Edgar Filing: CITIZENS & NORTHERN CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

For the fiscal year ended December 31, 2015

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

For the transition period from _______________ to _________________________.

Commission file number: 0-16084

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

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

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

570-724-3411

(Registrant's telephone number including area code)

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

Title of Each Class		Name of Exchange Where Registered
Common Stock Par Value $1.00		The NASDAQ Stock Market LLC

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

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

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

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 (Section 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 x No ¨

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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 definitions of “large accelerated filer,” “accelerated filer “and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one:) Large accelerated filer ¨ Accelerated filer x 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 ¨ No x

The aggregate market value of the registrant's common stock held by non-affiliates at June 30, 2015, the registrant’s most recently completed second fiscal quarter, was $244,570,133.

The number of shares of common stock outstanding at February 12, 2016 was 12,151,108.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for the annual meeting of its shareholders to be held April 21, 2016 are incorporated by reference into Parts III and IV of this report.

PART I

ITEM 1. BUSINESS

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

C&N Bank is a Pennsylvania banking institution that was formed by the consolidation of Northern National Bank of Wellsboro and Citizens National Bank of Towanda on October 1, 1971. Subsequent mergers included: First National Bank of Ralston in May 1972; Sullivan County National Bank in October 1977; Farmers National Bank of Athens in January 1984; and First National Bank of East Smithfield in May 1990. In 2005, the Corporation acquired Canisteo Valley Corporation and its subsidiary, First State Bank, a New York State chartered commercial bank with offices in Canisteo and South Hornell, NY. In 2010, the First State Bank operations were merged into C&N Bank and Canisteo Valley Corporation was merged into the Corporation. On May 1, 2007, the Corporation acquired Citizens Bancorp, Inc. (“Citizens”), with banking offices in Coudersport, Emporium and Port Allegany, Pennsylvania. Citizens Trust Company, the banking subsidiary of Citizens, was merged with and into C&N Bank as part of the transaction. C&N Bank has held its current name since May 6, 1975, at which time C&N Bank changed its charter from a national bank to a Pennsylvania bank.

C&N Bank provides an extensive range of banking services, including deposit and loan products for personal and commercial customers. The Bank also maintains a trust division that provides a wide range of financial services, such as 401(k) plans, retirement planning, estate planning, estate settlements and asset management. In January 2000, C&N Bank formed a subsidiary, C&N Financial Services Corporation (“C&NFSC”). C&NFSC is a licensed insurance agency that provides insurance products to individuals and businesses. In 2001, C&NFSC added a broker-dealer division, which offers mutual funds, annuities, educational savings accounts and other investment products through registered agents. C&NFSC’s operations are not significant in relation to the total operations of the Corporation.

All phases of the Bank’s business are competitive. The Bank primarily competes in Tioga, Bradford, Sullivan, Lycoming, Potter, Cameron and McKean counties in Pennsylvania, and Steuben and Allegany counties in New York. The Bank competes with local commercial banks headquartered in our market area as well as other commercial banks with branches in our market area. Some of the banks that have branches in our market area are larger in overall size. With respect to lending activities and attracting deposits, the Bank also competes with savings banks, savings and loan associations, insurance companies, regulated small loan companies and credit unions. Also, the Bank competes with mutual funds for deposits. C&N Bank competes with insurance companies, investment counseling firms, mutual funds and other business firms and individuals for trust, investment management, brokerage and insurance services. The Bank is generally competitive with all financial institutions in our service area with respect to interest rates paid on time and savings deposits, service charges on deposit accounts and interest rates charged on loans. The Bank serves a diverse customer base, and is not economically dependent on any small group of customers or on any individual industry.

Major initiatives within the last 5 years included the following:

in 2011, sold the banking facility at 130 Court Street, Williamsport, PA, and entered into a leasing arrangement to continue to offer banking and trust services from the facility, resulting in an estimated $122,000 (pre-tax) reduction in operating expenses in 2012;

in April 2012, re-opened the Athens, PA, facility, which was damaged by flooding in September 2011;

in 2013, worked with consultants on projects which resulted in increases in revenues from service charges on deposit accounts, starting primarily in the fourth quarter 2013, and reductions in electronic funds processing expenses and other benefits over approximately the next five years;

in 2014, approved a new treasury stock repurchase program. Under the new program, the Corporation is authorized to repurchase up to 622,500 shares of the Corporation’s common stock, or approximately 5% of the Corporation’s outstanding shares at July 16, 2014. Cumulatively through December 31, 2015, 435,200 shares had been repurchased; and

in 2015, began an organization-wide effort to enhance customer relationships, growth and profitability, including working with consultants on enhanced employee engagement and customer service training, and hiring four new lending personnel to provide more access to commercial and mortgage lending opportunities.

Virtually all of the Corporation’s banking offices are located in the “Marcellus Shale,” an area extending across portions of New York State, Pennsylvania, Ohio, Maryland, West Virginia and Virginia. In recent years, most of the Pennsylvania counties in which the Corporation operates were significantly affected by an upsurge in natural gas exploration, as technological developments made exploration of the Marcellus Shale commercially feasible. After a surge of activity in 2009 through most of 2011, the market price of natural gas declined, causing Marcellus Shale natural gas exploration activity to slow, though some activity has continued to occur throughout the Corporation’s market area. Through December 31, 2015, the Corporation has not experienced significant credit issues as a result of the expansion and subsequent reduction in Marcellus Shale-related activity.

At December 31, 2015, C&N Bank had total assets of $1,209,389,000, total deposits of $942,331,000, net loans outstanding of $696,991,000 and 283 full-time equivalent employees.

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

The Corporation is a bank holding company formed under the provisions of Section 3 of the Federal Reserve Act. The Corporation is under the direct supervision of the Federal Reserve and must comply with the reporting requirements of the Federal Bank Holding Company Act.

C&N Bank is a state-chartered, nonmember bank, supervised by the Federal Deposit Insurance Corporation and the Pennsylvania Department of Banking and Securities.

C&NFSC is a Pennsylvania corporation. The Pennsylvania Department of Insurance regulates C&NFSC’s insurance activities. Brokerage products are offered through third party networking agreements.

Bucktail is incorporated in the state of Arizona and supervised by the Arizona Department of Insurance.

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

ITEM 1A. RISK FACTORS

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

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

Interest Rate Risk - Business risk arising from changes in interest rates is an inherent factor in operating a banking organization. The Corporation’s assets are predominantly long-term, fixed-rate loans and debt securities. Funding for these assets comes principally from shorter-term deposits and borrowed funds. Accordingly, there is an inherent risk of lower future earnings or decline in fair value of the Corporation’s financial instruments when interest rates change. Significant fluctuations in interest rates could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity. For additional information regarding interest rate risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."

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

Limited Geographic Diversification - The Corporation grants commercial, residential and personal loans to customers primarily in the Pennsylvania counties of Tioga, Bradford, Sullivan, Lycoming, Potter, Cameron and McKean, and in Steuben and Allegany Counties in New York State. 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. Deterioration in economic conditions could adversely affect the quality of the Corporation's loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the Corporation's financial condition, results of operations or liquidity.

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

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

Mortgage Banking – In September 2009, the Corporation entered into an agreement to originate and sell residential mortgage loans to the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The Corporation’s mortgage sales activity under this program was not significant in 2009, but has subsequently increased. In 2014, the Corporation entered into an agreement and in June 2014 began to originate and sell residential mortgage loans to the secondary market through the MPFX Original program, which is also administered by the Federal Home Loan Banks of Pittsburgh and Chicago. At December 31, 2015, total residential mortgages sold and serviced through the two programs amounted to $152,448,000. The Corporation must strictly adhere to the MPF Xtra and MPFX Original program guidelines for origination, underwriting and servicing loans, and failure to do so may result in the Corporation being forced to repurchase loans or being dropped from the program. As of December 31, 2015, the total outstanding balance of residential mortgage loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,968,000. If the volume of such forced repurchases of loans were to increase significantly, or if the Corporation were to be dropped from the programs, it could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity.

Debt Securities Risk – In 2009, the Corporation’s earnings were materially impaired by securities losses. Much of the Corporation’s 2009 losses from trust-preferred securities and other securities stem from the much-publicized economic problems affecting the national and international economy, which particularly hurt the banking industry. The Corporation has exposure to the possibility of future losses from investments in obligations of states and political subdivisions (also known as municipal bonds) and other debt securities. For additional information regarding debt securities, see Note 7 to the consolidated financial statements.

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

The Corporation owns common stock of the FHLB-Pittsburgh in order to qualify for membership in the FHLB system and access services from the FHLB-Pittsburgh. The FHLB-Pittsburgh faces a variety of risks in its operations including interest rate risk, counterparty credit risk, and adverse changes in its regulatory framework. In addition, the 11 Federal Home Loan Banks are jointly liable for the consolidated obligations of the FHLB system. To the extent that one FHLB cannot meet its obligations, other FHLBs can be called upon to make required payments. Such risks affecting the FHLB-Pittsburgh could adversely impact the value of the Corporation’s investment in the common stock of the FHLB-Pittsburgh and/or affect its access to credit.

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

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

FDIC Insurance Assessments - In 2008 and 2009, higher levels of bank failures dramatically increased the resolution costs of the Federal Deposit Insurance Corporation, or the FDIC, and depleted the deposit insurance fund. In addition, the FDIC and the U.S. Congress increased federal deposit insurance coverage, placing additional stress on the deposit insurance fund. In order to maintain a strong funding position and restore reserve ratios of the deposit insurance fund, in 2009 the FDIC increased assessment rates. Although our total expenses from FDIC assessments have steadily decreased – to $600,000 in 2014 (up slightly to $603,000 in 2015) from $2,092,000 in 2009, we are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If a significant number of bank or financial institution failures occur, we may be required to pay higher FDIC premiums. Future increases in FDIC insurance premiums or additional special assessments may materially adversely affect our results of operations.

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

ITEM 1B. UNRESOLVED STAFF COMMENTS

Not applicable.

ITEM 2. PROPERTIES

The Bank owns each of its properties, except for the branch facilities located at 130 Court Street, Williamsport, PA, and at 2 East Mountain Avenue, South Williamsport, PA, which are leased. All of the properties are in good condition. None of the owned properties are subject to encumbrance.

A listing of properties is as follows:

Main administrative offices:

90-92 Main Street	or	10 Nichols Street
Wellsboro, PA 16901		Wellsboro, PA 16901

Branch offices – Citizens & Northern Bank:

428 S. Main Street	514 Main Street	2 East Mountain Avenue **
Athens, PA 18810	Laporte, PA 18626	South Williamsport, PA 17702

10 North Main Street	4534 Williamson Trail	41 Main Street
Coudersport, PA 16915	Liberty, PA 16930	Tioga, PA 16946

111 W. Main Street	1085 S. Main Street	428 Main Street
Dushore, PA 18614	Mansfield, PA 16933	Towanda, PA 18848

563 Main Street	612 James Monroe Avenue	64 Elmira Street
East Smithfield, PA 18817	Monroeton, PA 18832	Troy, PA 16947

104 W. Main Street	3461 Route 405 Highway	90-92 Main Street
Elkland, PA 16920	Muncy, PA 17756	Wellsboro, PA 16901

135 East Fourth Street	100 Maple Street	1510 Dewey Avenue
Emporium, PA 15834	Port Allegany, PA 16743	Williamsport, PA 17701

230 Railroad Street	24 Thompson Street	130 Court Street **
Jersey Shore, PA 17740	Ralston, PA 17763	Williamsport, PA 17701

102 E. Main Street	1827 Elmira Street	1467 Golden Mile Road
Knoxville, PA 16928	Sayre, PA 18840	Wysox, PA 18854

3 Main Street	6250 County Rte 64
Canisteo, NY 14823	Hornell, NY 14843

Facilities management office:

13 Water Street

Wellsboro, PA 16901

** designates leased branch facility

ITEM 3. LEGAL PROCEEDINGS

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

ITEM 4. MINE SAFETY DISCLOSURE

Not applicable.

PART II

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

QUARTERLY SHARE DATA

Trades of the Corporation’s stock are executed through various brokers who maintain a market in the Corporation’s stock. The Corporation’s stock is listed on the NASDAQ Capital Market with the trading symbol CZNC. As of December 31, 2015, there were 2,316 shareholders of record of the Corporation’s common stock.

The following table sets forth the high and low sales prices of the common stock during 2015 and 2014.

			2015						2014
					Dividend						Dividend
					Declared						Declared
					per						per
	High		Low		Quarter		High		Low		Quarter
First quarter	$	21.50	$	19.01	$	0.26	$	20.74	$	18.19	$	0.26
Second quarter		21.17		19.16		0.26		20.10		17.94		0.26
Third quarter		20.73		19.25		0.26		20.10		18.50		0.26
Fourth quarter		21.45		19.07		0.26		21.49		18.83		0.26

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. Also, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.

Effective July 17, 2014, the Corporation terminated its existing treasury stock repurchase programs and approved a new treasury stock repurchase program. Under the new program, the Corporation is authorized to repurchase 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 new program may be made from time to time in the open market at prevailing prices, or through privately negotiated transactions.

Consistent with previous programs, the Board of Directors’ July 17, 2014 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. Through December 31, 2015, 435,200 shares had been repurchased at a cost of $8,417,000.

The following table sets forth a summary of purchases by the Corporation, in the open market, of its equity securities during the fourth quarter 2015:

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
October 1 - 31, 2015		8,000	$	19.41		419,400		203,100
November 1 - 30, 2015		13,700	$	19.98		433,100		189,400
December 1 - 31, 2015		2,100	$	20.01		435,200		187,300

PERFORMANCE GRAPH

Set forth below is a chart comparing the Corporation’s cumulative return to stockholders against the cumulative return of the Russell 2000 and a Peer Group Index of similar banking organizations selected by the Corporation for the five-year period commencing December 31, 2010 and ended December 31, 2015. The index values are market-weighted dividend-reinvestment numbers, which measure the total return for investing $100.00 five years ago. This meets Securities & Exchange Commission requirements for showing dividend reinvestment share performance over a five-year period and measures the return to an investor for placing $100.00 into a group of bank stocks and reinvesting any and all dividends into the purchase of more of the same stock for which dividends were paid.

	Period Ending
Index	12/31/10		12/31/11		12/31/12		12/31/13		12/31/14		12/31/15
Citizens & Northern Corporation		100.00		128.69		137.49		157.68		166.63		178.31
Russell 2000		100.00		95.82		111.49		154.78		162.35		155.18
CZNC Peer Group Index*		100.00		93.86		112.37		140.86		154.64		162.21

The Corporation’s peer group consists of banks headquartered in Pennsylvania with total assets of $700 million to $2 billion as of September 30, 2015. This peer group consists of ACNB Corporation, Gettysburg; AmeriServ Financial, Inc., Johnstown; CB Financial Services , Inc., Carmichaels; Citizens Financial Services, Inc., Mansfield; Codorus Valley Bancorp, Inc., York; DNB Financial Corporation, Downingtown; ENB Financial Corp., Ephrata; ESSA Bancorp, Inc., Stroudsburg; Fidelity D&D Bancorp, Inc., Dunmore; First Keystone Corporation, Berwick; First National Community Bancorp, Inc., Dunmore; FNB Bancorp, Inc., Newtown; Fox Chase Bancorp, Inc., Hatboro; Franklin Financial Services Corporation, Chambersburg; Harleysville Savings Financial Corporation, Harleysville; Norwood Financial Corp., Honesdale; Orrstown Financial Services, Inc., Shippensburg; Penns Woods Bancorp, Inc., Williamsport; Peoples Financial Services Corp., Scranton; QNB Corp., Quakertown; Republic First Bancorp, Inc., Philadelphia; Royal Bancshares of Pennsylvania, Inc., Bala Cynwyd; Somerset Trust Holding Company, Somerset;1^st Summit Bancorp of Johnstown, Inc., Johnstown; Mid Penn Bancorp, Inc., Millersburg; Embassy Bancorp, Inc., Bethlehem.

The data for this graph was obtained from SNL Financial LC, Charlottesville, VA.

EQUITY COMPENSATION PLAN INFORMATION

The following table sets forth information concerning the Stock Incentive Plan and Independent Directors Stock Incentive Plan, both of which have been approved by the Corporation’s shareholders. The figures shown in the table below are as of December 31, 2015.

Number of

Weighted-

Securities

Securities to be

average

Remaining

Issued Upon

Exercise

for Future

Exercise of

Price of

Issuance Under

Outstanding

Equity Compen-

Options

sation Plans

Equity compensation plans approved by shareholders

248,486

18.59

323,977

Equity compensation plans not approved by shareholders

N/A

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

ITEM 6. SELECTED FINANCIAL DATA

As of or for the Year Ended December 31,

INCOME STATEMENT (In Thousands)	2015		2014		2013			2012			2011
Interest and fee income	$	44,519	$	46,009	$	48,914		$	56,632		$	61,256
Interest expense		4,602		5,122		5,765			9,031			13,556
Net interest income		39,917		40,887		43,149			47,601			47,700
Provision (credit) for loan losses		845		476		2,047			288			(285	)
Net interest income after provision (credit) for loan losses		39,072		40,411		41,102			47,313			47,985
Noninterest income excluding securities gains		15,404		15,420		16,451			16,383			13,897
Net impairment losses recognized in earnings from
available-for-sale securities		0		0		(25	)		(67	)		0
Net realized gains on available-for-sale securities		2,861		1,104		1,743			2,749			2,216
Loss on prepayment of debt		2,573		0		1,023			2,333			0
Noninterest expense excluding loss on prepayment of debt		32,956		34,157		33,471			32,914			32,016
Income before income tax provision		21,808		22,778		24,777			31,131			32,082
Income tax provision		5,337		5,692		6,183			8,426			8,714
Net income	$	16,471	$	17,086	$	18,594		$	22,705		$	23,368

PER COMMON SHARE:
Basic earnings per share	$	1.35	$	1.38	$	1.51		$	1.86		$	1.92
Diluted earnings per share	$	1.35	$	1.38	$	1.50		$	1.85		$	1.92
Cash dividends declared per share	$	1.04	$	1.04	$	1.00		$	0.84		$	0.58
Book value per common share at period-end	$	15.39	$	15.34	$	14.49		$	14.89		$	13.77
Tangible book value per common share at period-end	$	14.41	$	14.36	$	13.51		$	13.91		$	12.77
Weighted average common shares outstanding - basic		12,211,941		12,390,067		12,352,383			12,235,748			12,162,045
Weighted average common shares outstanding - diluted		12,233,773		12,412,050		12,382,790			12,260,208			12,166,768
END OF PERIOD BALANCES (In Thousands)
Available-for-sale securities	$	420,290	$	516,807	$	482,658		$	472,577		$	481,685
Gross loans		704,880		630,545		644,303			683,910			708,315
Allowance for loan losses		7,889		7,336		8,663			6,857			7,705
Total assets		1,223,417		1,241,963		1,237,695			1,286,907			1,323,735
Deposits		935,615		967,989		954,516			1,006,106			1,018,206
Borrowings		92,263		78,597		96,723			89,379			130,313
Stockholders' equity		187,487		188,362		179,472			182,786			167,385
Common shares outstanding		12,180,623		12,279,980		12,390,063			12,274,035			12,155,529
AVERAGE BALANCES (In Thousands)
Total assets		1,243,209		1,239,897		1,237,096			1,305,163			1,313,445
Earning assets		1,159,298		1,155,401		1,145,340			1,199,538			1,208,584
Gross loans		657,727		627,753		656,495			700,241			714,421
Deposits		968,201		965,418		964,031			1,008,469			1,001,125
Stockholders' equity		188,905		185,469		181,412			175,822			152,718

ITEM 6. SELECTED FINANCIAL DATA (Continued)

As of or for the Year Ended December 31,

	2015			2014			2013			2012			2011
KEY RATIOS
Return on average assets		1.32	%		1.38	%		1.50	%		1.74	%		1.78	%
Return on average equity		8.72	%		9.21	%		10.25	%		12.91	%		15.30	%
Average equity to average assets		15.19	%		14.96	%		14.66	%		13.47	%		11.63	%
Net interest margin (1)		3.69	%		3.80	%		4.05	%		4.26	%		4.22	%
Efficiency (2)		56.60	%		57.59	%		53.27	%		48.82	%		49.37	%
Cash dividends as a % of diluted earnings per share		77.04	%		75.36	%		66.67	%		45.41	%		30.21	%
Tier 1 leverage		14.31	%		13.89	%		13.78	%		12.53	%		10.93	%
Tier 1 risk-based capital		23.40	%		26.26	%		25.15	%		22.86	%		19.95	%
Total risk-based capital		24.45	%		27.60	%		26.60	%		24.01	%		21.17	%
Tangible common equity/tangible assets		14.49	%		14.34	%		13.66	%		13.39	%		11.84	%
Nonperforming assets/total assets		1.31	%		1.34	%		1.53	%		0.82	%		0.73	%
Nonperforming loans/total loans		2.09	%		2.45	%		2.80	%		1.41	%		1.19	%
Allowance for loan losses/total loans		1.12	%		1.16	%		1.34	%		1.00	%		1.09	%
Net charge-offs/average loans		0.04	%		0.29	%		0.04	%		0.16	%		0.16	%

(1) Rates of return on tax-exempt securities and loans are calculated on a fully-taxable equivalent basis.

(2) The efficiency ratio is calculated by dividing: (a) total noninterest expense excluding losses from prepayment of debt, by (b) the sum of net interest income (including income from tax-exempt securities and loans on a fully-taxable equivalent basis) and noninterest income excluding securities gains or losses.

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

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

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

In 2015, net income totaled $16,471,000, or $1.35 per common share - basic and diluted, as compared to $1.38 per share – basic and diluted in 2014 and $1.51 per share basic and $1.50 per share – diluted in 2013. The results for 2015 represented a return on average assets of 1.32% and a return on average equity of 8.72%.

2015 vs. 2014

Net income per share – diluted for 2015 was 2.2% lower than in 2014. Some of the more significant highlights related to annual earnings in 2015 as compared to 2014 are as follows:

Net interest income totaled $39,917,000 in 2015, down $970,000 (2.4%) from 2014. In 2015, yields earned on securities and loans fell by more than the corresponding drop in interest rates paid on deposits and borrowings. The net interest margin was 3.69% in 2015, down from 3.80% in 2014.

The provision for loan losses was $845,000 in 2015, up from $476,000 in 2014. The higher 2015 provision for loan losses reflected an increase in outstanding loans in the year which resulted in an increase in the collectively determined portion of the allowance for loan losses. Gross loans at December 31, 2015 were $74.3 million, or 11.8%, higher than the balance a year earlier.

In 2015, noninterest revenue, excluding net realized gains on available-for-sale securities, totaled $15,404,000, which was down slightly from $15,420,000 in 2014 The most significant changes in components of noninterest revenue for the year ended December 31, 2015 as compared to the corresponding period in 2014 included the following: (1) decrease of $161,000 (3.2%) in service charges on deposit accounts, primarily as a result of lower overdraft fees; (2) reduction of $135,000 as the fair value of servicing rights declined $162,000 in 2015 as compared to $27,000 in 2014; (3) net increase in revenues from Trust and brokerage services of $74,000 (1.4%); and (4) an increase in other operating income of $315,000, including a gain of $212,000 from a life insurance arrangement in which benefits were split between the Corporation and the heirs of a former employee as well as an increase of $36,000 in dividends from Federal Home Loan Bank of Pittsburgh stock and an increase of $28,000 in revenue from merchant services.

Realized gains from available-for-sale securities totaled $2,861,000 and losses from prepayment of borrowings totaled $2,573,000 in 2015, while in 2014 realized gains from securities totaled $1,104,000 and there were no losses from prepayment of borrowings. In 2015, the Corporation sold a significant portion of its marketable equity securities portfolio, which was made up of bank stocks, generating realized gains of $2,220,000. Losses from prepayment of borrowings stemmed from pay-downs made in May and December 2015 totaling $34,000,000 on a long-term repurchase agreement with an interest rate of 4.265%. After the effects of these pay-downs, there was no balance outstanding on this repurchase agreement as of December 31, 2015. Management expects the combined result of the debt prepayments and reinvestment of proceeds from sales of stocks will make a positive contribution to net interest income in 2016.

In 2015, noninterest expenses, excluding losses on prepayment of borrowings; totaled $32,956,000, which was $1,201,000 (3.5%) lower than total 2014 noninterest expenses. The reduction in noninterest expenses for the year ended December 31, 2015 as compared to the corresponding period in 2014 included the following: (1) a reduction in salaries and wages expenses of $439,000, mainly due to severance expenses in 2014; (2) a reduction in employee benefit-related expenses of $349,000 due to lower employee health insurance expense as a result of lower claims; (3) a reduction in Pennsylvania shares tax expense of $176,000, reflecting an increase in tax credits; (4) a reduction in professional fees expense of $161,000, as 2014 included expenses associated with an executive search; and (5) a reduction in other expenses of $182,000, including reductions in expenses from loan collections and other real estate properties.

2014 vs. 2013

Net income per share – diluted for 2014 was 8.0% lower than in 2013. Some of the more significant highlights related to annual earnings in 2014 as compared to 2013 are as follows:

Net interest income totaled $40,887,000 in 2014, down $2,262,000 (5.2%) from 2013. In 2014, yields earned on securities and loans fell by more than the corresponding drop in interest rates paid on deposits and borrowings. Also, average total loans outstanding were 4.3% lower in 2014 as compared to 2013. The net interest margin was 3.80% in 2014, down from 4.05% in 2013.

The provision for loan losses was $476,000 in 2014, down from $2,047,000 in 2013. The higher levels of expense in 2013 included a provision of $1,552,000 from loans to one commercial customer.

In 2014, noninterest revenue, excluding net realized gains on available-for-sale securities, totaled $15,420,000, which was lower than the 2013 amount by $1,031,000 (6.3%). Gains from sales of residential mortgage loans totaled $768,000 in 2014, down from $1,969,000 in 2013, reflecting lower volume from refinancing activity. Service charges on deposit accounts fell $221,000 in 2014 as compared to 2013, a decline of 4.2%, primarily as a result of lower net overdraft fees. Total Trust and brokerage revenue of $5,391,000 in 2014 was $520,000 (10.7%) higher than in 2013.

Realized gains from available-for-sale securities totaled $1,104,000 in 2014, while in 2013 realized gains from securities totaled $1,718,000 and losses from prepayment of borrowings totaled $1,023,000.

In 2014, noninterest expenses totaled $34,157,000, which was $686,000 (2.0%) higher than total 2013 noninterest expenses, excluding the loss on prepayment of borrowings. Salaries and wages expense increased $915,000 in 2014 as compared to 2013, mainly as a result of severance benefits. Pensions and other employee benefit expenses increased $619,000, mainly due to higher health care costs and a charge related to a distribution from a defined benefit pension plan. Professional fees expense was $835,000 lower in 2014 as compared to 2013, as the total in 2013 included fees associated with projects designed to identify sources of noninterest revenue and reductions in debit card and ATM processing expense.

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

CRITICAL ACCOUNTING POLICIES

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

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

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 7 to the 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 I, II and III include information regarding the Corporation’s net interest income in 2015, 2014, and 2013. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the tables.

2015 vs. 2014

Fully taxable equivalent net interest income was $42,819,000 in 2015, which was $1,074,000 (2.4%) lower than in 2014. As shown in Table III, in 2015 compared to 2014, interest rate changes had the effect of decreasing net interest income $2,283,000, and net changes in volume had the effect of increasing net interest income $1,209,000. The most significant components of the rate-related change in net interest income in 2015 were a decrease in interest income of $1,957,000 attributable to lower rates earned on loans receivable and a decrease of $468,000 in interest income on available-for-sale securities. The most significant components of the volume-related increase in net interest income in 2015 was an increase in interest income of $1,544,000 attributable to an increase in the balance of loans receivable, a decrease in interest expense of $270,000 attributable to a reduction in the balance of borrowed funds, and a decrease in interest expense of $117,000 attributable to a reduction in the balance of interest-bearing deposits (primarily certificates of deposit), partially offset by a volume-related decrease in interest income on available-for-securities of $681,000. As presented in Table II, the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 3.54% in 2015 as compared to 3.63% in 2014.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $47,421,000 in 2015, a decrease of 3.2% from 2014. Interest and fees on loans receivable decreased $413,000, or 1.2%. As indicated in Table II, average available-for-sale securities (at amortized cost) totaled $479,148,000 in 2015, a decrease of $15,786,000 (3.2%) from 2014. The net decrease in the Corporation’s available-for-sale securities portfolio consisted of decreases in tax-exempt municipal securities, U.S. Government mortgage-backed securities, U.S. Government agency bonds, and equity securities. These decreases were partially offset by increases in the balances of collateralized mortgage obligations and taxable municipal securities. The Corporation’s yield on securities was lower in 2015 than in 2014, primarily because of low market interest rates on new investments combined with higher-yielding securities maturing. The average rate of return on available-for-sale securities was 2.81% for 2015 and 2.95% in 2014.

The average balance of gross loans receivable increased 4.8% to $657,727,000 in 2015 from $627,753,000 in 2014. The Corporation experienced growth in the balances of tax free municipal loans, residential mortgages and participation loans purchased. These increases were partially offset by decreases in balances of commercial real estate loans. The Corporation’s average rate of return on loans receivable declined to 5.15% in 2015 from 5.46% in 2014.

The average balance of interest-bearing due from banks decreased to $22,201,000 in 2015 from $32,510,000 in 2014. This has consisted primarily of balances held by the Federal Reserve and also includes other overnight deposits and FDIC-insured certificates of deposit issued by other financial institutions.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense fell $520,000, or 10.2%, to $4,602,000 in 2015 from $5,122,000 in 2014. Table II shows that the overall cost of funds on interest-bearing liabilities fell to 0.55% in 2015 from 0.61% in 2014.

Total average deposits (interest-bearing and noninterest-bearing) increased 0.3%, to $968,201,000 in 2015 from $965,418,000 in 2014. Decreases in the average balances of certificates of deposit, Individual Retirement Accounts, and money market accounts were partially offset by increases in average balances of interest checking, savings accounts and non-interest bearing demand deposits. The average rate paid on interest-bearing deposits fell slightly to 0.26% in 2015 from 0.28% in 2014.

Total average borrowed funds decreased $2,298,000 to $77,642,000 in 2015 from $79,940,000 in 2014. The average rate on borrowed funds was 3.45% in 2015 compared to 3.70% in 2014, reflecting a $6,982,000 reduction in the average balance of higher-rate, long-term borrowings resulting from pre-payment of a long-term repurchase agreement borrowing with an interest rate of 4.265%. The Corporation paid off $10 million of principal on this borrowing in May 2015, and $24 million in December 2015, leaving no remaining balance outstanding at December 31, 2015. (The pre-payment of long-term borrowings is described in the Earnings Overview section.) The average balance of short-term borrowings increased $4,684,000 in 2015 over 2014, as average overnight borrowings were higher in 2015 and the Corporation funded the pay-off of the long-term repurchase agreement in December 2015 with funds from a series of short-term advances from the FHLB-Pittsburgh totaling $25,072,000 and an average rate of 0.86%.

2014 vs. 2013

Fully taxable equivalent net interest income was $43,893,000 in 2014, which was $2,491,000 (5.3%) lower than in 2013. As shown in Table III, in 2014 compared to 2013, interest rate changes had the effect of decreasing net interest income $1,622,000, and net changes in volume had the effect of decreasing net interest income $869,000. The most significant component of the rate-related change in net interest income in 2014 was a decrease in interest income of $1,718,000 attributable to lower rates earned on loans receivable. The most significant components of the volume-related decrease in net interest income in 2014 were a decrease in interest income of $1,602,000 attributable to a decline in the balance of loans receivable, partially offset by a volume-related increase in interest income on available-for-securities of $499,000, a decrease in interest expense of $161,000 attributable to a reduction in the balance of interest-bearing deposits (primarily certificates of deposit) and a decrease in interest expense of $109,000 attributable to a reduction in the balance of borrowed funds. As presented in Table II, 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% in 2014 as compared to 3.88% in 2013.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $49,015,000 in 2014, a decrease of 6.0% from 2013. Interest and fees on loans receivable decreased $3,320,000, or 8.8%. As indicated in Table II, average available-for-sale securities (at amortized cost) totaled $494,934,000 in 2014, an increase of $33,370,000 (7.2%) from 2013. Net increase in the Corporation’s available-for-sale securities portfolio was primarily made up of U.S. Government agency mortgage-backed securities and collateralized mortgage obligations. This increase was partially offset by decreases in the balances of U.S. Government agency bonds. The Corporation’s yield on securities was lower in 2014 than in 2013, primarily because of low market interest rates. The average rate of return on available-for-sale securities was 2.95% for 2014 and 3.12% in 2013.

The average balance of gross loans receivable decreased 4.3% to $627,753,000 in 2014 from $656,495,000 in 2013. The Corporation experienced contraction in the balance of loans receivable due to borrowers prepaying or refinancing existing loans combined with modest demand for new loans. The decline in the balance of the residential mortgage portfolio was also affected by management’s decision to sell a significant portion of newly originated residential mortgages on the secondary market. The Corporation’s average rate of return on loans receivable declined to 5.46% in 2014 from 5.73% in 2013.

The average balance of interest-bearing due from banks increased to $32,510,000 in 2014 from $26,159,000 in 2013. This has consisted primarily of balances held by the Federal Reserve and also includes other overnight deposits and FDIC-insured certificates of deposit issued by other financial institutions.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense fell $643,000, or 11.1%, to $5,122,000 in 2014 from $5,765,000 in 2013. Table II shows that the overall cost of funds on interest-bearing liabilities fell to 0.61% in 2014 from 0.67% in 2013.

Total average deposits (interest-bearing and noninterest-bearing) increased 0.1%, to $965,418,000 in 2014 from $964,031,000 in 2013. Decreases in the average balances of certificates of deposit, Individual Retirement Accounts, and money market accounts were partially offset by increases in average balances of interest checking, savings accounts and non-interest bearing demand deposits. Consistent with continuing low short-term market interest rates, the average rates incurred on certificates of deposit and Individual Retirement Accounts have continued to decrease in 2014 as compared to 2013.

Total average borrowed funds decreased $2,388,000 to $79,940,000 in 2014 from $82,328,000 in 2013. The average rate on borrowed funds was 3.70% in 2014, compared to 3.72% in 2013.

TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE

	Years Ended December 31,						Increase/(Decrease)
(In Thousands)	2015		2014		2013		2015/2014			2014/2013

INTEREST INCOME
Available-for-sale securities:
Taxable	$	7,587	$	8,028	$	7,105	$	(441	)	$	923
Tax-exempt		5,869		6,577		7,296		(708	)		(719	)
Total available-for-sale securities		13,456		14,605		14,401		(1,149	)		204
Interest-bearing due from banks		93		125		105		(32	)		20
Loans held for sale		16		16		54		0			(38	)
Loans receivable:
Taxable		31,311		32,127		35,484		(816	)		(3,357	)
Tax-exempt		2,545		2,142		2,105		403			37
Total loans receivable		33,856		34,269		37,589		(413	)		(3,320	)
Total Interest Income		47,421		49,015		52,149		(1,594	)		(3,134	)

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		214		216		211		(2	)		5
Money market		299		286		290		13			(4	)
Savings		128		121		117		7			4
Certificates of deposit		831		1,069		1,522		(238	)		(453	)
Individual Retirement Accounts		451		470		562		(19	)		(92	)
Other time deposits		1		1		1		0			0
Total interest-bearing deposits		1,924		2,163		2,703		(239	)		(540	)
Borrowed funds:
Short-term		32		9		9		23			0
Long-term		2,646		2,950		3,053		(304	)		(103	)
Total borrowed funds		2,678		2,959		3,062		(281	)		(103	)
Total Interest Expense		4,602		5,122		5,765		(520	)		(643	)

Net Interest Income	$	42,819	$	43,893	$	46,384	$	(1,074	)	$	(2,491	)

(1)

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

(2)

Fees on loans are included with interest on loans and amounted to $1,004,000 in 2015, $1,013,000 in 2014, and $1,338,000 in 2013.

TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES

(Dollars in Thousands)

	Year						Year						Year
	Ended			Rate of			Ended			Rate of			Ended			Rate of
	12/31/2015			Return/			12/31/2014			Return/			12/31/2013			Return/
	Average			Cost of			Average			Cost of			Average			Cost of
	Balance			Funds %			Balance			Funds %			Balance			Funds %
EARNING ASSETS
Available-for-sale securities, at amortized cost:
Taxable	$	366,448			2.07	%	$	371,125			2.16	%	$	330,980			2.15	%
Tax-exempt		112,700			5.21	%		123,809			5.31	%		130,584			5.59	%
Total available-for-sale securities		479,148			2.81	%		494,934			2.95	%		461,564			3.12	%
Interest-bearing due from banks		22,201			0.42	%		32,510			0.38	%		26,159			0.40	%
Federal funds sold		0			0.00	%		0			0.00	%		4			0.00	%
Loans held for sale		222			7.21	%		204			7.84	%		1,118			4.83	%
Loans receivable:
Taxable		603,771			5.19	%		589,120			5.45	%		620,412			5.72	%
Tax-exempt		53,956			4.72	%		38,633			5.54	%		36,083			5.83	%
Total loans receivable		657,727			5.15	%		627,753			5.46	%		656,495			5.73	%
Total Earning Assets		1,159,298			4.09	%		1,155,401			4.24	%		1,145,340			4.55	%
Cash		16,639						16,865						16,854
Unrealized gain/loss on securities		8,871						6,350						8,875
Allowance for loan losses		(7,380	)					(7,992	)					(7,204	)
Bank premises and equipment		15,911						16,789						18,154
Intangible Asset - Core Deposit Intangible		41						70						113
Intangible Asset – Goodwill		11,942						11,942						11,942
Other assets		37,887						40,472						43,022
Total Assets	$	1,243,209					$	1,239,897					$	1,237,096

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	$	195,940			0.11	%	$	183,874			0.12	%	$	174,790			0.12	%
Money market		196,585			0.15	%		198,990			0.14	%		203,023			0.14	%
Savings		128,355			0.10	%		121,685			0.10	%		117,055			0.10	%
Certificates of deposit		121,803			0.68	%		134,732			0.79	%		148,598			1.02	%
Individual Retirement Accounts		110,659			0.41	%		120,016			0.39	%		129,255			0.43	%
Other time deposits		1,031			0.10	%		1,039			0.10	%		1,062			0.09	%
Total interest-bearing deposits		754,373			0.26	%		760,336			0.28	%		773,783			0.35	%
Borrowed funds:
Short-term		11,428			0.28	%		6,744			0.13	%		6,422			0.14	%
Long-term		66,214			4.00	%		73,196			4.03	%		75,906			4.02	%
Total borrowed funds		77,642			3.45	%		79,940			3.70	%		82,328			3.72	%
Total Interest-bearing Liabilities		832,015			0.55	%		840,276			0.61	%		856,111			0.67	%
Demand deposits		213,828						205,082						190,248
Other liabilities		8,461						9,070						9,325
Total Liabilities		1,054,304						1,054,428						1,055,684
Stockholders' equity, excluding other comprehensive income/loss		183,125						181,271						175,893
Other comprehensive income/loss		5,780						4,198						5,519
Total Stockholders' Equity		188,905						185,469						181,412
Total Liabilities and Stockholders' Equity	$	1,243,209					$	1,239,897					$	1,237,096
Interest Rate Spread					3.54	%					3.63	%					3.88	%
Net Interest Income/Earning Assets					3.69	%					3.80	%					4.05	%

Total Deposits (Interest-bearing and Demand)	$	968,201					$	965,418					$	964,031

(1)

Rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 35%.

(2)

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

TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)	Year Ended 12/31/15 vs. 12/31/14									Year Ended 12/31/14 vs. 12/31/13
	Change in			Change in			Total			Change in			Change in			Total
	Volume			Rate			Change			Volume			Rate			Change
EARNING ASSETS
Available-for-sale securities:
Taxable	$	(100	)	$	(341	)	$	(441	)	$	868		$	55		$	923
Tax-exempt		(581	)		(127	)		(708	)		(369	)		(350	)		(719	)
Total available-for-sale securities		(681	)		(468	)		(1,149	)		499			(295	)		204
Interest-bearing due from banks		(42	)		10			(32	)		24			(4	)		20
Loans held for sale		1			(1	)		0			(60	)		22			(38	)
Loans receivable:
Taxable		786			(1,602	)		(816	)		(1,746	)		(1,611	)		(3,357	)
Tax-exempt		758			(355	)		403			144			(107	)		37
Total loans receivable		1,544			(1,957	)		(413	)		(1,602	)		(1,718	)		(3,320	)
Total Interest Income		822			(2,416	)		(1,594	)		(1,139	)		(1,995	)		(3,134	)

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		14			(16	)		(2	)		11			(6	)		5
Money market		(3	)		16			13			(6	)		2			(4	)
Savings		7			0			7			5			(1	)		4
Certificates of deposit		(97	)		(141	)		(238	)		(133	)		(320	)		(453	)
Individual Retirement Accounts		(38	)		19			(19	)		(38	)		(54	)		(92	)
Other time deposits		0			0			0			0			0			0
Total interest-bearing deposits		(117	)		(122	)		(239	)		(161	)		(379	)		(540	)
Borrowed funds:
Short-term		9			14			23			0			0			0
Long-term		(279	)		(25	)		(304	)		(109	)		6			(103	)
Total borrowed funds		(270	)		(11	)		(281	)		(109	)		6			(103	)
Total Interest Expense		(387	)		(133	)		(520	)		(270	)		(373	)		(643	)

Net Interest Income	$	1,209		$	(2,283	)	$	(1,074	)	$	(869	)	$	(1,622	)	$	(2,491	)

(1)

Changes in income on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 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 amounts of the change in each.

NONINTEREST INCOME

Years Ended December 31, 2015, 2014 and 2013

The table below presents a comparison of noninterest income and excludes realized gains on available-for-sale securities, which are discussed in the “Earnings Overview” section of Management’s Discussion and Analysis.

TABLE IV - COMPARISON OF NONINTEREST INCOME

(In Thousands)

	Years Ended
	December 31,						$			%
	2015			2014			Change			Change
Service charges on deposit accounts	$	4,864		$	5,025		$	(161	)		(3.2	)
Service charges and fees		494			538			(44	)		(8.2	)
Trust and financial management revenue		4,626			4,490			136			3.0
Brokerage revenue		839			901			(62	)		(6.9	)
Insurance commissions, fees and premiums		109			118			(9	)		(7.6	)
Interchange revenue from debit card transactions		1,935			1,959			(24	)		(1.2	)
Net gains from sales of loans		735			768			(33	)		(4.3	)
Decrease in fair value of servicing rights		(162	)		(27	)		(135	)		500.0
Increase in cash surrender value of life insurance		386			376			10			2.7
Net (loss) gain from premises and equipment		(1	)		8			(9	)		(112.5	)
Other operating income		1,579			1,264			315			24.9
Total other operating income before realized gains on available-for-sale securities, net	$	15,404		$	15,420		$	(16	)		(0.1	)

	Years Ended
	December 31,						$			%
	2014			2013			Change			Change
Service charges on deposit accounts	$	5,025		$	5,246		$	(221	)		(4.2	)
Service charges and fees		538			597			(59	)		(9.9	)
Trust and financial management revenue		4,490			4,087			403			9.9
Brokerage revenue		901			784			117			14.9
Insurance commissions, fees and premiums		118			170			(52	)		(30.6	)
Interchange revenue from debit card transactions		1,959			1,941			18			0.9
Net gains from sales of loans		768			1,969			(1,201	)		(61.0	)
(Decrease) increase in fair value of servicing rights		(27	)		67			(94	)		(140.3	)
Increase in cash surrender value of life insurance		376			399			(23	)		(5.8	)
Net gain (loss) from premises and equipment		8			(16	)		24			(150.0	)
Other operating income		1,264			1,207			57			4.7
Total other operating income before realized gains on available-for-sale securities, net	$	15,420		$	16,451		$	(1,031	)		(6.3	)

Total noninterest income, excluding realized gains on available-for-sale securities, decreased $16,000 in 2015 compared to 2014. In 2014, total noninterest income decreased $1,031,000 (6.3%) from 2013. Changes of significance are discussed in the narrative that follows.

2015 vs. 2014

Service charges on deposit accounts were $161,000 lower in 2015 than 2014. Total consumer and business overdraft and uncollected funds fees decreased $387,000 in 2015 as compared to 2014. These decreases were partially offset by adjustments to the existing fee structure of certain checking products in April 2015.

The fair value of servicing rights decreased $162,000 in 2015 as compared to a decrease of $27,000 in 2014. The greater decline in fair value in 2015 reflected the impact of a reduction in the outstanding balance of mortgage loans sold and serviced in 2015, as compared to an increase in the balance of loans serviced in 2014 over 2013.

Included in the $315,000 increase in other operating revenue in 2015 is the effect of a $212,000 gain recognized from a life insurance arrangement in which the benefits were split between Corporation and the heirs of the former employee.

In 2015, Trust and financial management revenue increased $136,000, or 3.0%. This increase was primarily in retirement services revenue.

2014 vs. 2013

Net gains from sales of loans decreased $1,201,000 in 2014. Since December 2009, the Corporation has sold a significant amount of residential mortgage loans into the secondary market through the MPF Xtra and Original programs administered by the Federal Home Loan Banks of Pittsburgh and Chicago. Volume remained brisk throughout most of 2013, slowing somewhat in the fourth quarter 2013 with a continued slowdown throughout 2014 reflecting a decrease in refinancing activity.

Service charges on deposit accounts were $221,000 lower in 2014 than 2013. Consumer and business overdraft fees decreased $543,000 in 2014 as compared to 2013. Changes made as a result of recommendations made by a consulting firm in 2013 resulted in service charges on deposit accounts of $611,000 in 2014 as compared to $229,000 in 2013, as most of the recommendations were implemented in the fourth quarter 2013.

In 2014, Trust and financial management revenue increased $403,000, or 9.9%. The increase in trust revenue in 2014 reflects the impact of new business obtained as well as higher valuations of U.S. equity securities throughout most of the period. Assets under management by the Corporation’s Trust and financial management group totaled $825,918,000 at December 31, 2014, an increase of 3.7% over the total one year earlier.

As a result of increased annuity sales, brokerage revenue increased $117,000 or 14.9% in 2014 over 2013.

NONINTEREST EXPENSE

Years Ended December 31, 2015, 2014 and 2013

As shown in Table V below, total noninterest expense increased $1,372,000, or 4.0%, in 2015 as compared to 2014; however, excluding losses from prepayment of debt, noninterest expense decreased $1,201,000 (3.5%) in 2015 as compared to 2014. Excluding losses from prepayment of debt, total noninterest expense was $686,000 (2.0%) higher in 2014 as compared to 2013. In 2015, the Corporation incurred losses totaling $2,573,000 and, in 2013, losses totaling $1,023,000 from prepayment of borrowings (repurchase agreements). There were no losses from prepayment of borrowings incurred in 2014. Changes of significance (other than the previously discussed losses on prepayment of debt) are discussed in the narrative that follows.

TABLE V - COMPARISON OF NONINTEREST EXPENSE

(In Thousands)

					$			%
	2015		2014		Change			Change
Salaries and wages	$	14,682	$	15,121	$	(439	)		(2.9	)
Pensions and other employee benefits		4,420		4,769		(349	)		(7.3	)
Occupancy expense, net		2,574		2,628		(54	)		(2.1	)
Furniture and equipment expense		1,860		1,859		1			0.1
FDIC Assessments		603		600		3			0.5
Pennsylvania shares tax		1,174		1,350		(176	)		(13.0	)
Professional fees		538		699		(161	)		(23.0	)
Automated teller machine and interchange expense		988		924		64			6.9
Software subscriptions		876		784		92			11.7
Loss on prepayment of debt		2,573		0		2,573			100.0
Other operating expense		5,241		5,423		(182	)		(3.4	)
Total Other Expense	$	35,529	$	34,157	$	1,372			4.0

					$			%
	2014		2013		Change			Change
Salaries and wages	$	15,121	$	14,206	$	915			6.4
Pensions and other employee benefits		4,769		4,150		619			14.9
Occupancy expense, net		2,628		2,473		155			6.3
Furniture and equipment expense		1,859		1,948		(89	)		(4.6	)
FDIC Assessments		600		604		(4	)		(0.7	)
Pennsylvania shares tax		1,350		1,402		(52	)		(3.7	)
Professional fees		699		1,534		(835	)		(54.4	)
Automated teller machine and interchange expense		924		1,020		(96	)		(9.4	)
Software subscriptions		784		836		(52	)		(6.2	)
Loss on prepayment of debt		0		1,023		(1,023	)		(100.0	)
Other operating expense		5,423		5,298		125			2.4
Total Other Expense	$	34,157	$	34,494	$	(337	)		(1.0	)

2015 vs 2014

Salaries and wages decreased $439,000, or 2.9%. As noted in the Earnings Overview section, this decrease is primarily the result of severance benefits incurred and paid in 2014. The decrease from severance benefits was partially offset by annual merit-based pay increases, an increase in incentive and other bonuses of $168,000 and the addition of new lending and other personnel. At December 31, 2015, the Corporation had 283 full-time equivalent employees, up from 278 a year earlier.

Pensions and other employee benefits decreased $349,000, or 7.3%. Health care expense decreased $342,000 as the amount of claims incurred during 2015 was lower than in 2014. The Corporation is self-insured for health insurance, up to a cap for catastrophic levels of losses, which are insured by a third party. In addition, pension expense decreased $111,000 as the result of a charge in 2014 related to a distribution from a defined benefit plan. These decreases were partially offset by annual increases in other benefit and administrative costs.

Pennsylvania shares tax decreased $176,000, including the effects of increased participation in state tax credit programs.

Professional fees decreased $161,000 as a result of nonrecurring executive search expenses that were incurred in 2014.

Included in other operating expense is a $191,000 decrease in loan collection expenses as well as an $86,000 decrease in other real estate expenses.

2014 vs. 2013

Salaries and wages increased $915,000, or 6.4%. As noted in the Earnings Overview section, this increase is primarily the result of severance benefits incurred and paid in 2014.

Pensions and other employee benefits increased $619,000, or 14.9%. Health care expense increased $415,000 as the amount of claims incurred during 2014 was higher than in 2013. The Corporation is self-insured for health insurance, up to a cap for catastrophic levels of losses, which are insured by a third party In addition, the Corporation incurred a $196,000 charge related to a distribution from a defined benefit plan.

Occupancy expense increased $155,000, or 6.3%, primarily due to increased weather related costs such as snow removal, fuel, utilities and maintenance.

Professional fees decreased $835,000, or 54.4%. The Corporation incurred professional fee expense of $1,039,000 in 2013 for two large consulting engagements. Similar size engagements did not occur during 2014.

Automated teller machine and interchange expenses decreased $96,000, or 9.4%, mainly resulting from benefits derived from a consulting project related to electronic funds processing that took place in 2013.

INCOME TAXES

The effective income tax rate was approximately 24.5% of pre-tax income in 2015, and 25% of pre-tax income in 2014 and 2013. The Corporation’s effective tax rates differ from the statutory rate of 35% principally because of the effects of tax-exempt interest income.

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At December 31, 2015, the net deferred tax asset was $3,115,000, an increase from the balance at December 31, 2014 of $1,668,000. The largest changes in temporary difference components were as follows:

Primarily as a result of the realization of $2,861,000 in gains on the sale of available-for-sale securities, the deferred tax liability resulting from net unrealized gains on available-for-sale securities decreased to $1,342,000 at December 31, 2015 from $2,844,000 at December 31, 2014.

There was no deferred tax asset representing a credit for alternative minimum tax paid at December 31, 2015 as the Corporation’s federal taxable income in 2015 exceeded alternative minimum taxable income sufficiently to utilize the available credit. At December 31, 2014 the related deferred tax asset amounted to $537,000.

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 December 31, 2015 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

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

SECURITIES

Table VI shows the composition of the investment portfolio at December 31, 2015, 2014 and 2013. Comparison of the amortized cost totals of available-for-sale securities at each year-end presented reflects an increase of $24,479,000 to $508,682,000 at December 31, 2014 from December 31, 2013. This change was followed by a decrease of $92,227,000 to $416,455,000 at December 31, 2015. After experiencing an increase in securities in 2014 as a result of a reduction in the balances of loans outstanding, the Corporation saw a reversal of that trend in 2015. The decrease in securities in 2015 reflects, in part, using cash generated from the investment portfolio to fund the increase in loans outstanding. Over the last year, the Corporation saw a decrease in almost all categories of investments, with the largest decrease being a $46,475,000 reduction in collateralized mortgage-backed obligations (CMOs) issued or guaranteed by U.S. Government agencies. As discussed in more detail in Note 7 to the financial statements, the Corporation reported net realized gains from available-for-sale securities of $2,861,000 in 2015, including realized gains from sales of equity securities (bank stocks) of $2,220,000. In comparison, net realized gains from available-for-sale securities totaled $1,104,000 in 2014 and $1,718,000 in 2013.

As reflected in Table VI, the fair value of available-for-sale securities as of December 31, 2015 was $3,835,000, or 0.92%, higher than the total amortized cost basis. The aggregate unrealized gain position at December 31, 2015 was down from $8,125,000 at December 31, 2014, mainly due to sales of a significant portion of the Corporation’s equity securities with substantial market appreciation in 2015. The aggregate unrealized gain position at December 31, 2015 included an unrealized gain of $3,129,000 on debt securities as well as an unrealized gain of $706,000 on marketable equity securities. Changes in intermediate-term and long-term interest rates have a significant impact on changes in fair values of debt securities. The aggregate unrealized gain on debt securities at December 31, 2015 was 0.75% of the amortized cost basis, down slightly from 1.01% at December 31, 2014 and up from a net unrealized loss on debt securities of 0.93% of amortized cost at December 31, 2013.

Management has reviewed the Corporation’s holdings as of December 31, 2015 and concluded that unrealized losses on all of the securities in an unrealized loss position are considered temporary. Notes 6 and 7 to the consolidated financial statements provide more detail concerning the Corporation’s processes for evaluating securities for other-than-temporary impairment. Management will continue to closely monitor the status of impaired securities in 2016.

TABLE VI - INVESTMENT SECURITIES
					As of December 31,
	2015				2014				2013
	Amortized		Fair		Amortized		Fair		Amortized		Fair
(In Thousands)	Cost		Value		Cost		Value		Cost		Value

AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$	10,663	$	10,483	$	27,221	$	26,676	$	47,382	$	45,877
Obligations of states and political subdivisions:
Tax-exempt		103,414		107,757		120,086		124,839		127,748		128,426
Taxable		34,317		34,597		33,637		33,878		35,154		34,471
Mortgage-backed securities		73,227		73,343		82,479		83,903		84,849		86,208
Collateralized mortgage obligations, Issued by U.S. Government agencies		193,145		191,715		239,620		238,823		182,372		178,092
Other collateralized debt obligations		9		9		34		34		660		660
Total debt securities		414,775		417,904		503,077		508,153		478,165		473,734
Marketable equity securities		1,680		2,386		5,605		8,654		6,038		8,924
Total	$	416,455	$	420,290	$	508,682	$	516,807	$	484,203	$	482,658

The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, 2015. Yields on tax-exempt securities are presented on a nominal basis, that is, the yields are not presented on a fully taxable-equivalent basis. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.

(In Thousands, Except for Percentages)	Within					One-					Five-					After
	One					Five					Ten					Ten
	Year		Yield			Years		Yield			Years		Yield			Years		Yield			Total		Yield

AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$	1,006		3.32	%	$	6,650		1.35	%	$	3,007		1.53	%	$	0		0.00	%	$	10,663		1.59	%
Obligations of states and political subdivisions:
Tax-exempt		4,645		2.83	%		36,609		2.48	%		28,666		2.70	%		33,494		4.74	%		103,414		3.29	%
Taxable		3,436		2.03	%		17,381		2.02	%		13,500		2.91	%		0		0.00	%		34,317		2.37	%
Other collateralized debt obligations		0		0.00	%		0		0.00	%		0		0.00	%		9		0.00	%		9		0.00	%
Subtotal	$	9,087		2.58	%	$	60,640		2.23	%	$	45,173		2.69	%	$	33,503		4.73	%	$	148,403		2.95	%
Mortgage-backed securities																						73,227		2.17	%
Collateralized mortgage obligations, Issued by U.S. Government agencies																						193,145		2.01	%
Total																					$	414,775		2.38	%

The Corporation’s mortgage-backed securities and collateralized mortgage obligations have stated maturities that may differ from actual maturities due to borrowers’ ability to prepay obligations. Cash flows from such investments are dependent upon the performance of the underlying mortgage loans and are generally influenced by the level of interest rates. As rates increase, cash flows generally decrease as prepayments on the underlying mortgage loans decrease. As rates decrease, cash flows generally increase as prepayments increase due to increased refinance activity and other factors. In the table above, the entire balances and weighted-average rates for mortgage-backed securities and collateralized mortgage obligations are shown in one period.

FINANCIAL CONDITION

Gross loans outstanding (excluding mortgage loans held for sale) were $704,880,000 at December 31, 2015, up 11.8% from $630,545,000 at December 31, 2014. The outstanding balance of tax-exempt municipal loans totaled $40,007,000 at December 31, 2015, an increase of $22,473,000 from December 31, 2014, and total participation loans outstanding amounted to $33,059,000 at December 31, 2015, an increase of $28,113,000 from December 31, 2014. The increase in municipal loans in 2015 includes loans to two school districts in the Corporation’s market area with outstanding balances totaling $15,947,000 at December 31, 2015. 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” and “Commercial loans secured by real estate” classes in the loan tables presented in this Form 10-K. At December 31, 2015, the balance of participation loans outstanding includes $8,860,000 to a business based in the Corporation’s market area, $10,000,000 to an entity located outside of the Corporation’s market area and $10,020,000 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.

The balance of available-for-sale securities fell $96,517,000 to $420,290,000 at December 31, 2015 from $516,807,000 at December 31, 2014. As discussed in the Earnings Overview section, the reduction included sales of securities for which the proceeds were used to pre-pay long-term debt with a book value of $34 million prior to the pay-down. The reduction also included use of proceeds from calls and maturities of securities to fund the increase in loans receivable and to offset some of the impact of the decrease in deposits in the second half of 2015, as the Pennsylvania state budget impasse led to reduced deposit balances held by municipal entities such as school districts, local governments and human service agencies.

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. The discussion provides useful information regarding changes in the Corporation’s balance sheet over the 3-year period ended December 31, 2015, including discussions related to available-for-sale securities, loans, deposits and borrowings. Other significant balance sheet items - the allowance for loan losses and stockholders’ equity - are discussed in separate sections of Management’s Discussion and Analysis.

Table VIII presents loan maturity data as of December 31, 2015. The interest rate simulation model classifies certain loans under different categories than they appear in Table VII. Fixed-rate loans are shown in Table VIII based on their contractually scheduled principal repayments, and variable-rate loans are shown based on the date of the next change in rate. Table VIII shows that fixed-rate loans are approximately 39% of the loan portfolio. Of the 61% of the portfolio made up of variable-rate loans, a significant portion (42%) will re-price after more than one year. Variable-rate loans re-pricing after more than one year include significant amounts of residential and commercial real estate loans. The Corporation’s substantial investment in long-term, fixed-rate loans and variable-rate loans with extended periods until re-pricing is one of the concerns management attempts to address through interest rate risk management practices. See Part II, Item 7A for a more detailed discussion of the Corporation’s interest rate risk.

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. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

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 December 31, 2015, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,968,000, and the corresponding total outstanding balance repurchased at December 31, 2014 was $1,802,000.

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 of $26,877,000. At December 31, 2014, outstanding balances of loans sold and serviced through the two programs totaled $152,505,000, including loans sold through the MPF Xtra program of $144,743,000 and loans sold through the Original program of $7,762,000. Based on the fairly limited volume of required repurchases to date, and of sales through the Original program with credit enhancement, no allowance had been established for representation and warranty exposures, or for credit losses on loan sales through the Original program as of December 31, 2015 and 2014.

Total future capital purchases in 2016 are estimated at approximately $2.8 million. Management does not expect capital expenditures to have a material, detrimental effect on the Corporation’s financial condition during 2016.

TABLE VII - Five-year Summary of Loans by Type

(In Thousands)

	2015			%		2014			%		2013			%		2012			%		2011			%
Residential mortgage:
Residential mortgage loans - first liens	$	304,783			43.2	$	291,882			46.3	$	299,831			46.5	$	311,627			45.6	$	331,015			46.7
Residential mortgage loans - junior liens		21,146			3.0		21,166			3.4		23,040			3.6		26,748			3.9		28,851			4.1
Home equity lines of credit		39,040			5.5		36,629			5.8		34,530			5.4		33,017			4.8		30,037			4.2
1-4 Family residential construction		21,121			3.0		16,739			2.7		13,909			2.2		12,842			1.9		9,959			1.4
Total residential mortgage		386,090			54.8		366,416			58.1		371,310			57.6		384,234			56.2		399,862			56.5
Commercial:
Commercial loans secured by real estate		154,779			22.0		145,878			23.1		147,215			22.8		158,413			23.2		156,388			22.1
Commercial and industrial		75,196			10.7		50,157			8.0		42,387			6.6		48,442			7.1		57,191			8.1
Political subdivisions		40,007			5.7		17,534			2.8		16,291			2.5		31,789			4.6		37,620			5.3
Commercial construction		5,122			0.7		6,938			1.1		17,003			2.6		28,200			4.1		23,518			3.3
Loans secured by farmland		7,019			1.0		7,916			1.3		10,468			1.6		11,403			1.7		10,949			1.5
Multi-family (5 or more) residential		9,188			1.3		8,917			1.4		10,985			1.7		6,745			1.0		6,583			0.9
Agricultural loans		4,671			0.7		3,221			0.5		3,251			0.5		3,053			0.4		2,987			0.4
Other commercial loans		12,152			1.7		13,334			2.1		14,631			2.3		362			0.1		552			0.1
Total commercial		308,134			43.7		253,895			40.3		262,231			40.7		288,407			42.2		295,788			41.8
Consumer		10,656			1.5		10,234			1.6		10,762			1.7		11,269			1.6		12,665			1.8
Total		704,880			100.0		630,545			100.0		644,303			100.0		683,910			100.0		708,315			100.0
Less: allowance for loan losses		(7,889	)				(7,336	)				(8,663	)				(6,857	)				(7,705	)
Loans, net	$	696,991				$	623,209				$	635,640				$	677,053				$	700,610

TABLE VIII – LOAN MATURITY DISTRIBUTION

(In Thousands)

	As of December 31, 2015

	Fixed-Rate Loans								Variable- or Adjustable-Rate Loans
	1 Year		1-5		>5				1 Year		1-5		>5
	or Less		Years		Years		Total		or Less		Years		Years		Total
Real Estate	$	2,915	$	17,658	$	171,617	$	192,190	$	87,874	$	183,361	$	78,665	$	349,900
Commercial		8,964		28,121		31,850		68,935		51,460		31,220		602		83,282
Consumer		1,899		5,257		3,340		10,496		41		0		36		77
Total	$	13,778	$	51,036	$	206,807	$	271,621	$	139,375	$	214,581	$	79,303	$	433,259

PROVISION AND ALLOWANCE FOR LOAN LOSSES

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. Notes 1 and 8 to the consolidated financial statements provide an overview of the process management uses for evaluating and determining the allowance for loan losses.

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

The allowance for loan losses was $7,889,000 at December 31, 2015, up from $7,336,000 at December 31, 2014. As shown in Table X, specific allowances on impaired loans totaled $820,000 at December 31, 2015, which was $51,000 higher than the total of specific allowances on impaired loans at December 31, 2014. Table X also shows the collectively determined component of the allowance for commercial loans was $371,000 higher and for residential mortgages was $122,000 higher at December 31, 2015 than at December 31, 2014. The increase in loans outstanding had the effect of increasing the collectively determined portion of the allowance for loan losses, as the Corporation’s net charge-off experience and qualitative data used in the December 31, 2015 allowance calculations were comparable to the December 31, 2014 data.

The provision for loan losses is determined based on the amount required in order to maintain an appropriate allowance for loan losses in light of all factors considered. The provision for loan losses by segment for 2015, 2014 and 2013 is as follows:

(In Thousands)
	2015			2014			2013
Residential mortgage	$	(19	)	$	250		$	559
Commercial		816			227			1,507
Consumer		16			2			24
Unallocated		32			(3	)		(43	)
Total	$	845		$	476		$	2,047

The provision for loan losses was $845,000 in 2015, in comparison to $476,000 in 2014 and $2,047,000 in 2013. As shown in Table XII, the average provision for loan losses for the five-year period ended December 31, 2015 was $674,000. The total amount of the provision for loan losses for each period is determined based on the amount required to maintain an appropriate allowance.

In 2015, the provision for loan losses related to the commercial segment was $816,000, as compared to $227,000 in 2014 and $1,507,000 in 2013. The increase in the provision for the commercial segment in 2015 as compared to 2014 includes the effects of the increase in the collectively determined allowance due to loan growth, as previously described. The provision for the commercial segment in 2015 also reflects the establishment of an allowance of $595,000 on a multi-family residential loan with a balance of $987,000 at December 31, 2015, partially offset by the effects of a recovery of $208,000 on loans charged-off in prior years. In 2014, the provision for the commercial segment included the effects of increases as compared to 2013 in average net charge-offs (based on historical experience over the previous thirty-six months) and qualitative factors used to estimate a portion of the collectively determined allowance, partially offset by lower loan balances, while the 2013 provision related to the commercial segment included a provision of $1,552,000 from the establishment of an allowance on loans to one borrower.

In 2015, the $19,000 credit for loan losses in the residential mortgage segment relates primarily to an adjustment to a specific allowance related to one loan relationship, partially offset by the effects of the previously described increase in the collectively determined allowance due to loan growth. In 2014, the provision for the residential mortgage segment was $250,000 as compared to $559,000 in 2013, reflecting the effect of lower loans outstanding.

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). Table XI shows total impaired loans of $9,774,000 at December 31, 2015, down $2,342,000 from the corresponding amount at December 31, 2014 of $12,316,000. Table XI shows that total impaired loans at December 31, 2013 was significantly higher than the corresponding amounts at December 31, 2011 and 2012, and that the amount of impaired loans (as well as nonperforming loans as reflected in the table) decreased in 2014 and again in 2015. The increase in impaired and nonaccrual loans outstanding in 2013, and the subsequent decrease in 2014 and 2015, included the effects of changes in the outstanding balance of large loans to two commercial entities. For one of the credits for which there was a loan balance of $1,815,000 and an allowance of $211,000 at December 31, 2014 and $72,000 at December 31, 2013, the Corporation acquired the commercial property that had collateralized the loan through foreclosure and sold the property, resulting in no remaining loan balance and a charge-off of $115,000 in 2015. For the other large commercial relationship, as described in the following paragraph, during the second quarter 2014, the Corporation recorded a charge-off of $1,486,000 related to a restructuring, which has reduced the outstanding balance of loans to this commercial entity to $4,997,000 at December 31, 2015.

As shown in Table XI, loans classified as TDRs decreased to $6,364,000 at December 31, 2015 from $7,195,000 at December 31, 2014. The reduction in outstanding TDRs in 2015 includes the effect of pay-offs received on loans secured by farmland. The balance of TDRs at December 31, 2014 had increased from $4,175,000 at December 31, 2013, mainly due to a restructuring agreement with one commercial borrower. The Corporation entered into a forbearance agreement with this commercial borrower which includes 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 is extended or the payment requirements are otherwise modified. In July 2015, the forbearance agreement was extended for twelve months. 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 amount of the charge-off was determined based on the excess of the contractual principal due over the present value of the payment amounts provided for in the forbearance agreement, assuming the revised payment amounts would continue until maturity, at the contractual interest rates.

Table XI reflects total loans past due 30-89 days and still accruing interest at December 31, 2015 of $7,057,000, down slightly from the December 31, 2014 total of $7,121,000. Total loans past due 90 days or more and still in accrual status increased to $3,229,000 at December 31, 2015 from $2,843,000 at December 31, 2014 mainly due to increased past due 1-4 family residential mortgages. Interest continues to be accrued on loans 90 days or more past due that management deems to be well secured and in the process of collection, and for which no loss is anticipated. Over the period 2011-2015, each period includes a few large commercial relationships that have required significant monitoring and workout efforts. As a result, a limited number of relationships may significantly impact the total amount of allowance required on impaired loans, and may significantly impact the amount of total charge-offs reported in any one period.

Management believes it has been conservative in its decisions concerning identification of impaired loans, estimates of loss, and nonaccrual status; however, the actual losses realized from these relationships could vary materially from the allowances calculated as of December 31, 2015. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

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

TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)	Years Ended December 31,
	2015			2014			2013			2012			2011
Balance, beginning of year	$	7,336		$	8,663		$	6,857		$	7,705		$	9,107
Charge-offs:
Residential mortgage		(217	)		(327	)		(95	)		(552	)		(100	)
Commercial		(251	)		(1,715	)		(459	)		(498	)		(1,189	)
Consumer		(94	)		(97	)		(117	)		(171	)		(157	)
Total charge-offs		(562	)		(2,139	)		(671	)		(1,221	)		(1,446	)
Recoveries:
Residential mortgage		1			25			24			18			3
Commercial		214			264			348			8			255
Consumer		55			47			58			59			71
Total recoveries		270			336			430			85			329
Net charge-offs		(292	)		(1,803	)		(241	)		(1,136	)		(1,117	)
Provision (credit) for loan losses		845			476			2,047			288			(285	)
Balance, end of period	$	7,889		$	7,336		$	8,663		$	6,857		$	7,705

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

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)

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

TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)

(In Thousands)

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

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

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

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

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

TABLE XII - FIVE-YEAR HISTORY OF LOAN LOSSES

(In Thousands)

	2015			2014			2013			2012			2011			Average
Average gross loans	$	657,727		$	627,753		$	656,495		$	700,241		$	714,421		$	671,327
Year-end gross loans		704,880			630,545			644,303			683,910			708,315			674,391
Year-end allowance for loan losses		7,889			7,336			8,663			6,857			7,705			7,690
Year-end nonaccrual loans		11,517			12,610			14,934			7,353			7,197			10,722
Year-end loans 90 days or more past due and still accruing		3,229			2,843			3,131			2,311			1,267			2,556
Net charge-offs		292			1,803			241			1,136			1,117			918
Provision (credit) for loan losses		845			476			2,047			288			(285	)		674
Earnings coverage of charge-offs		56			9			77			20			21			21
Allowance coverage of charge-offs		27			4			36			6			7			8
Net charge-offs as a % of provision (credit) for loan losses		34.56	%		378.78	%		11.77	%		394.44	%		-391.93	%		136.20	%
Net charge-offs as a % of average gross loans		0.04	%		0.29	%		0.04	%		0.16	%		0.16	%		0.14	%
Net income		16,471			17,086			18,594			22,705			23,368			19,645

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Table XIII presents the Corporation’s significant fixed and determinable contractual obligations as of December 31, 2015 by payment date. The payment amounts represent the principal amounts of time deposits and borrowings and do not include interest.

TABLE XIII – CONTRACTUAL OBLIGATIONS

(In Thousands)

	1 Year		1-3		3-5		Over 5
	or Less		Years		Years		Years		Total
Time deposits	$	124,562	$	73,596	$	23,515	$	11	$	221,684
Short-term borrowings:
Federal Home Loan Bank of Pittsburgh		48,581		0		0		0		48,581
Customer repurchase agreements		4,915		0		0		0		4,915
Long-term borrowings:
Federal Home Loan Bank of Pittsburgh		57		10,010		0		1,700		11,767
Repurchase agreements		0		27,000		0		0		27,000
Total	$	178,115	$	110,606	$	23,515	$	1,711	$	313,947

In addition to the amounts described in Table XIII, the Corporation has obligations related to deposits without a stated maturity with outstanding principal balances totaling $713,931,000 at December 31, 2015.

The Corporation’s operating lease and other commitments at December 31, 2015 are immaterial. The Corporation’s significant off-balance sheet arrangements consist of commitments to extend credit and standby letters of credit. Off-balance sheet arrangements are described in Note 16 to the consolidated financial statements.

LIQUIDITY

Liquidity is the ability to quickly raise cash at a reasonable cost. An adequate liquidity position permits the Corporation to pay creditors, compensate for unforeseen deposit fluctuations and fund unexpected loan demand. At December 31, 2015, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $18,603,000.

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 $20,039,000 at December 31, 2015.

The Corporation’s outstanding, available, and total credit facilities at December 31, 2015 and December 31, 2014 are as follows:

	Outstanding				Available				Total Credit
(In Thousands)	Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,
	2015		2014		2015		2014		2015		2014
Federal Home Loan Bank of Pittsburgh	$	60,348	$	12,060	$	262,361	$	311,007	$	322,709	$	323,067
Federal Reserve Bank Discount Window		0		0		19,606		25,367		19,606		25,367
Other correspondent banks		0		0		45,000		45,000		45,000		45,000
Total credit facilities	$	60,348	$	12,060	$	326,967	$	381,374	$	387,315	$	393,434

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. At December 31, 2014, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings with a total amount of $12,060,000. Additional information regarding borrowed funds is included in Note 12 to the consolidated financial statements.

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 December 31, 2015, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $255,527,000.

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

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 regulatory capital amounts and ratios are presented in Note 18 to the consolidated financial statements. As reflected in Note 18, at December 31, 2015 and 2014, the Corporation’s and Bank’s capital ratios are well in excess of regulatory capital requirements.

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 are subject to the new rule on January 1, 2015. Generally, the new rule implements higher minimum capital requirements, revises the definition of regulatory capital components and related calculations, adds a new common equity tier 1 capital ratio, implements a new capital conservation buffer, increases the risk weighting for past due loans and provides a transition period for several aspects of the new rule.

A summarized comparison of the existing capital requirements with requirements under the new rule is as follows:

	Current General
	Risk-Based
	Capital Rule	New Capital Rule
Minimum regulatory capital ratios:
Common equity tier 1 capital/ risk-weighted assets (RWA)	N/A	4.5%
Tier 1 capital / RWA	4%	6%
Total capital / RWA	8%	8%
Tier 1 capital / Average assets (Leverage ratio)	4%	4%

Capital buffers:
Capital conservation buffer	N/A	2.5% of RWA; composed of common equity tier 1 capital

Prompt correction action levels - Common equity tier 1 capital ratio:
Well capitalized	N/A	³6.5%
Adequately capitalized	N/A	³4.5%
Undercapitalized	N/A	<4.5%
Significantly undercapitalized	N/A	<3%

Prompt correction action levels - Tier 1 capital ratio:
Well capitalized	³6%	³8%
Adequately capitalized	³4%	³6%
Undercapitalized	<4%	<6%
Significantly undercapitalized	<3%	<4%

Prompt correction action levels - Total capital ratio:
Well capitalized	³10%	³10%
Adequately capitalized	³8%	³8%
Undercapitalized	<8%	<8%
Significantly undercapitalized	<6%	<6%

Prompt correction action levels - Leverage ratio:
Well capitalized	³5%	³5%
Adequately capitalized	³4%	³4%
Undercapitalized	<4%	<4%
Significantly undercapitalized	<3%	<3%

Prompt correction action levels - Critically undercapitalized:
Tangible equity to total assets	≤2%	≤2%

The 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 will begin 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:

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%

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition, the Corporation and C&N Bank are subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.

Management expects the Corporation and C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions for the next 12 months and for the foreseeable future. Planned capital expenditures are not expected to have a significantly detrimental effect on capital ratios.

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 (Loss) within stockholders’ equity. The balance in Accumulated Other Comprehensive Income (Loss) related to unrealized gains (losses) on available-for-sale securities, net of deferred income tax, amounted to $2,493,000 at December 31, 2015, $5,281,000 at December 31, 2014 and ($1,004,000) at December 31, 2013. Changes in accumulated other comprehensive income (loss) 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 7 to the consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale securities for other-than-temporary impairment at December 31, 2015.

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 $35,000 at December 31, 2015, $79,000 at December 31, 2014 and $11,000 at December 31, 2013.

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.

Comprehensive Income totaled $13,639,000 in 2015 as compared to $23,439,000 in 2014 and $6,598,000 in 2013. In 2015, Comprehensive Income included: (1) Net Income of $16,471,000, which was $615,000 lower than in 2014 and $2,123,000 lower than in 2013; (2) Other Comprehensive Loss from unrealized losses on available-for-sale securities, net of deferred income tax, of ($2,788,000) as compared to Other Comprehensive Income of $6,285,000 in 2014 and Other Comprehensive Loss of $12,572,000 in 2013; and (3) Other Comprehensive Loss from defined benefit plans of $44,000 in 2015 as compared to Other Comprehensive Income of $68,000 in 2014 and Other Comprehensive Income of $576,000 in 2013. Fluctuations in interest rates significantly affected fair values of available-for-sale securities in 2013 through 2015, and accordingly have an effect on Other Comprehensive Income (Loss) in each year.

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 December 16, 2015 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.

RECENT ACCOUNTING PRONOUNCEMENTS

See Note 2 to the consolidated financial statements for a description of recent accounting pronouncements and their recent or potential future effects on the Corporation’s financial statements.

ITEM 7A. 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 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 XIV, which follows this discussion, is based on the results of calculations performed using the simulation model as of December 31, 2015 and October 31, 2014. 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.

TABLE XIV - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES

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, 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	%

October 31, 2014 Data

(In Thousands)

Period Ending October 31, 2015

Basis Point	Interest		Interest		Net Interest		NII			NII
Change in Rates	Income		Expense		Income (NII)		% Change			Risk Limit
+400	$	55,351	$	23,123	$	32,228		-20.3	%		25.0	%
+300		52,975		18,223		34,752		-14.1	%		20.0	%
+200		50,546		13,618		36,928		-8.7	%		15.0	%
+100		47,977		9,330		38,647		-4.4	%		10.0	%
0		45,478		5,043		40,435		0.0	%		0.0	%
-100		42,869		4,794		38,075		-5.8	%		10.0	%
-200		41,095		4,729		36,366		-10.1	%		15.0	%
-300		40,123		4,707		35,416		-12.4	%		20.0	%
-400		39,998		4,707		35,291		-12.7	%		25.0	%

Market Value of Portfolio Equity at October 31, 2014

	Present		Present			Present
Basis Point	Value		Value			Value
Change in Rates	Equity		% Change			Risk Limit
+400	$	176,447		-24.4	%		50.0	%
+300		189,184		-18.9	%		45.0	%
+200		203,838		-12.6	%		35.0	%
+100		218,314		-6.4	%		25.0	%
0		233,255		0.0	%		0.0	%
-100		232,818		-0.2	%		25.0	%
-200		232,294		-0.4	%		35.0	%
-300		251,791		7.9	%		45.0	%
-400		288,059		23.5	%		50.0	%

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. As discussed further in Note 7 of the consolidated financial statements, the Corporation had no other-than-temporary impairment losses related to bank stocks in 2015 or 2014.

Equity securities held as of December 31, 2015 and 2014 are presented in Table XV. Table XV 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 XV 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 December 31, 2015.

TABLE XV - EQUITY SECURITIES RISK

(In Thousands)

	Dec. 31,			Dec. 31,
	2015			2014
Cost	$	1,680		$	5,605
Fair Value		2,386			8,654
Hypothetical 10% Decline In Market Value		(239	)		(865	)
Hypothetical 20% Decline In Market Value		(477	)		(1,731	)

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)

	December 31,			December 31,
	2015			2014
ASSETS
Cash and due from banks:
Noninterest-bearing	$	14,710		$	14,812
Interest-bearing		21,351			21,235
Total cash and due from banks		36,061			36,047
Available-for-sale securities, at fair value		420,290			516,807
Loans held for sale		280			0

Loans receivable		704,880			630,545
Allowance for loan losses		(7,889	)		(7,336	)
Loans, net		696,991			623,209
Bank-owned life insurance		20,764			22,119
Accrued interest receivable		3,768			3,908
Bank premises and equipment, net		15,406			16,256
Foreclosed assets held for sale		1,260			1,189
Deferred tax asset, net		3,115			1,668
Intangible asset - Core deposit intangibles		30			52
Intangible asset - Goodwill		11,942			11,942
Other assets		13,510			8,766
TOTAL ASSETS	$	1,223,417		$	1,241,963

LIABILITIES
Deposits:
Noninterest-bearing	$	211,041		$	212,439
Interest-bearing		724,574			755,550
Total deposits		935,615			967,989
Short-term borrowings		53,496			5,537
Long-term borrowings		38,767			73,060
Accrued interest and other liabilities		8,052			7,015
TOTAL LIABILITIES		1,035,930			1,053,601

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued at December 31, 2015 and December 31, 2014		0			0
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2015 and 2014; issued 12,655,171 at December 31, 2015 and December 31, 2014; outstanding 12,180,623 at December 31, 2015 and 12,279,980 December 31, 2014		12,655			12,655
Paid-in capital		71,654			71,541
Retained earnings		109,454			105,550
Treasury stock, at cost; 474,548 shares at December 31, 2015 and 375,191 shares at
December 31, 2014		(8,804	)		(6,744	)
Sub-total		184,959			183,002
Accumulated other comprehensive income:
Unrealized gain on available-for-sale securities		2,493			5,281
Defined benefit plans gain		35			79
Total accumulated other comprehensive income		2,528			5,360
TOTAL STOCKHOLDERS' EQUITY		187,487			188,362
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	1,223,417		$	1,241,963

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

Consolidated Statements of Income	Years Ended December 31,
(In Thousands Except Per Share Data)
	2015			2014			2013
INTEREST INCOME
Interest and fees on loans	$	31,311		$	32,127		$	35,484
Interest on balances with depository institutions		93			125			105
Interest on loans to political subdivisions		1,668			1,403			1,381
Interest on mortgages held for sale		16			16			54
Income from available-for-sale securities:
Taxable		7,303			7,721			6,810
Tax-exempt		3,844			4,310			4,785
Dividends		284			307			295
Total interest and dividend income		44,519			46,009			48,914
INTEREST EXPENSE
Interest on deposits		1,924			2,163			2,703
Interest on short-term borrowings		32			9			9
Interest on long-term borrowings		2,646			2,950			3,053
Total interest expense		4,602			5,122			5,765
Net interest income		39,917			40,887			43,149
Provision for loan losses		845			476			2,047
Net interest income after provision for loan losses		39,072			40,411			41,102
OTHER INCOME
Service charges on deposit accounts		4,864			5,025			5,246
Service charges and fees		494			538			597
Trust and financial management revenue		4,626			4,490			4,087
Brokerage revenue		839			901			784
Insurance commissions, fees and premiums		109			118			170
Interchange revenue from debit card transactions		1,935			1,959			1,941
Net gains from sale of loans		735			768			1,969
(Decrease) increase in fair value of servicing rights		(162	)		(27	)		67
Increase in cash surrender value of life insurance		386			376			399
Net (loss) gain from premises and equipment		(1	)		8			(16	)
Other operating income		1,579			1,264			1,207
Sub-total		15,404			15,420			16,451
Total other-than-temporary impairment losses on available-for-sale securities		0			0			(25	)
Portion of (gain) recognized in other comprehensive loss (before taxes)		0			0			0
Net impairment losses recognized in earnings		0			0			(25	)
Realized gains on available-for-sale securities, net		2,861			1,104			1,743
Total other income		18,265			16,524			18,169
OTHER EXPENSES
Salaries and wages		14,682			15,121			14,206
Pensions and other employee benefits		4,420			4,769			4,150
Occupancy expense, net		2,574			2,628			2,473
Furniture and equipment expense		1,860			1,859			1,948
FDIC Assessments		603			600			604
Pennsylvania shares tax		1,174			1,350			1,402
Professional fees		538			699			1,534
Automated teller machine and interchange expense		988			924			1,020
Software subscriptions		876			784			836
Loss on prepayment of debt		2,573			0			1,023
Other operating expense		5,241			5,423			5,298
Total other expenses		35,529			34,157			34,494
Income before income tax provision		21,808			22,778			24,777
Income tax provision		5,337			5,692			6,183
NET INCOME	$	16,471		$	17,086		$	18,594
NET INCOME PER SHARE - BASIC	$	1.35		$	1.38		$	1.51
NET INCOME PER SHARE - DILUTED	$	1.35		$	1.38		$	1.50

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

Consolidated Statements of Comprehensive Income

(In Thousands)

	Years Ended December 31,
	2015			2014			2013
Net income	$	16,471		$	17,086		$	18,594

Unrealized (losses) gains on available-for-sale securities:
Unrealized holding (losses) gains on available-for-sale securities		(1,429	)		10,774			(17,623	)
Reclassification adjustment for gains realized in income		(2,861	)		(1,104	)		(1,718	)
Other comprehensive (loss) gain on available-for-sale securities		(4,290	)		9,670			(19,341	)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive (loss) gain		(135	)		(79	)		885
Amortization of net transition obligation, prior service cost, net actuarial loss and loss on settlement included in net periodic benefit cost		67			184			2
Other comprehensive (loss) gain on unfunded retirement obligations		(68	)		105			887

Other comprehensive (loss) income before income tax		(4,358	)		9,775			(18,454	)
Income tax related to other comprehensive loss (income)		1,526			(3,422	)		6,458

Net other comprehensive (loss) income		(2,832	)		6,353			(11,996	)

Comprehensive income	$	13,639		$	23,439		$	6,598

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

Consolidated Statements of Changes in Stockholders' Equity

(In Thousands Except Share and Per Share Data)

																Accumulated
																Other
	Common			Treasury			Common			Paid-in			Retained			Comprehensive			Treasury
	Shares			Shares			Stock			Capital			Earnings			Income			Stock			Total

Balance, January 1, 2013		12,525,411			251,376		$	12,525		$	68,622		$	94,839		$	11,003		$	(4,203	)	$	182,786
Net income														18,594									18,594
Other comprehensive loss, net																	(11,996	)					(11,996	)
Cash dividends declared on common stock, $1.00 per share														(12,343	)								(12,343	)
Shares issued for dividend reinvestment Plan		71,129						71			1,356												1,427
Shares issued from treasury related to exercise of stock options					(10,656	)					5									179			184
Restricted stock granted					(37,886	)					(633	)								633			0
Forfeiture of restricted stock					3,643						61									(61	)		0
Stock-based compensation expense											696												696
Tax effect of stock option exercises											(2	)											(2	)
Tax benefit from employee benefit plan														126									126
Balance, December 31, 2013		12,596,540			206,477			12,596			70,105			101,216			(993	)		(3,452	)		179,472
Net income														17,086									17,086
Other comprehensive income, net																	6,353						6,353
Cash dividends declared on common stock, $1.04 per share														(12,889	)								(12,889	)
Shares issued for dividend reinvestment Plan		59,498			(18,473	)		60			1,069									368			1,497
Treasury stock purchased					208,300															(4,002	)		(4,002	)
Shares issued from treasury related to exercise of stock options		(867	)		(11,860	)		(1	)		(64	)								188			123
Restricted stock granted					(16,711	)					(279	)								279			0
Forfeiture of restricted stock					7,458						125									(125	)		0
Stock-based compensation expense											565												565
Tax benefit from dividends on restricted stock											(1	)											(1	)
Tax effect of stock option exercises											21												21
Tax benefit from employee benefit plan														137									137
Balance, December 31, 2014		12,655,171			375,191			12,655			71,541			105,550			5,360			(6,744	)		188,362
Net income														16,471									16,471
Other comprehensive loss, net																	(2,832	)					(2,832	)
Cash dividends declared on common stock, $1.04 per share														(12,710	)								(12,710	)
Shares issued for dividend reinvestment Plan					(73,810	)					86									1,379			1,465
Treasury stock purchased					226,900															(4,415	)		(4,415	)
Shares issued from treasury and redeemed related to exercise of stock options					(22,435	)					(27	)								408			381
Restricted stock granted					(34,800	)					(627	)								627			0
Forfeiture of restricted stock					3,502						59									(59	)		0
Stock-based compensation expense											606												606
Tax effect of stock option exercises											(6	)											(6	)
Tax benefit from dividends on restricted stock											22												22
Tax benefit from employee benefit plan														143									143
Balance, December 31, 2015		12,655,171			474,548		$	12,655		$	71,654		$	109,454		$	2,528		$	(8,804	)	$	187,487

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)

	Years Ended December 31,
	2015			2014			2013
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,471		$	17,086		$	18,594
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		845			476			2,047
Realized gains on available-for-sale securities, net		(2,861	)		(1,104	)		(1,718	)
Loss on prepayment of debt		2,573			0			1,023
Realized (gain) loss on foreclosed assets		(84	)		(136	)		71
Loss (gain) on disposition of premises and equipment		1			(8	)		16
Depreciation expense		1,888			1,940			2,020
Accretion and amortization on securities, net		1,562			1,375			1,836
Accretion and amortization on loans and deposits, net		(21	)		(27	)		(32	)
Decrease (increase) in fair value of servicing rights		162			27			(67	)
Increase in cash surrender value of life insurance		(386	)		(376	)		(399	)
Gain on life insurance benefits		(212	)		0			0
Stock-based compensation		606			565			696
Amortization of core deposit intangibles		22			35			51
Deferred income taxes		79			1,254			1,839
Gains on sales of loans, net		(735	)		(768	)		(1,969	)
Origination of loans for sale		(21,823	)		(21,680	)		(58,427	)
Proceeds from sales of loans		22,101			22,317			62,436
(Increase) decrease in accrued interest receivable and other assets		(1,697	)		1,395			3,234
Increase (decrease) in accrued interest payable and other liabilities		1,195			(90	)		(679	)
Net Cash Provided by Operating Activities		19,686			22,281			30,572
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposit		1,780			2,560			480
Purchase of certificates of deposit		(100	)		(960	)		(1,688	)
Proceeds from sales of available-for-sale securities		44,504			56,269			25,500
Proceeds from calls and maturities of available-for-sale securities		89,159			78,101			97,123
Purchase of available-for-sale securities		(40,363	)		(158,894	)		(152,163	)
Redemption of Federal Home Loan Bank of Pittsburgh stock		5,029			2,804			2,680
Purchase of Federal Home Loan Bank of Pittsburgh stock		(8,102	)		(602	)		(1,624	)
Net (increase) decrease in loans		(77,129	)		10,317			39,059
Proceeds from bank-owned life insurance		1,953			0			0
Purchase of premises and equipment		(1,039	)		(801	)		(801	)
Proceeds from disposition of premises and equipment		0			43			42
Purchase of investment in limited liability company		0			0			(147	)
Return of principal on limited liability entity investments		181			173			164
Proceeds from sale of foreclosed assets		2,536			1,504			255
Net Cash Provided by (Used in) Investing Activities		18,409			(9,486	)		8,880
CASH FLOWS FROM FINANCING ACTIVITIES:
Net (decrease) increase in deposits		(32,374	)		13,473			(51,590	)
Net increase (decrease) in short-term borrowings		47,959			(17,848	)		17,818
Repayments of long-term borrowings		(36,866	)		(278	)		(11,497	)
Purchase of treasury stock		(4,415	)		(4,002	)		0
Sale of treasury stock		381			123			184
Tax benefit from compensation plans		159			157			124
Common dividends paid		(11,245	)		(11,392	)		(10,916	)
Net Cash Used in Financing Activities		(36,401	)		(19,767	)		(55,877	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		1,694			(6,972	)		(16,425	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		31,619			38,591			55,016
CASH AND CASH EQUIVALENTS, END OF YEAR	$	33,313		$	31,619		$	38,591
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through foreclosure of real estate loans	$	2,523		$	1,665		$	339
Accrued purchase of available-for-sale securities	$	0		$	226		$	0
Interest paid	$	4,636		$	5,138		$	5,782
Income taxes paid	$	4,827		$	4,432		$	4,213

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

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF CONSOLIDATION - The consolidated financial statements include the accounts of Citizens & Northern Corporation and its subsidiaries, Citizens & Northern Bank (“C&N Bank”), Bucktail Life Insurance Company and Citizens & Northern Investment Corporation (collectively, “Corporation”), as well as C&N Bank’s wholly-owned subsidiary, C&N Financial Services Corporation. All material intercompany balances and transactions have been eliminated in consolidation.

NATURE OF OPERATIONS - The Corporation is primarily engaged in providing a full range of banking and mortgage services to individual and corporate customers in North Central Pennsylvania and Southern New York State. Lending products include mortgage loans, commercial loans and consumer loans, as well as specialized instruments such as commercial letters-of-credit. Deposit products include various types of checking accounts, passbook and statement savings, money market accounts, interest checking accounts, Individual Retirement Accounts and certificates of deposit. The Corporation also offers non-insured “RepoSweep” accounts.

The Corporation provides Trust and Financial Management services, including administration of trusts and estates, retirement plans, and other employee benefit plans, and investment management services. The Corporation offers a variety of personal and commercial insurance products through C&N Financial Services Corporation. C&N Financial Services Corporation also offers mutual funds, annuities, educational savings accounts and other investment products through registered agents. Management has determined that the Corporation has one reportable segment, “Community Banking.” All of the Corporation’s activities are interrelated, and each activity is dependent and assessed based on how each of the activities of the Corporation supports the others.

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

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

Material estimates that are particularly susceptible to change include: (1) the allowance for loan losses, (2) fair values of debt securities based on estimates from independent valuation services or from brokers, (3) assessment of impaired securities to determine whether or not the securities are other-than-temporarily impaired, (4) valuation of deferred tax assets and (5) valuation of obligations from defined benefit plans.

INVESTMENT SECURITIES - Investment securities are accounted for as follows:

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

Other-than-temporary impairment - Declines in the fair value of available-for-sale securities that are deemed to be other-than-temporary are reflected in earnings as realized losses. In estimating other-than-temporary impairment losses, management considers (1) the length of time and the extent to which the fair value has been less than cost, (2) the financial condition and near-term prospects of the issuer, (3) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value, and (4) whether the Corporation intends to sell the security or if it is more likely than not that the Corporation will be required to sell the security before the recovery of its amortized cost basis. The credit-related impairment is recognized in earnings and is the difference between a security’s amortized cost basis and the present value of expected future cash flows discounted at the security’s effective interest rate. For debt securities classified as held-to-maturity, if any, the amount of noncredit-related impairment is recognized in other comprehensive income and accreted over the remaining life of the debt security as an increase in the carrying value of the security. In addition, the risk of future other-than-temporary impairment may be influenced by additional bank failures, prolonged recession in the U.S. economy, changes to real estate values, interest deferrals and whether the federal government provides assistance to financial institutions.

Restricted equity securities - Restricted equity securities consist primarily of Federal Home Loan Bank of Pittsburgh stock, and are carried at cost and evaluated for impairment. Holdings of restricted equity securities are included in Other Assets in the Consolidated Balance Sheet, and dividends received on restricted securities are included in Other Income in the Consolidated Statement of Income.

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

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

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

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

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

The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In addition, various regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses. Such agencies may require the Corporation to recognize adjustments to the allowance based on their judgments of information available to them at the time of their examination. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of December 31, 2015 and 2014, management determined that no allowance for credit losses related to unfunded loan commitments was required.

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

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

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

The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors. 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 57% at December 31, 2015) are 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.

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

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

Loans whose terms are modified are classified as troubled debt restructurings if the Corporation grants such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve reductions in required payments, an extension of a loan’s stated maturity date or a temporary reduction in interest rate. Non-accrual troubled debt restructurings may be restored to accrual status if principal and interest payments, under the modified terms, are current for six consecutive months after modification. Loans classified as troubled debt restructurings are designated as impaired.

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

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

INTEREST COSTS - The Corporation capitalizes interest as a component of the cost of premises and equipment constructed or acquired for its own use. The amount of capitalized interest in 2015, 2014, and 2013 was not significant.

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

GOODWILL AND CORE DEPOSIT INTANGIBLE ASSETS - Goodwill represents the excess of the cost of acquisitions over the fair value of the net assets acquired. Goodwill is tested at least annually for impairment, or more often if events or circumstances indicate there may be impairment. Core deposit intangibles are being amortized over periods of time that represent the expected lives using a method of amortization that reflects the pattern of economic benefit. Core deposit intangibles are subject to impairment testing whenever events or changes in circumstances indicate their carrying amounts may not be recoverable.

SERVICING RIGHTS - The estimated fair value of servicing rights related to mortgage loans sold and serviced by the Corporation is recorded as an asset upon the sale of such loans. The valuation of servicing rights is adjusted quarterly, with changes in fair value included in Other Operating Income in the consolidated statements of operations. Significant inputs to the valuation include expected net servicing income to be received, the expected life of the underlying loans and the discount rate. The servicing rights asset is included in Other Assets in the consolidated balance sheet, with a balance equal to fair value of $1,296,000 at December 31, 2015 and $1,281,000 at December 31, 2014.

INCOME TAXES - Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases given the provisions of the enacted tax laws. Deferred tax assets are reduced, if necessary, by the amount of such benefits that are not expected to be realized based upon available evidence. Tax benefits from investments in limited partnerships that have qualified for federal low-income tax credits are recognized as a reduction in the provision for income tax over the term of the investment using the effective yield method. The Corporation includes income tax penalties in the provision for income tax. The Corporation has no accrued interest related to unrecognized tax benefits.

STOCK COMPENSATION PLANS - The Corporation’s stock-based compensation policy applies to all forms of stock-based compensation including stock options and restricted stock units. All stock-based compensation is accounted for under the fair value method as required by generally accepted accounting principles in the United States. The expense associated with stock-based compensation is recognized over the vesting period of each individual arrangement.

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

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

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

TRUST ASSETS AND INCOME - Assets held by the Corporation in a fiduciary or agency capacity for its customers are not included in the financial statements since such items are not assets of the Corporation. Trust income is recorded on a cash basis, which is not materially different from the accrual basis.

2. RECENT ACCOUNTING PRONOUNCEMENTS:

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

In January 2014, the FASB issued ASU 2014-01, Accounting for Investments in Qualified Affordable Housing Projects. This Update provides guidance on accounting for investments in flow-through limited liability entities that qualify for the federal low-income housing tax credit. Prior to ASU 2014-01, under U.S. GAAP, a reporting entity that invests in a qualified affordable housing project could elect to account for that investment using the effective yield method if certain conditions are met, or alternatively, the investment would be accounted for under either the equity method or the cost method. Generally, investors in qualified affordable housing project investments expect to receive all of their return through the receipt of tax credits and tax deductions from operating losses, and use of the effective yield method results in recognition of the return as a reduction of income tax expense over the period of the investment. The amendments in this Update modify the conditions that a reporting entity must meet to be eligible to use a method other than the equity or cost methods to account for investments in qualified affordable housing projects. Additionally, the amendments introduce new recurring disclosure requirements about investments in qualified affordable housing projects. The amendments in this Update became effective for the Corporation for annual and interim periods beginning in the first quarter 2015, and are to be applied retrospectively. Information concerning the Corporation’s investments in qualified affordable housing projects is provided in Note 14 to these consolidated financial statements.

In January 2014, the FASB issued ASU 2014-04, Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure. The objective of the amendments in this Update is to reduce diversity among reporting entities by clarifying when an in substance foreclosure occurs. The amendments in this Update clarify that an in substance foreclosure occurs, and a creditor is considered to have received physical possession of residential real property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Additionally, the amendments require interim and annual disclosure of both (1) the amount of foreclosed residential real estate property held by the creditor and (2) the recorded investment in consumer mortgage loans collateralized by residential real estate property that are in the process of foreclosure according to the requirements of the applicable jurisdiction. An entity can elect to adopt the amendments in this Update using either a modified retrospective transition method or a prospective transition method. Under the modified retrospective transition method, an entity would record a cumulative-effect adjustment to residential consumer mortgage loans and foreclosed residential real estate properties existing as of the beginning of the annual period for which the amendments are effective. For prospective transition, an entity would apply the amendments to all instances of an entity receiving physical possession of residential real estate property collateralizing consumer mortgage loans that occur after the date of adoption. Early adoption is permitted. The amendments in this Update became effective for the Corporation for annual and interim periods beginning in the first quarter 2015. The Corporation has applied the amendments to its accounting and reporting practices prospectively in the first quarter 2015. Disclosures required by this Update are provided in Note 8 to these consolidated financial statements.

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 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.

In June 2014, the FASB issued ASU 2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings, and Disclosures. In addition to various other amendments that will affect accounting and disclosures for transactions in which the Corporation has not engaged to date, this Update requires expanded disclosures for repurchase agreements that are accounted for as secured borrowings, including: (1) a disaggregation of the gross obligation by the class of collateral pledged, (2) the remaining contractual tenor of the agreements and (3) a discussion of the potential risks associated with the agreements and the related collateral pledged, including obligations arising from a decline in the fair value of the collateral pledged and how those risks are managed. The expanded disclosure requirements associated with repurchase agreements are effective for the Corporation for annual and interim periods beginning in the second quarter 2015. Information concerning the Corporation’s repurchase agreements is provided in Note 12 to these consolidated financial statements.

In August 2014, the FASB issued ASU 2014-14, Receivables – Troubled Debt Restructuring by Creditors, which requires that a mortgage loan be derecognized and that a separate other receivable be recognized upon foreclosure if the following conditions are met: (1) the loan has a government guarantee that is not separable from the loan before foreclosure, (2) at the time of foreclosure, the creditor has the intent to convey the real estate property to the guarantor and make a claim on the guarantee, and the creditor has the ability to recover under the claim and (3) at the time of foreclosure, any amount of the claim that is determined on the basis of the fair value of the real estate is fixed. The amendments in this Update became effective for the Corporation for annual and interim periods beginning in the first quarter 2015, and the impact of the amendment was not significant to the Corporation.

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 December 31, 2015 and 2014, 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.

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