Edgar Filing: CITIZENS & NORTHERN CORP

Unassociated Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2009

o 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.

Yes x No ¨

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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ¨ No ¨

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨

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

Yes ¨ No x

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) 8,993,750 Shares Outstanding on July 30, 2009

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheet – June 30, 2009 and December 31, 2008		Page 3

Consolidated Statement of Income - Three Months and Six Months Ended June 30, 2009 and 2008		Page 4

Consolidated Statement of Cash Flows - Six Months Ended June 30, 2009 and 2008		Page 5

Consolidated Statement of Changes in Stockholders’ Equity- Six Months Ended June 30, 2009		Page 6

Notes to Consolidated Financial Statements		Pages 7 through 20

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		Pages 21 through 38

Item 3. Quantitative and Qualitative Disclosures About Market Risk		Pages 39 through 42

Item 4. Controls and Procedures		Page 42

Part II. Other Information		Pages 43 through 46

Signatures		Page 46

Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification - Chief Executive Officer		Page 47

Exhibit 31.2. Rule 13a-14(a)/15d-14(a) Certification - Chief Financial Officer		Page 48

Exhibit 32. Section 1350 Certifications		Page 49

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED BALANCE SHEET	June 30,			December 31,
(In Thousands Except Share Data)	2009			2008
	(Unaudited)			(Note)
ASSETS
Cash and due from banks:
Noninterest-bearing	$	17,830		$	18,105
Interest-bearing		33,449			5,923
Total cash and cash equivalents		51,279			24,028
Trading securities		547			2,306
Available-for-sale securities		415,791			419,688
Held-to-maturity securities		402			406
Loans, net		719,347			735,687
Bank-owned life insurance		22,574			22,297
Accrued interest receivable		5,606			5,846
Bank premises and equipment, net		25,118			25,909
Foreclosed assets held for sale		922			298
Deferred tax asset, net		20,291			16,389
Intangible asset - Core deposit intangibles		665			826
Intangible asset - Goodwill		11,942			12,014
Other assets		22,525			15,943
TOTAL ASSETS	$	1,297,009		$	1,281,637

LIABILITIES
Deposits:
Noninterest-bearing	$	127,380		$	124,922
Interest-bearing		758,564			739,135
Total deposits		885,944			864,057
Dividends payable		2,324			2,147
Short-term borrowings		39,390			48,547
Long-term borrowings		221,658			236,926
Accrued interest and other liabilities		11,135			7,934
TOTAL LIABILITIES		1,160,451			1,159,611

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation
preference per share; 26,440 shares issued at June 30, 2009 and		25,664			0
no shares issued at December 31, 2008
Common stock, par value $1.00 per share; authorized 20,000,000 shares
in 2009 and 2008; issued 9,284,148 in 2009 and 2008		9,284			9,284
Paid-in capital		45,453			44,308
Retained earnings		79,486			97,757
Unamortized stock compensation		(83	)		(48	)
Treasury stock, at cost; 306,178 shares at June 30, 2009
and 348,041 shares at December 31, 2008		(5,331	)		(6,061	)
Sub-total		154,473			145,240
Accumulated other comprehensive loss:
Unrealized losses on available-for-sale securities (including $6,665 at
June 30, 2009 for which a portion of an other-than-temporary impairment
loss has been recognized in earnings)		(17,560	)		(23,120	)
Defined benefit plans		(355	)		(94	)
Total accumulated other comprehensive loss		(17,915	)		(23,214	)
TOTAL STOCKHOLDERS' EQUITY		136,558			122,026
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	1,297,009		$	1,281,637

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

Note: The balance sheet at December 31, 2008 has been derived from the audited financial statements at that date but does not include all the information and notes required by U.S. generally accepted accounting principles for complete financial statements.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENT OF INCOME	3 Months Ended						Fiscal Year To Date
(In Thousands, Except Per Share Data)	June 30,			June 30,			6 Months Ended June 30,
	2009			2008			2009			2008
	(Current)			(Prior Year)			(Current)			(Prior Year)
INTEREST INCOME
Interest and fees on loans	$	11,356		$	12,269		$	22,713		$	24,581
Interest on balances with depository institutions		3			5			4			18
Interest on loans to political subdivisions		415			345			808			710
Interest on federal funds sold		7			24			15			74
Interest on trading securities		8			10			31			43
Income from available-for-sale and held-to-maturity securities:
Taxable		4,268			4,768			8,922			9,759
Tax-exempt		1,124			736			2,060			1,439
Dividends		160			216			359			449
Total interest and dividend income		17,341			18,373			34,912			37,073
INTEREST EXPENSE
Interest on deposits		3,699			4,757			7,680			10,384
Interest on short-term borrowings		140			237			310			543
Interest on long-term borrowings		2,325			2,730			4,780			5,453
Total interest expense		6,164			7,724			12,770			16,380
Interest margin		11,177			10,649			22,142			20,693
Provision (credit) for loan losses		93			(376	)		(80	)		528
Interest margin after provision (credit) for loan losses		11,084			11,025			22,222			20,165

OTHER INCOME
Trust and financial management revenue		870			975			1,639			1,852
Service charges on deposit accounts		1,150			1,103			2,197			2,049
Service charges and fees		227			187			417			361
Insurance commissions, fees and premiums		76			97			157			169
Increase in cash surrender value of life insurance		126			192			277			390
Other operating income		605			601			1,133			1,821
Sub-total		3,054			3,155			5,820			6,642
Total other-than-temporary impairment losses on available-for-sale securities		(17,974	)		(1,171	)		(42,955	)		(1,420	)
Portion of (gain) loss recognized in other comprehensive loss (before taxes)		(1,806	)		0			6,495			0
Net impairment losses recognized in earnings		(19,780	)		(1,171	)		(36,460	)		(1,420	)
Realized gains on available-for-sale securities, net		785			304			786			443
Net impairment losses recognized in earnings and realized gains on available-for-sale securities		(18,995	)		(867	)		(35,674	)		(977	)
Total other (loss) income		(15,941	)		2,288			(29,854	)		5,665
OTHER EXPENSES
Salaries and wages		3,318			3,736			6,659			7,427
Pensions and other employee benefits		1,075			1,079			2,319			2,230
Occupancy expense, net		679			717			1,421			1,471
Furniture and equipment expense		702			642			1,376			1,290
FDIC assessments		956			24			1,258			47
Pennsylvania shares tax		318			292			636			584
Other operating expense		2,110			1,767			4,127			3,672
Total other expenses		9,158			8,257			17,796			16,721
(Loss) income before income tax provision		(14,015	)		5,056			(25,428	)		9,109
Income tax provision		(5,284	)		1,303			(9,672	)		2,240
Net (loss) income		(8,731	)		3,753			(15,756	)		6,869
U.S Treasury preferred dividends		373			0			682			0
NET (LOSS) INCOME AVAILABLE TO COMMON SHAREHOLDERS	$	(9,104	)	$	3,753		$	(16,438	)	$	6,869

PER SHARE DATA:
Net (loss) income per average common share - basic	$	(1.01	)	$	0.42		$	(1.83	)	$	0.77
Net (loss) income per average common share - diluted	$	(1.01	)	$	0.42		$	(1.83	)	$	0.76

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Cash Flows	6 Months Ended
(In Thousands)	June 30,			June 30,
	2009			2008
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income	$	(15,756	)	$	6,869
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
(Credit) provision for loan losses		(80	)		528
Realized losses on available-for-sale securities, net		35,674			977
Loss (gain) on sale of foreclosed assets, net		10			(39	)
Depreciation expense		1,433			1,449
Loss on disposition of premises and equipment		8			0
Accretion and amortization on securities, net		20			220
Accretion and amortization on loans, deposits and borrowings, net		(176	)		(208	)
Increase in cash surrender value of life insurance		(277	)		(390	)
Stock-based compensation		314			256
Amortization of core deposit intangibles		161			276
Deferred income taxes		(7,856	)		(477	)
Net decrease (increase) in trading securities		116			(1,862	)
Increase in accrued interest receivable and other assets		(6,422	)		(1,629	)
(Decrease) increase in accrued interest payable and other liabilities		(245	)		1,587
Net Cash Provided by Operating Activities		6,924			7,557
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturity of held-to-maturity securities		4			2
Proceeds from sales of available-for-sale securities		14,452			15,131
Proceeds from calls and maturities of available-for-sale securities		31,779			38,525
Purchase of available-for-sale securities		(61,178	)		(55,473	)
Purchase of Federal Home Loan Bank of Pittsburgh stock		(4	)		(1,772	)
Redemption of Federal Home Loan Bank of Pittsburgh stock		0			1,974
Net decrease (increase) in loans		15,538			(14,913	)
Purchase of premises and equipment		(650	)		(732	)
Return of principal on limited partnership investment		26			15
Proceeds from sale of foreclosed assets		320			299
Net Cash Provided by (Used in) Investing Activities		287			(16,944	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		21,874			9,872
Net (decrease) increase in short-term borrowings		(9,157	)		1,481
Proceeds from long-term borrowings		0			24,703
Repayments of long-term borrowings		(15,151	)		(27,185	)
Purchase of treasury stock		0			(852	)
Issuance of US Treasury preferred stock and warrant		26,409			0
Sale of treasury stock		30			0
Tax benefit from compensation plans		92			0
US Treasury preferred dividends paid		(427	)		0
Common dividends paid		(3,630	)		(4,091	)
Net Cash Provided by Financing Activities		20,040			3,928
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		27,251			(5,459	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		24,028			31,661
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	51,279		$	26,202
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through foreclosure of real estate loans	$	954		$	204
Securities transferred from trading to available-for-sale	$	1,643		$	3,072
Accrued purchase of available-for-sale securities	$	3,308		$	0
Interest paid	$	13,049		$	16,519
Income taxes paid	$	1,275		$	2,054

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statement of Changes
in Stockholders' Equity
(In Thousands Except Per Share Data)											Accumulated
											Other			Unamortized
	Preferred		Common		Paid-in			Retained			Comprehensive			Stock			Treasury
	Stock		Stock		Capital			Earnings			Loss			Compensation			Stock			Total
Balance, December 31, 2008	$	0	$	9,284	$	44,308		$	97,757		$	(23,214	)	$	(48	)	$	(6,061	)	$	122,026
Comprehensive (loss) income:
Net loss									(15,756	)											(15,756	)
Unrealized gain on securities, net of reclassification and tax (including unrealized loss, net of tax, of $4,287 on securities for which an other-than-temporary impairment loss has been recognized)												7,938									7,938
Change in value of FASB 158 adjustment to equity												(261	)								(261	)
Total comprehensive loss																					(8,079	)
Reclassify non-credit portion of other-than-temporary impairment losses recognized in prior period									2,378			(2,378	)								0
Issuance of U.S. Treasury preferred stock		25,588				821															26,409
Accretion of discount associated with U.S. Treasury preferred stock		76							(76	)											0
Cash dividends on U.S. Treasury preferred stock									(606	)											(606	)
Cash dividends declared on common stock, $.48 per share									(4,303	)											(4,303	)
Shares issued for dividend reinvestment plan						46												629			675
Shares issued from treasury related to exercise of stock options						(4	)											34			30
Restricted stock granted						10									(79	)		69			0
Forfeiture of restricted stock						(1	)								3			(2	)		0
Stock-based compensation expense						273									41						314
Tax benefit from employee benefit plan									92												92
Balance, June 30, 2009	$	25,664	$	9,284	$	45,453		$	79,486		$	(17,915	)	$	(83	)	$	(5,331	)	$	136,558

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Notes to Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION

The financial information included herein, with the exception of the consolidated balance sheet dated December 31, 2008, is unaudited; however, 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, cash flows and changes in stockholders’ equity for the interim periods. Certain 2008 information has been reclassified for consistency with the 2009 presentation.

Results reported for the three-month and six-month periods ended June 30, 2009 might not be indicative of the results for the year ending December 31, 2009.

This document has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation or any other regulatory agency.

2. CHANGES IN ACCOUNTING PRINCIPLES

As of January 1, 2009, the Corporation adopted the following new accounting pronouncements:

FASB Staff Position (FSP) FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” amends other-than-temporary impairment (OTTI) accounting guidance for debt securities, requires new disclosures and changes the presentation and amount of OTTI recognized in the income statement. The FSP requires impairment of debt securities be separated into (a) the amount of the total impairment related to credit loss, which is recognized in the income statement, and (b) the amount of the total impairment related to all other factors, which is recognized in other comprehensive income. The total OTTI is presented in the income statement with an offset for the amount of total OTTI recognized in other comprehensive income. As required, the Corporation recognized the cumulative effect of adopting this FSP as an increase in retained earnings of $2,378,000, and a decrease in accumulated other comprehensive loss of the same amount, as of January 1, 2009. For the six-month period ended June 30, 2009, the effect of adopting this FSP was to reduce impairment losses recognized in earnings by $6,495,000, and increase the income tax provision by $2,208,000, resulting in an increase in net income of $4,287,000, or $0.48 per average common share. For the three-month period ended June 30, 2009, the effect of adopting this FSP was to increase impairment losses recognized in earnings by $1,806,000, and reduce the income tax provision by $614,000, resulting in a reduction in net income (larger net loss) of $1,192,000, or $0.13 per average common share. Additional disclosures required by this FSP are provided in Note 6 to the Consolidated Financial Statements.

FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly” provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased. This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly. There were no changes in the Corporation’s valuation techniques or their application that resulted from adoption of this FSP. The FSP amends the disclosure requirements of FASB Statement No. 157 to require the Corporation to disclose in interim and annual periods the inputs and valuation techniques used to measure fair value and to discuss changes in valuation techniques and related inputs during the period. Further, the FSP requires presentation of information concerning securities in more detailed “major security types” than had been required in the past. Disclosures required by this FSP are provided in Note 5 to the Consolidated Financial Statements.

FSP FAS 107-1 and APB 28-1, “Interim Disclosures about Fair Values of Financial Instruments” requires the Corporation to provide disclosures each quarter that had previously been required only on an annual basis, about the fair value of financial instruments. The required disclosures are provided in Note 7 to the Consolidated Financial Statements.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

3. PER COMMON SHARE DATA

Basic net (loss) income per average common share represents income available to common shareholders divided by the weighted-average number of shares of common stock outstanding. As shown in the table that follows, diluted net income per common share for the three-month and six-month periods ended June 30, 2008 was 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 common 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. For the three-month and six-month periods ended June 30, 2009, outstanding stock options and the warrant (issued in January 2009) are anti-dilutive, and are therefore excluded in determining diluted loss per common share.

				Weighted-
	Net			Average			Earnings
	(Loss)			Common			Per
	Income			Shares			Share
Six Months Ended June 30, 2009
Earnings per common share – basic and diluted	$	(16,438,000	)		8,964,850		$	(1.83	)

Six Months Ended June 30, 2008
Earnings per share – basic	$	6,869,000			8,968,999		$	0.77
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options					148,788
Hypothetical share repurchase at $19.09					(133,389	)
Earnings per share – diluted	$	6,869,000			8,984,398		$	0.76

Quarter Ended June 30, 2009
Earnings per common share – basic and diluted	$	(9,104,000	)	8,973,531		$	(1.01	)

Quarter Ended June 30, 2008
Earnings per share – basic	$	3,753,000		8,963,552		$	0.42
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options				148,788
Hypothetical share repurchase at $ 18.89				(134,800	)
Earnings per share – diluted	$	3,753,000		8,977,540		$	0.42

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

4. COMPREHENSIVE (LOSS) INCOME

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

(In Thousands)	3 Months Ended						6 Months Ended
	June 30,						June 30,
	2009			2008			2009			2008
Net (loss) income	$	(8,731	)	$	3,753		$	(15,756	)	$	6,869

Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities		(9,517	)		(5,086	)		(23,647	)		(14,829	)
Reclassification adjustment for losses realized in income		18,995			867			35,674			977
Other comprehensive gain (loss) before income tax		9,478			(4,219	)		12,027			(13,852	)
Income tax related to other comprehensive gain (loss)		3,222			(1,435	)		4,089			(4,710	)
Other comprehensive gain (loss) on available-for-sale securities		6,256			(2,784	)		7,938			(9,142	)

Unfunded pension and postretirement obligations:
Change in items from defined benefit plans included in
accumulated other comprehensive loss		(209	)		0			(462	)		0
Amortization of net transition obligation, prior service cost and net
actuarial loss included in net periodic benefit cost		54			6			66			11
Other comprehensive (loss) gain before income tax		(155	)		6			(396	)		11
Income tax related to other comprehensive (loss) gain		(53	)		1			(135	)		2
Other comprehensive (loss) gain on unfunded retirement obligations		(102	)		5			(261	)		9

Net other comprehensive gain (loss)		6,154			(2,779	)		7,677			(9,133	)

Total comprehensive (loss) income	$	(2,577	)	$	974		$	(8,079	)	$	(2,264	)

In the six-month period ended June 30, 2009, the Corporation recognized other comprehensive loss of $6,495,000 before income tax, or $4,287,000 after income tax, related to available-for-sale debt securities for which a portion of an OTTI loss has been recognized in earnings. In the second quarter 2009, the Corporation recognized other comprehensive income of $1,806,000 before income tax, or $1,192,000 after income tax, related to available-for-sale debt securities for which a portion of an OTTI loss has been recognized in earnings.

5. ASSETS MEASURED AT FAIR VALUE ON A RECURRING BASIS

The Corporation measures certain assets at fair value on a recurring basis. 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. Statement of Financial Accounting Standards No. 157 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.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

At June 30 2009, assets measured at fair value on a recurring basis and the valuation methods used are as follows:

			June 30, 2009
			Market Values Based on:
	Quoted Prices		Other
	in Active		Observable		Unobservable		Total
	Markets		Inputs		Inputs		Fair
(In Thousands)	(Level 1)		(Level 2)		(Level 3)		Value

AVAILABLE-FOR-SALE SECURITIES:
Obligations of other U.S. Government agencies	$	0	$	20,851	$	0	$	20,851
Obligations of states and political subdivisions		6,789		87,523		0		94,312
Mortgage-backed securities		4,291		166,591		0		170,882
Collateralized mortgage obligations		0		71,643		0		71,643
Corporate bonds		0		1,078		0		1,078
Trust preferred securities issued by individual institutions		0		6,566		0		6,566
Collateralized debt obligations:
Pooled trust preferred securities - senior tranches		0		0		8,471		8,471
Pooled trust preferred securities - mezzanine tranches		0		0		28,999		28,999
Other collateralized debt obligations		0		713		0		713
Total debt securities		11,080		354,965		37,470		403,515
Marketable equity securities		12,276		0		0		12,276
Total available-for-sale securities		23,356		354,965		37,470		415,791

TRADING SECURITIES,
Obligations of states and political subdivisions		484		63		0		547

Total	$	23,840	$	355,028	$	37,470	$	416,338

Management determined there were virtually no trades of pooled trust-preferred securities in the second half of 2008 or the first half of 2009, except for a limited number of transactions that took place as a result of bankruptcies, forced liquidations or similar circumstances. Also, in management’s judgment, there were no available quoted market prices in active markets for assets sufficiently similar to the Corporation’s pooled trust-preferred securities to be reliable as observable inputs. Accordingly, in the third quarter of 2008, the Corporation changed its method of valuing pooled trust-preferred securities from a Level 2 methodology that had been used in prior periods, based on price quotes received from pricing services, to a Level 3 methodology, using discounted cash flows.

At June 30, 2009, management calculated the fair values of pooled trust-preferred securities by applying discount rates to estimated cash flows for each security. Management used the cash flow estimates for each security determined using the process described in Note 6. Management used discount rates considered reflective of a market participant’s expectations regarding the extent of credit and liquidity risk inherent in the securities. In establishing the discount rates, management considered: (1) the implied discount rates as of the end of 2007, prior to the market for trust-preferred securities becoming inactive; (2) adjustment to the year-end 2007 discount rates for the change in the spread between indicative market rates (3-month LIBOR, for most of the Corporation’s securities) over corresponding risk-free rates (3-month U.S. Treasury Bill, for most of the Corporation’s securities) in 2009; and (3) an additional adjustment – an increase of 2% in the discount rate – for liquidity risk. Management considered the additional 2% increase in the discount rate necessary in order to give some consideration to price estimates based on trades made under distressed conditions, as reported by brokers and pricing services. Management’s estimates of cash flows and discount rates used to calculate fair values of pooled trust-preferred securities were based on sensitive assumptions, and market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amounts calculated by management.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Following is a reconciliation of activity for assets (pooled trust-preferred securities) measured at fair value based on significant unobservable information:

	3 Months Ended					Fiscal Year To Date
	June 30,			June 30,		6 Months Ended June 30,
	2009			2008		2009			2008
	(Current)			(Prior Year)		(Current)			(Prior Year)
Balance, beginning of period	$	49,833		$	0	$	58,914		$	0
Transfers		0			0		0			0
Purchases, issuances and settlements		(72	)		0		41			0
Realized (losses) on securities deemed worthless		0			0		(335	)		0
Unrealized (losses) included in earnings		(19,176	)		0		(30,281	)		0
Unrealized gains included in other
comprehensive income		6,885			0		9,131			0
Balance, end of period	$	37,470		$	0	$	37,470		$	0

Unrealized losses included in earnings are from the Corporation’s other-than-temporary impairment analysis of securities, as described in Note 6, and are included in net impairment losses recognized in earnings in the consolidated statement of income.

6. SECURITIES

The Corporation’s trading assets at June 30, 2009 and December 31, 2008 were composed exclusively of municipal bonds. Gains and losses from trading activities are included in other operating income in the consolidated statement of income as follows (in thousands):

	3 Months Ended						Fiscal Year To Date
	June 30,			June 30,			6 Months Ended June 30,
	2009			2008			2009			2008
Gross realized gains	$	1		$	5		$	41		$	40
Gross realized losses		(104	)		(63	)	$	(104	)		(63	)
Net change in unrealized gains/losses		123			15			66			(1	)
Net gains (losses)	$	20		$	(43	)	$	3		$	(24	)
Income taxes related to net gains (losses)	$	7		$	(15	)	$	1		$	(8	)

Amortized cost and fair value of available-for-sale and held-to-maturity securities at June 30, 2009 and December 31, 2008 are summarized as follows:

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

			June 30, 2009
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding			Fair
(In Thousands)	Cost		Gains		Losses			Value

AVAILABLE-FOR-SALE SECURITIES:
Obligations of other U.S. Government agencies	$	20,455	$	424	$	(28	)	$	20,851
Obligations of states and political subdivisions		102,531		354		(8,573	)		94,312
Mortgage-backed securities		166,275		4,622		(15	)		170,882
Collateralized mortgage obligations		73,652		612		(2,621	)		71,643
Corporate bonds		1,000		78		0			1,078
Trust preferred securities issued by individual institutions		10,326		0		(3,760	)		6,566
Collateralized debt obligations:
Pooled trust preferred securities - senior tranches		11,763		0		(3,292	)		8,471
Pooled trust preferred securities - mezzanine tranches		44,029		0		(15,030	)		28,999
Other collateralized debt obligations		713		0		0			713
Total debt securities		430,744		6,090		(33,319	)		403,515
Marketable equity securities		11,653		1,459		(836	)		12,276
Total	$	442,397	$	7,549	$	(34,155	)	$	415,791

HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury