flow Discount rate 10.00 % Rate used through modeling period $ 1,208 Discounted cash flow Discount rate 10.00 % Rate used through modeling period
Loan prepayment speeds 181.00 % Weighted-average PSA Loan prepayment speeds 194.00 % 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

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

Fair Value at
12/31/15 Valuation Unobservable Method or Value As of
Asset (In Thousands) Technique Input(s) 12/31/15
Servicing rights $ 1,296 Discounted cash flow Discount rate 10.00 % Rate used through modeling period
Loan prepayment speeds 146.00 % Weighted-average PSA
Servicing fees 0.25 % of loan balances
4.00 % of payments are late
5.00 % late fees assessed
$ 1.94 Miscellaneous fees per account per month
Servicing costs $ 6.00 Monthly servicing cost per account
$ 24.00 Additional monthly servicing cost per loan on loans more than 30 days delinquent
1.50 % of loans more than 30 days delinquent
3.00 % annual increase in servicing costs

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

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

(In Thousands) Three Months Ended Six Months Ended Three Months Ended Nine Months Ended
June 30,
2016 June 30,
2015 June 30,
2016 June 30,
2015 Sept. 30,
2016 Sept. 30,
2015 Sept. 30,
2016 Sept. 30,
2015
Servicing rights balance, beginning of period $ 1,261 $ 1,195 $ 1,296 $ 1,281 $ 1,224 $ 1,209 $ 1,296 $ 1,281
Issuances of servicing rights 71 47 107 78 52 57 159 135
Unrealized losses included in earnings (108 ) (33 ) (179 ) (150 )
Unrealized (losses) gains included in earnings (68 ) 13 (247 ) (137 )
Servicing rights balance, end of period $ 1,224 $ 1,209 $ 1,224 $ 1,209 $ 1,208 $ 1,279 $ 1,208 $ 1,279

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 ~~June~~September 30, 2016 and December 31, 2015, quantitative information regarding significant techniques and inputs used for nonrecurring fair value measurements using unobservable inputs (Level 3 methodologies) are as follows:

(In Thousands, Except Value at Value at
Percentages) Valuation 6/30/16 Valuation 9/30/16
Balance at Allowance at Fair Value at Valuation Unobservable (Weighted Balance at Allowance at Fair Value at Valuation Unobservable (Weighted
Asset 6/30/16 6/30/16 6/30/16 Technique Inputs Average) 9/30/16 9/30/16 9/30/16 Technique Inputs Average)

Impaired loans:
Residential mortgage loans - first liens $ 0 $ 0 $ 0 Sales comparison Discount to appraised value 0 %
Commercial:
Commercial loans secured by real estate $ 413 $ 125 $ 288 Sales comparison Discount to appraised value 44 % 2,794 528 2,266 Sales comparison Discount to appraised value 7 %
Commercial and industrial 354 77 277 Sales comparison Discount to appraised value 54 % 321 106 215 Sales comparison Discount to appraised value 35 %
Commercial construction and land 0 0 0 Sales comparison Discount to appraised value 0 %
Loans secured by farmland 508 51 457 Sales comparison Discount to appraised value 55 % 506 51 455 Sales comparison Discount to appraised value 55 %
Multi-family (5 or more) residential 0 0 0 Sales comparison Discount to appraised value 0 %
Total impaired loans $ 1,275 $ 253 $ 1,022 $ 3,621 $ 685 $ 2,936
Foreclosed assets held for sale - real estate:
Residential (1-4 family) $ 1,005 $ 0 $ 1,005 Sales comparison Discount to appraised value 34 % $ 1,195 $ 0 $ 1,195 Sales comparison Discount to appraised value 39 %
Land 1,047 0 1,047 Sales comparison Discount to appraised value 39 % 696 0 696 Sales comparison Discount to appraised value 29 %
Commercial real estate 430 0 430 Sales comparison Discount to appraised value 50 %
Total foreclosed assets held for sale $ 2,052 $ 0 $ 2,052 $ 2,321 $ 0 $ 2,321

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

(In Thousands, Except Value at Value at
Percentages) Valuation 12/31/15 Valuation 12/31/15
Balance at Allowance at Fair Value at Valuation Unobservable (Weighted Balance at Allowance at Fair Value at Valuation Unobservable (Weighted
Asset 12/31/15 12/31/15 12/31/15 Technique Inputs Average) 12/31/15 12/31/15 12/31/15 Technique Inputs Average)

Impaired loans:
Residential mortgage loans - first liens $ 42 $ 1 $ 41 Sales comparison Discount to appraised value 31 % $ 42 $ 1 $ 41 Sales comparison Discount to appraised value 31 %
Commercial:
Commercial loans secured by
real estate 317 97 220 Sales comparison Discount to appraised value 46 %
Commercial loans secured by real estate 317 97 220 Sales comparison Discount to appraised value 46 %
Commercial and industrial 75 75 0 Sales comparison Discount to appraised value 31 % 75 75 0 Sales comparison Discount to appraised value 31 %
Commercial construction and land 0 0 0 Sales comparison Discount to appraised value 0 %
Loans secured by farmland 512 52 460 Sales comparison Discount to appraised value 49 % 512 52 460 Sales comparison Discount to appraised value 49 %
Multi-family (5 or more) residential 987 595 392 Sales comparison Discount to appraised value 41 % 987 595 392 Sales comparison Discount to appraised value 41 %
Total impaired loans $ 1,933 $ 820 $ 1,113 $ 1,933 $ 820 $ 1,113
Foreclosed assets held for sale -real estate:
Foreclosed assets held for sale - real estate:
Residential (1-4 family) $ 556 $ 0 $ 556 Sales comparison Discount to appraised value 32 % $ 556 $ 0 $ 556 Sales comparison Discount to appraised value 32 %
Land 704 0 704 Sales comparison Discount to appraised value 29 % 704 0 704 Sales comparison Discount to appraised value 29 %
Total foreclosed assets held for sale $ 1,260 $ 0 $ 1,260 $ 1,260 $ 0 $ 1,260

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.

The Corporation used the following methods and assumptions in estimating fair value disclosures for financial instruments:

CASH AND CASH EQUIVALENTS - The carrying amounts of cash and short-term instruments approximate fair values.

CERTIFICATES OF DEPOSIT - Fair values for certificates of deposit, included in cash and due from banks in the consolidated balance sheet, are based on quoted market prices for certificates of similar remaining maturities.

SECURITIES - Fair values for securities, excluding restricted equity securities, are based on quoted market prices or other methods as described above. The carrying value of restricted equity securities approximates fair value based on applicable redemption provisions.

LOANS HELD FOR SALE - Fair values of loans held for sale are determined based on applicable sale prices available under the Federal Home Loan Banks’ MPF Xtra and MPF Original programs.

LOANS - Fair values are estimated for portfolios of loans with similar financial characteristics. Loans are segregated by type such as commercial, commercial real estate, residential mortgage and other consumer. Each loan category is further segmented into fixed and adjustable rate interest terms and by performing and nonperforming categories. The fair value of performing loans is calculated by discounting contractual cash flows, adjusted for estimated prepayments based on historical experience, using estimated market discount rates that reflect the credit and interest rate risk inherent in the loans. Fair value of nonperforming loans is based on recent appraisals or estimates prepared by the Corporation’s lending officers.

SERVICING RIGHTS - The fair value of servicing rights, included in other assets in the consolidated balance sheet, is determined through a discounted cash flow valuation. Significant inputs include expected net servicing income, the discount rate and the expected prepayment speeds of the underlying loans.

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

DEPOSITS - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and interest checking accounts, is (by definition) equal to the amount payable on demand at ~~June~~September 30, 2016 and December 31, 2015. The fair value of time deposits, such as certificates of deposit and Individual Retirement Accounts, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered
for deposits of similar remaining maturities. The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

BORROWED FUNDS - The fair value of borrowings is estimated using discounted cash flow analyses based on rates currently available to the Corporation for similar types of borrowing arrangements.

ACCRUED INTEREST - The carrying amounts of accrued interest receivable and payable approximate fair values.

OFF-BALANCE SHEET COMMITMENTS - 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.

The estimated fair values, and related carrying amounts, of the Corporation’s financial instruments are as follows:

(In Thousands) Valuation June 30, 2016 December 31, 2015 Valuation Sept. 30, 2016 December 31, 2015
Method(s) Carrying Fair Carrying Fair Method(s) Carrying Fair Carrying Fair
Used Amount Value Amount Value Used Amount Value Amount Value
Financial assets:
Cash and cash equivalents Level 1 $ 23,968 $ 23,968 $ 33,313 $ 33,313 Level 1 $ 30,102 $ 30,102 $ 33,313 $ 33,313
Certificates of deposit Level 2 3,468 3,500 2,748 2,752 Level 2 3,968 3,982 2,748 2,752
Available-for-sale securities See Above 417,205 417,205 420,290 420,290 See Above 409,800 409,800 420,290 420,290
Restricted equity securities (included in Other Assets) Level 2 3,615 3,615 4,657 4,657 Level 2 3,360 3,360 4,657 4,657
Loans held for sale Level 2 381 381 280 280 Level 2 621 621 280 280
Loans, net Level 3 719,913 720,987 696,991 685,552 Level 3 733,917 737,353 696,991 685,552
Accrued interest receivable Level 2 3,837 3,837 3,768 3,768 Level 2 3,871 3,871 3,768 3,768
Servicing rights Level 3 1,224 1,224 1,296 1,296 Level 3 1,208 1,208 1,296 1,296

Financial liabilities:
Deposits with no stated maturity Level 2 737,817 737,817 713,931 713,931 Level 2 769,734 769,734 713,931 713,931
Time deposits Level 2 230,134 230,555 221,684 221,891 Level 2 222,146 222,881 221,684 221,891
Short-term borrowings Level 2 25,702 25,615 53,496 53,398 Level 2 14,590 14,497 53,496 53,398
Long-term borrowings Level 2 38,615 40,017 38,767 40,166 Level 2 38,538 39,807 38,767 40,166
Accrued interest payable Level 2 73 73 70 70 Level 2 79 79 70 70

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

6. SECURITIES

Amortized cost and fair value of available-for-sale securities at ~~June~~September 30, 2016 and December 31, 2015 are summarized as follows:

June 30, 2016 September 30, 2016
Gross Gross Gross Gross
Unrealized Unrealized Unrealized Unrealized
Amortized Holding Holding Fair Amortized Holding Holding Fair
(In Thousands) Cost Gains Losses Value Cost Gains Losses Value

Obligations of U.S. Government agencies $ 9,664 $ 117 $ 0 $ 9,781 $ 9,667 $ 80 $ 0 $ 9,747
Obligations of states and political subdivisions:
Tax-exempt 110,702 5,374 (20 ) 116,056 116,797 4,565 (79 ) 121,283
Taxable 34,015 1,117 0 35,132 32,764 908 0 33,672
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities 64,108 1,299 0 65,407 60,966 1,221 0 62,187
Residential collateralized mortgage obligations 175,889 2,354 (263 ) 177,980 164,508 1,517 (306 ) 165,719
Commercial mortgage-backed securities 11,120 119 0 11,239 16,056 69 (13 ) 16,112
Collateralized debt obligations 1 0 0 1
Total debt securities 405,499 10,380 (283 ) 415,596 400,758 8,360 (398 ) 408,720
Marketable equity securities 1,171 438 0 1,609 752 328 0 1,080
Total $ 406,670 $ 10,818 $ (283 ) $ 417,205 $ 401,510 $ 8,688 $ (398 ) $ 409,800

December 31, 2015
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
(In Thousands) Cost Gains Losses Value

Obligations of U.S. Government agencies $ 10,663 $ 12 $ (192 ) $ 10,483
Obligations of states and political subdivisions:
Tax-exempt 103,414 4,365 (22 ) 107,757
Taxable 34,317 381 (101 ) 34,597
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities 73,227 486 (370 ) 73,343
Residential collateralized mortgage obligations 193,145 623 (2,053 ) 191,715
Collateralized debt obligations: 9 0 0 9
Total debt securities 414,775 5,867 (2,738 ) 417,904
Marketable equity securities 1,680 706 0 2,386
Total $ 416,455 $ 6,573 $ (2,738 ) $ 420,290

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

The following table presents gross unrealized losses and fair value of available-for-sale securities with unrealized loss positions that are not deemed to be other-than-temporarily impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at ~~June~~September 30, 2016 and December 31, 2015:

June 30, 2016 Less Than 12 Months 12 Months or More Total
September 30, 2016 Less Than 12 Months 12 Months or More Total
(In Thousands) Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses Value Losses Value Losses Value Losses

Obligations of states and political subdivisions, Tax-exempt $ 2,875 $ (6 ) $ 1,002 $ (14 ) $ 3,877 $ (20 )
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies,
Obligations of states and political subdivisions,
Tax-exempt $ 15,448 $ (64 ) $ 1,001 $ (15 ) $ 16,449 $ (79 )
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential collateralized mortgage obligations 2,773 (73 ) 25,995 (190 ) 28,768 (263 ) 19,303 (38 ) 24,426 (268 ) 43,729 (306 )
Commercial mortgage-backed securities 4,989 (13 ) 0 0 4,989 (13 )
Total temporarily impaired available-for-sale securities $ 5,648 $ (79 ) $ 26,997 $ (204 ) $ 32,645 $ (283 ) $ 39,740 $ (115 ) $ 25,427 $ (283 ) $ 65,167 $ (398 )

December 31, 2015 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 U.S. Government agencies $ 0 $ 0 $ 7,850 $ (192 ) $ 7,850 $ (192 )
Obligations of states and political subdivisions:
Tax-exempt 5,200 (19 ) 216 (3 ) 5,416 (22 )
Taxable 10,605 (60 ) 2,910 (41 ) 13,515 (101 )
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored Agencies:
Residential pass-through securities 38,764 (295 ) 3,503 (75 ) 42,267 (370 )
Residential collateralized mortgage obligations 88,355 (648 ) 49,273 (1,405 ) 137,628 (2,053 )
Total temporarily impaired available-for-sale securities $ 142,924 $ (1,022 ) $ 63,752 $ (1,716 ) $ 206,676 $ (2,738 )

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

(In Thousands) 3 Months Ended 6 Months Ended 3 Months Ended 9 Months Ended
June 30, June 30, June 30, June 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2016 2015 2016 2015 2016 2015 2016 2015
Gross realized gains from sales $ 123 $ 932 $ 506 $ 1,006 $ 584 $ 156 $ 1,090 $ 1,162
Gross realized losses from sales (1 ) 0 (1 ) 0 0 (77 ) (1 ) (77 )
Net realized gains $ 122 $ 932 $ 505 $ 1,006 $ 584 $ 79 $ 1,089 $ 1,085

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

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of ~~June~~September 30, 2016. 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.

Amortized Fair Amortized Fair
(In Thousands) Cost Value Cost Value

Due in one year or less $ 11,792 $ 11,899 $ 16,631 $ 16,837
Due from one year through five years 73,657 76,144 71,211 73,423
Due from five years through ten years 44,270 46,349 47,463 49,076
Due after ten years 24,663 26,578 23,923 25,366
Sub-total 154,382 160,970 159,228 164,702
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities 64,108 65,407 60,966 62,187
Residential collateralized mortgage obligations 175,889 177,980 164,508 165,719
Commercial mortgage-backed securities 11,120 11,239 16,056 16,112
Total $ 405,499 $ 415,596 $ 400,758 $ 408,720

The Corporation’s mortgage-backed securities 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 ~~$203,791,000~~$221,427,000 at ~~June~~September 30, 2016 and $228,616,000 at December 31, 2015 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.

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 ~~June~~September 30, 2016 is provided below.

Debt Securities

At ~~June~~September 30, 2016, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of debt securities at ~~June~~September 30, 2016 to be temporary.

Equity Securities

The Corporation’s marketable equity securities at ~~June~~September 30, 2016 and December 31, 2015 consisted exclusively of stocks of banking companies. At ~~June~~September 30, 2016, the Corporation held no stocks with an unrealized loss.

The Corporation realized gains from sales of bank stocks totaling ~~$28,000~~$560,000 in the three-month period ended ~~June~~September 30, 2016 and ~~$277,000~~$837,000 during the first ~~six~~nine months of 2016. ~~Realized~~There were no realized gains or losses on bank stocks in the three-month period ended September 30, 2015, while realized gains from sales of bank stocks totaled $476,000 in the ~~three-month and six-month periods~~nine-month period ended ~~June~~September 30, 2015.

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

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 sheet, was ~~$3,485,000~~$3,230,000 at ~~June~~September 30, 2016 and $4,527,000 at December 31, 2015. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at ~~June~~September 30, 2016 and December 31, 2015. 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.

7. LOANS

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. Loans outstanding at ~~June~~September 30, 2016 and December 31, 2015 are summarized by segment, and by classes within each segment, as follows:

Summary of Loans by Type
(In Thousands) June 30, Dec. 31, Sept. 30, Dec. 31,
2016 2015 2016 2015
Residential mortgage:
Residential mortgage loans - first liens $ 315,191 $ 304,783 $ 325,533 $ 304,783
Residential mortgage loans - junior liens 22,159 21,146 22,794 21,146
Home equity lines of credit 39,054 39,040 38,623 39,040
1-4 Family residential construction 22,241 21,121 23,310 21,121
Total residential mortgage 398,645 386,090 410,260 386,090
Commercial:
Commercial loans secured by real estate 153,070 154,779 149,938 154,779
Commercial and industrial 82,390 75,196 86,969 75,196
Political subdivisions 41,026 40,007 38,653 40,007
Commercial construction and land 9,193 5,122 12,809 5,122
Loans secured by farmland 6,615 7,019 6,900 7,019
Multi-family (5 or more) residential 8,173 9,188 8,133 9,188
Agricultural loans 4,692 4,671 4,313 4,671
Other commercial loans 11,904 12,152 11,557 12,152
Total commercial 317,063 308,134 319,272 308,134
Consumer 12,134 10,656 12,806 10,656
Total 727,842 704,880 742,338 704,880
Less: allowance for loan losses (7,929 ) (7,889 ) (8,421 ) (7,889 )
Loans, net $ 719,913 $ 696,991 $ 733,917 $ 696,991

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in the Pennsylvania and New York counties that comprise the market serviced by Citizens & Northern Bank. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at either ~~June~~September 30, 2016 or December 31, 2015.

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of ~~June~~September 30, 2016 and December 31, 2015, management determined that no allowance for credit losses related to unfunded loan commitments was required.

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

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and ~~six-month~~nine-month periods ended ~~June~~September 30, 2016 and 2015 were as follows:

Three Months Ended June 30, 2016 March 31, June 30,
Three Months Ended September 30, 2016 June 30, Sept. 30,
(In Thousands) 2016
Balance Charge-offs Recoveries Provision
(Credit) 2016
Balance 2016
Balance Charge-offs Recoveries Provision
(Credit) 2016
Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens $ 2,722 $ (42 ) $ 0 $ 150 $ 2,830 $ 2,830 $ (31 ) $ 2 $ 155 $ 2,956
Residential mortgage loans - junior liens 228 0 0 11 239 239 0 0 9 248
Home equity lines of credit 351 0 0 8 359 359 0 0 0 359
1-4 Family residential construction 200 0 0 22 222 222 0 0 14 236
Total residential mortgage 3,501 (42 ) 0 191 3,650 3,650 (31 ) 2 178 3,799
Commercial:
Commercial loans secured by real estate 2,027 0 1 55 2,083 2,083 0 0 304 2,387
Commercial and industrial 976 0 0 62 1,038 1,038 (2 ) 1 1 1,038
Commercial construction and land 84 0 0 21 105 105 0 0 41 146
Loans secured by farmland 108 0 0 (5 ) 103 103 0 0 3 106
Multi-family (5 or more) residential 256 0 0 (8 ) 248 248 0 0 (5 ) 243
Agricultural loans 44 0 0 3 47 47 0 0 (4 ) 43
Other commercial loans 112 0 0 7 119 119 0 0 (3 ) 116
Total commercial 3,607 0 1 135 3,743 3,743 (2 ) 1 337 4,079
Consumer 126 (21 ) 12 21 138 138 (28 ) 12 23 145
Unallocated 427 0 0 (29 ) 398 398 0 0 0 398
Total Allowance for Loan Losses $ 7,661 $ (63 ) $ 13 $ 318 $ 7,929 $ 7,929 $ (61 ) $ 15 $ 538 $ 8,421

Three Months Ended June 30, 2015 March 31, June 30,
Three Months Ended September 30, 2015 June 30, Sept. 30,
(In Thousands) 2015
Balance Charge-offs Recoveries Provision
(Credit) 2015
Balance 2015
Balance Charge-offs Recoveries Provision
(Credit) 2015
Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens $ 2,774 $ (58 ) $ 0 $ 59 $ 2,775 $ 2,775 $ (12 ) $ 0 $ (112 ) $ 2,651
Residential mortgage loans - junior liens 200 0 0 10 210 210 (42 ) 0 45 213
Home equity lines of credit 322 0 0 22 344 344 0 0 (5 ) 339
1-4 Family residential construction 207 0 0 50 257 257 0 0 55 312
Total residential mortgage 3,503 (58 ) 0 141 3,586 3,586 (54 ) 0 (17 ) 3,515
Commercial:
Commercial loans secured by real estate 1,736 0 0 (44 ) 1,692 1,692 0 0 39 1,731
Commercial and industrial 684 0 3 113 800 800 0 1 127 928
Commercial construction and land 286 0 0 10 296 296 (115 ) 0 (74 ) 107
Loans secured by farmland 159 0 0 (4 ) 155 155 0 0 (45 ) 110
Multi-family (5 or more) residential 81 0 0 (1 ) 80 80 0 0 231 311
Agricultural loans 29 0 0 11 40 40 0 0 3 43
Other commercial loans 123 0 0 (3 ) 120 120 0 0 1 121
Total commercial 3,098 0 3 82 3,183 3,183 (115 ) 1 282 3,351
Consumer 139 (19 ) 19 (4 ) 135 135 (28 ) 10 6 123
Unallocated 394 0 0 2 396 396 0 0 31 427
Total Allowance for Loan Losses $ 7,134 $ (77 ) $ 22 $ 221 $ 7,300 $ 7,300 $ (197 ) $ 11 $ 302 $ 7,416

23
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

Six Months Ended June 30, 2016 Dec. 31, June 30,
Nine Months Ended September 30, 2016 Dec. 31, Sept. 30,
(In Thousands) 2015
Balance Charge-offs Recoveries Provision
(Credit) 2016
Balance 2015
Balance Charge-offs Recoveries Provision
(Credit) 2016
Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens $ 2,645 $ (42 ) $ 0 $ 227 $ 2,830 $ 2,645 $ (73 ) $ 2 $ 382 $ 2,956
Residential mortgage loans - junior liens 219 0 0 20 239 219 0 0 29 248
Home equity lines of credit 347 0 0 12 359 347 0 0 12 359
1-4 Family residential construction 207 0 0 15 222 207 0 0 29 236
Total residential mortgage 3,418 (42 ) 0 274 3,650 3,418 (73 ) 2 452 3,799
Commercial:
Commercial loans secured by real estate 1,939 0 2 142 2,083 1,939 0 2 446 2,387
Commercial and industrial 981 0 1 56 1,038 981 (2 ) 2 57 1,038
Commercial construction and land 58 0 0 47 105 58 0 0 88 146
Loans secured by farmland 106 0 0 (3 ) 103 106 0 0 0 106
Multi-family (5 or more) residential 675 (595 ) 0 168 248 675 (595 ) 0 163 243
Agricultural loans 45 0 0 2 47 45 0 0 (2 ) 43
Other commercial loans 118 0 0 1 119 118 0 0 (2 ) 116
Total commercial 3,922 (595 ) 3 413 3,743 3,922 (597 ) 4 750 4,079
Consumer 122 (39 ) 27 28 138 122 (67 ) 39 51 145
Unallocated 427 0 0 (29 ) 398 427 0 0 (29 ) 398
Total Allowance for Loan Losses $ 7,889 $ (676 ) $ 30 $ 686 $ 7,929 $ 7,889 $ (737 ) $ 45 $ 1,224 $ 8,421

Six Months Ended June 30, 2015 Dec. 31, June 30,
Nine Months Ended September 30, 2015 Dec. 31, Sept. 30,
(In Thousands) 2014
Balance Charge-offs Recoveries Provision
(Credit) 2015
Balance 2014
Balance Charge-offs Recoveries Provision
(Credit) 2015
Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens $ 2,941 $ (137 ) $ 1 $ (30 ) $ 2,775 $ 2,941 $ (149 ) $ 1 $ (142 ) $ 2,651
Residential mortgage loans - junior liens 176 0 0 34 210 176 (42 ) 0 79 213
Home equity lines of credit 322 0 0 22 344 322 0 0 17 339
1-4 Family residential construction 214 0 0 43 257 214 0 0 98 312
Total residential mortgage 3,653 (137 ) 1 69 3,586 3,653 (191 ) 1 52 3,515
Commercial:
Commercial loans secured by real estate 1,758 (115 ) 0 49 1,692 1,758 (115 ) 0 88 1,731
Commercial and industrial 688 (10 ) 4 118 800 688 (10 ) 5 245 928
Commercial construction and land 283 0 0 13 296 283 (115 ) 0 (61 ) 107
Loans secured by farmland 165 0 0 (10 ) 155 165 0 0 (55 ) 110
Multi-family (5 or more) residential 87 0 0 (7 ) 80 87 0 0 224 311
Agricultural loans 31 0 0 9 40 31 0 0 12 43
Other commercial loans 131 0 0 (11 ) 120 131 0 0 (10 ) 121
Total commercial 3,143 (125 ) 4 161 3,183 3,143 (240 ) 5 443 3,351
Consumer 145 (37 ) 34 (7 ) 135 145 (65 ) 44 (1 ) 123
Unallocated 395 0 0 1 396 395 0 0 32 427
Total Allowance for Loan Losses $ 7,336 $ (299 ) $ 39 $ 224 $ 7,300 $ 7,336 $ (496 ) $ 50 $ 526 $ 7,416

24
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

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

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 below.

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of ~~June~~September 30, 2016 and December 31, 2015:

June 30, 2016
September 30, 2016
(In Thousands) Special Special
Pass Mention Substandard Doubtful Total Pass Mention Substandard Doubtful Total
Residential Mortgage:
Residential mortgage loans - first liens $ 304,713 $ 562 $ 9,852 $ 64 $ 315,191 $ 315,849 $ 331 $ 9,292 $ 61 $ 325,533
Residential mortgage loans - junior liens 21,591 154 414 0 22,159 22,376 145 273 0 22,794
Home equity lines of credit 38,030 423 601 0 39,054 37,925 124 574 0 38,623
1-4 Family residential construction 22,225 16 0 0 22,241 23,310 0 0 0 23,310
Total residential mortgage 386,559 1,155 10,867 64 398,645 399,460 600 10,139 61 410,260
Commercial:
Commercial loans secured by real estate 135,738 5,941 11,391 0 153,070 133,140 3,087 13,711 0 149,938
Commercial and Industrial 77,197 3,509 1,558 126 82,390 82,076 4,196 686 11 86,969
Political subdivisions 41,026 0 0 0 41,026 38,653 0 0 0 38,653
Commercial construction and land 9,096 60 37 0 9,193 12,707 66 36 0 12,809
Loans secured by farmland 4,911 169 1,517 18 6,615 5,243 168 1,472 17 6,900
Multi-family (5 or more) residential 7,538 0 635 0 8,173 7,505 0 628 0 8,133
Agricultural loans 3,862 817 13 0 4,692 3,503 0 810 0 4,313
Other commercial loans 11,828 0 76 0 11,904 11,482 0 75 0 11,557
Total commercial 291,196 10,496 15,227 144 317,063 294,309 7,517 17,418 28 319,272
Consumer 11,922 1 211 0 12,134 12,651 0 155 0 12,806
Totals $ 689,677 $ 11,652 $ 26,305 $ 208 $ 727,842 $ 706,420 $ 8,117 $ 27,712 $ 89 $ 742,338

25
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

December 31, 2015
(In Thousands) Special
Pass Mention Substandard Doubtful Total
Residential Mortgage:
Residential mortgage loans - first liens $ 295,302 $ 407 $ 9,007 $ 67 $ 304,783
Residential mortgage loans - junior liens 20,558 185 403 0 21,146
Home equity lines of credit 38,071 543 426 0 39,040
1-4 Family residential construction 21,104 17 0 0 21,121
Total residential mortgage 375,035 1,152 9,836 67 386,090
Commercial:
Commercial loans secured by real estate 140,381 5,862 8,536 0 154,779
Commercial and Industrial 71,225 2,106 1,737 128 75,196
Political subdivisions 40,007 0 0 0 40,007
Commercial construction and land 4,957 60 105 0 5,122
Loans secured by farmland 5,084 483 1,432 20 7,019
Multi-family (5 or more) residential 7,943 0 1,245 0 9,188
Agricultural loans 4,655 0 16 0 4,671
Other commercial loans 12,073 0 79 0 12,152
Total commercial 286,325 8,511 13,150 148 308,134
Consumer 10,490 21 145 0 10,656
Totals $ 671,850 $ 9,684 $ 23,131 $ 215 $ 704,880

The general component of the allowance for loan losses covers pools of loans including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject to a restructuring agreement. The pools of loans are evaluated for loss exposure based upon three-year average historical net charge-off rates for each loan class, adjusted for qualitative factors. Qualitative risk factors (described in the following paragraph) are evaluated for the impact on each of the three segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. The adjustment for qualitative factors is applied as an increase or decrease to the three-year average net charge-off rate to each loan class within each segment.

The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors. Further, the residential mortgage segment is significantly affected by the values of residential real estate that provide collateral for the loans. The majority of the Corporation’s commercial segment loans (approximately 56% at ~~June~~September 30, 2016) is secured by real estate, and accordingly, the Corporation’s risk for the commercial segment is significantly affected by commercial real estate values. The consumer segment includes a wide mix of loans for different purposes, primarily secured loans, including loans secured by motor vehicles, manufactured housing and other types of collateral.

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

26
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

The scope of loans evaluated individually for impairment include all loan relationships greater than $200,000 for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Also, all loans classified as troubled debt restructurings (discussed in more detail below) and all loan relationships less than $200,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment. Loans that are individually evaluated for impairment, but which are not determined to be impaired, are combined with all remaining loans that are not reviewed on a specific basis, and such loans are included within larger pools of loans based on similar risk and loss characteristics for purposes of determining the general component of the allowance. The loans that have been individually evaluated, but which have not been determined to be impaired, are included in the “Collectively Evaluated” column in the tables summarizing the allowance and associated loan balances as of ~~June~~September 30, 2016 and December 31, 2015.

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of ~~June~~September 30, 2016 and December 31, 2015:

June 30, 2016 Loans: Allowance for Loan Losses:
September 30, 2016 Loans: Allowance for Loan Losses:
(In Thousands)
Individually Collectively Individually Collectively Individually Collectively Individually Collectively
Evaluated Evaluated Totals Evaluated Evaluated Totals Evaluated Evaluated Totals Evaluated Evaluated Totals
Residential mortgage:
Residential mortgage loans - first liens $ 824 $ 314,367 $ 315,191 $ 0 $ 2,830 $ 2,830 $ 734 $ 324,799 $ 325,533 $ 0 $ 2,956 $ 2,956
Residential mortgage loans - junior liens 71 22,088 22,159 0 239 239 70 22,724 22,794 0 248 248
Home equity lines of credit 0 39,054 39,054 0 359 359 0 38,623 38,623 0 359 359
1-4 Family residential construction 0 22,241 22,241 0 222 222 0 23,310 23,310 0 236 236
Total residential mortgage 895 397,750 398,645 0 3,650 3,650 804 409,456 410,260 0 3,799 3,799
Commercial:
Commercial loans secured by real estate 5,856 147,214 153,070 125 1,958 2,083 8,088 141,850 149,938 528 1,859 2,387
Commercial and industrial 766 81,624 82,390 77 961 1,038 439 86,530 86,969 106 932 1,038
Political subdivisions 0 41,026 41,026 0 0 0 0 38,653 38,653 0 0 0
Commercial construction and land 0 9,193 9,193 0 105 105 0 12,809 12,809 0 146 146
Loans secured by farmland 1,408 5,207 6,615 51 52 103 1,399 5,501 6,900 51 55 106
Multi-family (5 or more) residential 392 7,781 8,173 0 248 248 392 7,741 8,133 0 243 243
Agricultural loans 13 4,679 4,692 0 47 47 13 4,300 4,313 0 43 43
Other commercial loans 0 11,904 11,904 0 119 119 0 11,557 11,557 0 116 116
Total commercial 8,435 308,628 317,063 253 3,490 3,743 10,331 308,941 319,272 685 3,394 4,079
Consumer 0 12,134 12,134 0 138 138 0 12,806 12,806 0 145 145
Unallocated 398 398

Total $ 9,330 $ 718,512 $ 727,842 $ 253 $ 7,278 $ 7,929 $ 11,135 $ 731,203 $ 742,338 $ 685 $ 7,338 $ 8,421

27
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

December 31, 2015 Loans: Allowance for Loan Losses:
(In Thousands)
Individually Collectively Individually Collectively
Evaluated Evaluated Totals Evaluated Evaluated Totals
Residential mortgage:
Residential mortgage loans - first liens $ 884 $ 303,899 $ 304,783 $ 1 $ 2,644 $ 2,645
Residential mortgage loans - junior liens 74 21,072 21,146 0 219 219
Home equity lines of credit 0 39,040 39,040 0 347 347
1-4 Family residential construction 0 21,121 21,121 0 207 207
Total residential mortgage 958 385,132 386,090 1 3,417 3,418
Commercial:
Commercial loans secured by real estate 6,262 148,517 154,779 97 1,842 1,939
Commercial and industrial 324 74,872 75,196 75 906 981
Political subdivisions 0 40,007 40,007 0 0 0
Commercial construction and land 0 5,122 5,122 0 58 58
Loans secured by farmland 1,427 5,592 7,019 52 54 106
Multi-family (5 or more) residential 987 8,201 9,188 595 80 675
Agricultural loans 16 4,655 4,671 0 45 45
Other commercial loans 0 12,152 12,152 0 118 118
Total commercial 9,016 299,118 308,134 819 3,103 3,922
Consumer 0 10,656 10,656 0 122 122
Unallocated 427

Total $ 9,974 $ 694,906 $ 704,880 $ 820 $ 6,642 $ 7,889

Summary information related to impaired loans at ~~June~~September 30, 2016 and December 31, 2015 is as follows:

(In Thousands) June 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015
Unpaid Unpaid Unpaid Unpaid
Principal Recorded Related Principal Recorded Related Principal Recorded Related Principal Recorded Related
Balance Investment Allowance Balance Investment Allowance Balance Investment Allowance Balance Investment Allowance
With no related allowance recorded:
Residential mortgage loans - first liens $ 824 $ 824 $ 0 $ 842 $ 842 $ 0 $ 764 $ 734 $ 0 $ 842 $ 842 $ 0
Residential mortgage loans - junior liens 71 71 0 74 74 0 70 70 0 74 74 0
Commercial loans secured by real estate 7,127 5,443 0 7,580 5,945 0 7,003 5,294 0 7,580 5,945 0
Commercial and industrial 412 412 0 249 249 0 118 118 0 249 249 0
Loans secured by farmland 900 900 0 915 915 0 893 893 0 915 915 0
Multi-family (5 or more) residential 987 392 0 0 0 0 987 392 0 0 0 0
Agricultural loans 13 13 0 16 16 0 13 13 0 16 16 0
Total with no related allowance recorded 10,334 8,055 0 9,676 8,041 0 9,848 7,514 0 9,676 8,041 0

With a related allowance recorded:
Residential mortgage loans - first liens 0 0 0 42 42 1 0 0 0 42 42 1
Commercial loans secured by real estate 413 413 125 317 317 97 2,794 2,794 528 317 317 97
Commercial and industrial 354 354 77 75 75 75 321 321 106 75 75 75
Loans secured by farmland 508 508 51 512 512 52 506 506 51 512 512 52
Multi-family (5 or more) residential 0 0 0 987 987 595 0 0 0 987 987 595
Consumer 0 0 0 0 0 0
Total with a related allowance recorded 1,275 1,275 253 1,933 1,933 820 3,621 3,621 685 1,933 1,933 820
Total $ 11,609 $ 9,330 $ 253 $ 11,609 $ 9,974 $ 820 $ 13,469 $ 11,135 $ 685 $ 11,609 $ 9,974 $ 820

28
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

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

Interest Income Recognized on Interest Income Recognized on
Average Investment in Impaired Loans Impaired Loans on a Cash Basis Average Investment in Impaired Loans Impaired Loans on a Cash Basis
(In Thousands) 3 Months Ended 6 Months Ended 3 Months Ended 6 Months Ended 3 Months Ended 9 Months Ended 3 Months Ended 9 Months Ended
June 30, June 30, June 30, June 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
Residential mortgage:
Residential mortgage loans - first lien $ 833 $ 3,701 $ 847 $ 3,819 $ 12 $ 20 $ 22 $ 58 $ 789 $ 1,990 $ 818 $ 2,534 $ 11 $ 9 $ 33 $ 67
Residential mortgage loans - junior lien 71 66 72 57 1 1 2 2 72 67 72 62 0 1 2 3
Total residential mortgage 904 3,767 919 3,876 13 21 24 60 861 2,057 890 2,596 11 10 35 70
Commercial:
Commercial loans secured by real estate 5,892 6,286 6,026 6,437 81 90 191 203 7,022 6,327 6,524 6,382 83 90 274 293
Commercial and industrial 754 423 661 513 7 5 10 12 577 421 619 467 7 4 17 16
Commercial construction and land 0 41 0 58 0 0 0 0 0 42 0 50 0 0 0 0
Loans secured by farmland 1,413 1,447 1,418 1,468 17 26 38 52 1,408 1,466 1,413 1,467 13 26 51 78
Multi-family (5 or more) residential 490 0 590 0 0 0 0 0 492 741 541 741 0 0 0 0
Agricultural loans 15 46 15 23 0 2 1 2 13 21 14 22 0 1 1 3
Total commercial 8,564 8,243 8,710 8,499 105 123 240 269 9,512 9,018 9,111 9,129 103 121 343 390
Consumer 18 0 15 0 0 0 0 0 17 0 16 0 0 0 0 0
Total $ 9,486 $ 12,010 $ 9,644 $ 12,375 $ 118 $ 144 $ 264 $ 329 $ 10,390 $ 11,075 $ 10,017 $ 11,725 $ 114 $ 131 $ 378 $ 460

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

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

(In Thousands) June 30, 2016 December 31, 2015 September 30, 2016 December 31, 2015
Past Due Past Due Past Due Past Due
90+ Days and 90+ Days and 90+ Days and 90+ Days and
Accruing Nonaccrual Accruing Nonaccrual Accruing Nonaccrual Accruing Nonaccrual
Residential mortgage:
Residential mortgage loans - first liens $ 3,663 $ 2,739 $ 2,381 $ 3,044 $ 4,016 $ 2,537 $ 2,381 $ 3,044
Residential mortgage loans - junior liens 44 0 79 0 58 0 79 0
Home equity lines of credit 285 12 130 0 106 11 130 0
Total residential mortgage 3,992 2,751 2,590 3,044 4,180 2,548 2,590 3,044
Commercial:
Commercial loans secured by real estate 135 5,592 503 5,730 2,795 7,898 503 5,730
Commercial and industrial 313 310 65 313 313 193 65 313
Loans secured by farmland 102 1,408 0 1,427 219 1,399 0 1,427
Multi-family (5 or more) residential 0 392 0 987 0 392 0 987
Agricultural loans 76 13 0 16 16 13 0 16
Total commercial 626 7,715 568 8,473 3,343 9,895 568 8,473
Consumer 36 38 71 0 16 38 71 0

Totals $ 4,654 $ 10,504 $ 3,229 $ 11,517 $ 7,539 $ 12,481 $ 3,229 $ 11,517

29
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

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.

The table below presents a summary of the contractual aging of loans as of ~~June~~September 30, 2016 and December 31, 2015:

As of June 30, 2016 As of December 31, 2015 As of September 30, 2016 As of December 31, 2015
Current & Current & Current & Current &
(In Thousands) Past Due Past Due Past Due Past Due Past Due Past Due Past Due Past Due Past Due Past Due Past Due Past Due
Less than 30-89 90+ Less than 30-89 90+ Less than 30-89 90+ Less than 30-89 90+
30 Days Days Days Total 30 Days Days Days Total 30 Days Days Days Total 30 Days Days Days Total
Residential mortgage:
Residential mortgage loans - first liens $ 306,697 $ 3,852 $ 4,642 $ 315,191 $ 294,703 $ 6,156 $ 3,924 $ 304,783 $ 316,869 $ 3,058 $ 5,606 $ 325,533 $ 294,703 $ 6,156 $ 3,924 $ 304,783
Residential mortgage loans - junior liens 21,826 289 44 22,159 20,816 251 79 21,146 22,544 192 58 22,794 20,816 251 79 21,146
Home equity lines of credit 38,527 242 285 39,054 38,581 329 130 39,040 38,143 374 106 38,623 38,581 329 130 39,040
1-4 Family residential construction 22,241 0 0 22,241 21,121 0 0 21,121 23,079 231 0 23,310 21,121 0 0 21,121
Total residential mortgage 389,291 4,383 4,971 398,645 375,221 6,736 4,133 386,090 400,635 3,855 5,770 410,260 375,221 6,736 4,133 386,090

Commercial:
Commercial loans secured by real estate 149,599 2,762 709 153,070 153,427 108 1,244 154,779 146,888 107 2,943 149,938 153,427 108 1,244 154,779
Commercial and industrial 81,927 139 324 82,390 75,002 118 76 75,196 86,637 8 324 86,969 75,002 118 76 75,196
Political subdivisions 41,026 0 0 41,026 40,007 0 0 40,007 38,653 0 0 38,653 40,007 0 0 40,007
Commercial construction and land 9,193 0 0 9,193 5,018 104 0 5,122 12,801 8 0 12,809 5,018 104 0 5,122
Loans secured by farmland 5,413 284 918 6,615 5,970 223 826 7,019 5,807 62 1,031 6,900 5,970 223 826 7,019
Multi-family (5 or more) residential 7,713 68 392 8,173 8,201 0 987 9,188 7,657 84 392 8,133 8,201 0 987 9,188
Agricultural loans 4,560 43 89 4,692 4,642 13 16 4,671 4,156 128 29 4,313 4,642 13 16 4,671
Other commercial loans 11,904 0 0 11,904 12,152 0 0 12,152 11,557 0 0 11,557 12,152 0 0 12,152
Total commercial 311,335 3,296 2,432 317,063 304,419 566 3,149 308,134 314,156 397 4,719 319,272 304,419 566 3,149 308,134
Consumer 11,979 81 74 12,134 10,537 48 71 10,656 12,544 208 54 12,806 10,537 48 71 10,656

Totals $ 712,605 $ 7,760 $ 7,477 $ 727,842 $ 690,177 $ 7,350 $ 7,353 $ 704,880 $ 727,335 $ 4,460 $ 10,543 $ 742,338 $ 690,177 $ 7,350 $ 7,353 $ 704,880

Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at ~~June~~September 30, 2016 and December 31, 2015 is as follows:

Current & Current &
(In Thousands) 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
June 30, 2016 Nonaccrual Totals $ 6,866 $ 815 $ 2,823 $ 10,504
September 30, 2016 Nonaccrual Totals $ 9,057 $ 420 $ 3,004 $ 12,481
December 31, 2015 Nonaccrual Totals $ 7,100 $ 293 $ 4,124 $ 11,517 $ 7,100 $ 293 $ 4,124 $ 11,517

Loans whose terms are modified are classified as Troubled Debt Restructurings (TDRs) if the Corporation grants such borrowers concessions, and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of loans subject to TDRs, as well as contractual aging information at ~~June~~September 30, 2016 and December 31, 2015 is as follows:

Current & Current &
(In Thousands) 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 Nonaccrual Total 30 Days Days Days Nonaccrual Total
June 30, 2016 Totals $ 989 $ 58 $ 81 $ 5,021 $ 6,149
September 30, 2016 Totals $ 889 $ 57 $ 0 $ 5,032 $ 5,978
December 31, 2015 Totals $ 1,186 $ 0 $ 81 $ 5,097 $ 6,364 $ 1,186 $ 0 $ 81 $ 5,097 $ 6,364

30
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

The TDR that occurred during the three-month period ended ~~June~~September 30, 2016 is as follows:

Three Months Ended June 30, 2016 Pre- Post-
(Balances in Thousands) Modification Modification
Number Outstanding Outstanding
of Recorded Recorded
Contracts Investment Investment
Commercial,
Commercial and industrial 1 $ 102 $ 102
Three Months Ended September 30, 2016 Pre- Post-
(Balances in Thousands) Modification Modification
Number Outstanding Outstanding
of Recorded Recorded
Contracts Investment Investment

Consumer 1 $ 25 $ 25

There were no TDRs that occurred during the three-month period ended ~~June~~September 30, 2015.

The TDR in the three-month period ended ~~June~~September 30, 2016 ~~resulted~~represented a new, unsecured loan contract for $25,000. The new loan contract was entered into pursuant to a settlement agreement with a borrower for whom the Corporation accepted a short fall from ~~an extension~~the sale of residential real estate as payment in full on a ~~final maturity date and a lowered interest rate. There was a $30,000 allowance for loan losses on this loan at June~~mortgage loan. At September 30, 2016, ~~as compared to~~there was no allowance for loan losses ~~on the loan prior~~related to this TDR and there were no changes to the ~~second~~allowance for loan losses related to this TDR in the third quarter 2016.

TDRs that occurred during the ~~six-month~~nine-month periods ended ~~June~~September 30, 2016 and 2015 were as follows:

Six Months Ended June 30, 2016 Pre- Post-
Nine Months Ended September 30, 2016 Pre- Post-
(Balances in Thousands) Modification Modification Modification Modification
Number Outstanding Outstanding Number Outstanding Outstanding
of Recorded Recorded of Recorded Recorded
Contracts Investment Investment Contracts Investment Investment
Residential mortgage,
Residential mortgage loans - first liens 1 $ 102 $ 102
Commercial,
Commercial and industrial 2 $ 107 $ 107
Commercial and Industrial 1 5 5
Consumer 1 25 25

Six Months Ended June 30, 2015 Pre- Post-
Nine Months Ended September 30, 2015 Pre- Post-
(Balances in Thousands) Modification Modification Modification Modification
Number Outstanding Outstanding Number Outstanding Outstanding
of Recorded Recorded of Recorded Recorded
Contracts Investment Investment Contracts Investment Investment
Residential mortgage:
Residential mortgage loans - first liens 1 $ 56 $ 56 1 $ 56 $ 56
Residential mortgage loans - junior liens 1 32 32 1 32 32
Consumer 1 30 30 1 30 30

The TDRs in the ~~six-month~~nine-month period ended ~~June~~September 30, 2016 included an extension of a final maturity date and a lowered interest rate on one contract ~~and~~on a residential mortgage – first lien, an extension of a final maturity date on ~~one contract. There was~~ a ~~$30,000 allowance for loan losses on the~~ commercial and industrial loan, ~~that included~~and establishment of an ~~extension~~unsecured consumer loan contract pursuant to a settlement agreement with a borrower for whom the Corporation accepted a short fall from the sale of residential real estate as payment in full on a ~~final maturity date and~~mortgage loan. In the third quarter 2016, a ~~lowered interest rate at June~~partial charge-off of $31,000 was recorded on the residential mortgage –first lien. At September 30, 2016, ~~as compared to no allowance for loan losses on the loan at December 31, 2015. There~~there was no allowance for loan losses ~~at June 30, 2016~~related to these TDRs, and except for the partial charge-off on the ~~other commercial and industrial loan (TDR), and~~residential mortgage – first lien, no ~~change~~changes in the allowance for loan losses ~~resulting~~that resulted from ~~that TDR~~these TDRs in the ~~six-month~~nine-month period ended ~~June~~September 30, 2016.

The TDRs in the ~~six-month~~nine-month period ended ~~June~~September 30, 2015 included an extended maturity date and a reduction in interest rate on a residential mortgage – first lien, a lowered interest rate and reduced payment amount on a residential mortgage – junior lien and a lowered interest rate and reduced payment amount on the consumer loan. There was no allowance for loan losses on these loans at ~~June~~September 30, 2015, and there was no change in the allowance for loan losses ~~resulting~~that resulted from these TDRs.
~~In the three-month period ended June 30, 2016, defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months were as follows:~~
Number
of Recorded
Contracts Investment
Three Months Ended June 30, 2016
(Balances in Thousands)
Residential mortgage:
Residential mortgage loans - first liens 1 $ 242
Residential mortgage loans - junior liens 1 30
Consumer 1 28
31
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

There were no defaults on loans for which modification considered to be TDRs were entered into within the previous 12 months in the three-month period ended ~~June~~September 30, ~~2015.~~2016.
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In the three-month period ended September 30, 2015, defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months were as follows:
Number
of Recorded
Contracts Investment
Three Months Ended September 30, 2015
(Balances in Thousands)
Residential mortgage,
Residential mortgage loans - first liens 1 $ 32

In the ~~six-month~~three-month period ended ~~June~~September 30, ~~2016,~~2015, the ~~events~~event of default in the table listed above resulted from a borrower’s failure to ~~pay in a timely manner~~make regular payments after reduced payment ~~amounts for~~amount period of six months ~~expired~~ended on ~~the Residential mortgage –~~a first lien ~~and a borrower’s failure to pay in a timely manner after lowered interest rates and reduced payment amounts on the Residential mortgage – junior lien and on the Consumer loan.~~residential mortgage. There was no allowance for loan losses recorded on ~~these loans~~this loan at ~~June~~September 30, ~~2016.~~2015.

In the ~~six-month~~nine-month periods ended ~~June~~September 30, 2016 and 2015, defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months were as follows:

Number Number
of Recorded of Recorded
Contracts Investment Contracts Investment
Six Months Ended June 30, 2016
Nine Months Ended September 30, 2016
(Balances in Thousands)
Residential mortgage:
Residential mortgage loans - first liens 2 $ 273 1 $ 242
Residential mortgage loans - junior liens 1 30 1 30
Commercial,
Commercial and industrial 1 5 1 5
Consumer 1 28 1 28

Number Number
of Recorded of Recorded
Contracts Investment Contracts Investment
Six Months Ended June 30, 2015
Nine Months Ended September 30, 2015
(Balances in Thousands)
Residential mortgage,
Residential mortgage loans - first liens 2 $ 115 2 $ 65
Commercial:
Commercial loans secured by real estate 1 407
Commercial,
Commercial construction and land 1 25 1 25

In the ~~six-month~~nine-month period ended ~~June~~September 30, 2016, the events of default in the table listed above resulted from the borrowers’ failure to make timely payments under the following circumstances: (1) for ~~one customer relationship included in~~ the ~~Residential first lien mortgage class, timely payment was missed after payment amounts were reduced for six months; (2) for the other~~ customer relationship in the Residential first lien mortgage class, payment was missed after the monthly payment amount was reduced for six months; ~~(3)~~(2) for the customer relationships in the Residential junior lien mortgage class and the consumer class, timely payments were missed after interest rates and payment amounts were reduced on both loans; and ~~(4)~~(3) for the Commercial and industrial loan, the borrower failed to pay off the loan at the extended maturity date. There was no allowance for loan losses recorded on these loans at September 30, 2016.

In the ~~six-month~~nine-month period ended ~~June~~September 30, 2015, the events of default in the table listed above resulted from the borrowers’ failure to make timely payments under the following circumstances: (1) for one customer relationship included in the Residential first lien mortgage class, payment was missed after the interest rate and monthly payment amount had been reduced; (2) for the other customer relationship included in the Residential first lien class, monthly payments were missed after reducing the monthly payments to interest only payments; ~~(3) for the Commercial loan secured by real estate, monthly payments were missed after reducing the monthly payments to interest only;~~ and ~~(4)~~(3) for the Commercial construction and land loan, monthly payments were missed after extending the term of maturity. There were no allowances for loan losses recorded on these loans at ~~June~~September 30, 2015.

32
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

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

(In Thousands) June 30, Dec. 31, Sept. 30, Dec. 31,
2016 2015 2016 2015
Foreclosed residential real estate $ 1,005 $ 556 $ 1,195 $ 555

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

(In Thousands) June 30, Dec. 31, Sept. 30, Dec. 31,
2016 2015 2016 2015
Residential real estate in process of foreclosure $ 1,598 $ 1,173 $ 1,991 $ 1,173

8. BORROWED FUNDS

Short-term borrowings include the following:

(In Thousands) June 30, Dec. 31, Sept. 30, Dec. 31,
2016 2015 2016 2015
FHLB-Pittsburgh borrowings $ 20,041 $ 48,581 $ 8,270 $ 48,581
Customer repurchase agreements 5,661 4,915 6,320 4,915
Total short-term borrowings $ 25,702 $ 53,496 $ 14,590 $ 53,496

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

(In Thousands) June 30, Dec. 31 Sept. 30, Dec. 31
2016 2015 2016 2015
Overnight borrowing $ 7,500 $ 23,500 $ 2,000 $ 23,500
Other short-term advances 12,541 25,081 6,270 25,081
Total short-term FHLB-Pittsburgh borrowings $ 20,041 $ 48,581 $ 8,270 $ 48,581

The FHLB-Pittsburgh loan facilities are collateralized by qualifying loans secured by real estate with a book value totaling ~~$454,935,000~~$460,590,000 at ~~June~~September 30, 2016 and $450,883,000 at December 31, 2015. Also, the FHLB-Pittsburgh loan facilities require the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in Other Assets) were ~~$3,485,000~~$3,230,000 at ~~June~~September 30, 2016 and $4,527,000 at December 31, 2015.

At ~~June~~September 30, 2016, short-term borrowings from the FHLB-Pittsburgh include 63 advances of approximately $2,090,000 each, maturing monthly throughout the remainder of the year ending December 31, 2016, with a weighted average interest rate of ~~0.99%~~1.03% and rates ranging from ~~0.92%~~1.006% to 1.052%. In the first ~~six~~nine months of 2016, the Corporation repaid ~~six~~nine advances of approximately $2,090,000 each, with a weighted average rate of ~~0.72%~~0.80%.

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 interest rate paid by the Corporation on customer repurchase agreements was 0.10% at ~~June~~September 30, 2016 and December 31, 2015. The carrying value of the underlying securities was ~~$17,218,000~~$16,472,000 at ~~June~~September 30, 2016 and $12,613,000 at December 31, 2015.

Long-term borrowings are as follows:
(In Thousands) Sept. 30, Dec. 31,
2016 2015
FHLB-Pittsburgh borrowings $ 11,538 $ 11,767
Repurchase agreement 27,000 27,000
Total long-term borrowings $ 38,538 $ 38,767
33
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
~~Long-term borrowings are as follows:~~
(In Thousands) June 30, Dec. 31,
2016 2015
FHLB-Pittsburgh borrowings $ 11,615 $ 11,767
Repurchase agreement 27,000 27,000
Total long-term borrowings $ 38,615 $ 38,767

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

(In Thousands) June 30, Dec. 31, Sept. 30, Dec. 31,
2016 2015 2016 2015
Loan maturing in 2016 with a rate of 6.86% $ 32 $ 57 $ 18 $ 57
Loan maturing in 2017 with a rate of 6.83% 7 10 6 10
Loan maturing in 2017 with a rate of 3.81% 10,000 10,000 10,000 10,000
Loan maturing in 2020 with a rate of 4.79% 734 821 691 821
Loan maturing in 2025 with a rate of 4.91% 842 879 823 879
Total long-term FHLB-Pittsburgh borrowings $ 11,615 $ 11,767 $ 11,538 $ 11,767

The repurchase agreement included in long-term borrowings has an interest rate of 3.595% and an effective maturity date in December 2017.

The “Repurchase Date,” as defined in the Master Repurchase Agreement between the Corporation and the broker-dealer, occurs quarterly on or about the 20^th of each March, June, September and December until the “Final Repurchase Date” (as defined) on December 20, 2017. The Corporation pays interest, and the borrowing is putable by the issuer, on each Repurchase Date. The Final Repurchase Date is the effective maturity date of the borrowing.

Securities sold under repurchase agreements were delivered to the broker-dealer who is the counter-party to the transactions. The broker-dealer may have sold, loaned or otherwise disposed of such securities to other parties in the normal course of their operations, and has agreed to resell to the Corporation substantially identical securities at the maturities of the agreements. The Master Repurchase Agreement provides that the Agreement constitutes a “netting contract,” as defined; however, the Corporation and the broker-dealer have no other obligations to one another and accordingly, no netting has occurred.

The carrying value of the underlying securities was ~~$36,117,000~~$34,130,000 at ~~June 30,~~September30, 2016 and $33,780,000 at December 31, 2015, detailed in the following table:

(In Thousands) June 30, Dec. 31, Sept. 30, Dec. 31,
2016 2015 2016 2015
Mortgage-backed securities $ 20,116 $ 15,772
Collateralized mortgage obligations, Issued by U.S. Government agencies 16,001 18,008
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities $ 19,444 $ 15,772
Residential collateralized mortgage obligations 14,686 18,008
Total $ 36,117 $ 33,780 $ 34,130 $ 33,780

Two of the more significant risks associated with the repurchase agreement with the broker-dealer are as follows:
· The borrowings are putable at quarterly intervals by the issuer. Accordingly, if interest rates were to rise to a sufficient level, the issuer would be expected to require the Corporation to pay off the borrowing. In this circumstance, the Corporation would be required to obtain a new borrowing at a higher interest rate than the existing repurchase agreement or utilize cash from other sources to pay off the borrowing. If sales of available-for-sale securities were used to generate cash to pay off the borrowing, the value of such securities would be expected to have fallen, which could result in the Corporation recognizing a loss.

· As principal pay-downs of mortgage backed securities and CMOs occur, the Corporation must have available, unencumbered assets or purchase a sufficient amount of assets with credit quality suitable to the broker-dealer to replace the amounts being paid off. Since pre-payments of mortgages typically increase as interest rates fall, the Corporation may be required to purchase additional assets at times when market rates are lower than the rates paid on the borrowing.

34
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
The Corporation manages these risks by maintaining sufficient available assets of acceptable credit quality, as well as maintaining other borrowing facilities, to meet ongoing collateral maintenance requirements or pay off the borrowing if required. In particular, the Corporation had unused borrowing capacity available from the FHLB-Pittsburgh of ~~$294,373,000~~$315,685,000 at ~~June~~September 30, 2016.
34

9. DEFINED BENEFIT PLANS

The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. Full-time employees no longer accrue service time toward the Corporation-subsidized portion of the medical benefits. This plan contains a cost-sharing feature, which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at ~~June~~September 30, 2016 and December 31, 2015, and are not expected to significantly affect the Corporation's future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.

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

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

Defined Benefit Plans
(In Thousands) Pension Postretirement Pension Postretirement
Six Months Ended Six Months Ended Nine Months Ended Nine Months Ended
June 30, June 30, Sept. 30, Sept. 30,
2016 2015 2016 2015 2016 2015 2016 2015
Service cost $ 0 $ 0 $ 18 $ 19 $ 0 $ 0 $ 27 $ 29
Interest cost 13 18 31 28 20 27 47 42
Expected return on plan assets (13 ) (23 ) 0 0 (20 ) (34 ) 0 0
Amortization of prior service cost 0 0 (15 ) (15 ) 0 0 (23 ) (22 )
Recognized net actuarial loss 5 7 0 0 8 11 0 0
Net periodic benefit cost $ 5 $ 2 $ 34 $ 32 $ 8 $ 4 $ 51 $ 49

Defined Benefit Plans
(In Thousands) Pension Postretirement Pension Postretirement
Three Months Ended Three Months Ended Three Months Ended Three Months Ended
June 30, June 30, Sept. 30, Sept. 30,
2016 2015 2016 2015 2016 2015 2016 2015
Service cost $ 0 $ 0 $ 9 $ 9 $ 0 $ 0 $ 9 $ 10
Interest cost 6 9 15 15 7 9 16 14
Expected return on plan assets (6 ) (12 ) 0 0 (7 ) (11 ) 0 0
Amortization of prior service cost 0 0 (7 ) (8 ) 0 0 (8 ) (7 )
Recognized net actuarial loss 2 3 0 0 3 4 0 0
Net periodic benefit cost $ 2 $ 0 $ 17 $ 16 $ 3 $ 2 $ 17 $ 17

In the first ~~six~~nine months of 2016, the Corporation funded postretirement contributions totaling ~~$31,000,~~$44,000, with estimated annual postretirement contributions of $68,000 expected in 2016 for the full year. Based upon the related actuarial reports, no defined benefit pension contributions are required in 2016, though the Corporation may make discretionary contributions.

10. STOCK-BASED COMPENSATION PLANS

The Corporation has a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. In the three-month periods ended March 31, 2016 and 2015, the Corporation issued restricted stock under each of the Plans.
35
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

In the first quarter 2016, the Corporation awarded a total of 34,199 shares of restricted stock under the Stock Incentive and Independent Directors Stock Incentive Plans. Restricted stock awards in the first quarter 2016 included the following: (1) a total of 17,289 shares to employees, vesting over a three-year term, with vesting contingent upon the Corporation meeting an annual return on average equity (“ROAE”) performance ratio, as defined; (2) a total of 10,304 shares to employees, vesting over a three-year term, with vesting dependent on satisfactory performance; and (3) a total of 6,606 shares under the Independent Directors Incentive Plan, vesting over a term of one year.

In the second quarter 2016, the Corporation awarded a total of 1,228 shares of restricted stock under the Independent Directors Stock Incentive Plan. The restricted stock was awarded to two new directors, with each award vesting over a term of one year.

35
In the first quarter 2015, a total of 34,800 shares of restricted stock were awarded under the Plans. Restricted stock awards in 2015 included the following: (1) a total of 20,298 shares to employees, vesting over a four-year term, with vesting contingent upon the Corporation meeting an annual ROAE performance ratio, as defined; (2) a total of 2,198 shares to employees, vesting over a four-year term, with vesting dependent on satisfactory performance; (3) an award to the Chief Executive Officer of 5,174 shares, vesting over a three-year term, with vesting dependent on satisfactory performance; and (4) a total of 7,130 shares under the Independent Directors Incentive Plan, vesting over a term of one year.

Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period. Management has estimated restricted stock expense in the first ~~six~~nine months of 2016 based on an assumption that the ROAE target for 2016 will be met.

Total stock-based compensation expense is as follows:

(In Thousands) 3 Months Ended 6 Months Ended 3 Months Ended 9 Months Ended
June 30, June 30, June 30, June 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2016 2015 2016 2015 2016 2015 2016 2015
Restricted stock $ 163 $ 157 $ 325 $ 307 $ 155 $ 152 $ 480 $ 459

11. INCOME TAXES

The net deferred tax asset at ~~June~~September 30, 2016 and December 31, 2015 represents the following temporary difference components:

June 30, December 31,
(In Thousands) 2016 2015
Deferred tax assets:
Net realized losses on securities $ 36 $ 69
Allowance for loan losses 2,775 2,761
Other deferred tax assets 2,359 2,634
Total deferred tax assets 5,170 5,464

Deferred tax liabilities:
Unrealized holding gains on securities 3,686 1,342
Defined benefit plans - ASC 835 25 19
Bank premises and equipment 916 869
Core deposit intangibles 8 11
Other deferred tax liabilities 110 108
Total deferred tax liabilities 4,745 2,349
Deferred tax asset, net $ 425 $ 3,115
36
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
September 30, December 31,
(In Thousands) 2016 2015
Deferred tax assets:
Net realized losses on securities 36 $ 69
Allowance for loan losses 2,980 2,761
Other deferred tax assets 2,517 2,634
Total deferred tax assets 5,533 5,464

Deferred tax liabilities:
Unrealized holding gains on securities 2,902 1,342
Defined benefit plans - ASC 835 23 19
Bank premises and equipment 952 869
Core deposit intangibles 7 11
Other deferred tax liabilities 105 108
Total deferred tax liabilities 3,989 2,349
Deferred tax asset, net $ 1,544 $ 3,115

The provision for income tax for the three-month and ~~six~~nine- month periods ended ~~June~~September 30, 2016 and 2015 is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The effective tax rates for the Corporation are as follows:

Three Months Ended Six Months Ended 3 Months Ended 9 Months Ended
(In thousands) June 30, June 30, September 30, September 30,
2016 2015 2016 2015 2016 2015 2016 2015
Income before income tax provision $ 5,174 $ 5,809 $ 9,840 $ 10,853 $ 5,538 $ 5,629 $ 15,378 $ 16,482
Income tax provision 1,303 1,452 2,396 2,681 1,451 1,395 3,847 4,076
Effective tax rate 25.18 % 25.00 % 24.35 % 24.70 % 26.20 % 24.78 % 25.02 % 24.73 %

The effective tax rate for each period presented differs from the statutory rate of 35% principally because of the effects of tax-exempt interest income.
36

The Corporation has investments in three limited partnerships that manage affordable housing projects that have qualified for the federal low-income housing tax credit. The Corporation’s expected return from these investments is based on the receipt of tax credits and tax benefits from deductions of operating losses. The Corporation uses the effective yield method to account for these investments, with the benefits recognized as a reduction of the provision for income taxes. For two of the three limited partnership investments, the tax credits have been received in full in prior years, and the Corporation has fully realized the benefits of the credits and amortized its initial investments in the partnerships. The most recent affordable housing project was completed in 2013, and the Corporation received tax credits in 2013, 2014 and 2015 and expects to continue to receive tax credits annually through 2022. The carrying amount of the Corporation’s investment is ~~$762,000~~$737,000 at ~~June~~September 30, 2016 and $812,000 at December 31, 2015 (included in Other Assets in the consolidated balance sheets). For the year ending December 31, 2016, the estimated amount of tax credits and other tax benefits to be received is $158,000 and the estimated amount to be recognized as a reduction of the provision for income taxes is $76,000. For the year ended December 31, 2015, tax credits and other tax benefits totaled $158,000 and the amount recognized as a reduction of the provision for income taxes for 2015 was $80,000. The total reduction in the provision for income taxes resulting from this investment is $19,000 in the ~~second~~third quarter 2016, and ~~$38,000~~$57,000 for the ~~six~~nine months ended ~~June~~September 30, 2016, and ~~$20,000~~$22,000 in the ~~second~~third quarter 2015, and ~~$41,000~~$62,000 for the ~~six~~nine months ended ~~June~~September 30, 2015.

The Corporation has no unrecognized tax benefits, nor pending examination issues related to tax positions taken in preparation of its income tax returns. With limited exceptions, the Corporation is no longer subject to examination by the Internal Revenue Service for years prior to ~~2012.~~2013.

12. CONTINGENCIES

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

13. RECENT ACCOUNTING PRONOUNCEMENTS

The FASB issues Accounting Standards Updates (ASUs) to the FASB ~~Accounting Standards Codification (ASC).~~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.

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers, which provides a principles-based framework for revenue recognition that supersedes virtually all previously issued revenue recognition guidance under U.S. GAAP. Additionally, the ASU requires improved disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. The core principle of the five-step revenue recognition framework is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In April 2016, the FASB issued ASU 2016-10, which provides clarifying information related to identifying performance obligations and licensing. In May 2016, the FASB issued ASU 2016-12, which provides clarifying guidance in a few narrow areas and adds some practical expedients to the guidance. In August 2015 the FASB issued ASU 2015-14, which deferred the effective date of the revenue recognition standard by a year, making it applicable for the Corporation in the first quarter 2018 and for the annual period ending December 31, 2018. The amendments should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. The Corporation is in the process of evaluating the potential impact of adopting the amendments, including determining which transition method to apply.
37
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. This makes significant changes in U.S. GAAP related to certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The changes provided for in this Update that are applicable to the Corporation are as follows: (1) require equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income; however, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer; (2) for equity investments without readily determinable fair values, require a qualitative assessment to identify impairment, and if a qualitative assessment indicates that impairment exists, requiring an entity to measure the investment at fair value; (3) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments (at ~~March 31,~~September 30, 2016 and December 31, 2015, the Corporation has no liabilities for which the fair value measurement option has been elected); (6) require separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (that is, securities or loans and receivables) on the balance sheet or the accompanying notes to the financial statements; and (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this Update will become effective for the Corporation for annual and interim periods beginning in the first quarter 2018. With limited exceptions, early adoption of the amendments in this Update is not permitted. Amendments are to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively.
37

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The core principle of Topic 842 is that a lessee should recognize the assets and liabilities that arise from leases. Specifically, a lessee should recognize on the balance sheet a liability to make lease payments (the lease liability) and a right-of-use asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee would be permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and liabilities. Topic 842 would not significantly change the recognition, measurement and presentation of expenses and cash flows arising from a lease by a lessee from current U.S. GAAP; however, the principal change from current GAAP is that lease assets and liabilities arising from operating leases would be recognized on the balance sheet. Topic 842 provides several other changes or clarifications to existing GAAP, and will require qualitative disclosures, along with quantitative disclosures, so that financial statement users can understand more about the nature of an entity’s leasing activities. In transition, Topic 842 provides that lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, including optional practical expedients. An entity that elects to apply the practical expedients will, in effect, continue to account for leases that commence before the effective date in accordance with previous GAAP unless the lease is modified, except that lessees will be required to recognize a right-of-use asset and a lease liability for all operating leases at each reporting date based on the present value of the remaining minimum rental payments that were tracked and disclosed under previous GAAP. Topic 842 will become effective for the Corporation for annual and interim periods beginning in the first quarter 2019.

In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures. This ASU eliminates the requirement that when an investment qualifies for the equity method as a result of an increase in the level of ownership interest or influence, an investor must adjust the investment, results of operations and retained earnings retroactively as if the equity method had been in effect during all previous periods the investment had been held. The ASU requires the equity method investor to add the cost of acquiring an additional interest in the investee to the basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for the equity method. The ASU further requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method recognize through earnings the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update are effective for the Corporation for annual and interim periods beginning in the first quarter 2017, with earlier application permitted. The amendments should be applied prospectively upon their effective date.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. This ASU changes several aspects of accounting for share-based payment transactions, and includes some changes that apply only to nonpublic companies. This Update includes amendments that currently apply, or may apply in the future, to the Corporation related to the following: (1) accounting for the difference between the deduction for tax purposes and the amount of compensation cost recognized for financial reporting purposes; (2) classification of excess tax benefits on the statement of cash flows; (3) accounting for forfeitures; (4) accounting for awards partially settled in cash in excess of the employer’s minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments in this Update are effective for the Corporation for annual and interim periods beginning in the first quarter 2017, with earlier adoption permitted. The ASU provides separate transition provisions for each of the amendments. The Corporation is in the process of evaluating the potential impact of adopting the amendments.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326). This ASU will result in significant changes in the Corporation’s accounting for credit losses related to loans receivable and investment securities. A summary of significant provisions of this ASU is as follows:

· The ASU requires that a financial asset (or a group of financial assets) measured at amortized cost basis be presented, net of a valuation allowance for credit losses, at an amount expected to be collected on the financial asset(s), and that the income statement include the measurement of credit losses for newly recognized financial assets as well as changes in expected losses on previously recognized financial assets. The provisions of this ASU require measurement of expected credit losses based on relevant information including past events, historical experience, current conditions, and reasonable and supportive forecasts that affect the collectability of the asset. The provisions of this ASU differ from current U.S. GAAP in that current U.S. GAAP generally delays recognition of the full amount of credit losses until the loss is probable of occurring.

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· The amendments in the Update retain many of the disclosure requirements related to credit quality in current U.S. GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology. In addition, the Update requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination.

· This ASU requires that credit losses on available-for-sale debt securities be presented as an allowance rather than as a write-down, and limits the amount of the allowance for credit losses to the amount by which the fair value is below amortized cost. For purchased available-for-sale securities with a more-than-insignificant amount of credit deterioration since origination, the ASU requires an allowance be determined in a manner similar to other available-for-sale debt securities; however, the initial allowance would be added to the purchase price, with only subsequent changes in the allowance recorded in credit loss expense, and interest income recognized at the effective rate excluding the discount embedded in the purchase price related to estimated credit losses at acquisition.

· This ASU will be effective for the Corporation for interim and annual periods beginning in the first quarter of 2020. Earlier adoption is permitted beginning in the first quarter of 2019. The entity will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective. The Corporation is in the early stages of evaluating the potential impact of adopting this amendment.

In June 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230) –Classification of Certain Cash Receipts and Cash Payments. This Update provides clarification regarding eight specific cash flow issues with the objective of reducing diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. For the Corporation, the amendments in this Update are effective beginning in the first quarter 2018. The amendments in this Update should be applied using a retroactive transition method to each period presented. The Corporation anticipates there will be no adjustments to the Consolidated Statements of Cash Flows, as previously reported, as a result of the clarifications provided in the Update.
39
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

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

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

· changes in monetary and fiscal policies of the Federal Reserve Board and the U. S. Government, particularly related to changes in interest rates
· changes in general economic conditions
· legislative or regulatory changes
· downturn in demand for loan, deposit and other financial services in the Corporation’s market area
· increased competition from other banks and non-bank providers of financial services
· technological changes and increased technology-related costs
· changes in accounting principles, or the application of generally accepted accounting principles.

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

EARNINGS OVERVIEW

~~Second~~Third quarter 2016 net income was ~~$0.32~~$0.34 per basic and diluted share, as compared to ~~$0.29 in the first quarter 2016 and $0.36~~$0.32 in the second quarter 2016 and $0.35 in the third quarter 2015. For the ~~six~~nine months ended ~~June~~September 30, 2016, net income per basic and diluted share was ~~$0.61~~$0.95 as compared to ~~$0.67~~$1.02 per basic and $1.01 per diluted share for the first ~~six~~nine months of 2015. The return on average assets for the first ~~six~~nine months of 2016 was ~~1.22%~~1.25%, and the return on average equity was ~~7.94%~~8.16%.

Some of the more significant fluctuations in revenues and expenses between the three-month period ended ~~June~~September 30, 2016 and the corresponding period in 2015 were as follows:

· Net interest income ~~was lower by $11,000, or 0.1%~~increased $179,000 (1.8%), in the ~~second~~third quarter 2016 as compared to the ~~second~~third quarter 2015. The net interest margin for the ~~second~~third quarter 2016 was ~~0.07%~~0.08% higher than in the ~~second~~third quarter 2015 due to a lower cost of borrowed funds and a more favorable mix of earning assets. The average balance of total borrowed funds was ~~$61,874,000~~$57,226,000 at an average interest rate of ~~2.62%~~2.75% in the ~~second~~third quarter 2016, down from average borrowings of ~~$78,396,000~~$75,848,000 at an average interest rate of ~~3.57%~~3.34% in the ~~second~~third quarter 2015. The reduction in amount and average rate on borrowed funds reflects the impact of prepayments in the second and fourth quarters of 2015 of a long-term borrowing with an interest rate of 4.265%. Average total loans outstanding were higher by ~~$70.7~~$59.3 million ~~(11.0%~~(8.8%) in the ~~second~~third quarter 2016 as compared to the ~~second~~third quarter 2015, while average total available-for-sale securities were lower by ~~$99.9~~$68.7 million. ~~The average balance of earning assets fell $26.5 million, reflecting a reduction in funding available for investment, as average~~Average total deposits ~~decreased $12.5~~were $6.0 million ~~(1.3%~~(0.6%). higher in the third quarter 2016 as compared to the third quarter 2015.

· The ~~second~~third quarter 2016 provision for loan losses was ~~$97,000~~$236,000 higher than the comparative ~~second~~third quarter 2015 amount. The higher provision in the ~~second~~third quarter 2016 included the impact of ~~increasing~~an increase in specific allowances on impaired loans to $685,000 at September 30, 2016 from $253,000 at June 30, 2016, including the effect of recording an allowance ~~for~~of $528,000 in the third quarter 2016 related to one real estate secured commercial loan ~~losses for the effects~~relationship with total loans outstanding of ~~loan growth and slight increases in qualitative factor percentages used in determining the collectively evaluated portion of the allowance.~~$3,347,000 at September 30, 2016.

· Noninterest revenue in the ~~second~~third quarter 2016 ~~was lower by $56,000 (1.4%~~fell $77,000 (1.9%) ~~than~~from the ~~second~~third quarter 2015 amount. Service charges on deposit accounts were ~~$141,000 (10.8%~~$81,000 (6.2%) lower, reflecting a reduced volume of consumer overdrafts, and the fair value of mortgage servicing rights decreased ~~$108,000~~$68,000 in the ~~second~~third quarter 2016 compared to ~~a $33,000 decrease~~an increase in fair value of $13,000 in the ~~second~~third quarter 2015. ~~Net gains from sales of loans~~Trust and Financial Management revenue increased $49,000 (4.4%) in the ~~second quarter 2016 exceeded the corresponding second quarter 2015 amount by $112,000, or 61.2%, reflecting higher volume of sales. Other operating income was $82,000 higher in the second~~third quarter 2016 as compared to the ~~second~~third quarter 2015. Other operating income was $58,000 higher in the third quarter 2016 as compared to the third quarter 2015, including ~~increases~~an increase of $15,000 in dividend income from Federal Home Loan Bank of Pittsburgh ~~stock and in revenue from redemption of tax credits.~~stock.

40
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

· Realized gains from securities totaled ~~$122,000~~$584,000 in the ~~second~~third quarter ~~2016. In comparison, in the second quarter 2015, C&N generated~~2016, including gains of $560,000 from sales of bank stocks. In comparison, realized gains from securities ~~totaling $932,000, and also incurred a loss from prepayment of borrowings totaling $910,000. In~~totaled $79,000 in the ~~second~~third quarter ~~2015, C&N prepaid principal of $10 million on a long-term borrowing (repurchase agreement)~~2015. At September 30, 2016, the Corporation had one remaining bank stock investment, with an ~~interest rate~~amortized cost basis of ~~4.265%.~~$752,000 and a fair value of $1,080,000. In October 2016, the Corporation sold the stock for a realized gain (pre-tax) of $288,000.

· Noninterest expenses ~~excluding loss on prepayment of borrowings,~~ in the ~~second~~third quarter 2016 exceeded the ~~second~~third quarter 2015 amount by ~~$571,000 (7.2%~~$462,000 (5.7%). Salaries and wages expense increased ~~$310,000 (8.6%~~$157,000 (4.2%), reflecting an increase in number of employees, including new positions established for lending, lending support, information technology, training, human resources and marketing functions. Professional fees expense increased ~~$142,000~~$104,000 in the ~~second~~third quarter 2016 over the ~~second~~third quarter 2015 amount, including increases related to employee sales and service training, information technology, marketing and outsourced commercial loan credit review. Other operating expense increased $164,000 (13.6%) in the third quarter 2016 over the third quarter 2015, including increases in education and training-related expense of $29,000, net collection-related expenses of $29,000 and expenses related to other real estate properties of $27,000. Also, other operating expense in the third quarter 2015 was reduced by a refund of $69,000 from recovery of previously-paid sales tax, with no corresponding recovery in the third quarter 2016.
· The third quarter 2016 provision for income tax of $1,451,000, or 26.2% of pre-tax income, was $56,000 higher than the third quarter 2015 tax provision of $1,395,000, or 24.8% of pre-tax income. The higher effective tax in the third quarter 2016 included the effects of a reduction in tax-exempt interest income of $127,000. The reduction in tax-exempt interest income resulted from pay-offs received on municipal bonds purchased several years ago when market interest yields were higher. Also, the provision for state income tax was $39,000 higher, primarily as a result of a catch-up adjustment to increase New York State taxes for the effect of changes in the tax methodology that first became effective in 2015.

Some of the more significant fluctuations in revenues and expenses between the ~~six-month~~nine-month period ended ~~June~~September 30, 2016 and the corresponding period in 2015 were as follows:

· ~~For the first six months of 2016, net~~Net interest income was ~~$72,000, or 0.4%,~~$251,000 (0.8%) higher than the comparable total for the first ~~six~~nine months of 2015. ~~Consistent with the trends described above, the~~The net interest margin of 3.77% was 0.08% higher than the margin for the first ~~six~~nine months of 2015, reflecting a lower cost of borrowed funds resulting from prepayment in 2015 of a long-term borrowing and a more favorable mix of earning assets. The average balance of total borrowed funds was ~~$68,141,000~~$64,476,000 at an average interest rate of ~~2.44%~~2.53% for the first ~~six~~nine months of 2016, down from average borrowings of ~~$78,715,000~~$77,749,000 at an average interest rate of ~~3.65%~~3.55% in the first ~~six~~nine months of 2015. Average total loans outstanding were higher by ~~$73.9~~$68.9 million ~~(11.7%~~(10.7%) in the first ~~six~~nine months of 2016 as compared to the first ~~six~~nine months of 2015, while average total available-for-sale securities were lower by ~~$97.2~~$87.6 million. The average balance of earning assets ~~fell $25.1~~was $20.6 million lower in the nine-month period ended September 30, 2016 as compared to the first nine months of 2015, reflecting a reduction in funding available for investment, asincluding a decrease in average total deposits ~~decreased $17.0~~of $9.3 million ~~(1.7%~~(1.0%).

· The provision for loan losses for the ~~six~~nine months ended ~~June~~September 30, 2016 ~~exceeded~~totaled $1,224,000, an increase of $698,000 over the corresponding amount for the first ~~six~~nine months of 2015. In 2016, the provision included an increase of $418,000 as compared to the first nine months of 2015 ~~by $462,000.~~from changes in specific allowances on loans individually identified as impaired, adjusted for the impact of net charge-offs. The provision in 2016 also included the impact of increasing the allowance for loan losses for the effects of loan growth and slight increases in net charge-off experience and qualitative factors used in determining the collectively evaluated portion of the allowance. In comparison, the provision in 2015 also reflected the effects of loan growth, but the qualitative factors used in determining a portion of the collectively determined allowance for loan ~~allowances~~losses were slightly decreased during the period.

· ~~Noninterest~~Total noninterest revenue ~~increased $78,000 (1.0%) in~~for the ~~first six~~nine months ofended September 30, 2016 ~~as compared to~~was virtually unchanged from the ~~total~~corresponding amount for the first ~~six~~nine months of 2015. ~~Net gains from sales of loans increased $133,000, or 40.3%, reflecting higher volume of sales. Other~~Within noninterest income, the categories with the largest increases included: (1) other operating income, which increased ~~$99,000,~~$157,000, mainly due to an increase in revenue from redemption of tax ~~credits. Brokerage~~credits; (2) net gains from sales of loans, which increased $126,000 (22.0%), reflecting higher volume of sales; and (3) Trust and Financial Management revenue, ~~decreased $72,000,~~which increased $89,000 (2.6%). The categories with the largest decreases within noninterest revenue included: (1) decrease in fair value of mortgage servicing rights of $247,000 in the first nine months of 2016 as compared to a decrease in fair value of $137,000 in the first nine months of 2015; (2) decrease in service charges on deposit accounts of $106,000 (2.9%), reflecting a reduction in consumer overdraft volume; and (3) reduction in brokerage revenue of $71,000, as the volume of sales of annuities declined.

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· In the first ~~six~~nine months of 2016, realized gains from securities totaled ~~$505,000,~~$1,089,000, including gains from sales of bank stocks of ~~$277,000.~~$837,000. In the first ~~six~~nine months of 2015, ~~C&N~~the Corporation generated gains from sales of securities totaling ~~$1,006,000,~~$1,085,000, including gains from sales of bank stocks of $476,000, and also incurred ~~the~~a loss from prepayment of a borrowing ~~described above~~ of $910,000. In the second quarter 2015, the Corporation prepaid principal of $10 million on a long-term borrowing (repurchase agreement) with an interest rate of 4.265%.

· Noninterest expenses, excluding loss on prepayment of borrowings, in the first ~~six~~nine months of 2016 exceeded the amount for the first ~~six~~nine months of 2015 by ~~$1,110,000 (6.7%~~$1,572,000 (6.4%). Salaries and wages expense increased ~~$710,000 (10.0%~~$867,000 (8.0%). As described above, several new positions were established in the latter portion of 2015 and early 2016. Professional fees expense increased ~~$275,000,~~$379,000, including increases related to employee sales and service training, information technology, marketing and outsourced commercial loan credit review. Other operating expense increased $311,000 (8.0%), including increases in donations and public relations-related expenses of $90,000, education and training-related expenses of $86,000 and other real estate expenses of $48,000. Also, other operating expense was reduced in 2015 by $69,000 as a result of a recovery of sales tax previously paid. Within other operating expense, net collections-related expense was $59,000 lower in the first nine months of 2016 as compared to the corresponding period in 2015.
· The provision for income tax totaled $3,847,000 for the nine months ended September 30, 2016, down $229,000 from the amount for the first nine months of 2015. The lower tax provision in 2016 resulted from lower pre-tax income; however, the provision increased as a percentage of pre-tax income to 25.02% in 2016 from 24.73% in 2015. The higher effective tax rate included the impact of a $253,000 reduction in tax-exempt interest income and an increase in the provision for state income tax of $30,000 that resulted mainly from a catch-up adjustment to increase New York State taxes for the effect of changes in the tax methodology that first became effective in 2015.

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

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~TABLE I - QUARTERLY FINANCIAL DATA
(In Thousands) (Unaudited)

TABLE I - QUARTERLY FINANCIAL DATA
(In Thousands) (Unaudited) For the Three Months Ended:
For the Three Months Ended:
June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31, Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2016 2016 2015 2015 2015 2015 2016 2016 2016 2015 2015 2015 2015
Interest income $ 10,924 $ 10,937 $ 11,036 $ 11,134 $ 11,186 $ 11,163 $ 11,131 $ 10,924 $ 10,937 $ 11,036 $ 11,134 $ 11,186 $ 11,163
Interest expense 925 904 1,087 1,126 1,176 1,213 944 925 904 1,087 1,126 1,176 1,213
Net interest income 9,999 10,033 9,949 10,008 10,010 9,950 10,187 9,999 10,033 9,949 10,008 10,010 9,950
Provision for loan losses 318 368 319 302 221 3 538 318 368 319 302 221 3
Net interest income after provision for loan losses 9,681 9,665 9,630 9,706 9,789 9,947 9,649 9,681 9,665 9,630 9,706 9,789 9,947
Other income 3,906 3,690 3,999 3,961 3,962 3,556 3,884 3,906 3,690 3,999 3,961 3,962 3,556
Net gains on available-for-sale securities 122 383 1,776 79 932 74 584 122 383 1,776 79 932 74
Loss on prepayment of borrowings 0 0 1,663 0 910 0 0 0 0 1,663 0 910 0
Other expenses 8,535 9,072 8,416 8,117 7,964 8,533 8,579 8,535 9,072 8,416 8,117 7,964 8,533
Income before income tax provision 5,174 4,666 5,326 5,629 5,809 5,044 5,538 5,174 4,666 5,326 5,629 5,809 5,044
Income tax provision 1,303 1,093 1,261 1,395 1,452 1,229 1,451 1,303 1,093 1,261 1,395 1,452 1,229
Net income $ 3,871 $ 3,573 $ 4,065 $ 4,234 $ 4,357 $ 3,815 $ 4,087 $ 3,871 $ 3,573 $ 4,065 $ 4,234 $ 4,357 $ 3,815
Net income per share – basic $ 0.32 $ 0.29 $ 0.33 $ 0.35 $ 0.36 $ 0.31 $ 0.34 $ 0.32 $ 0.29 $ 0.33 $ 0.35 $ 0.36 $ 0.31
Net income per share – diluted $ 0.32 $ 0.29 $ 0.33 $ 0.35 $ 0.36 $ 0.31 $ 0.34 $ 0.32 $ 0.29 $ 0.33 $ 0.35 $ 0.36 $ 0.31

CRITICAL ACCOUNTING POLICIES

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

A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes the allowance for loan losses is adequate and reasonable. Analytical information related to the Corporation’s aggregate loans and the related allowance for loan losses is summarized by loan segment and classes of loans in Note 7 to the unaudited consolidated financial statements. Additional discussion of the Corporation’s allowance for loan losses is provided in a separate section later in Management’s Discussion and Analysis. Given the very subjective nature of identifying and valuing loan losses, it is likely that well-informed individuals could make materially different assumptions, and could, therefore calculate a materially different allowance value. While management uses available information to recognize losses on loans, changes in economic conditions may necessitate revisions in future years. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination.

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

As described in Note 6 to the unaudited consolidated financial statements, management evaluates securities for other-than-temporary impairment (OTTI). In making that evaluation, consideration is given to (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, and (3) whether the Corporation intends to sell the security or more likely than not will be required to sell the security before its anticipated recovery. Management’s assessments of the likelihood and potential for recovery in value of securities are subjective and based on sensitive assumptions.

NET INTEREST INCOME

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month and ~~six-month~~nine-month periods ended ~~June~~September 30, 2016 and ~~June~~September 30, 2015. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.

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~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
~~Six-Month~~Nine-Month Periods Ended ~~June~~September 30, 2016 and 2015

For the ~~six-month~~nine-month periods, fully taxable equivalent net interest income was ~~$21,428,000~~$32,297,000 in 2016, ~~$11,000 (0.1%~~$125,000 (0.4%) higher than in 2015. Interest income was ~~$549,000~~$617,000 lower in 2016 as compared to 2015; however, interest expense was lower by ~~$560,000~~$742,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was ~~3.79%~~3.77% in 2016 as compared to ~~3.71%~~3.69% in 2015, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was ~~3.66%~~3.64% in 2016 as compared to ~~3.55%~~3.54% in 2015.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled ~~$23,257,000~~$35,070,000 in 2016, a decrease of ~~2.3%~~1.7% from 2015. Interest and fees on loans receivable increased ~~$844,000,~~$1,320,000, or ~~5.1%~~5.2%. The average balance of gross loans receivable increased ~~$73,894,000,~~$68,937,000, or ~~11.7%~~10.7%, to ~~$706,759,000~~$715,575,000 in 2016 from ~~$632,865,000~~$646,638,000 in 2015. The Corporation experienced significant growth in both commercial and mortgage loans outstanding. Growth in commercial loans included an increase of approximately ~~$25~~$23.3 million in the average outstanding balance of participation loans in the first ~~six~~nine months of 2016 as compared to the first ~~six~~nine months of 2015. The Corporation’s average rate of return on loans receivable declined to ~~4.96%~~4.94% in 2016 from ~~5.29%~~5.20% in 2015 as average interest rates on new loans are lower, reflecting recent market conditions.

As indicated in Table III, average available-for-sale securities (at amortized cost) totaled ~~$408,773,000~~$407,347,000 in 2016, a decrease of ~~$97,180,000 (19.2%~~$87,574,000 (17.7%) from 2015. The net decrease in the Corporation’s available-for-sale securities portfolio consisted of decreases in all categories of securities with the exception of commercial mortgage-backed securities. The Corporation’s yield on securities was slightly lower in 2016 than in 2015, primarily because of lower market interest rates. The average rate of return on available-for-sale securities was ~~2.83%~~2.78% in 2016 and ~~2.85%~~2.82% in 2015.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense fell ~~$560,000,~~$742,000, or ~~23.4%~~21.1%, to ~~$1,829,000~~$2,773,000 in 2016 from ~~$2,389,000~~$3,515,000 in 2015. Table III shows that the overall cost of funds on interest-bearing liabilities fell to 0.45% in 2016 from ~~0.58%~~0.56% in 2015.

Total average deposits (interest-bearing and noninterest-bearing) decreased ~~1.7%~~1.0%, to ~~$956,602,000~~$965,584,000 in 2016 from ~~$973,631,000~~$974,873,000 in 2015. Decreases in the average balances of ~~demand deposits,~~Individual Retirement Accounts, certificates of deposit and ~~Individual Retirement Accounts~~demand deposits were partially offset by increases in savings, interest checking and money market ~~accounts and savings~~ accounts.
43

Total average borrowed funds decreased ~~$10,574,000~~$13,273,000 to ~~$68,141,000~~$64,476,000 in 2016 from ~~$78,715,000~~$77,749,000 in 2015. The average rate on borrowed funds was ~~2.44%~~2.53% in 2016 compared to ~~3.65%~~3.55% in 2015, reflecting a ~~$32,418,000~~$29,684,000 reduction in the average balance of higher-rate, long-term borrowings resulting from prepayment in the second and fourth quarters of 2015 of a long-term repurchase agreement borrowing with an interest rate of 4.265%. The average balance of short-term borrowings increased ~~$21,844,000~~$16,411,000 in 2016 over 2015, as average overnight borrowings were higher in 2016 and the Corporation funded the pay-off of the long-term repurchase agreement with a series of short-term advances from the FHLB-Pittsburgh.

Three-Month Periods Ended ~~June~~September 30, 2016 and 2015

For the three-month periods, fully taxable equivalent net interest income was ~~$10,684,000~~$10,869,000 in 2016, which was ~~$65,000 (0.6%~~$114,000 (1.1%) ~~lower~~higher than in 2015. Interest income was ~~$316,000~~$68,000 lower in 2016 as compared to 2015, while interest expense was lower by ~~$251,000~~$182,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was ~~3.76%~~3.74% in 2016 as compared to ~~3.69%~~3.66% in 2015, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was ~~3.63%~~3.61% in 2016 as compared to ~~3.53%~~3.51% in 2015.

Interest income totaled ~~$11,609,000~~$11,813,000 in 2016, a decrease of ~~$316,000 (2.6%~~$68,000 (0.6%) from 2015. Interest and fees from loans receivable increased ~~$426,000,~~$476,000, or ~~5.1%~~5.6%, in 2016 as compared to 2015, while income from available-for-sale securities decreased ~~$758,000 (21.4%~~$553,000 (16.8%). As indicated in Table III, for the three-month periods, the average balance of gross loans receivable increased ~~11.0%~~8.8% to ~~$711,882,000~~$733,016,000 in 2016 from ~~$641,214,000~~$673,735,000 in 2015. The average rate of return on loans was ~~4.96%~~4.91% in 2016, down from ~~5.22%~~5.05% in 2015. Total average available-for-sale securities (at amortized cost) in 2016 decreased
to ~~$406,260,000~~$404,526,000 from ~~$506,126,000~~$473,216,000 in 2015. The average rate of return on available-for-sale securities was ~~2.76%~~2.69% for 2016, down from ~~2.81%~~2.75% in 2015.

For the three-month periods, interest expense fell ~~$251,000,~~$182,000, or ~~21.3%~~16.2%, to ~~$925,000~~$944,000 in 2016 from ~~$1,176,000~~$1,126,000 in 2015. Total average deposits (interest-bearing and noninterest-bearing) amounted to ~~$968,605,000~~$983,353,000 in the ~~second~~third quarter 2016, ~~a decrease~~an increase of ~~$12,547,000 (1.3%~~$6,036,000 (0.6%) from the ~~second~~third quarter 2015 total. Total average borrowed funds decreased to
43
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
~~$61,874,000~~ $57,226,000 in the ~~second~~third quarter 2016 from ~~$78,396,000~~$75,848,000 in the ~~second~~third quarter 2015, while the average rate on borrowed funds fell to ~~2.62%~~2.75% in the ~~second~~third quarter 2016 from ~~3.57%~~3.34% in the ~~second~~third quarter 2015. The net change in average borrowed funds included an increase of ~~$14,040,000~~$5,683,000 in short-term borrowings and a decrease of ~~$30,562,000~~$24,305,000 in long-term borrowings. In total, the average interest rate on interest-bearing liabilities was 0.46% in the ~~second~~third quarter 2016 as compared to ~~0.56%~~0.53% in the ~~second~~third quarter 2015. The reduction in average rate on interest-bearing liabilities in 2016 was mainly caused by the pay-off (prepayment) of the higher-cost borrowing in 2015, as described above.

44
TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE

Three Months Ended Six Months Ended Three Months Ended Nine Months Ended
June 30, Increase/ June 30, Increase/ Sept. 30, Increase/ Sept. 30, Increase/
(In Thousands) 2016 2015 (Decrease) 2016 2015 (Decrease) 2016 2015 (Decrease) 2016 2015 (Decrease)

INTEREST INCOME
Available-for-sale securities:
Taxable $ 1,495 $ 2,001 $ (506 ) $ 3,084 $ 4,062 $ (978 ) $ 1,456 $ 1,837 $ (381 ) $ 4,540 $ 5,899 $ (1,359 )
Tax-exempt 1,294 1,546 (252 ) 2,664 3,097 (433 ) 1,277 1,449 (172 ) 3,941 4,546 (605 )
Total available-for-sale securities 2,789 3,547 (758 ) 5,748 7,159 (1,411 ) 2,733 3,286 (553 ) 8,481 10,445 (1,964 )
Interest-bearing due from banks 36 25 11 60 51 9 29 22 7 89 73 16
Loans held for sale 8 3 5 14 5 9 7 5 2 21 10 11
Loans receivable:
Taxable 8,086 7,753 333 16,060 15,462 598 8,347 7,851 496 24,407 23,313 1,094
Tax-exempt 690 597 93 1,375 1,129 246 697 717 (20 ) 2,072 1,846 226
Total loans receivable 8,776 8,350 426 17,435 16,591 844 9,044 8,568 476 26,479 25,159 1,320
Total Interest Income 11,609 11,925 (316 ) 23,257 23,806 (549 ) 11,813 11,881 (68 ) 35,070 35,687 (617 )

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking 74 54 20 132 109 23 78 53 25 210 162 48
Money market 86 73 13 165 145 20 89 77 12 254 222 32
Savings 33 33 0 65 64 1 34 32 2 99 96 3
Certificates of deposit 220 205 15 422 420 2 238 211 27 660 631 29
Individual Retirement Accounts 109 114 (5 ) 217 227 (10 ) 109 113 (4 ) 326 340 (14 )
Other time deposits 0 0 0 0 0 0 1 1 0 1 1 0
Total interest-bearing deposits 522 479 43 1,001 965 36 549 487 62 1,550 1,452 98
Borrowed funds:
Short-term 41 5 36 103 6 97 30 9 21 133 15 118
Long-term 362 692 (330 ) 725 1,418 (693 ) 365 630 (265 ) 1,090 2,048 (958 )
Total borrowed funds 403 697 (294 ) 828 1,424 (596 ) 395 639 (244 ) 1,223 2,063 (840 )
Total Interest Expense 925 1,176 (251 ) 1,829 2,389 (560 ) 944 1,126 (182 ) 2,773 3,515 (742 )

Net Interest Income $ 10,684 $ 10,749 $ (65 ) $ 21,428 $ 21,417 $ 11 $ 10,869 $ 10,755 $ 114 $ 32,297 $ 32,172 $ 125

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 35%.

4445
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

TABLE III - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
(Dollars in Thousands)

3 Months 3 Months 6 Months 6 Months 3 Months 3 Months 9 Months 9 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
6/30/2016 Return/ 6/30/2015 Return/ 6/30/2016 Return/ 6/30/2015 Return/ 9/30/2016 Return/ 9/30/2015 Return/ 9/30/2016 Return/ 9/30/2015 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
Available-for-sale securities, at amortized cost:
Taxable $ 297,608 2.02 % $ 389,705 2.06 % $ 301,744 2.06 % $ 388,909 2.11 % $ 291,847 1.98 % $ 361,481 2.02 % $ 298,421 2.03 % $ 379,666 2.08 %
Tax-exempt 108,652 4.79 % 116,421 5.33 % 107,029 5.01 % 117,044 5.34 % 112,679 4.51 % 111,735 5.14 % 108,926 4.83 % 115,255 5.27 %
Total available-for-sale securities 406,260 2.76 % 506,126 2.81 % 408,773 2.83 % 505,953 2.85 % 404,526 2.69 % 473,216 2.75 % 407,347 2.78 % 494,921 2.82 %
Interest-bearing due from banks 24,250 0.60 % 21,970 0.46 % 22,299 0.54 % 24,468 0.42 % 17,138 0.67 % 19,774 0.44 % 20,566 0.58 % 22,886 0.43 %
Loans held for sale 540 5.96 % 145 8.30 % 496 5.68 % 117 8.62 % 556 5.01 % 245 8.10 % 516 5.44 % 160 8.36 %
Loans receivable:
Taxable 650,213 5.00 % 592,188 5.25 % 645,586 5.00 % 587,370 5.31 % 671,408 4.95 % 610,516 5.10 % 654,256 4.98 % 595,170 5.24 %
Tax-exempt 61,669 4.50 % 49,026 4.88 % 61,173 4.52 % 45,495 5.00 % 61,608 4.50 % 63,219 4.50 % 61,319 4.51 % 51,468 4.80 %
Total loans receivable 711,882 4.96 % 641,214 5.22 % 706,759 4.96 % 632,865 5.29 % 733,016 4.91 % 673,735 5.05 % 715,575 4.94 % 646,638 5.20 %
Total Earning Assets 1,142,932 4.09 % 1,169,455 4.09 % 1,138,327 4.11 % 1,163,403 4.13 % 1,155,236 4.07 % 1,166,970 4.04 % 1,144,004 4.09 % 1,164,605 4.10 %
Cash 16,522 17,072 16,055 16,602 17,523 16,961 16,548 16,723
Unrealized gain/loss on securities 7,737 10,260 7,396 10,442 9,654 7,015 8,154 9,287
Allowance for loan losses (7,756 ) (7,226 ) (7,844 ) (7,308 ) (8,050 ) (7,376 ) (7,913 ) (7,331 )
Bank premises and equipment 15,390 16,095 15,424 16,173 15,379 15,808 15,409 16,050
Intangible Asset - Core Deposit Intangible 25 44 27 47 24 38 26 44
Intangible Asset - Goodwill 11,942 11,942 11,942 11,942 11,942 11,942 11,942 11,942
Other assets 38,938 38,065 38,734 37,603 38,225 38,294 38,563 37,836
Total Assets $ 1,225,730 $ 1,255,707 $ 1,220,061 $ 1,248,904 $ 1,239,933 $ 1,249,652 $ 1,226,733 $ 1,249,156

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking $ 196,918 0.15 % $ 199,373 0.11 % $ 196,030 0.14 % $ 195,560 0.11 % $ 200,789 0.15 % $ 197,189 0.11 % $ 197,628 0.14 % $ 196,109 0.11 %
Money market 200,896 0.17 % 196,537 0.15 % 196,205 0.17 % 195,690 0.15 % 205,158 0.17 % 202,106 0.15 % 199,211 0.17 % 197,852 0.15 %
Savings 132,353 0.10 % 128,879 0.10 % 131,178 0.10 % 128,369 0.10 % 133,269 0.10 % 128,939 0.10 % 131,880 0.10 % 128,561 0.10 %
Certificates of deposit 117,825 0.75 % 122,634 0.67 % 115,618 0.73 % 122,322 0.69 % 123,475 0.77 % 125,886 0.66 % 118,256 0.75 % 123,523 0.68 %
Individual Retirement Accounts 104,030 0.42 % 111,765 0.41 % 104,796 0.42 % 112,780 0.41 % 103,259 0.42 % 109,661 0.41 % 104,280 0.42 % 111,729 0.41 %
Other time deposits 1,140 0.00 % 1,125 0.00 % 972 0.00 % 965 0.00 % 1,523 0.26 % 1,514 0.26 % 1,157 0.12 % 1,150 0.12 %
Total interest-bearing deposits 753,162 0.28 % 760,313 0.25 % 744,799 0.27 % 755,686 0.26 % 767,473 0.28 % 765,295 0.25 % 752,412 0.28 % 758,924 0.26 %
Borrowed funds:
Short-term 23,225 0.71 % 9,185 0.22 % 29,454 0.70 % 7,610 0.16 % 18,655 0.64 % 12,972 0.28 % 25,828 0.69 % 9,417 0.21 %
Long-term 38,649 3.77 % 69,211 4.01 % 38,687 3.77 % 71,105 4.02 % 38,571 3.76 % 62,876 3.98 % 38,648 3.77 % 68,332 4.01 %
Total borrowed funds 61,874 2.62 % 78,396 3.57 % 68,141 2.44 % 78,715 3.65 % 57,226 2.75 % 75,848 3.34 % 64,476 2.53 % 77,749 3.55 %
Total Interest-bearing Liabilities 815,036 0.46 % 838,709 0.56 % 812,940 0.45 % 834,401 0.58 % 824,699 0.46 % 841,143 0.53 % 816,888 0.45 % 836,673 0.56 %
Demand deposits 215,443 220,839 211,803 217,945 215,880 212,022 213,172 215,949
Other liabilities 8,304 7,756 7,841 7,937 9,057 8,803 8,249 8,229
Total Liabilities 1,038,783 1,067,304 1,032,584 1,060,283 1,049,636 1,061,968 1,038,309 1,060,851
Stockholders' equity, excluding other comprehensive income/loss 181,882 181,683 182,629 181,813 183,966 183,116 183,078 182,252
Other comprehensive income/loss 5,065 6,720 4,848 6,808 6,331 4,568 5,346 6,053
Total Stockholders' Equity 186,947 188,403 187,477 188,621 190,297 187,684 188,424 188,305
Total Liabilities and Stockholders' Equity $ 1,225,730 $ 1,255,707 $ 1,220,061 $ 1,248,904 $ 1,239,933 $ 1,249,652 $ 1,226,733 $ 1,249,156
Interest Rate Spread 3.63 % 3.53 % 3.66 % 3.55 % 3.61 % 3.51 % 3.64 % 3.54 %
Net Interest Income/Earning Assets 3.76 % 3.69 % 3.79 % 3.71 % 3.74 % 3.66 % 3.77 % 3.69 %

Total Deposits (Interest-bearing and Demand) $ 968,605 $ 981,152 $ 956,602 $ 973,631 $ 983,353 $ 977,317 $ 965,584 $ 974,873

(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 35%.
(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.

4546
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES

(In Thousands) 3 Months Ended 6/30/16 vs. 6/30/15 6 Months Ended 6/30/16 vs. 6/30/15 3 Months Ended 9/30/16 vs. 9/30/15 9 Months Ended 9/30/16 vs. 9/30/15
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
Available-for-sale securities:
Taxable $ (469 ) $ (37 ) $ (506 ) $ (883 ) $ (95 ) $ (978 ) $ (351 ) $ (30 ) $ (381 ) $ (1,234 ) $ (125 ) $ 1,359 )
Tax-exempt (101 ) (151 ) (252 ) (251 ) (182 ) (433 ) 11 (183 ) (172 ) (240 ) (365 ) (605 )
Total available-for-sale securities (570 ) (188 ) (758 ) (1,134 ) (277 ) (1,411 ) (340 ) (213 ) (553 ) (1,474 ) (490 ) (1,964 )
Interest-bearing due from banks 2 9 11 (5 ) 14 9 (3 ) 10 7 (8 ) 24 16
Loans held for sale 7 (2 ) 5 12 (3 ) 9 3 (1 ) 2 15 (4 ) 11
Loans receivable:
Taxable 721 (388 ) 333 1,508 (910 ) 598 748 (252 ) 496 2,256 (1,162 ) 1,094
Tax-exempt 142 (49 ) 93 363 (117 ) 246 (24 ) 4 (20 ) 339 (113 ) 226
Total loans receivable 863 (437 ) 426 1,871 (1,027 ) 844 724 (248 ) 476 2,595 (1,275 ) 1,320
Total Interest Income 302 (618 ) (316 ) 744 (1,293 ) (549 ) 384 (452 ) (68 ) 1,128 (1,745 ) (617 )

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking (1 ) 21 20 0 23 23 1 24 25 1 47 48
Money market 1 12 13 0 20 20 2 10 12 2 30 32
Savings 0 0 0 1 0 1 1 1 2 2 1 3
Certificates of deposit (9 ) 24 15 (23 ) 25 2 (5 ) 32 27 (28 ) 57 29
Individual Retirement Accounts (9 ) 4 (5 ) (16 ) 6 (10 ) (7 ) 3 (4 ) (23 ) 9 (14 )
Other time deposits 0 0 0 0 0 0 0 0 0 0 0 0
Total interest-bearing deposits (18 ) 61 43 (38 ) 74 36 (8 ) 70 62 (46 ) 144 98
Borrowed funds:
Short-term 21 15 36 43 54 97 9 12 21 52 66 118
Long-term (290 ) (40 ) (330 ) (609 ) (84 ) (693 ) (233 ) (32 ) (265 ) (842 ) (116 ) (958 )
Total borrowed funds (269 ) (25 ) (294 ) (566 ) (30 ) (596 ) (224 ) (20 ) (244 ) (790 ) (50 ) (840 )
Total Interest Expense (287 ) 36 (251 ) (604 ) 44 (560 ) (232 ) 50 (182 ) (836 ) 94 (742 )

Net Interest Income $ 589 $ (654 ) $ (65 ) $ 1,348 $ (1,337 ) $ 11 $ 616 $ (502 ) $ 114 $ 1,964 ($ 1,839 ) $ 125

(1) Changes in income on tax-exempt securities and loans are presented on a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 35%.

(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.

4647
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

TABLE V - COMPARISON OF NONINTEREST INCOME
(In Thousands)

6 Months Ended 9 Months Ended
June 30, $ % September 30, $ %
2016 2015 Change Change 2016 2015 Change Change
Service charges on deposit accounts $ 2,302 $ 2,327 $ (25 ) (1.1 ) $ 3,523 $ 3,629 $ (106 ) (2.9 )
Service charges and fees 217 236 (19 ) (8.1 ) 335 373 (38 ) (10.2 )
Trust and financial management revenue 2,395 2,355 40 1.7 3,567 3,478 89 2.6
Brokerage revenue 353 425 (72 ) (16.9 ) 569 640 (71 ) (11.1 )
Insurance commissions, fees and premiums 48 63 (15 ) (23.8 ) 74 87 (13 ) (14.9 )
Interchange revenue from debit card transactions 950 974 (24 ) (2.5 ) 1,431 1,456 (25 ) (1.7 )
Net gains from sales of loans 463 330 133 40.3 699 573 126 22.0
Decrease in fair value of servicing rights (179 ) (150 ) (29 ) 19.3 (247 ) (137 ) (110 ) 80.3
Increase in cash surrender value of life insurance 189 199 (10 ) (5.0 ) 286 294 (8 ) (2.7 )
Other operating income 858 759 99 13.0 1,243 1,086 157 14.5
Total other operating income before realized gains on available-for-sale securities, net $ 7,596 $ 7,518 $ 78 1.0 $ 11,480 $ 11,479 $ 1 0.0

Table V excludes realized gains on available-for-sale securities, which are discussed in the “Earnings Overview” section of Management’s Discussion and Analysis. Total noninterest income shown in Table V ~~increased $78,000 or 1.0%,~~was virtually unchanged in the first ~~six~~nine months of 2016 as compared to the first ~~six~~nine months of 2015. The most significant variances include the following:

· Other operating income increased $157,000, reflecting an increase of $91,000 in revenue from the redemption of tax credits. Also, other income associated with lending programs increased by a total of $59,000, including increases in fees associated with providing credit enhancement for the Mortgage Partnership Finance (MPF) Original Program, providing access to certain U.S. Government programs and from the Corporation’s participation in a title insurance entity on a co-operative basis with other banks.
· Net gains on the sale of loans increased ~~$133,000 reflecting a higher volume of residential mortgage sales.~~$126,000 (22.0%). The Corporation originates and sells some of its residential mortgage production under the ~~Mortgage Partnership Finance Program,~~MPF Original and Xtra Programs, administered by the Federal Home Loan Banks of Chicago and Pittsburgh. The 2016 increase in net gains from sales reflects the effects of a higher volume of residential mortgage sales, along with a higher margin on loans sold. For the first nine months of 2016, the amount of residential mortgage loans originated for the purpose of sale totaled $19.4 million, an increase of 16.6% over the first nine months of 2015, and total cash proceeds from residential mortgage loans sold in the first nine months of 2016 amounted to $19.6 million, an increase of 15.3% over the amount for the first nine months of 2015.

· ~~Other operating income~~Trust and Financial Management revenue increased ~~$99,000, mainly due~~$89,000 (2.6%), reflecting an increase in the balance of Trust assets under management. Trust assets under management amounted to $867,852,000 at September 30, 2016, an increase of ~~$91,000~~6.5% over the total at December 31, 2015 and 9.8% over the corresponding total at September 30, 2015. Increases in ~~revenue~~Trust assets under management have resulted from an overall valuation increase in the ~~redemption~~U.S. stock market, along with growth from new business.
· The fair value of ~~tax credits.~~mortgage servicing rights decreased $247,000 in the first nine months of 2016, primarily from changes in prepayment assumptions driven by market expectations of lower interest rates. In comparison, the fair value of mortgage servicing rights decreased $137,000 in the first nine months of 2015.
· Service charges on deposit accounts decreased $106,000 (2.9%), mainly as a result of a reduction in consumer overdraft volume.

· Brokerage revenue ~~decreased $72,000,~~declined $71,000, as the volume of sales of annuities ~~decreased. Brokerage revenue was also impacted by decreases in market values of underlying assets for a portion of the first six months of 2016.~~declined.
48

TABLE VI - COMPARISON OF NONINTEREST INCOME
(In Thousands)

3 Months Ended 3 Months Ended
June 30, $ % September 30, $ %
2016 2015 Change Change 2016 2015 Change Change
Service charges on deposit accounts $ 1,164 $ 1,305 $ (141 ) (10.8 ) $ 1,221 $ 1,302 $ (81 ) (6.2 )
Service charges and fees 123 123 0 0.0 118 137 (19 ) (13.9 )
Trust and financial management revenue 1,251 1,241 10 0.8 1,172 1,123 49 4.4
Brokerage revenue 180 206 (26 ) (12.6 ) 216 215 1 0.5
Insurance commissions, fees and premiums 27 23 4 17.4 26 24 2 8.3
Interchange revenue from debit card transactions 487 500 (13 ) (2.6 ) 481 482 (1 ) (0.2 )
Net gains from sales of loans 295 183 112 61.2 236 243 (7 ) (2.9 )
Decrease in fair value of servicing rights (108 ) (33 ) (75 ) 227.3
(Decrease) increase in fair value of servicing rights (68 ) 13 (81 ) (623.1 )
Increase in cash surrender value of life insurance 93 102 (9 ) (8.8 ) 97 95 2 2.1
Other operating income 394 312 82 26.3 385 327 58 17.7
Total other operating income before realized gains on available-for-sale securities, net $ 3,906 $ 3,962 $ (56 ) (1.4 ) $ 3,884 $ 3,961 $ (77 ) (1.9 )

Table VI excludes realized gains on available-for-sale securities, which are discussed in the “Earnings Overview” section of Management’s Discussion and Analysis. Total noninterest income shown in Table VI decreased ~~$56,000~~$77,000, or ~~1.4%~~1.9%, in the three months ended ~~June~~September 30, 2016 as compared to the three months ended ~~June~~September 30, 2015. The most significant variances include the following:
47
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

· Service charges on deposit accounts decreased ~~$141,000,~~$81,000, or ~~10.8%~~6.2%, primarily as a result of a lower volume of consumer overdrafts.

· ~~Fair~~The fair value of mortgage servicing rights decreased ~~$108,000~~$68,000 in the ~~second~~third quarter 2016, primarily from changes in prepayment assumptions driven by market expectations of lower interest rates. In comparison, the fair value of mortgage servicing rights ~~decreased $33,000~~increased $13,000 in the ~~second~~third quarter 2015.
· ~~Net gains from the sales of loans increased $112,000 in 2016 (61.2%) reflecting a higher volume of sales of residential mortgages.~~

· Other operating income increased ~~$82,000~~$58,000 in 2016, with increases in several categories, most significantly dividends received on Federal Home Loan Bank of Pittsburgh ~~stock~~stock.
· Trust and financial management revenue increased $49,000 (4.4%) in the third quarter 2016 as compared to the third quarter 2015, reflecting growth in the amount of Trust assets under management and including an increase in revenue from ~~redemption~~retirement plan services of ~~tax credits.~~$16,000.

TABLE VII - COMPARISON OF NONINTEREST EXPENSE
(In Thousands)

Six Months Ended 9 Months Ended
June 30, $ % September 30, $ %
2016 2015 Change Change 2016 2015 Change Change
Salaries and wages $ 7,800 $ 7,090 $ 710 10.0 $ 11,701 $ 10,834 $ 867 8.0
Pensions and other employee benefits 2,439 2,320 119 5.1 3,499 3,336 163 4.9
Occupancy expense, net 1,169 1,362 (193 ) (14.2 ) 1,770 1,985 (215 ) (10.8 )
Furniture and equipment expense 866 921 (55 ) (6.0 ) 1,301 1,398 (97 ) (6.9 )
FDIC Assessments 297 299 (2 ) (0.7 ) 448 454 (6 ) (1.3 )
Pennsylvania shares tax 645 635 10 1.6 932 946 (14 ) (1.5 )
Professional fees 571 296 275 92.9 816 437 379 86.7
Automated teller machine and interchange expense 516 501 15 3.0 807 735 72 9.8
Software subscriptions 492 408 84 20.6 729 617 112 18.2
Loss on prepayment of borrowings 0 910 (910 ) (100.0 ) 0 910 (910 ) (100.0 )
Other operating expense 2,812 2,665 147 5.5 4,183 3,872 311 8.0
Total Other Expense $ 17,607 $ 17,407 $ 200 1.1 $ 26,186 $ 25,524 $ 662 2.6
49

As shown in Table VII, total noninterest expense increased ~~$200,000~~$662,000 or ~~1.1%~~2.6% in the first ~~six~~nine months of 2016 as compared to the first ~~six~~nine months of 2015. Excluding the $910,000 loss on prepayment of debt in 2015, total noninterest expense increased ~~$1,110,000,~~$1,572,000, or ~~6.7%~~6.4%. Other significant variances include the following:

· Salaries and wages expense increased ~~$710,000 (10.0%~~$867,000 (8.0%), reflecting an increase in number of ~~employees and the effects of a significant portion of 2016 employee annual performance evaluations and merit increases occurring in the first six months of 2016.~~employees. The average number of full-time equivalent employees was ~~286~~287 in 2016, up from ~~277~~278 in 2015, including new positions established for lending, lending support, information technology, training and marketing functions.

· Professional fees expense increased ~~$275,000 (92.9%~~$379,000 (86.7%) in the first ~~six~~nine months 2016 over the first ~~six~~nine months of 2015 amount, including increases related to employee sales and service training, information technology, marketing and outsourced commercial loan credit review.

· Other operating expense increased ~~$147,000 (5.5%~~$311,000 (8.0%) in the first ~~six~~nine months of 2016 over the first ~~six~~nine months of 2015, including an increase in charitable donations of ~~$75,000 and a $57,000~~$90,000, an $86,000 increase in education and training related expenses and a $48,000 increase in other real estate expenses. Also, other operating expense was reduced in 2015 by $69,000 as a result of a recovery of sales tax previously paid. Within other operating expense, net collections-related expense was $59,000 lower in the first nine months of 2016 as compared to the corresponding period in 2015.

· Pensions and other employee benefits increased ~~$119,000 (5.1%~~$163,000 (4.9%) in the first ~~six~~nine months of 2016 over the first ~~six~~nine months of 2015 as a result of increased healthcare claims on the Corporation’s partially self-insured plan as well as increases in other benefits attributable to having more personnel.

· Software subscriptions and updates increased ~~$84,000 (20.6%~~$112,000 (18.2%) in the first ~~six~~nine months of 2016 over the first ~~six~~nine months 2015 as a result of enhancements and new applications initiated in 2015 and continuing into 2016.

48
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
· Occupancy expense in the first ~~six~~nine months of 2016 was ~~$193,000 (14.2%~~$215,000 (10.8%) lower than the total for the first ~~six~~nine months of 2015, primarily as a result of lower depreciation expense and lower winter-related expenses such as snow removal and fuel costs.

TABLE VIII - COMPARISON OF NONINTEREST EXPENSE
(In Thousands)

Three Months Ended 3 Months Ended
June 30, $ % September 30, $ %
2016 2015 Change Change 2016 2015 Change Change
Salaries and wages $ 3,913 $ 3,603 $ 310 8.6 $ 3,901 $ 3,744 $ 157 4.2
Pensions and other employee benefits 1,002 935 67 7.2 1,060 1,016 44 4.3
Occupancy expense, net 560 640 (80 ) (12.5 ) 601 623 (22 ) (3.5 )
Furniture and equipment expense 439 467 (28 ) (6.0 ) 435 477 (42 ) (8.8 )
FDIC Assessments 155 148 7 4.7 151 155 (4 ) (2.6 )
Pennsylvania shares tax 323 317 6 1.9 287 311 (24 ) (7.7 )
Professional fees 282 140 142 101.4 245 141 104 73.8
Automated teller machine and interchange expense 267 255 12 4.7 291 234 57 24.4
Software subscriptions 251 211 40 19.0 237 209 28 13.4
Loss on prepayment of borrowings 0 910 (910 ) (100.0 )
Other operating expense 1,343 1,248 95 7.6 1,371 1,207 164 13.6
Total Other Expense $ 8,535 $ 8,874 $ (339 ) (3.8 ) $ 8,579 $ 8,117 $ 462 5.7

As shown in Table VIII, total noninterest expense ~~decreased $339,000~~increased $462,000, or ~~3.8%~~5.7%, in the three months ended ~~June~~September 30, 2016 as compared to the same period of 2015. ~~Excluding the $910,000 loss on prepayment of debt in 2015, total noninterest expense increased $571,000, or 7.2%.Significant~~Significant variances include the following:

· Salaries and wages expense increased ~~$310,000 (8.6%~~$157,000 (4.2%), reflecting an increase in number of employees. The average number of full-time equivalent employees was ~~286~~288 in the ~~second~~third quarter 2016, up from ~~278~~279 in the ~~second~~third quarter 2015, including new positions established for lending, lending support, information technology, training, human resources and marketing functions.
50

· Professional fees expense increased ~~$142,000 (101.4%~~$104,000 (73.8%) in the three months ~~June~~ended September 30, 2016 over the same period in 2015, including increases related to employee sales and service training, information technology, marketing and outsourced commercial loan credit review.

· Other operating expense increased ~~$95,000 (7.6%~~$164,000 (13.6%) in the three months ended ~~June~~September 30, 2016 over the same period in 2015, including ~~a $28,000 increase~~increases in education and ~~training related~~training-related expense of $29,000, net collection-related expenses of $29,000 and ~~a $26,000 increase in~~ expenses related to other real ~~estate.~~
· ~~Pensions and~~estate properties of $27,000. Also, other employee benefits increased $67,000 (7.2%) in the three months ended June 30, 2016 over the same period in 2015 as a result of increased healthcare claims and increases in other benefits attributable to having more personnel.
· Software subscriptions and updates increased $40,000 (19.0%) in the three months ended June 30, 2016 over the same period in 2015 as a result of enhancements and new applications initiated in 2015 and continuing into 2016.
· ~~Occupancy~~operating expense in the ~~three months ended June 30, 2016~~third quarter 2015 was ~~$80,000 (12.5%) lower than~~reduced by a refund of $69,000 from recovery of previously-paid sales tax, with no corresponding recovery in the ~~same period in 2015, primarily as a result of lower depreciation and utility costs.~~third quarter 2016.
49
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

FINANCIAL CONDITION

Gross loans outstanding (excluding mortgage loans held for sale) were ~~$727,842,000~~$742,338,000 at ~~June~~September 30, 2016, up ~~3.3%~~5.3% from $704,880,000 at December 31, 2015 and up ~~9.6%~~9.2% from ~~$663,818,000~~$679,865,000 at ~~June~~September 30, 2015. The total outstanding balances of residential mortgage segment loans at ~~June~~September 30, 2016 increased ~~$12,555,000 (3.3%~~$24,170,000 (6.3%) as compared to December 31, 2015 and ~~increased $23,374,000 (6.2%~~$29,345,000 (7.7%) as compared to ~~June~~September 30, 2015. The total outstanding balances of commercial segment loans at ~~June~~September 30, 2016 increased ~~$8,929,000 (2.9%~~$11,138,000 (3.6%) as compared to December 31, 2015 and ~~increased $63,168,000 (13.9%~~$30,482,000 (10.6%) as compared to ~~June~~September 30, 2015. ~~These~~
The increases in loans outstanding in the latter half of 2015 and first nine months of 2016 included ~~significant~~ increases in commercial participation ~~loans and commercial real estate secured~~ 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” and “Political subdivisions” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to ~~$35,940,000~~$48,670,000 at ~~June~~September 30, 2016, up from ~~$33,059,000~~$44,456,000 at December 31, 2015 and ~~up significantly from $10,354,000~~$32,332,000 at ~~June~~September 30, 2015. At ~~June~~September 30, 2016, the balance of participation loans outstanding includes ~~$7,320,000~~a total of $34,564,000 to ~~a business based in the Corporation’s market area, $10,000,000 to an entity~~businesses located outside of the Corporation’s market area, ~~and $11,089,000~~including $11,996,000 from participations in loans originated through the Corporation’s membership in a network that originates loans throughout the U.S. The Corporation’s participation loans originated through the network consist of loans to businesses that are larger than the Corporation’s typical commercial customer base. The loans originated through the network are considered “leveraged loans,” meaning the businesses typically have minimal tangible book equity and the extent of collateral available is limited, though the businesses have demonstrated strong cash flow performance in their recent histories. At September 30, 2016, total leveraged participation loans, including loans originated through the network and a loan originated through another lead institution, totaled $14,688,000.

Other 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 the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis.

Management does not expect capital expenditures to have a material, detrimental effect on the Corporation’s financial condition in 2016.

Since 2009, the Corporation has originated and sold residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Xtra program consist primarily of conforming, prime loans sold to the Federal National Mortgage Association (Fannie Mae), a government agency. In 2014, the Corporation began to originate and sell residential mortgage loans to the secondary market through the MPF Original program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Residential mortgages originated and sold through the MPF Original program consist primarily of conforming, prime loans sold to the Federal Home Loan Bank of Pittsburgh. For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At ~~June~~September 30, 2016, the Corporation has recorded an allowance in the amount of ~~$155,000~~$169,000 for credit losses on loans sold under the MPF Original Program which is included in “Accrued interest and other liabilities” in the accompanying balance sheet. There was no allowance recorded at December 31, 2015. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.
51

For loan sales originated under the MPF Xtra and Original programs, the Corporation provides customary representations and warranties to investors that specify, among other things, that the loans have been underwritten to the standards established by the investor. The Corporation may be required to repurchase a loan and reimburse a portion of fees received, or reimburse the investor for a credit loss incurred on a loan, if it is determined that the representations and warranties have not been met. Such repurchases or reimbursements generally result from an underwriting or documentation deficiency. At ~~June~~September 30, 2016, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to ~~$1,939,000,~~$1,866,000, and the corresponding total outstanding balance repurchased at December 31, 2015 was $1,968,000.

At ~~June~~September 30, 2016, outstanding balances of loans sold and serviced through the two programs totaled ~~$156,417,000,~~$157,845,000, including loans sold through the MPF Xtra program of ~~$120,225,000~~$117,738,000 and loans sold through the Original program of ~~$36,192,000.~~$40,107,000. At December 31, 2015, outstanding balances of loans sold and serviced through the two programs totaled $152,448,000, including loans sold through the MPF Xtra program of $125,571,000 and loans sold through the Original ~~program~~Program of $26,877,000. Based on the fairly limited volume of required repurchases to date, no allowance had been established for representation and warranty exposures as of ~~June~~September 30, 2016 and December 31, 2015.
50
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

PROVISION AND ALLOWANCE FOR LOAN LOSSES

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction of the investment in loans. Note 7 to the unaudited consolidated financial statements provides an overview of the process management uses for evaluating and determining the allowance for loan losses.

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

The allowance for loan losses was ~~$7,929,000~~$8,421,000 at ~~June~~September 30, 2016, up ~~slightly~~ from $7,889,000 at December 31, 2015. ~~As shown in~~ Table X shows the ~~specific~~collectively determined component of the allowance ~~on impaired loans totaled $253,000~~for residential mortgages was $382,000 higher at ~~June~~September 30, 2016 ~~which was $567,000 lower~~ than ~~the total specific allowance~~ at December 31, 2015, ~~primarily as a result~~reflecting growth in outstanding loans and the use of ~~a $595,000 partial charge-off on one commercial loan. Table X also shows~~slightly higher qualitative factors to estimate the required allowance. Also, the collectively determined component of the allowance for commercial loans was ~~$387,000~~$291,000 higher at ~~June~~September 30, 2016 than at December 31, 2015, reflecting the effects of growth in outstanding loans and increases in the average net charge-offs experience and qualitative factors used to estimate the required allowance. The collectively determined component of the allowance for residential mortgages was $233,000 higher at June 30, 2016 than at December 31, 2015, reflecting growth in outstanding loans and the use of slightly higher qualitative factors to estimate the required allowance.

The provision (credit) for loan losses by segment in the three-month and ~~six-month~~nine-month period ended ~~June~~September 30, 2016 and 2015 is as follows:

(In Thousands) 3 Months Ended 6 Months Ended 3 Months Ended 9 Months Ended
June 30, June 30, June 30, June 30, Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2016 2015 2016 2015 2016 2015 2016 2015
Residential mortgage $ 191 $ 141 $ 274 $ 69 $ 178 $ (17 ) $ 452 $ 52
Commercial 135 82 413 161 337 282 750 443
Consumer 21 (4 ) 28 (7 ) 23 6 51 (1 )
Unallocated (29 ) 2 (29 ) 1 0 31 (29 ) 32

Total $ 318 $ 221 $ 686 $ 224 $ 538 $ 302 $ 1,224 $ 526

~~The increases~~As shown in the table above, the provision for loan losses for the ~~second~~third quarter 2016 exceeded the third quarter 2015 amount by $236,000, with the largest increases in the residential mortgage and ~~first six months~~commercial segments. In the third quarter 2016, the provision related to residential mortgage loans included an increase of ~~2016 as compared~~$142,000 in the qualitative factors component of the collectively determined allowance. In comparison, the net credit related to the ~~corresponding periods~~residential mortgage segment in the third quarter 2015 included an increase related to qualitative factors of $55,000, but also included a credit of $78,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period. For the commercial segment, the third quarter 2016 provision included $433,000 from the increase in total specific allowances on impaired loans, as adjusted for net charge-offs, and $26,000 from an increase in the allowance related to qualitative factors, reduced $122,000 by improvement in the net charge-offs experience component of the collectively determined allowance. In comparison, the main components of the commercial provision in the third quarter 2015 ~~reflect, in part, increases~~included an increase in the collectively determined portion of the allowance based on qualitative factors of $141,000 and a net increase in specific allowances on impaired loans of $108,000.
52
The provision for loan losses ~~resulting from growth~~for the nine months ended September 30, 2016 totaled $1,224,000, an increase of $698,000 over the corresponding amount for the first nine months of 2015. In the first nine months of 2016, the provision related to the residential mortgage segment increased $400,000, and the provision related to the commercial segment increased $307,000. For the nine-month period ended September 30, 2016, the provision related to residential mortgage loans included an increase of $70,000 related to the change in ~~outstanding~~total specific allowances on impaired loans, ~~and from slight increases~~as adjusted for net charge-offs during the period, while the net provision for the first nine months of 2015 included a credit of $164,000 attributable to a net reduction in specific allowances on impaired residential mortgage loans. Also, the provision related to residential mortgage loans in the first nine months of 2016 included an increase of $367,000 in the qualitative factors ~~used~~component of the allowance as compared to ~~estimate~~an increase of $127,000 in the ~~required allowance. In 2016,~~qualitative factors component in the first nine months of 2015. For the commercial segment, the provision for the first nine months of 2016 included $459,000 from the increase in total specific allowances on impaired loans, as compared to a net increase of $282,000 in specific allowances on impaired loans in the first nine months of 2015. Also, the provision related to the commercial segment ~~also includes~~for the ~~effects~~first nine months of 2016 included $194,000 from an increase in ~~average net charge-offs as a percentage of outstanding loans (based on historical experience over~~ the ~~previous thirty-six months) used to estimate a portion~~qualitative factors component of the collectively determined ~~allowance.~~portion of the allowance as compared to a corresponding $80,000 increase in the first nine months of 2015.

Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). Total nonperforming loans as a percentage of outstanding loans was 2.70% at September 30, 2016, up from 2.09% at December 31, 2015, and nonperforming assets as a percentage of total assets was 1.79% at September 30, 2016, up from 1.31% at December 31, 2015. Table XI ~~shows~~presents data at September 30, 2016 and at the end of each of the years ended December 31, 2011 through 2015. For the range of dates presented in Table XI, total nonperforming loans as a percentage of loans has ranged from a low of 1.19% at December 31, 2011 to a high of 2.80% at December 31, 2013, and total nonperforming assets as a percentage of assets has ranged from a low of 0.73% at December 31, 2011 to a high of 1.79% at September 30, 2016.
Total impaired loans of ~~$9,330,000~~$11,135,000 at ~~June~~September 30, 2016, ~~down $644,000~~are up $1,161,000 from the corresponding amount at December 31, 2015 of ~~$9,974,000. As also shown~~$9,974,000, including an increase in ~~Table XI,~~impaired loans with a valuation allowance of $1,688,000. In the third quarter 2016, the Corporation recorded an allowance of $528,000 related to one real estate secured commercial loan relationship with total loans outstanding of $3,347,000, including one loan with an outstanding balance of $2,695,000 that was classified as ~~TDRs totaled $6,149,000~~impaired with a valuation allowance at ~~June~~September 30, 2016.
Total nonperforming assets of $22,341,000 at September 30, 2016 ~~down slightly~~are up $6,335,000 from ~~$6,364,000~~the corresponding amount at December 31, 2015, ~~and~~including increases in nonaccrual loans, ~~totaled $10,504,000 at June 30, 2016~~loans past due 90 days or more and still accruing interest and foreclosed (real estate) assets held for sale, summarized as ~~compared to $11,517,000 at December 31, 2015.~~follows:
· Total nonaccrual loans at September 30, 2016 of $12,481,000 was $964,000 higher than the corresponding December 31, 2015 total, including the effect of classifying the real estate secured commercial loan noted above with an outstanding balance at September 30, 2016 of $2,695,000 as nonaccrual in the third quarter 2016.
· Total loans past due 90 days or more and still accruing interest amounted to $7,539,000 at September 30, 2016, an increase of $4,310,000 from $3,229,000 at December 31, 2015. The increase in 2016 in the balance of loans past due 90 days or more and still accruing interest included a commercial loan with a balance of $2,697,000 at September 30, 2016 that was deemed by management to be well secured and in the process of collection. At September 30, 2016, in addition to this commercial loan, total residential mortgage loans that were more than 90 days past due but deemed to be well secured and in the process of collection amounted to $4,016,000, up from $2,381,000 at December 31, 2015. The Corporation reviews the status of loans past due 90 days or more each quarter to determine if it is appropriate to continue to accrue interest, and has determined the loans included in this category are well secured and that ultimate collection of all principal and interest is probable.
· Foreclosed assets held for sale consisted of real estate, and totaled $2,321,000 at September 30, 2016, an increase of $1,061,000 from $1,260,000 at December 31, 2015. At September 30, 2016, the Corporation held 22 such properties for sale, with total carrying values of $1,195,000 related to residential real estate, $696,000 of land and $430,000 related to commercial real estate. At December 31, 2016, the Corporation held 12 such properties for sale, with total carrying values of $556,000 related to residential real estate and $704,000 of land. The Corporation evaluates the carrying values of foreclosed assets each quarter based on the most recent market activity or appraisals for each property.
53

The outstanding balances of impaired loans without a valuation allowance, nonaccrual loans and nonperforming TDRs at ~~June~~September 30, 2016, include an outstanding balance of ~~$4,925,000~~$4,836,000 from loans to one commercial entity. In 2014, the Corporation entered into a forbearance agreement with this commercial borrower which included a reduction in monthly payment amounts over a fifteen-month period. At the end of the fifteen-month period, the monthly payment amounts would revert to the original amounts, unless the forbearance agreement was extended or the payment requirements otherwise modified. The forbearance agreement has been extended for two additional twelve-month periods, most recently in July 2016. The Corporation recorded a charge-off of $1,486,000 in the second quarter 2014 as a result of these modifications, as the payment amounts based on the forbearance agreement are not sufficient to fully amortize the contractual amount of principal outstanding on the loans. The borrower has made all required payments on the loans in accordance with the terms of the forbearance agreement, as extended.

51
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
As also shown in Table XI total loans past due 90 days or more and still accruing interest increased to $4,654,000 at June 30, 2016 from $3,229,000 at December 31, 2015. This category includes first lien residential mortgages with a total outstanding balance of $3,663,000 at June 30, 2016. The Corporation reviews the status of loans past due 90 days or more each quarter to determine if it is appropriate to continue to accrue interest, and has determined the loans included in this category are well secured and that ultimate collection of all principal and interest is probable.
Each period presented in Table XI includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period.

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of ~~June~~September 30, 2016. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

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

TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES
(In Thousands)

6 Months Ended
June 30, June 30, Years Ended December 31,
2016 2015 2015 2014 2013 2012 2011
Balance, beginning of year $ 7,889 $ 7,336 $ 7,336 $ 8,663 $ 6,857 $ 7,705 $ 9,107
Charge-offs:
Residential mortgage (42 ) (137 ) (217 ) (327 ) (95 ) (552 ) (100 )
Commercial (595 ) (125 ) (251 ) (1,715 ) (459 ) (498 ) (1,189 )
Consumer (39 ) (37 ) (94 ) (97 ) (117 ) (171 ) (157 )
Total charge-offs (676 ) (299 ) (562 ) (2,139 ) (671 ) (1,221 ) (1,446 )
Recoveries:
Residential mortgage 0 1 1 25 24 18 3
Commercial 3 4 214 264 348 8 255
Consumer 27 34 55 47 58 59 71
Total recoveries 30 39 270 336 430 85 329
Net charge-offs (646 ) (260 ) (292 ) (1,803 ) (241 ) (1,136 ) (1,117 )
Provision (credit) for loan losses 686 224 845 476 2,047 288 (285 )
Balance, end of period $ 7,929 $ 7,300 $ 7,889 $ 7,336 $ 8,663 $ 6,857 $ 7,705

Net charge-offs as a % of average loans 0.09 % 0.04 % 0.04 % 0.29 % 0.04 % 0.16 % 0.16 %
52
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
9 Months Ended
Sept. 30, Sept. 30, Years Ended December 31,
2016 2015 2015 2014 2013 2012 2011
Balance, beginning of year $ 7,889 $ 7,336 $ 7,336 $ 8,663 $ 6,857 $ 7,705 $ 9,107
Charge-offs:
Residential mortgage (73 ) (191 ) (217 ) (327 ) (95 ) (552 ) (100 )
Commercial (597 ) (240 ) (251 ) (1,715 ) (459 ) (498 ) (1,189 )
Consumer (67 ) (65 ) (94 ) (97 ) (117 ) (171 ) (157 )
Total charge-offs (737 ) (496 ) (562 ) (2,139 ) (671 ) (1,221 ) (1,446 )
Recoveries:
Residential mortgage 2 1 1 25 24 18 3
Commercial 4 5 214 264 348 8 255
Consumer 39 44 55 47 58 59 71
Total recoveries 45 50 270 336 430 85 329
Net charge-offs (692 ) (446 ) (292 ) (1,803 ) (241 ) (1,136 ) (1,117 )
Provision (credit) for loan losses 1,224 526 845 476 2,047 288 (285 )
Balance, end of period $ 8,421 $ 7,416 $ 7,889 $ 7,336 $ 8,663 $ 6,857 $ 7,705

Net charge-offs as a % of average loans 0.10 % 0.07 % 0.04 % 0.29 % 0.04 % 0.16 % 0.16 %

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES
(In Thousands)
June 30, As of December 31,
2016 2015 2014 2013 2012 2011
ASC 310 - Impaired loans $ 253 $ 820 $ 769 $ 2,333 $ 623 $ 1,126
ASC 450 - Collective segments:
Commercial 3,490 3,103 2,732 2,583 2,594 2,811
Residential mortgage 3,650 3,417 3,295 3,156 3,011 3,130
Consumer 138 122 145 193 188 204
Unallocated 398 427 395 398 441 434
Total Allowance $ 7,929 $ 7,889 $ 7,336 $ 8,663 $ 6,857 $ 7,705
Sept. 30, As of December 31,
2016 2015 2014 2013 2012 2011
ASC 310 - Impaired loans $ 685 $ 820 $ 769 $ 2,333 $ 623 $ 1,126
ASC 450 - Collective segments:
Commercial 3,394 3,103 2,732 2,583 2,594 2,811
Residential mortgage 3,799 3,417 3,295 3,156 3,011 3,130
Consumer 145 122 145 193 188 204
Unallocated 398 427 395 398 441 434
Total Allowance $ 8,421 $ 7,889 $ 7,336 $ 8,663 $ 6,857 $ 7,705

The above allocation is based on estimates and subjective judgments and is not necessarily indicative of the specific amounts or loan categories in which losses may occur.

54
TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS
AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
(In Thousands) As of
June 30, As of December 31,
2016 2015 2014 2013 2012 2011
Impaired loans with a valuation allowance $ 1,275 $ 1,933 $ 3,241 $ 9,889 $ 2,710 $ 3,433
Impaired loans without a valuation allowance 8,055 8,041 9,075 6,432 4,719 4,431
Total impaired loans $ 9,330 $ 9,974 $ 12,316 $ 16,321 $ 7,429 $ 7,864

Total loans past due 30-89 days and still accruing $ 6,945 $ 7,057 $ 7,121 $ 8,305 $ 7,756 $ 7,898

Nonperforming assets:
Total nonaccrual loans $ 10,504 $ 11,517 $ 12,610 $ 14,934 $ 7,353 $ 7,197
Total loans past due 90 days or more and still accruing 4,654 3,229 2,843 3,131 2,311 1,267
Total nonperforming loans 15,158 14,746 15,453 18,065 9,664 8,464
Foreclosed assets held for sale (real estate) 2,052 1,260 1,189 892 879 1,235
Total nonperforming assets $ 17,210 $ 16,006 $ 16,642 $ 18,957 $ 10,543 $ 9,699

Loans subject to troubled debt restructurings (TDRs):
Performing $ 1,047 $ 1,186 $ 1,807 $ 3,267 $ 906 $ 1,064
Nonperforming 5,102 5,178 5,388 908 1,155 2,413
Total TDRs $ 6,149 $ 6,364 $ 7,195 $ 4,175 $ 2,061 $ 3,477

Total nonperforming loans as a % of loans 2.08 % 2.09 % 2.45 % 2.80 % 1.41 % 1.19 %
Total nonperforming assets as a % of assets 1.40 % 1.31 % 1.34 % 1.53 % 0.82 % 0.73 %
Allowance for loan losses as a % of total loans 1.09 % 1.12 % 1.16 % 1.34 % 1.00 % 1.09 %
Allowance for loan losses as a % of nonperforming loans 52.31 % 53.50 % 47.47 % 47.95 % 70.95 % 91.03 %
(In Thousands)

53
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
As of
Sept. 30, As of December 31,
2016 2015 2014 2013 2012 2011
Impaired loans with a valuation allowance $ 3,621 $ 1,933 $ 3,241 $ 9,889 $ 2,710 $ 3,433
Impaired loans without a valuation allowance 7,514 8,041 9,075 6,432 4,719 4,431
Total impaired loans $ 11,135 $ 9,974 $ 12,316 $ 16,321 $ 7,429 $ 7,864
Total loans past due 30-89 days and still accruing $ 4,040 $ 7,057 $ 7,121 $ 8,305 $ 7,756 $ 7,898
Nonperforming assets:
Total nonaccrual loans $ 12,481 $ 11,517 $ 12,610 $ 14,934 $ 7,353 $ 7,197
Total loans past due 90 days or more and still accruing 7,539 3,229 2,843 3,131 2,311 1,267
Total nonperforming loans 20,020 14,746 15,453 18,065 9,664 8,464
Foreclosed assets held for sale (real estate) 2,321 1,260 1,189 892 879 1,235
Total nonperforming assets $ 22,341 $ 16,006 $ 16,642 $ 18,957 $ 10,543 $ 9,699
Loans subject to troubled debt restructurings (TDRs):
Performing $ 946 $ 1,186 $ 1,807 $ 3,267 $ 906 $ 1,064
Nonperforming 5,032 5,178 5,388 908 1,155 2,413
Total TDRs $ 5,978 $ 6,364 $ 7,195 $ 4,175 $ 2,061 $ 3,477

Total nonperforming loans as a % of loans 2.70 % 2.09 % 2.45 % 2.80 % 1.41 % 1.19 %
Total nonperforming assets as a % of assets 1.79 % 1.31 % 1.34 % 1.53 % 0.82 % 0.73 %
Allowance for loan losses as a % of total loans 1.13 % 1.12 % 1.16 % 1.34 % 1.00 % 1.09 %
Allowance for loan losses as a % of nonperforming loans 42.06 % 53.50 % 47.47 % 47.95 % 70.95 % 91.03 %

TABLE XII - SUMMARY OF LOANS BY TYPE
Summary of Loans by Type
(In Thousands) June 30, As of December 31,
2016 2015 2014 2013 2012 2011
Residential mortgage:
Residential mortgage loans - first liens $ 315,191 $ 304,783 $ 291,882 $ 299,831 $ 311,627 $ 331,015
Residential mortgage loans - junior liens 22,159 21,146 21,166 23,040 26,748 28,851
Home equity lines of credit 39,054 39,040 36,629 34,530 33,017 30,037
1-4 Family residential construction 22,241 21,121 16,739 13,909 12,842 9,959
Total residential mortgage 398,645 386,090 366,416 371,310 384,234 399,862
Commercial:
Commercial loans secured by real estate 153,070 154,779 145,878 147,215 158,413 156,388
Commercial and industrial 82,390 75,196 50,157 42,387 48,442 57,191
Political subdivisions 41,026 40,007 17,534 16,291 31,789 37,620
Commercial construction and land 9,193 5,122 6,938 17,003 28,200 23,518
Loans secured by farmland 6,615 7,019 7,916 10,468 11,403 10,949
Multi-family (5 or more) residential 8,173 9,188 8,917 10,985 6,745 6,583
Agricultural loans 4,692 4,671 3,221 3,251 3,053 2,987
Other commercial loans 11,904 12,152 13,334 14,631 362 552
Total commercial 317,063 308,134 253,895 262,231 288,407 295,788
Consumer 12,134 10,656 10,234 10,762 11,269 12,665
Total 727,842 704,880 630,545 644,303 683,910 708,315
Less: allowance for loan losses (7,929 ) (7,889 ) (7,336 ) (8,663 ) (6,857 ) (7,705 )
Loans, net $ 719,913 $ 696,991 $ 623,209 $ 635,640 $ 677,053 $ 700,610
(In Thousands)
Sept. 30, As of December 31,
2016 2015 2014 2013 2012 2011
Residential mortgage:
Residential mortgage loans - first liens $ 325,533 $ 304,783 $ 291,882 $ 299,831 $ 311,627 $ 331,015
Residential mortgage loans - junior liens 22,794 21,146 21,166 23,040 26,748 28,851
Home equity lines of credit 38,623 39,040 36,629 34,530 33,017 30,037
1-4 Family residential construction 23,310 21,121 16,739 13,909 12,842 9,959
Total residential mortgage 410,260 386,090 366,416 371,310 384,234 399,862
Commercial:
Commercial loans secured by real estate 149,938 154,779 145,878 147,215 158,413 156,388
Commercial and industrial 86,969 75,196 50,157 42,387 48,442 57,191
Political subdivisions 38,653 40,007 17,534 16,291 31,789 37,620
Commercial construction and land 12,809 5,122 6,938 17,003 28,200 23,518
Loans secured by farmland 6,900 7,019 7,916 10,468 11,403 10,949
Multi-family (5 or more) residential 8,133 9,188 8,917 10,985 6,745 6,583
Agricultural loans 4,313 4,671 3,221 3,251 3,053 2,987
Other commercial loans 11,557 12,152 13,334 14,631 362 552
Total commercial 319,272 308,134 253,895 262,231 288,407 295,788
Consumer 12,806 10,656 10,234 10,762 11,269 12,665
Total 742,338 704,880 630,545 644,303 683,910 708,315
Less: allowance for loan losses (8,421 ) (7,889 ) (7,336 ) (8,663 ) (6,857 ) (7,705 )
Loans, net $ 733,917 $ 696,991 $ 623,209 $ 635,640 $ 677,053 $ 700,610
55

LIQUIDITY

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At ~~June~~September 30, 2016, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling ~~$9,401,000.~~$9,620,000.

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

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. Management intends to use this line of credit as a contingency funding source. As collateral for the line, the Corporation has pledged available-for-sale securities with a carrying value of ~~$19,031,000~~$18,899,000 at ~~June~~September 30, 2016.

The Corporation’s outstanding, available, and total credit facilities at ~~June~~September 30, 2016 and December 31, 2015 are as follows:

Outstanding Available Total Credit Outstanding Available Total Credit
(In Thousands) June 30, Dec. 31, June 30, Dec. 31, June 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, Dec. 31, Sept. 30, Dec. 31,
2016 2015 2016 2015 2016 2015 2016 2015 2016 2015 2016 2015
Federal Home Loan Bank of Pittsburgh $ 31,656 $ 60,348 $ 294,372 $ 262,361 $ 326,028 $ 322,709 $ 19,808 $ 60,348 $ 315,685 $ 262,361 $ 335,493 $ 322,709
Federal Reserve Bank Discount Window 0 0 17,285 19,606 17,285 19,606 0 �� 0 16,802 19,606 16,802 19,606
Other correspondent banks 0 0 45,000 45,000 45,000 45,000 0 0 45,000 45,000 45,000 45,000
Total credit facilities $ 31,656 $ 60,348 $ 356,657 $ 326,967 $ 388,313 $ 387,315 $ 19,808 $ 60,348 $ 377,487 $ 326,967 $ 397,295 $ 387,315

At ~~June~~September 30, 2016, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of ~~$7,500,000,~~$2,000,000, short-term borrowings of ~~$12,541,000,~~$6,270,000, and long-term borrowings with a total amount of ~~$11,615,000.~~$11,538,000. At December 31, 2015, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $23,500,000, short-term borrowings of $25,081,000, and long-term borrowings with a total amount of $11,767,000. Additional information regarding borrowed funds is included in Note 8 of the unaudited consolidated financial statements.

54
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
Additionally, the Corporation uses repurchase agreements placed with brokers to borrow funds secured by investment assets and “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. At ~~June~~September 30, 2016, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was ~~$224,393,000.~~$193,452,000.

Management believes the Corporation is well-positioned to meet its short-term and long-term obligations.
56

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

The Corporation and C&N Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Details concerning capital ratios at ~~June~~September 30, 2016 and December 31, 2015 are presented below. Management believes, as of ~~June~~September 30, 2016 and December 31, 2015, that the Corporation and C&N Bank meet all capital adequacy requirements to which they are subject and maintain capital conservation buffers (described in more detail in the “New Capital Rule” section below) that allow the Corporation and C&N Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at ~~June~~September 30, 2016 and December 31, 2015 exceed the Corporation’s policy threshold levels.

(Dollars in Thousands) Minimum To Be Well
Minimum Minimum To Maintain Capitalized Under Minimum To Meet
Capital Capital Conservation Prompt Corrective the Corporation's
Actual Requirement Buffer at Reporting Date Action Provisions Policy Thresholds
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
June 30, 2016:
Total capital to risk-weighted assets:
Consolidated $ 179,810 23.47 % $ 61,279 8 % $ 66,067 ³8.625% $ 76,599 ³10 % $ 80,429 ³10.5 %
C&N Bank 159,919 21.01 % 60,903 8 % 65,661 ³8.625% 76,128 ³10 % 79,935 ³10.5 %
Tier 1 capital to risk-weighted assets:
Consolidated 171,684 22.41 % 30,640 6 % 50,747 ³6.625% 61,279 ³8 % 65,109 ³8.5 %
C&N Bank 151,990 19.96 % 30,451 6 % 50,435 ³6.625% 60,903 ³8 % 64,709 ³8.5 %
Common equity tier 1 capital to risk-weighted assets:
Consolidated 171,684 22.41 % 30,640 4.5 % 39,257 ³5.125% 49,789 ³6.5 % 53,619 ³7 %
C&N Bank 151,990 19.96 % 30,451 4.5 % 39,016 ³5.125% 49,483 ³6.5 % 53,290 ³7 %
Tier 1 capital to average assets:
Consolidated 171,684 14.19 % 48,391 4 % N/A N/A 60,489 ³5 % 60,489 ³5 %
C&N Bank 151,990 12.72 % 47,786 4 % N/A N/A 59,732 ³5 % 59,732 ³5 %

December 31, 2015:
Total capital to risk-weighted assets:
Consolidated $ 181,216 24.40 % $ 59,424 8 % N/A N/A $ 74,281 ³10 % $ 77,995 ³10.5 %
C&N Bank 161,187 21.83 % 59,058 8 % N/A N/A 73,823 ³10 % 77,514 ³10.5 %
Tier 1 capital to risk-weighted assets:
Consolidated 173,009 23.29 % 29,712 6 % N/A N/A 59,424 ³8 % 63,139 ³8.5 %
C&N Bank 153,298 20.77 % 29,529 6 % N/A N/A 59,058 ³8 % 62,749 ³8.5 %
Common equity tier 1 capital to risk-weighted assets:
Consolidated 173,009 23.29 % 29,712 4.5 % N/A N/A 48,282 ³6.5 % 51,996 ³7 %
C&N Bank 153,298 20.77 % 29,529 4.5 % N/A N/A 47,985 ³6.5 % 51,676 ³7 %
Tier 1 capital to average assets:
Consolidated 173,009 14.31 % 48,355 4 % N/A N/A 60,444 ³5 % 60,444 ³5 %
C&N Bank 153,298 12.81 % 47,861 4 % N/A N/A 59,826 ³5 % 59,826 ³5 %
55
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
(Dollars in Thousands) Minimum To Be Well
Minimum Minimum To Maintain Capitalized Under Minimum To Meet
Capital Capital Conservation Prompt Corrective the Corporation's
Actual Requirement Buffer at Reporting Date Action Provisions Policy Thresholds
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
September 30, 2016:
Total capital to risk-weighted assets:
Consolidated $ 181,961 23.56 % $ 61,784 ³8 % $ 66,611 ³8.625 % $ 77,230 ³10 % $ 81,091 ³10.5 %
C&N Bank 161,486 21.04 % 61,411 ³8 % 66,209 ³8.625 % 76,764 ³10 % 80,602 ³10.5 %
Tier 1 capital to risk-weighted assets:
Consolidated 173,223 22.43 % 30,892 ³6 % 51,165 ³6.625 % 61,784 ³8 % 65,645 ³8.5 %
C&N Bank 152,896 19.92 % 30,706 ³6 % 50,856 ³6.625 % 61,411 ³8 % 65,249 ³8.5 %
Common equity tier 1 capital to risk-weighted assets: ��
Consolidated 173,223 22.43 % 30,892 ³4.5 % 39,580 ³5.125 % 50,199 ³6.5 % 54,061 ³7 %
C&N Bank 152,896 19.92 % 30,706 ³4.5 % 39,341 ³5.125 % 49,897 ³6.5 % 53,735 ³7 %
Tier 1 capital to average assets:
Consolidated 173,223 14.17 % 48,885 ³4 % N/A N/A 61,107 ³5 % 61,107 ³5 %
C&N Bank 152,896 12.66 % 48,321 ³4 % N/A N/A 60,401 ³5 % 60,401 ³5 %

December 31, 2015:
Total capital to risk-weighted assets:
Consolidated $ 181,216 24.40 % $ 59,424 ³8 % N/A N/A $ 74,281 ³10 % $ 77,995 ³10.5 %
C&N Bank 161,187 21.83 % 59,058 ³8 % N/A N/A 73,823 ³10 % 77,514 ³10.5 %
Tier 1 capital to risk-weighted assets:
Consolidated 173,009 23.29 % 29,712 ³6 % N/A N/A 59,424 ³8 % 63,139 ³8.5 %
C&N Bank 153,298 20.77 % 29,529 ³6 % N/A N/A 59,058 ³8 % 62,749 ³8.5 %
Common equity tier 1 capital to risk-weighted assets:
Consolidated 173,009 23.29 % 29,712 ³4.5 % N/A N/A 48,282 ³6.5 % 51,996 ³7 %
C&N Bank 153,298 20.77 % 29,529 ³4.5 % N/A N/A 47,985 ³6.5 % 51,676 ³7 %
Tier 1 capital to average assets:
Consolidated 173,009 14.31 % 48,355 ³4 % N/A N/A 60,444 ³5 % 60,444 ³5 %
C&N Bank 153,298 12.81 % 47,861 ³4 % N/A N/A 59,826 ³5 % 59,826 ³5 %

Management expects the Corporation and C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions and the applicable capital conservation buffers for the next 12 months and for the foreseeable future.

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. As described in more detail in the section below titled “New Capital Rule," 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.

57
NEW CAPITAL RULE

In July 2013, the federal regulatory authorities issued a new capital rule based, in part, on revisions developed by the Basel Committee on Banking Supervision to the Basel capital framework (Basel III). The Corporation and C&N Bank became subject to the new rule effective January 1, 2015. Generally, the new rule implemented higher minimum capital requirements, revised the definition of regulatory capital components and related calculations, added a new common equity tier 1 capital ratio, implemented a new capital conservation buffer, increased the risk weighting for past due loans and provided a transition period for several aspects of the new rule.

The current (new) capital rule provides that, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. Phase-in of the capital conservation buffer requirements began January 1, 2016. The transition schedule for new ratios, including the capital conservation buffer, is as follows:

As of January 1:
2015 2016 2017 2018 2019
Minimum common equity tier 1 capital ratio 4.5 % 4.5 % 4.5 % 4.5 % 4.5 %
Common equity tier 1 capital conservation buffer N/A 0.625 % 1.25 % 1.875 % 2.5 %
Minimum common equity tier 1 capital ratio plus capital conservation buffer 4.5 % 5.125 % 5.75 % 6.375 % 7.0 %
Phase-in of most deductions from common equity tier 1 capital 40 % 60 % 80 % 100 % 100 %
Minimum tier 1 capital ratio 6.0 % 6.0 % 6.0 % 6.0 % 6.0 %
Minimum tier 1 capital ratio plus capital conservation buffer N/A 6.625 % 7.25 % 7.875 % 8.5 %
Minimum total capital ratio 8.0 % 8.0 % 8.0 % 8.0 % 8.0 %
Minimum total capital ratio plus capital conservation buffer N/A 8.625 % 9.25 % 9.875 % 10.5 %

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

56
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
Capital Conservation Buffer Maximum Payout
(as a % of risk-weighted assets) (as a % of eligible retained income)
Greater than 2.5% No payout limitation applies
≤2.5% and >1.875% 60 %
≤1.875% and >1.25% 40 %
≤1.25% and >0.625% 20 %
≤0.625% 0 %

At ~~June~~September 30, 2016, the Corporation’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was ~~15.47%~~15.56%. C&N Bank’s Capital Conservation Buffer (also determined based on the minimum total capital ratio) was ~~13.01%~~13.04%.
58

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale securities. The difference between amortized cost and fair value of available-for-sale securities, net of deferred income tax, is included in Accumulated Other Comprehensive Income within stockholders’ equity. The balance in Accumulated Other Comprehensive Income related to unrealized gains on available-for-sale securities, net of deferred income tax, amounted to ~~$6,849,000~~$5,388,000 at ~~June~~September 30, 2016 and $2,493,000 at December 31, 2015. Changes in accumulated other comprehensive income are excluded from earnings and directly increase or decrease stockholders’ equity. If available-for-sale securities
are deemed to be other-than-temporarily impaired, unrealized losses are recorded as a charge against earnings, and amortized cost for the affected securities is reduced. Note 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale securities for other-than-temporary impairment at ~~June~~September 30, 2016.

Stockholders’ equity is also affected by the underfunded or overfunded status of defined benefit pension and postretirement plans. The balance in Accumulated Other Comprehensive Income related to defined benefit plans, net of deferred income tax, was ~~$45,000~~$42,000 at ~~June~~September 30, 2016 and $35,000 at December 31, 2015.

COMPREHENSIVE INCOME

Comprehensive Income is the total of (1) net income, and (2) all other changes in equity from non-stockholder sources, which are referred to as Other Comprehensive Income. Changes in the components of Accumulated Other Comprehensive Income (Loss) are included in Other Comprehensive Income, and for the Corporation, consist of changes in unrealized gains or losses on available-for-sale securities and changes in underfunded or overfunded defined benefit plans. Fluctuations in interest rates significantly affect fair values of available-for-sale securities, and accordingly have an effect on Other Comprehensive Income (Loss) in each period.

Comprehensive Income totaled ~~$5,369,000~~$2,623,000 for the three months ended ~~June~~September 30, 2016 as compared to ~~$777,000~~$6,270,000 in the ~~second~~third quarter 2015. For the three months ended ~~June~~September 30, 2016, Comprehensive Income included: (1) Net Income of ~~$3,871,000,~~$4,087,000, which was ~~$486,000~~$147,000 lower than in the ~~second~~third quarter 2015; (2) Other Comprehensive Loss from a decrease in net unrealized gains on available-for-sale securities of ($1,461,000) as compared to Other Comprehensive Income of $2,039,000 from an increase in net unrealized gains on available-for-sale securities ~~of $1,502,000 as compared to Other Comprehensive Loss of ($3,577,000) from a decrease in net unrealized gains on available-for-sale securities~~ in the ~~second~~third quarter 2015; and (3) Other Comprehensive Loss from defined benefit plans of ($~~4,000) for the second quarter 2016 and ($~~3,000) for the ~~second quarter~~third quarters of 2016 and 2015.

Comprehensive Income totaled ~~$11,810,000~~$14,433,000 for the ~~six~~nine months ended ~~June~~September 30, 2016 as compared to ~~$6,898,000~~$13,168,000 for the ~~six~~nine months ended ~~June~~September 30, 2015. In the ~~six~~nine months ended ~~June~~September 30, 2016, Comprehensive Income included: (1) Net Income of ~~$7,444,000,~~$11,531,000, which was ~~$728,000~~$875,000 lower than in the first ~~six~~nine months of 2015; (2) Other Comprehensive Income from an increase in net unrealized gains on available-for-sale securities ~~net~~ of ~~deferred income tax, of $4,356,000~~$2,895,000 as compared to Other Comprehensive ~~Loss~~Income of ~~($1,204,000)~~$835,000 in the first ~~six~~nine months of 2015; and (3) Other Comprehensive Income from defined benefit plans of ~~$10,000~~$7,000 as compared to Other Comprehensive Loss of ($~~70,000)~~73,000) in the first ~~six~~nine months of 2015.

INCOME TAXES

~~The effective income tax rate ranged from 24.35% to 25.18% of pre-tax income for the three-month and six-month periods ended June 30, 2016 and 2015.~~ The provision for income tax for interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The Corporation’s effective tax rates differ from the statutory rate of 35% principally because of the effects of tax-exempt interest income.

57
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~The third quarter 2016 provision for income tax of $1,451,000, or 26.20% of pre-tax income, was $56,000 higher than the third quarter 2015 tax provision of $1,395,000, or 24.78% of pre-tax income. The higher effective tax in the third quarter 2016 included the effects of a reduction in tax-exempt interest income of $127,000. The reduction in tax-exempt interest income resulted from pay-offs received on municipal bonds purchased several years ago when market interest yields were higher. Also, the provision for state income tax was $39,000 higher, primarily as a result of a catch-up adjustment to increase New York State taxes for the effect of changes in the tax methodology that first became effective in 2015.
The provision for income tax totaled $3,847,000 for the nine months ended September 30, 2016, down $229,000 from the amount for the first nine months of 2015. The lower tax provision in 2016 resulted from lower pre-tax income; however, the provision increased as a percentage of pre-tax income to 25.02% in 2016 from 24.73% in 2015. The higher effective tax rate included the impact of a $253,000 reduction in tax-exempt interest income and an increase in the provision for state income tax of $30,000 that resulted mainly from a catch-up adjustment to increase the state tax provision for New York State.

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At ~~June~~September 30, 2016, the net deferred tax asset was ~~$425,000,~~$1,544,000, down from $3,115,000 at December 31, 2015. The most significant change in temporary difference components was an increase of ~~$2,344,000~~$1,560,000 in the deferred tax liability associated with unrealized gains on available-for-sale securities.
59

The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income. Management believes the recorded net deferred tax asset at ~~June~~September 30, 2016 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

Additional information related to income taxes is presented in Note 11 to the unaudited, consolidated financial statements.

INFLATION

The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. Beginning in September 2007, in response to concerns about weakness in the U.S. economy, the Federal Reserve lowered the fed funds target rate numerous times; in December 2008, it established a target range of 0% to 0.25%, which it maintained through mid-December 2015. On December 16, 2015, the Federal Reserve raised their target for the federal funds rate to 0.25% to 0.50%. This decision was based on data available that suggested economic activity had been expanding at a moderate pace. This included an increase in household spending, business fixed investments increasing, and an improvement in labor market conditions. Also, throughout this period, the Federal Reserve has injected massive amounts of liquidity into the nation’s monetary system through a variety of programs. The Federal Reserve has purchased large amounts of securities in an effort to keep interest rates low and stimulate economic growth. Beginning in late 2013, the Federal Reserve began reducing the amount of securities purchased under its asset purchase program and then ended the program in October 2014, though still reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and continued to roll over maturing Treasury securities at auction. The Federal Reserve maintained their commitment to this policy in their ~~June 15,~~September 21, 2016 statement and anticipates doing so until normalization of the level of the federal funds rate is well under way.

Despite the current low short-term rate environment, inflation statistics indicate that the overall rate of inflation is unlikely to significantly affect the Corporation’s operations within the near future. Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including any indicators of inflationary pressures, in managing interest rate and other financial risks.

5860
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

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

The Corporation’s two major categories of market risk are interest rate risk and equity securities risk, which are discussed in the following sections.

INTEREST RATE RISK

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

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

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

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

Table XIII, which follows this discussion, is based on the results of calculations performed using the simulation model as of ~~April 30,~~July 31, 2016 and December 31, 2015. The table shows that as of the respective dates, the changes in net interest income and changes in market value were within the policy limits in all scenarios.

5961
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

TABLE XIII - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES

April 30, 2016 Data
(In Thousands) Period Ending April 30, 2017

Basis Point Interest Interest Net Interest NII NII
Change in Rates Income Expense Income (NII) % Change Risk Limit
+400 $ 51,989 $ 21,581 $ 30,408 -17.8 % 25.0 %
+300 49,254 16,936 32,318 -12.6 % 20.0 %
+200 46,486 12,380 34,106 -7.8 % 15.0 %
+100 43,641 8,020 35,621 -3.7 % 10.0 %
0 40,711 3,713 36,998 0.0 % 0.0 %
-100 38,093 3,194 34,899 -5.7 % 10.0 %
-200 36,860 3,192 33,668 -9.0 % 15.0 %
-300 36,402 3,192 33,210 -10.2 % 20.0 %
-400 36,269 3,192 33,077 -10.6 % 25.0 %
July 31, 2016 Data
(In Thousands) Period Ending July 31, 2017
Basis Point Interest Interest Net Interest NII NII
Change in Rates Income Expense Income (NII) % Change Risk Limit
+400 $ 52,459 $ 22,058 $ 30,401 -19.3 % 25.0 %
+300 49,766 17,276 32,490 -13.7 % 20.0 %
+200 47,042 12,576 34,466 -8.5 % 15.0 %
+100 44,249 8,131 36,118 -4.1 % 10.0 %
0 41,379 3,717 37,662 0.0 % 0.0 %
-100 38,822 3,228 35,594 -5.5 % 10.0 %
-200 37,849 3,194 34,655 -8.0 % 15.0 %
-300 37,408 3,194 34,214 -9.2 % 20.0 %
-400 37,272 3,194 34,078 -9.5 % 25.0 %

Market Value of Portfolio Equity at April 30, 2016

Present Present Present
Basis Point Value Value Value
Change in Rates Equity % Change Risk Limit
+400 $ 176,279 -21.4 % 50.0 %
+300 186,707 -16.7 % 45.0 %
+200 198,706 -11.4 % 35.0 %
+100 210,669 -6.0 % 25.0 %
0 224,161 0.0 % 0.0 %
-100 222,397 -0.8 % 25.0 %
-200 229,441 2.4 % 35.0 %
-300 263,537 17.6 % 45.0 %
-400 295,145 31.7 % 50.0 %
Market Value of Portfolio Equity at July 31, 2016
Present Present Present
Basis Point Value Value Value
Change in Rates Equity % Change Risk Limit
+400 $ 171,023 -23.2 % 50.0 %
+300 182,116 -18.2 % 45.0 %
+200 195,320 -12.3 % 35.0 %
+100 208,307 -6.4 % 25.0 %
0 222,627 0.0 % 0.0 %
-100 220,366 -1.0 % 25.0 %
-200 236,569 6.3 % 35.0 %
-300 273,916 23.0 % 45.0 %
-400 305,754 37.3 % 50.0 %

December 31, 2015 Data
(In Thousands) Period Ending December 31, 2016
Basis Point Interest Interest Net Interest NII NII
Change in Rates Income Expense Income (NII) % Change Risk Limit
+400 $ 52,181 $ 21,985 $ 30,196 -20.8 % 25.0 %
+300 49,687 17,282 32,405 -15.0 % 20.0 %
+200 47,136 12,659 34,477 -9.6 % 15.0 %
+100 44,546 8,109 36,437 -4.4 % 10.0 %
0 41,835 3,715 38,120 0.0 % 0.0 %
-100 39,116 3,171 35,945 -5.7 % 10.0 %
-200 37,417 3,168 34,249 -10.2 % 15.0 %
-300 36,838 3,168 33,670 -11.7 % 20.0 %
-400 36,689 3,168 33,521 -12.1 % 25.0 %

Market Value of Portfolio Equity at December 31, 2016

Present Present Present
Basis Point Value Value Value
Change in Rates Equity % Change Risk Limit
+400 $ 167,741 -24.4 % 50.0 %
+300 179,772 -18.9 % 45.0 %
+200 193,823 -12.6 % 35.0 %
+100 207,803 -6.3 % 25.0 %
0 221,750 0.0 % 0.0 %
-100 223,517 0.8 % 25.0 %
-200 225,185 1.5 % 35.0 %
-300 250,353 12.9 % 45.0 %
-400 286,210 29.1 % 50.0 %
Market Value of Portfolio Equity at December 31, 2015
Present Present Present
Basis Point Value Value Value
Change in Rates Equity % Change Risk Limit
+400 $ 167,741 -24.4 % 50.0 %
+300 179,772 -18.9 % 45.0 %
+200 193,823 -12.6 % 35.0 %
+100 207,803 -6.3 % 25.0 %
0 221,750 0.0 % 0.0 %
-100 223,517 0.8 % 25.0 %
-200 225,185 1.5 % 35.0 %
-300 250,353 12.9 % 45.0 %
-400 286,210 29.1 % 50.0 %

6062
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

EQUITY SECURITIES RISK

The Corporation’s equity securities portfolio consists of investments in stocks of banks and bank holding companies. Investments in bank stocks are subject to risk factors that affect the banking industry in general, including credit risk, competition from non-bank entities, interest rate risk and other factors, which could result in a decline in market prices. Also, losses could occur in individual stocks held by the Corporation because of specific circumstances related to each bank.

Equity securities held as of ~~June~~September 30, 2016 and December 31, 2015 are presented in Table XIV. Table XIV presents quantitative data concerning the effects of a decline in fair value of the Corporation’s equity securities of 10% or 20%. The data in Table XIV does not reflect the effects of any appreciation in value that may occur, nor does it present the Corporation’s maximum exposure to loss on equity securities, which would be 100% of their fair value as of ~~June~~September 30, 2016.

TABLE XIV - EQUITY SECURITIES RISK
(In Thousands)

June 30, Dec. 31,
2016 2015
Cost $ 1,171 $ 1,680
Fair Value 1,609 2,386
Hypothetical 10% Decline In Market Value (161 ) (239 )
Hypothetical 20% Decline In Market Value (322 ) (477 )
TABLE XIV - EQUITY SECURITIES RISK
(In Thousands)
Sept. 30, Dec. 31,
2016 2015
Cost $ 752 $ 1,680
Fair Value 1,080 2,386
Hypothetical 10% Decline In Market Value (108 ) (239 )
Hypothetical 20% Decline In Market Value (216 ) (477 )

ITEM 4. CONTROLS AND PROCEDURES

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

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

6163
~~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.

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 18, 2016.

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

Issuer Purchases of Equity Securities

The following table sets forth a summary of the purchases by the Corporation, on the open market, of its equity securities during the ~~second~~third quarter 2016:

Period Total Number
of Shares
Purchased Average
Price Paid
per Share Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs Maximum Number of
Shares that May Yet
be Purchased Under
the Plans or
Programs
April 1 - 30, 2016 32,950 $ 19.82 622,500 600,000
May 1 - 31, 2016 0 $ 0 0 600,000
June 1 - 30, 2016 0 $ 0 0 600,000
Period Total Number
of Shares
Purchased
Average
Price Paid
per Share
Total Number of
Shares Purchased
as Part of Publicly
Announced Plans
or Programs Maximum Number of
Shares that May Yet
be Purchased Under
the Plans or
Programs
July 1 - 31, 2016 0 $ 0 0 600,000
August 1 - 31, 2016 0 $ 0 0 600,000
September 1 - 30, 2016 0 $ 0 0 600,000

~~Notes~~Note to Table: Effective April 21, 2016, the Corporation’s Board of Directors approved a new treasury stock repurchase program. Under the newly approved stock repurchase program, the Corporation is authorized to repurchase up to 600,000 shares of the Corporation's common stock or slightly less than 5% of the Corporation's issued and outstanding shares at April 19, 2016. The Board of Directors’ April 21, 2016 authorization provides that: (1) the new treasury stock repurchase program shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. To date, no purchases have been made under this repurchase program.

1. Effective July 17, 2014, the Corporation established a treasury stock repurchase program authorizing repurchase of up to 622,500 shares of the Corporation’s common stock, or approximately 5% of the Corporation’s issued and outstanding shares at July 16, 2014. As permitted by securities laws and other legal requirements and subject to market conditions and other factors, purchases under the program could be made from time to time in the open market at prevailing prices, or through privately negotiated transactions.
In April 2016, the Corporation repurchased the remainder of the shares authorized under the program. In total, 622,500 shares were repurchased for a total cost of $12,140,000, at an average price of $19.50 per share.
2. Effective April 21, 2016, the Corporation’s Board of Directors approved a new treasury stock repurchase program. Under the newly approved stock repurchase program, the Corporation is authorized to repurchase up to 600,000 shares of the Corporation's common stock or slightly less than 5% of the Corporation's issued and outstanding shares at April 19, 2016. Consistent with the previous program, the Board of Directors’ April 21, 2016 authorization provides that: (1) the new treasury stock repurchase program shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. To date, no purchases have been made under this repurchase program.
Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not applicable

62
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~
Item 5. Other Information

None

64
Item 6. Exhibits

2. Plan of acquisition, reorganization, arrangement, liquidation or succession Not applicable

3. (i) Articles of Incorporation Incorporated by reference to Exhibit 3.1 of the Corporation's Form 8-K filed September 21, 2009

3. (ii) By-laws Incorporated by reference to Exhibit 3.1 of the Corporation's Form 8-K filed April 19, 2013

4. Instruments defining the rights of Security holders, including indentures Not applicable

10. Material ~~contracts:~~contracts
10.1 Form of Restricted Stock agreement dated May 3, 2016 between the Corporation and Independent Directors Terry L. Lehman and Frank G. Pellegrino pursuant to the Citizens & Northern Corporation Independent Directors Stock Incentive Plan ~~Filed herewith~~Not applicable

11. Statement re: computation of per share earnings Information concerning the computation of earnings per share is provided in Note 2 to the unaudited consolidated financial statements, which is included in Part I, Item 1 of Form 10-Q

15. Letter re: unaudited interim information Not applicable

18. Letter re: change in accounting principles Not applicable

19. Report furnished to security holders Not applicable

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

23. Consents of experts and counsel Not applicable

24. Power of attorney Not applicable

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

31.1 Certification of Chief Executive Officer Filed herewith
31.2 Certification of Chief Financial Officer Filed herewith

32. Section 1350 certifications Filed herewith

99. Additional exhibits Not applicable

100. XBRL-related documents Not applicable

101. Interactive data file Filed herewith

6365
~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~

SIGNATURES

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

CITIZENS & NORTHERN CORPORATION

~~August 4,~~November 3, 2016 By: /s/ J. Bradley Scovill
Date President and Chief Executive Officer

~~August 4,~~November 3, 2016 By: ~~/s/~~ /s/ Mark A. Hughes
Date Treasurer and Chief Financial Officer

6466

For the Six Months Ended June 30, 2015
(In Thousands)
	Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Consolidated
Comprehensive Income Components	Comprehensive Income			Statements of Income
Unrealized gains and losses on available-for-sale securities	$	(1,006	)	Realized gains on available-for-sale securities, net
		352		Income tax provision
		(654	)	Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost		(15	)	Pensions and other employee benefits
Actuarial loss		7		Pensions and other employee benefits
		(8	)	Total before tax
		3		Income tax provision
		(5	)	Net of tax
Total reclassifications for the period	$	(659	)

For the Three Months Ended June 30, 2016
(In Thousands)
	Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Consolidated
Comprehensive Income Components	Comprehensive Income			Statements of Income
Unrealized gains and losses on available-for-sale securities	$	(122	)	Realized gains on available-for-sale securities, net
		43		Income tax provision
		(79	)	Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost		(7	)	Pensions and other employee benefits
Actuarial loss		2		Pensions and other employee benefits
		(5	)	Total before tax
		1		Income tax provision
		(4	)	Net of tax
Total reclassifications for the period	$	(83	)

For the Three Months Ended June 30, 2015
For the Three Months Ended September 30, 2016
(In Thousands)	(In Thousands)
		Reclassified from				Reclassified from
Details about Accumulated Other		Accumulated Other			Affected Line Item in the Consolidated	Accumulated Other			Affected Line Item in the Consolidated
Comprehensive Income Components		Comprehensive Income			Statements of Income	Comprehensive Income			Statements of Income
Unrealized gains and losses on available-for-sale securities		$	(932	)	Realized gains on available-for-sale securities, net
Unrealized gains and losses on available-for-sale									Realized gains on available-for-sale
securities						$	(584	)	securities, net
			326		Income tax provision		204		Income tax provision
			(606	)	Net of tax		(380	)	Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost			(8	)	Pensions and other employee benefits		(8	)	Pensions and other employee benefits
Actuarial loss			3		Pensions and other employee benefits		3		Pensions and other employee benefits
			(5	)	Total before tax		(5	)	Total before tax
			2		Income tax provision		2		Income tax provision
			(3	)	Net of tax		(3	)	Net of tax
Total reclassifications for the period		$	(609	)		$	(383	)

(In thousands)	June 30,		Dec. 31,		Sept. 30,		Dec. 31,
	2016		2015		2016		2015
Cash and cash equivalents	$	23,968	$	33,313	$	30,102	$	33,313
Certificates of deposit		3,468		2,748		3,968		2,748
Total cash and due from banks	$	27,436	$	36,061	$	34,070	$	36,061

			June 30, 2016										September 30, 2016
	Quoted Prices		Other								Quoted 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
AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$	0	$	9,781	$	0		$	9,781		$	0	$	9,747	$	0		$	9,747
Obligations of states and political subdivisions:
Tax-exempt		0		116,056		0			116,056			0		121,283		0			121,283
Taxable		0		35,132		0			35,132			0		33,672		0			33,672
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		65,407		0			65,407			0		62,187		0			62,187
Residential collateralized mortgage obligations		0		177,980		0			177,980			0		165,719		0			165,719
Commercial mortgage-backed securities		0		11,239		0			11,239			0		16,112		0			16,112
Collateralized debt obligations		0		1		0			1
Total debt securities		0		415,596		0			415,596			0		408,720		0			408,720
Marketable equity securities		1,609		0		0			1,609			1,080		0		0			1,080
Total available-for-sale securities		1,609		415,596		0			417,205			1,080		408,720		0			409,800
Servicing rights		0		0		1,224			1,224			0		0		1,208			1,208
Total recurring fair value measurements	$	1,609	$	415,596	$	1,224		$	418,429		$	1,080	$	408,720	$	1,208		$	411,008

Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$	0	$	0	$	1,275		$	1,275		$	0	$	0	$	3,621		$	3,621
Valuation allowance		0		0		(253	)		(253	)		0		0		(685	)		(685	)
Impaired loans, net		0		0		1,022			1,022			0		0		2,936			2,936
Foreclosed assets held for sale		0		0		2,052			2,052			0		0		2,321			2,321
Total nonrecurring fair value measurements	$	0	$	0	$	3,074		$	3,074		$	0	$	0	$	5,257		$	5,257

			December 31, 2015										December 31, 2015
	Quoted Prices		Other								Quoted 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
AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$	0	$	10,483	$	0		$	10,483		$	0	$	10,483	$	0		$	10,483
Obligations of states and political subdivisions:
Tax-exempt		0		107,757		0			107,757			0		107,757		0			107,757
Taxable		0		34,597		0			34,597			0		34,597		0			34,597
Mortgage-backed securities		0		73,343		0			73,343
Collateralized mortgage obligations, Issued by U.S. Government agencies		0		191,715		0			191,715
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities												0		73,343		0			73,343
Residential collateralized mortgage obligations												0		191,715		0			191,715
Collateralized debt obligations		0		9		0			9			0		9		0			9
Total debt securities		0		417,904		0			417,904			0		417,904		0			417,904
Marketable equity securities		2,386		0		0			2,386			2,386		0		0			2,386
Total available-for-sale securities		2,386		417,904		0			420,290			2,386		417,904		0			420,290
Servicing rights		0		0		1,296			1,296			0		0		1,296			1,296
Total recurring fair value measurements	$	2,386	$	417,904	$	1,296		$	421,586		$	2,386	$	417,904	$	1,296		$	421,586

Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$	0	$	0	$	1,933		$	1,933		$	0	$	0	$	1,933		$	1,933
Valuation allowance		0		0		(820	)		(820	)		0		0		(820	)		(820	)
Impaired loans, net		0		0		1,113			1,113			0		0		1,113			1,113
Foreclosed assets held for sale		0		0		1,260			1,260			0		0		1,260			1,260
Total nonrecurring fair value measurements	$	0	$	0	$	2,373		$	2,373		$	0	$	0	$	2,373		$	2,373

	Fair Value at								Fair Value at
	6/30/16		Valuation	Unobservable				Method or Value As of	9/30/16		Valuation	Unobservable	Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				6/30/16	(In Thousands)		Technique	Input(s)	9/30/16
Servicing rights	$	1,224	Discounted cash flow	Discount rate		10.00	%	Rate used through modeling period	$	1,208	Discounted cash flow	Discount rate		10.00	%	Rate used through modeling period
				Loan prepayment speeds		181.00	%	Weighted-average PSA				Loan prepayment speeds		194.00	%	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
	12/31/15		Valuation	Unobservable	Method or Value As of
Asset	(In Thousands)		Technique	Input(s)	12/31/15
Servicing rights	$	1,296	Discounted cash flow	Discount rate		10.00	%	Rate used through modeling period
				Loan prepayment speeds		146.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late
						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs

(In Thousands)	Three Months Ended						Six Months Ended						Three Months Ended					Nine Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015			Sept. 30, 2016			Sept. 30, 2015		Sept. 30, 2016			Sept. 30, 2015
Servicing rights balance, beginning of period	$	1,261		$	1,195		$	1,296		$	1,281		$	1,224		$	1,209	$	1,296		$	1,281
Issuances of servicing rights		71			47			107			78			52			57		159			135
Unrealized losses included in earnings		(108	)		(33	)		(179	)		(150	)
Unrealized (losses) gains included in earnings														(68	)		13		(247	)		(137	)
Servicing rights balance, end of period	$	1,224		$	1,209		$	1,224		$	1,209		$	1,208		$	1,279	$	1,208		$	1,279

(In Thousands, Except									Value at											Value at
Percentages)			Valuation						6/30/16					Valuation						9/30/16
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	(Weighted			Balance at		Allowance at		Fair Value at		Valuation	Unobservable	(Weighted
Asset	6/30/16		6/30/16		6/30/16		Technique	Inputs	Average)			9/30/16		9/30/16		9/30/16		Technique	Inputs	Average)

Impaired loans:
Residential mortgage loans - first liens												$	0	$	0	$	0	Sales comparison	Discount to appraised value		0	%
Commercial:
Commercial loans secured by real estate	$	413	$	125	$	288	Sales comparison	Discount to appraised value		44	%		2,794		528		2,266	Sales comparison	Discount to appraised value		7	%
Commercial and industrial		354		77		277	Sales comparison	Discount to appraised value		54	%		321		106		215	Sales comparison	Discount to appraised value		35	%
Commercial construction and land													0		0		0	Sales comparison	Discount to appraised value		0	%
Loans secured by farmland		508		51		457	Sales comparison	Discount to appraised value		55	%		506		51		455	Sales comparison	Discount to appraised value		55	%
Multi-family (5 or more) residential													0		0		0	Sales comparison	Discount to appraised value		0	%
Total impaired loans	$	1,275	$	253	$	1,022						$	3,621	$	685	$	2,936
Foreclosed assets held for sale - real estate:
Residential (1-4 family)	$	1,005	$	0	$	1,005	Sales comparison	Discount to appraised value		34	%	$	1,195	$	0	$	1,195	Sales comparison	Discount to appraised value		39	%
Land		1,047		0		1,047	Sales comparison	Discount to appraised value		39	%		696		0		696	Sales comparison	Discount to appraised value		29	%
Commercial real estate													430		0		430	Sales comparison	Discount to appraised value		50	%
Total foreclosed assets held for sale	$	2,052	$	0	$	2,052						$	2,321	$	0	$	2,321

			June 30, 2016									September 30, 2016
			Gross		Gross							Gross		Gross
			Unrealized		Unrealized							Unrealized		Unrealized
	Amortized		Holding		Holding			Fair		Amortized		Holding		Holding			Fair
(In Thousands)	Cost		Gains		Losses			Value		Cost		Gains		Losses			Value

Obligations of U.S. Government agencies	$	9,664	$	117	$	0		$	9,781	$	9,667	$	80	$	0		$	9,747
Obligations of states and political subdivisions:
Tax-exempt		110,702		5,374		(20	)		116,056		116,797		4,565		(79	)		121,283
Taxable		34,015		1,117		0			35,132		32,764		908		0			33,672
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		64,108		1,299		0			65,407		60,966		1,221		0			62,187
Residential collateralized mortgage obligations		175,889		2,354		(263	)		177,980		164,508		1,517		(306	)		165,719
Commercial mortgage-backed securities		11,120		119		0			11,239		16,056		69		(13	)		16,112
Collateralized debt obligations		1		0		0			1
Total debt securities		405,499		10,380		(283	)		415,596		400,758		8,360		(398	)		408,720
Marketable equity securities		1,171		438		0			1,609		752		328		0			1,080
Total	$	406,670	$	10,818	$	(283	)	$	417,205	$	401,510	$	8,688	$	(398	)	$	409,800

June 30, 2016	Less Than 12 Months					12 Months or More					Total
September 30, 2016																Less Than 12 Months					12 Months or More					Total
(In Thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses

Obligations of states and political subdivisions, Tax-exempt	$	2,875	$	(6	)	$	1,002	$	(14	)	$	3,877	$	(20	)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies,
Obligations of states and political subdivisions,
Tax-exempt																$	15,448	$	(64	)	$	1,001	$	(15	)	$	16,449	$	(79	)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential collateralized mortgage obligations		2,773		(73	)		25,995		(190	)		28,768		(263	)		19,303		(38	)		24,426		(268	)		43,729		(306	)
Commercial mortgage-backed securities																	4,989		(13	)		0		0			4,989		(13	)
Total temporarily impaired available-for-sale securities	$	5,648	$	(79	)	$	26,997	$	(204	)	$	32,645	$	(283	)	$	39,740	$	(115	)	$	25,427	$	(283	)	$	65,167	$	(398	)

Summary of Loans by Type
(In Thousands)	June 30,			Dec. 31,			Sept. 30,			Dec. 31,
	2016			2015			2016			2015
Residential mortgage:
Residential mortgage loans - first liens	$	315,191		$	304,783		$	325,533		$	304,783
Residential mortgage loans - junior liens		22,159			21,146			22,794			21,146
Home equity lines of credit		39,054			39,040			38,623			39,040
1-4 Family residential construction		22,241			21,121			23,310			21,121
Total residential mortgage		398,645			386,090			410,260			386,090
Commercial:
Commercial loans secured by real estate		153,070			154,779			149,938			154,779
Commercial and industrial		82,390			75,196			86,969			75,196
Political subdivisions		41,026			40,007			38,653			40,007
Commercial construction and land		9,193			5,122			12,809			5,122
Loans secured by farmland		6,615			7,019			6,900			7,019
Multi-family (5 or more) residential		8,173			9,188			8,133			9,188
Agricultural loans		4,692			4,671			4,313			4,671
Other commercial loans		11,904			12,152			11,557			12,152
Total commercial		317,063			308,134			319,272			308,134
Consumer		12,134			10,656			12,806			10,656
Total		727,842			704,880			742,338			704,880
Less: allowance for loan losses		(7,929	)		(7,889	)		(8,421	)		(7,889	)
Loans, net	$	719,913		$	696,991		$	733,917		$	696,991

Three Months Ended June 30, 2016	March 31,										June 30,
Three Months Ended September 30, 2016													June 30,										Sept. 30,
(In Thousands)	2016 Balance		Charge-offs			Recoveries		Provision (Credit)			2016 Balance		2016 Balance		Charge-offs			Recoveries		Provision (Credit)			2016 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	2,722	$	(42	)	$	0	$	150		$	2,830	$	2,830	$	(31	)	$	2	$	155		$	2,956
Residential mortgage loans - junior liens		228		0			0		11			239		239		0			0		9			248
Home equity lines of credit		351		0			0		8			359		359		0			0		0			359
1-4 Family residential construction		200		0			0		22			222		222		0			0		14			236
Total residential mortgage		3,501		(42	)		0		191			3,650		3,650		(31	)		2		178			3,799
Commercial:
Commercial loans secured by real estate		2,027		0			1		55			2,083		2,083		0			0		304			2,387
Commercial and industrial		976		0			0		62			1,038		1,038		(2	)		1		1			1,038
Commercial construction and land		84		0			0		21			105		105		0			0		41			146
Loans secured by farmland		108		0			0		(5	)		103		103		0			0		3			106
Multi-family (5 or more) residential		256		0			0		(8	)		248		248		0			0		(5	)		243
Agricultural loans		44		0			0		3			47		47		0			0		(4	)		43
Other commercial loans		112		0			0		7			119		119		0			0		(3	)		116
Total commercial		3,607		0			1		135			3,743		3,743		(2	)		1		337			4,079
Consumer		126		(21	)		12		21			138		138		(28	)		12		23			145
Unallocated		427		0			0		(29	)		398		398		0			0		0			398
Total Allowance for Loan Losses	$	7,661	$	(63	)	$	13	$	318		$	7,929	$	7,929	$	(61	)	$	15	$	538		$	8,421

December 31, 2015
(In Thousands)			Special
	Pass		Mention		Substandard		Doubtful		Total
Residential Mortgage:
Residential mortgage loans - first liens	$	295,302	$	407	$	9,007	$	67	$	304,783
Residential mortgage loans - junior liens		20,558		185		403		0		21,146
Home equity lines of credit		38,071		543		426		0		39,040
1-4 Family residential construction		21,104		17		0		0		21,121
Total residential mortgage		375,035		1,152		9,836		67		386,090
Commercial:
Commercial loans secured by real estate		140,381		5,862		8,536		0		154,779
Commercial and Industrial		71,225		2,106		1,737		128		75,196
Political subdivisions		40,007		0		0		0		40,007
Commercial construction and land		4,957		60		105		0		5,122
Loans secured by farmland		5,084		483		1,432		20		7,019
Multi-family (5 or more) residential		7,943		0		1,245		0		9,188
Agricultural loans		4,655		0		16		0		4,671
Other commercial loans		12,073		0		79		0		12,152
Total commercial		286,325		8,511		13,150		148		308,134
Consumer		10,490		21		145		0		10,656
Totals	$	671,850	$	9,684	$	23,131	$	215	$	704,880

June 30, 2016	Loans:						Allowance for Loan Losses:
September 30, 2016													Loans:						Allowance for Loan Losses:
(In Thousands)
	Individually		Collectively				Individually		Collectively				Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens	$	824	$	314,367	$	315,191	$	0	$	2,830	$	2,830	$	734	$	324,799	$	325,533	$	0	$	2,956	$	2,956
Residential mortgage loans - junior liens		71		22,088		22,159		0		239		239		70		22,724		22,794		0		248		248
Home equity lines of credit		0		39,054		39,054		0		359		359		0		38,623		38,623		0		359		359
1-4 Family residential construction		0		22,241		22,241		0		222		222		0		23,310		23,310		0		236		236
Total residential mortgage		895		397,750		398,645		0		3,650		3,650		804		409,456		410,260		0		3,799		3,799
Commercial:
Commercial loans secured by real estate		5,856		147,214		153,070		125		1,958		2,083		8,088		141,850		149,938		528		1,859		2,387
Commercial and industrial		766		81,624		82,390		77		961		1,038		439		86,530		86,969		106		932		1,038
Political subdivisions		0		41,026		41,026		0		0		0		0		38,653		38,653		0		0		0
Commercial construction and land		0		9,193		9,193		0		105		105		0		12,809		12,809		0		146		146
Loans secured by farmland		1,408		5,207		6,615		51		52		103		1,399		5,501		6,900		51		55		106
Multi-family (5 or more) residential		392		7,781		8,173		0		248		248		392		7,741		8,133		0		243		243
Agricultural loans		13		4,679		4,692		0		47		47		13		4,300		4,313		0		43		43
Other commercial loans		0		11,904		11,904		0		119		119		0		11,557		11,557		0		116		116
Total commercial		8,435		308,628		317,063		253		3,490		3,743		10,331		308,941		319,272		685		3,394		4,079
Consumer		0		12,134		12,134		0		138		138		0		12,806		12,806		0		145		145
Unallocated												398												398

Total	$	9,330	$	718,512	$	727,842	$	253	$	7,278	$	7,929	$	11,135	$	731,203	$	742,338	$	685	$	7,338	$	8,421

									Interest Income Recognized on																Interest Income Recognized on
	Average Investment in Impaired Loans								Impaired Loans on a Cash Basis								Average Investment in Impaired Loans								Impaired Loans on a Cash Basis
(In Thousands)	3 Months Ended				6 Months Ended				3 Months Ended				6 Months Ended				3 Months Ended				9 Months Ended				3 Months Ended				9 Months Ended
	June 30,				June 30,				June 30,				June 30,				Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,
	2016		2015		2016		2015		2016		2015		2016		2015		2016		2015		2016		2015		2016		2015		2016		2015
Residential mortgage:
Residential mortgage loans - first lien	$	833	$	3,701	$	847	$	3,819	$	12	$	20	$	22	$	58	$	789	$	1,990	$	818	$	2,534	$	11	$	9	$	33	$	67
Residential mortgage loans - junior lien		71		66		72		57		1		1		2		2		72		67		72		62		0		1		2		3
Total residential mortgage		904		3,767		919		3,876		13		21		24		60		861		2,057		890		2,596		11		10		35		70
Commercial:
Commercial loans secured by real estate		5,892		6,286		6,026		6,437		81		90		191		203		7,022		6,327		6,524		6,382		83		90		274		293
Commercial and industrial		754		423		661		513		7		5		10		12		577		421		619		467		7		4		17		16
Commercial construction and land		0		41		0		58		0		0		0		0		0		42		0		50		0		0		0		0
Loans secured by farmland		1,413		1,447		1,418		1,468		17		26		38		52		1,408		1,466		1,413		1,467		13		26		51		78
Multi-family (5 or more) residential		490		0		590		0		0		0		0		0		492		741		541		741		0		0		0		0
Agricultural loans		15		46		15		23		0		2		1		2		13		21		14		22		0		1		1		3
Total commercial		8,564		8,243		8,710		8,499		105		123		240		269		9,512		9,018		9,111		9,129		103		121		343		390
Consumer		18		0		15		0		0		0		0		0		17		0		16		0		0		0		0		0
Total	$	9,486	$	12,010	$	9,644	$	12,375	$	118	$	144	$	264	$	329	$	10,390	$	11,075	$	10,017	$	11,725	$	114	$	131	$	378	$	460

	As of June 30, 2016								As of December 31, 2015								As of September 30, 2016								As of December 31, 2015
	Current &								Current &								Current &								Current &
(In Thousands)	Past Due		Past Due		Past Due				Past Due		Past Due		Past Due				Past Due		Past Due		Past Due				Past Due		Past Due		Past Due
	Less than		30-89		90+				Less than		30-89		90+				Less than		30-89		90+				Less than		30-89		90+
	30 Days		Days		Days		Total		30 Days		Days		Days		Total		30 Days		Days		Days		Total		30 Days		Days		Days		Total
Residential mortgage:
Residential mortgage loans - first liens	$	306,697	$	3,852	$	4,642	$	315,191	$	294,703	$	6,156	$	3,924	$	304,783	$	316,869	$	3,058	$	5,606	$	325,533	$	294,703	$	6,156	$	3,924	$	304,783
Residential mortgage loans - junior liens		21,826		289		44		22,159		20,816		251		79		21,146		22,544		192		58		22,794		20,816		251		79		21,146
Home equity lines of credit		38,527		242		285		39,054		38,581		329		130		39,040		38,143		374		106		38,623		38,581		329		130		39,040
1-4 Family residential construction		22,241		0		0		22,241		21,121		0		0		21,121		23,079		231		0		23,310		21,121		0		0		21,121
Total residential mortgage		389,291		4,383		4,971		398,645		375,221		6,736		4,133		386,090		400,635		3,855		5,770		410,260		375,221		6,736		4,133		386,090

Commercial:
Commercial loans secured by real estate		149,599		2,762		709		153,070		153,427		108		1,244		154,779		146,888		107		2,943		149,938		153,427		108		1,244		154,779
Commercial and industrial		81,927		139		324		82,390		75,002		118		76		75,196		86,637		8		324		86,969		75,002		118		76		75,196
Political subdivisions		41,026		0		0		41,026		40,007		0		0		40,007		38,653		0		0		38,653		40,007		0		0		40,007
Commercial construction and land		9,193		0		0		9,193		5,018		104		0		5,122		12,801		8		0		12,809		5,018		104		0		5,122
Loans secured by farmland		5,413		284		918		6,615		5,970		223		826		7,019		5,807		62		1,031		6,900		5,970		223		826		7,019
Multi-family (5 or more) residential		7,713		68		392		8,173		8,201		0		987		9,188		7,657		84		392		8,133		8,201		0		987		9,188
Agricultural loans		4,560		43		89		4,692		4,642		13		16		4,671		4,156		128		29		4,313		4,642		13		16		4,671
Other commercial loans		11,904		0		0		11,904		12,152		0		0		12,152		11,557		0		0		11,557		12,152		0		0		12,152
Total commercial		311,335		3,296		2,432		317,063		304,419		566		3,149		308,134		314,156		397		4,719		319,272		304,419		566		3,149		308,134
Consumer		11,979		81		74		12,134		10,537		48		71		10,656		12,544		208		54		12,806		10,537		48		71		10,656

Totals	$	712,605	$	7,760	$	7,477	$	727,842	$	690,177	$	7,350	$	7,353	$	704,880	$	727,335	$	4,460	$	10,543	$	742,338	$	690,177	$	7,350	$	7,353	$	704,880

Six Months Ended June 30, 2015			Pre-		Post-
Nine Months Ended September 30, 2015									Pre-		Post-
(Balances in Thousands)			Modification		Modification				Modification		Modification
	Number		Outstanding		Outstanding		Number		Outstanding		Outstanding
	of		Recorded		Recorded		of		Recorded		Recorded
	Contracts		Investment		Investment			Contracts		Investment		Investment
Residential mortgage:
Residential mortgage loans - first liens		1	$	56	$	56		1	$	56	$	56
Residential mortgage loans - junior liens		1		32		32		1		32		32
Consumer		1		30		30		1		30		30

(In Thousands)	June 30,		Dec. 31		Sept. 30,		Dec. 31
	2016		2015		2016		2015
Overnight borrowing	$	7,500	$	23,500	$	2,000	$	23,500
Other short-term advances		12,541		25,081		6,270		25,081
Total short-term FHLB-Pittsburgh borrowings	$	20,041	$	48,581	$	8,270	$	48,581

Defined Benefit Plans
(In Thousands)	Pension						Postretirement						Pension						Postretirement
	Six Months Ended						Six Months Ended						Nine Months Ended						Nine Months Ended
	June 30,						June 30,						Sept. 30,						Sept. 30,
	2016			2015			2016			2015			2016			2015			2016			2015
Service cost	$	0		$	0		$	18		$	19		$	0		$	0		$	27		$	29
Interest cost		13			18			31			28			20			27			47			42
Expected return on plan assets		(13	)		(23	)		0			0			(20	)		(34	)		0			0
Amortization of prior service cost		0			0			(15	)		(15	)		0			0			(23	)		(22	)
Recognized net actuarial loss		5			7			0			0			8			11			0			0
Net periodic benefit cost	$	5		$	2		$	34		$	32		$	8		$	4		$	51		$	49

TABLE I - QUARTERLY FINANCIAL DATA
(In Thousands) (Unaudited)	For the Three Months Ended:
													For the Three Months Ended:
	June 30,		Mar. 31,		Dec. 31,		Sept. 30,		June 30,		Mar. 31,		Sept. 30,		June 30,		Mar. 31,		Dec. 31,		Sept. 30,		June 30,		Mar. 31,
	2016		2016		2015		2015		2015		2015		2016		2016		2016		2015		2015		2015		2015
Interest income	$	10,924	$	10,937	$	11,036	$	11,134	$	11,186	$	11,163	$	11,131	$	10,924	$	10,937	$	11,036	$	11,134	$	11,186	$	11,163
Interest expense		925		904		1,087		1,126		1,176		1,213		944		925		904		1,087		1,126		1,176		1,213
Net interest income		9,999		10,033		9,949		10,008		10,010		9,950		10,187		9,999		10,033		9,949		10,008		10,010		9,950
Provision for loan losses		318		368		319		302		221		3		538		318		368		319		302		221		3
Net interest income after provision for loan losses		9,681		9,665		9,630		9,706		9,789		9,947		9,649		9,681		9,665		9,630		9,706		9,789		9,947
Other income		3,906		3,690		3,999		3,961		3,962		3,556		3,884		3,906		3,690		3,999		3,961		3,962		3,556
Net gains on available-for-sale securities		122		383		1,776		79		932		74		584		122		383		1,776		79		932		74
Loss on prepayment of borrowings		0		0		1,663		0		910		0		0		0		0		1,663		0		910		0
Other expenses		8,535		9,072		8,416		8,117		7,964		8,533		8,579		8,535		9,072		8,416		8,117		7,964		8,533
Income before income tax provision		5,174		4,666		5,326		5,629		5,809		5,044		5,538		5,174		4,666		5,326		5,629		5,809		5,044
Income tax provision		1,303		1,093		1,261		1,395		1,452		1,229		1,451		1,303		1,093		1,261		1,395		1,452		1,229
Net income	$	3,871	$	3,573	$	4,065	$	4,234	$	4,357	$	3,815	$	4,087	$	3,871	$	3,573	$	4,065	$	4,234	$	4,357	$	3,815
Net income per share – basic	$	0.32	$	0.29	$	0.33	$	0.35	$	0.36	$	0.31	$	0.34	$	0.32	$	0.29	$	0.33	$	0.35	$	0.36	$	0.31
Net income per share – diluted	$	0.32	$	0.29	$	0.33	$	0.35	$	0.36	$	0.31	$	0.34	$	0.32	$	0.29	$	0.33	$	0.35	$	0.36	$	0.31

	3 Months						3 Months						6 Months						6 Months						3 Months						3 Months						9 Months						9 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
	6/30/2016			Return/			6/30/2015			Return/			6/30/2016			Return/			6/30/2015			Return/			9/30/2016			Return/			9/30/2015			Return/			9/30/2016			Return/			9/30/2015			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
Available-for-sale securities, at amortized cost:
Taxable	$	297,608			2.02	%	$	389,705			2.06	%	$	301,744			2.06	%	$	388,909			2.11	%	$	291,847			1.98	%	$	361,481			2.02	%	$	298,421			2.03	%	$	379,666			2.08	%
Tax-exempt		108,652			4.79	%		116,421			5.33	%		107,029			5.01	%		117,044			5.34	%		112,679			4.51	%		111,735			5.14	%		108,926			4.83	%		115,255			5.27	%
Total available-for-sale securities		406,260			2.76	%		506,126			2.81	%		408,773			2.83	%		505,953			2.85	%		404,526			2.69	%		473,216			2.75	%		407,347			2.78	%		494,921			2.82	%
Interest-bearing due from banks		24,250			0.60	%		21,970			0.46	%		22,299			0.54	%		24,468			0.42	%		17,138			0.67	%		19,774			0.44	%		20,566			0.58	%		22,886			0.43	%
Loans held for sale		540			5.96	%		145			8.30	%		496			5.68	%		117			8.62	%		556			5.01	%		245			8.10	%		516			5.44	%		160			8.36	%
Loans receivable:
Taxable		650,213			5.00	%		592,188			5.25	%		645,586			5.00	%		587,370			5.31	%		671,408			4.95	%		610,516			5.10	%		654,256			4.98	%		595,170			5.24	%
Tax-exempt		61,669			4.50	%		49,026			4.88	%		61,173			4.52	%		45,495			5.00	%		61,608			4.50	%		63,219			4.50	%		61,319			4.51	%		51,468			4.80	%
Total loans receivable		711,882			4.96	%		641,214			5.22	%		706,759			4.96	%		632,865			5.29	%		733,016			4.91	%		673,735			5.05	%		715,575			4.94	%		646,638			5.20	%
Total Earning Assets		1,142,932			4.09	%		1,169,455			4.09	%		1,138,327			4.11	%		1,163,403			4.13	%		1,155,236			4.07	%		1,166,970			4.04	%		1,144,004			4.09	%		1,164,605			4.10	%
Cash		16,522						17,072						16,055						16,602						17,523						16,961						16,548						16,723
Unrealized gain/loss on securities		7,737						10,260						7,396						10,442						9,654						7,015						8,154						9,287
Allowance for loan losses		(7,756	)					(7,226	)					(7,844	)					(7,308	)					(8,050	)					(7,376	)					(7,913	)					(7,331	)
Bank premises and equipment		15,390						16,095						15,424						16,173						15,379						15,808						15,409						16,050
Intangible Asset - Core Deposit Intangible		25						44						27						47						24						38						26						44
Intangible Asset - Goodwill		11,942						11,942						11,942						11,942						11,942						11,942						11,942						11,942
Other assets		38,938						38,065						38,734						37,603						38,225						38,294						38,563						37,836
Total Assets	$	1,225,730					$	1,255,707					$	1,220,061					$	1,248,904					$	1,239,933					$	1,249,652					$	1,226,733					$	1,249,156

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	$	196,918			0.15	%	$	199,373			0.11	%	$	196,030			0.14	%	$	195,560			0.11	%	$	200,789			0.15	%	$	197,189			0.11	%	$	197,628			0.14	%	$	196,109			0.11	%
Money market		200,896			0.17	%		196,537			0.15	%		196,205			0.17	%		195,690			0.15	%		205,158			0.17	%		202,106			0.15	%		199,211			0.17	%		197,852			0.15	%
Savings		132,353			0.10	%		128,879			0.10	%		131,178			0.10	%		128,369			0.10	%		133,269			0.10	%		128,939			0.10	%		131,880			0.10	%		128,561			0.10	%
Certificates of deposit		117,825			0.75	%		122,634			0.67	%		115,618			0.73	%		122,322			0.69	%		123,475			0.77	%		125,886			0.66	%		118,256			0.75	%		123,523			0.68	%
Individual Retirement Accounts		104,030			0.42	%		111,765			0.41	%		104,796			0.42	%		112,780			0.41	%		103,259			0.42	%		109,661			0.41	%		104,280			0.42	%		111,729			0.41	%
Other time deposits		1,140			0.00	%		1,125			0.00	%		972			0.00	%		965			0.00	%		1,523			0.26	%		1,514			0.26	%		1,157			0.12	%		1,150			0.12	%
Total interest-bearing deposits		753,162			0.28	%		760,313			0.25	%		744,799			0.27	%		755,686			0.26	%		767,473			0.28	%		765,295			0.25	%		752,412			0.28	%		758,924			0.26	%
Borrowed funds:
Short-term		23,225			0.71	%		9,185			0.22	%		29,454			0.70	%		7,610			0.16	%		18,655			0.64	%		12,972			0.28	%		25,828			0.69	%		9,417			0.21	%
Long-term		38,649			3.77	%		69,211			4.01	%		38,687			3.77	%		71,105			4.02	%		38,571			3.76	%		62,876			3.98	%		38,648			3.77	%		68,332			4.01	%
Total borrowed funds		61,874			2.62	%		78,396			3.57	%		68,141			2.44	%		78,715			3.65	%		57,226			2.75	%		75,848			3.34	%		64,476			2.53	%		77,749			3.55	%
Total Interest-bearing Liabilities		815,036			0.46	%		838,709			0.56	%		812,940			0.45	%		834,401			0.58	%		824,699			0.46	%		841,143			0.53	%		816,888			0.45	%		836,673			0.56	%
Demand deposits		215,443						220,839						211,803						217,945						215,880						212,022						213,172						215,949
Other liabilities		8,304						7,756						7,841						7,937						9,057						8,803						8,249						8,229
Total Liabilities		1,038,783						1,067,304						1,032,584						1,060,283						1,049,636						1,061,968						1,038,309						1,060,851
Stockholders' equity, excluding other comprehensive income/loss		181,882						181,683						182,629						181,813						183,966						183,116						183,078						182,252
Other comprehensive income/loss		5,065						6,720						4,848						6,808						6,331						4,568						5,346						6,053
Total Stockholders' Equity		186,947						188,403						187,477						188,621						190,297						187,684						188,424						188,305
Total Liabilities and Stockholders' Equity	$	1,225,730					$	1,255,707					$	1,220,061					$	1,248,904					$	1,239,933					$	1,249,652					$	1,226,733					$	1,249,156
Interest Rate Spread					3.63	%					3.53	%					3.66	%					3.55	%					3.61	%					3.51	%					3.64	%					3.54	%
Net Interest Income/Earning Assets					3.76	%					3.69	%					3.79	%					3.71	%					3.74	%					3.66	%					3.77	%					3.69	%

Total Deposits (Interest-bearing and Demand)	$	968,605					$	981,152					$	956,602					$	973,631					$	983,353					$	977,317					$	965,584					$	974,873

(In Thousands)	3 Months Ended 6/30/16 vs. 6/30/15									6 Months Ended 6/30/16 vs. 6/30/15									3 Months Ended 9/30/16 vs. 9/30/15									9 Months Ended 9/30/16 vs. 9/30/15
	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
Available-for-sale securities:
Taxable	$	(469	)	$	(37	)	$	(506	)	$	(883	)	$	(95	)	$	(978	)	$	(351	)	$	(30	)	$	(381	)	$	(1,234	)	$	(125	)	$	1,359	)
Tax-exempt		(101	)		(151	)		(252	)		(251	)		(182	)		(433	)		11			(183	)		(172	)		(240	)		(365	)		(605	)
Total available-for-sale securities		(570	)		(188	)		(758	)		(1,134	)		(277	)		(1,411	)		(340	)		(213	)		(553	)		(1,474	)		(490	)		(1,964	)
Interest-bearing due from banks		2			9			11			(5	)		14			9			(3	)		10			7			(8	)		24			16
Loans held for sale		7			(2	)		5			12			(3	)		9			3			(1	)		2			15			(4	)		11
Loans receivable:
Taxable		721			(388	)		333			1,508			(910	)		598			748			(252	)		496			2,256			(1,162	)		1,094
Tax-exempt		142			(49	)		93			363			(117	)		246			(24	)		4			(20	)		339			(113	)		226
Total loans receivable		863			(437	)		426			1,871			(1,027	)		844			724			(248	)		476			2,595			(1,275	)		1,320
Total Interest Income		302			(618	)		(316	)		744			(1,293	)		(549	)		384			(452	)		(68	)		1,128			(1,745	)		(617	)

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		(1	)		21			20			0			23			23			1			24			25			1			47			48
Money market		1			12			13			0			20			20			2			10			12			2			30			32
Savings		0			0			0			1			0			1			1			1			2			2			1			3
Certificates of deposit		(9	)		24			15			(23	)		25			2			(5	)		32			27			(28	)		57			29
Individual Retirement Accounts		(9	)		4			(5	)		(16	)		6			(10	)		(7	)		3			(4	)		(23	)		9			(14	)
Other time deposits		0			0			0			0			0			0			0			0			0			0			0			0
Total interest-bearing deposits		(18	)		61			43			(38	)		74			36			(8	)		70			62			(46	)		144			98
Borrowed funds:
Short-term		21			15			36			43			54			97			9			12			21			52			66			118
Long-term		(290	)		(40	)		(330	)		(609	)		(84	)		(693	)		(233	)		(32	)		(265	)		(842	)		(116	)		(958	)
Total borrowed funds		(269	)		(25	)		(294	)		(566	)		(30	)		(596	)		(224	)		(20	)		(244	)		(790	)		(50	)		(840	)
Total Interest Expense		(287	)		36			(251	)		(604	)		44			(560	)		(232	)		50			(182	)		(836	)		94			(742	)

Net Interest Income	$	589		$	(654	)	$	(65	)	$	1,348		$	(1,337	)	$	11		$	616		$	(502	)	$	114		$	1,964		($	1,839	)	$	125

	June 30,		As of December 31,
	2016		2015		2014		2013		2012		2011
ASC 310 - Impaired loans	$	253	$	820	$	769	$	2,333	$	623	$	1,126
ASC 450 - Collective segments:
Commercial		3,490		3,103		2,732		2,583		2,594		2,811
Residential mortgage		3,650		3,417		3,295		3,156		3,011		3,130
Consumer		138		122		145		193		188		204
Unallocated		398		427		395		398		441		434
Total Allowance	$	7,929	$	7,889	$	7,336	$	8,663	$	6,857	$	7,705

(In Thousands)	As of
	June 30,			As of December 31,
	2016			2015			2014			2013			2012			2011
Impaired loans with a valuation allowance	$	1,275		$	1,933		$	3,241		$	9,889		$	2,710		$	3,433
Impaired loans without a valuation allowance		8,055			8,041			9,075			6,432			4,719			4,431
Total impaired loans	$	9,330		$	9,974		$	12,316		$	16,321		$	7,429		$	7,864

Total loans past due 30-89 days and still accruing	$	6,945		$	7,057		$	7,121		$	8,305		$	7,756		$	7,898

Nonperforming assets:
Total nonaccrual loans	$	10,504		$	11,517		$	12,610		$	14,934		$	7,353		$	7,197
Total loans past due 90 days or more and still accruing		4,654			3,229			2,843			3,131			2,311			1,267
Total nonperforming loans		15,158			14,746			15,453			18,065			9,664			8,464
Foreclosed assets held for sale (real estate)		2,052			1,260			1,189			892			879			1,235
Total nonperforming assets	$	17,210		$	16,006		$	16,642		$	18,957		$	10,543		$	9,699

Loans subject to troubled debt restructurings (TDRs):
Performing	$	1,047		$	1,186		$	1,807		$	3,267		$	906		$	1,064
Nonperforming		5,102			5,178			5,388			908			1,155			2,413
Total TDRs	$	6,149		$	6,364		$	7,195		$	4,175		$	2,061		$	3,477

Total nonperforming loans as a % of loans		2.08	%		2.09	%		2.45	%		2.80	%		1.41	%		1.19	%
Total nonperforming assets as a % of assets		1.40	%		1.31	%		1.34	%		1.53	%		0.82	%		0.73	%
Allowance for loan losses as a % of total loans		1.09	%		1.12	%		1.16	%		1.34	%		1.00	%		1.09	%
Allowance for loan losses as a % of nonperforming loans		52.31	%		53.50	%		47.47	%		47.95	%		70.95	%		91.03	%

	Outstanding				Available				Total Credit				Outstanding				Available				Total Credit
(In Thousands)	June 30,		Dec. 31,		June 30,		Dec. 31,		June 30,		Dec. 31,		Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,
	2016		2015		2016		2015		2016		2015		2016		2015		2016		2015		2016		2015
Federal Home Loan Bank of Pittsburgh	$	31,656	$	60,348	$	294,372	$	262,361	$	326,028	$	322,709	$	19,808	$	60,348	$	315,685	$	262,361	$	335,493	$	322,709
Federal Reserve Bank Discount Window		0		0		17,285		19,606		17,285		19,606		0	��	0		16,802		19,606		16,802		19,606
Other correspondent banks		0		0		45,000		45,000		45,000		45,000		0		0		45,000		45,000		45,000		45,000
Total credit facilities	$	31,656	$	60,348	$	356,657	$	326,967	$	388,313	$	387,315	$	19,808	$	60,348	$	377,487	$	326,967	$	397,295	$	387,315

(Dollars in Thousands)												Minimum To Be Well
					Minimum				Minimum To Maintain			Capitalized Under				Minimum To Meet
					Capital				Capital Conservation			Prompt Corrective				the Corporation's
	Actual				Requirement				Buffer at Reporting Date			Action Provisions				Policy Thresholds
		Amount	Ratio			Amount	Ratio			Amount	Ratio		Amount	Ratio			Amount	Ratio
June 30, 2016:
Total capital to risk-weighted assets:
Consolidated	$	179,810	23.47	%	$	61,279	8	%	$	66,067	³8.625%	$	76,599	³10	%	$	80,429	³10.5	%
C&N Bank		159,919	21.01	%		60,903	8	%		65,661	³8.625%		76,128	³10	%		79,935	³10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated		171,684	22.41	%		30,640	6	%		50,747	³6.625%		61,279	³8	%		65,109	³8.5	%
C&N Bank		151,990	19.96	%		30,451	6	%		50,435	³6.625%		60,903	³8	%		64,709	³8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		171,684	22.41	%		30,640	4.5	%		39,257	³5.125%		49,789	³6.5	%		53,619	³7	%
C&N Bank		151,990	19.96	%		30,451	4.5	%		39,016	³5.125%		49,483	³6.5	%		53,290	³7	%
Tier 1 capital to average assets:
Consolidated		171,684	14.19	%		48,391	4	%		N/A	N/A		60,489	³5	%		60,489	³5	%
C&N Bank		151,990	12.72	%		47,786	4	%		N/A	N/A		59,732	³5	%		59,732	³5	%

December 31, 2015:
Total capital to risk-weighted assets:
Consolidated	$	181,216	24.40	%	$	59,424	8	%		N/A	N/A	$	74,281	³10	%	$	77,995	³10.5	%
C&N Bank		161,187	21.83	%		59,058	8	%		N/A	N/A		73,823	³10	%		77,514	³10.5	%
Tier 1 capital to risk-weighted assets:
Consolidated		173,009	23.29	%		29,712	6	%		N/A	N/A		59,424	³8	%		63,139	³8.5	%
C&N Bank		153,298	20.77	%		29,529	6	%		N/A	N/A		59,058	³8	%		62,749	³8.5	%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		173,009	23.29	%		29,712	4.5	%		N/A	N/A		48,282	³6.5	%		51,996	³7	%
C&N Bank		153,298	20.77	%		29,529	4.5	%		N/A	N/A		47,985	³6.5	%		51,676	³7	%
Tier 1 capital to average assets:
Consolidated		173,009	14.31	%		48,355	4	%		N/A	N/A		60,444	³5	%		60,444	³5	%
C&N Bank		153,298	12.81	%		47,861	4	%		N/A	N/A		59,826	³5	%		59,826	³5	%

	As of January 1:
	2015			2016			2017			2018			2019
Minimum common equity tier 1 capital ratio		4.5	%		4.5	%		4.5	%		4.5	%		4.5	%
Common equity tier 1 capital conservation buffer		N/A			0.625	%		1.25	%		1.875	%		2.5	%
Minimum common equity tier 1 capital ratio plus capital conservation buffer		4.5	%		5.125	%		5.75	%		6.375	%		7.0	%
Phase-in of most deductions from common equity tier 1 capital		40	%		60	%		80	%		100	%		100	%
Minimum tier 1 capital ratio		6.0	%		6.0	%		6.0	%		6.0	%		6.0	%
Minimum tier 1 capital ratio plus capital conservation buffer		N/A			6.625	%		7.25	%		7.875	%		8.5	%
Minimum total capital ratio		8.0	%		8.0	%		8.0	%		8.0	%		8.0	%
Minimum total capital ratio plus capital conservation buffer		N/A			8.625	%		9.25	%		9.875	%		10.5	%

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	%