Edgar Filing: CITIZENS & NORTHERN CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2016

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

For the transition period from _______________ to _________________________.

Commission file number: 000-16084

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

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

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

570-724-3411

(Registrant's telephone number including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨ Accelerated 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

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

Common Stock ($1.00 par value)

12,068,583 Shares Outstanding on August 1, 2016

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index

Part I. Financial Information

Item 1. Financial Statements

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

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

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

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

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

Notes to Unaudited Consolidated Financial Statements	Pages 8 – 39

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	Pages 40 – 58

Item 3. Quantitative and Qualitative Disclosures About Market Risk	Pages 59 – 61

Item 4. Controls and Procedures	Page 61

Part II. Other Information	Pages 62 – 63

Signatures	Page 64

Exhibit 10.1. Restricted Stock Agreement

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

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

Exhibit 32. Section 1350 Certifications

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

LIABILITIES
Deposits:
Noninterest-bearing	$	215,004		$	211,041
Interest-bearing		752,947			724,574
Total deposits		967,951			935,615
Short-term borrowings		25,702			53,496
Long-term borrowings		38,615			38,767
Accrued interest and other liabilities		8,220			8,052
TOTAL LIABILITIES		1,040,488			1,035,930

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income	3 Months Ended						6 Months Ended
(In Thousands Except Per Share Data) (Unaudited)	June 30,			June 30,			June 30,			June 30,
	2016			2015			2016			2015
INTEREST INCOME
Interest and fees on loans	$	8,086		$	7,753		$	16,060		$	15,462
Interest on balances with depository institutions		36			25			60			51
Interest on loans to political subdivisions		452			391			900			740
Interest on mortgages held for sale		8			3			14			5
Income from available-for-sale securities:
Taxable		1,490			1,934			3,045			3,908
Tax-exempt		847			1,013			1,743			2,029
Dividends		5			67			39			154
Total interest and dividend income		10,924			11,186			21,861			22,349
INTEREST EXPENSE
Interest on deposits		522			479			1,001			965
Interest on short-term borrowings		41			5			103			6
Interest on long-term borrowings		362			692			725			1,418
Total interest expense		925			1,176			1,829			2,389
Net interest income		9,999			10,010			20,032			19,960
Provision for loan losses		318			221			686			224
Net interest income after provision for loan losses		9,681			9,789			19,346			19,736
OTHER INCOME
Service charges on deposit accounts		1,164			1,305			2,302			2,327
Service charges and fees		123			123			217			236
Trust and financial management revenue		1,251			1,241			2,395			2,355
Brokerage revenue		180			206			353			425
Insurance commissions, fees and premiums		27			23			48			63
Interchange revenue from debit card transactions		487			500			950			974
Net gains from sale of loans		295			183			463			330
Decrease in fair value of servicing rights		(108	)		(33	)		(179	)		(150	)
Increase in cash surrender value of life insurance		93			102			189			199
Other operating income		394			312			858			759
Sub-total		3,906			3,962			7,596			7,518
Realized gains on available-for-sale securities, net		122			932			505			1,006
Total other income		4,028			4,894			8,101			8,524
OTHER EXPENSES
Salaries and wages		3,913			3,603			7,800			7,090
Pensions and other employee benefits		1,002			935			2,439			2,320
Occupancy expense, net		560			640			1,169			1,362
Furniture and equipment expense		439			467			866			921
FDIC Assessments		155			148			297			299
Pennsylvania shares tax		323			317			645			635
Professional fees		282			140			571			296
Automated teller machine and interchange expense		267			255			516			501
Software subscriptions		251			211			492			408
Loss on prepayment of debt		0			910			0			910
Other operating expense		1,343			1,248			2,812			2,665
Total other expenses		8,535			8,874			17,607			17,407
Income before income tax provision		5,174			5,809			9,840			10,853
Income tax provision		1,303			1,452			2,396			2,681
NET INCOME	$	3,871		$	4,357		$	7,444		$	8,172
NET INCOME PER SHARE - BASIC	$	0.32		$	0.36		$	0.61		$	0.67
NET INCOME PER SHARE - DILUTED	$	0.32		$	0.36		$	0.61		$	0.67

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income	3 Months Ended						Six Months Ended
(In Thousands)	June 30,						June 30,
	2016			2015			2016			2015
Net income	$	3,871		$	4,357		$	7,444		$	8,172

Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) on available-for-sale securities		2,431			(4,572	)		7,205			(847	)
Reclassification adjustment for gains realized in income		(122	)		(932	)		(505	)		(1,006	)
Other comprehensive gain (loss) on available-for-sale securities		2,309			(5,504	)		6,700			(1,853	)

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

Other comprehensive income (loss) before income tax		2,304			(5,509	)		6,716			(1,961	)
Income tax related to other comprehensive income (loss)		(806	)		1,929			(2,350	)		687

Net other comprehensive income (loss)		1,498			(3,580	)		4,366			(1,274	)

Comprehensive income	$	5,369		$	777		$	11,810		$	6,898

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS	6 Months Ended
(In Thousands) (Unaudited)	June 30,			June 30,
	2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	7,444		$	8,172
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		686			224
Realized gains on available-for-sale securities, net		(505	)		(1,006	)
Loss on prepayment of debt		0			910
Realized loss (gain) on foreclosed assets		67			(61	)
Depreciation expense		787			958
Accretion and amortization on securities, net		660			791
Accretion and amortization on loans and deposits, net		(8	)		(10	)
Decrease in fair value of servicing rights		179			150
Increase in cash surrender value of life insurance		(189	)		(199	)
Stock-based compensation		325			307
Amortization of core deposit intangibles		6			11
Deferred income taxes		340			424
Gains on sales of loans, net		(463	)		(330	)
Origination of loans for sale		(12,698	)		(10,029	)
Proceeds from sales of loans		12,953			10,089
Increase in accrued interest receivable and other assets		(708	)		(1,225	)
(Decrease) increase in accrued interest payable and other liabilities		(296	)		681
Net Cash Provided by Operating Activities		8,580			9,857
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposit		100			0
Purchase of certificates of deposit		(340	)		0
Proceeds from sales of available-for-sale securities		19,387			11,255
Proceeds from calls and maturities of available-for-sale securities		37,009			41,777
Purchase of available-for-sale securities		(46,766	)		(35,200	)
Redemption of Federal Home Loan Bank of Pittsburgh stock		2,642			2,042
Purchase of Federal Home Loan Bank of Pittsburgh stock		(1,600	)		(2,960	)
Net increase in loans		(24,751	)		(34,153	)
Proceeds from bank owned life insurance		1,442			1,442
Purchase of premises and equipment		(720	)		(539	)
Return of principal on limited liability entity investments		82			99
Proceeds from sale of foreclosed assets		292			657
Net Cash Used in Investing Activities		(13,223	)		(15,580	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		32,336			10,460
Net (decrease) increase in short-term borrowings		(27,794	)		14,269
Repayments of long-term borrowings		(152	)		(11,054	)
Purchase of treasury stock		(3,723	)		(3,415	)
Sale of treasury stock		100			378
Tax benefit from compensation plans		88			78
Common dividends paid		(5,557	)		(5,635	)
Net Cash (Used in) Provided by Financing Activities		(4,702	)		5,081
DECREASE IN CASH AND CASH EQUIVALENTS		(9,345	)		(642	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		33,313			31,619
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	23,968		$	30,977

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Accrued purchase of certificates of deposit	$	480		$	0
Assets acquired through foreclosure of real estate loans	$	1,151		$	630
Interest paid	$	1,826		$	2,404
Income taxes paid	$	1,485		$	1,645

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION

The consolidated financial information included herein, with the exception of the consolidated balance sheet dated December 31, 2015, is unaudited. Such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’ equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for a complete set of financial statements. Certain 2015 information has been reclassified for consistency with the 2016 presentation.

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

2. PER SHARE DATA

Net income per share is based on the weighted-average number of shares of common stock outstanding. The following data show the amounts used in computing basic and diluted net income per share. As shown in the table that follows, diluted earnings per share is computed using weighted average common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation's common stock during the period.

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

Six Months Ended June 30, 2015
Earnings per share – basic	$	8,172,000		12,233,964		$	0.67
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options				218,115
Hypothetical share repurchase at $19.97				(196,407	)
Earnings per share – diluted	$	8,172,000		12,255,672		$	0.67

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

Three Months Ended June 30, 2015
Earnings per share – basic	$	4,357,000		12,199,996		$	0.36
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options				205,024
Hypothetical share repurchase at $20.15				(182,494	)
Earnings per share – diluted	$	4,357,000		12,222,526		$	0.36

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

3. COMPREHENSIVE INCOME

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

(In Thousands)	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
Six Months Ended June 30, 2016
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities	$	7,205		$	(2,521	)	$	4,684
Reclassification adjustment for (gains) realized in income		(505	)		177			(328	)
Other comprehensive income on available-for-sale securities		6,700			(2,344	)		4,356

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

Total other comprehensive income	$	6,716		$	(2,350	)	$	4,366

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

Total other comprehensive loss	$	(1,961	)	$	687	$	(1,274	)

(In Thousands)	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
Three Months Ended June 30, 2016
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities	$	2,431		$	(850	)	$	1,581
Reclassification adjustment for (gains) realized in income		(122	)		43			(79	)
Other comprehensive income on available-for-sale securities		2,309			(807	)		1,502

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

Total other comprehensive income	$	2,304		$	(806	)	$	1,498

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

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

Total other comprehensive loss	$	(5,509	)	$	1,929	$	(3,580	)

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

Six Months Ended June 30, 2015
Balance, beginning of period	$	5,281		$	79		$	5,360
Other comprehensive loss before reclassifications		(550	)		(65	)		(615	)
Amounts reclassified from accumulated other comprehensive income		(654	)		(5	)		(659	)
Other comprehensive loss		(1,204	)		(70	)		(1,274	)
Balance, end of period	$	4,077		$	9		$	4,086

Three Months Ended June 30, 2016
Balance, beginning of period	$	5,347		$	49		$	5,396
Other comprehensive income before reclassifications		1,581			0			1,581
Amounts reclassified from accumulated other comprehensive income		(79	)		(4	)		(83	)
Other comprehensive income		1,502			(4	)		1,498
Balance, end of period	$	6,849		$	45		$	6,894

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

4. CASH AND DUE FROM BANKS

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

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

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

The Corporation is required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were $12,532,000 at June 30, 2016 and $15,327,000 at December 31, 2015.

5. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At June 30, 2016 and December 31, 2015, assets measured at fair value and the valuation methods used are as follows:

			June 30, 2016
	Quoted Prices		Other
	in Active		Observable		Unobservable			Total
	Markets		Inputs		Inputs			Fair
(In Thousands)	(Level 1)		(Level 2)		(Level 3)			Value

Recurring fair value measurements
AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$	0	$	9,781	$	0		$	9,781
Obligations of states and political subdivisions:
Tax-exempt		0		116,056		0			116,056
Taxable		0		35,132		0			35,132
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		65,407		0			65,407
Residential collateralized mortgage obligations		0		177,980		0			177,980
Commercial mortgage-backed securities		0		11,239		0			11,239
Collateralized debt obligations		0		1		0			1
Total debt securities		0		415,596		0			415,596
Marketable equity securities		1,609		0		0			1,609
Total available-for-sale securities		1,609		415,596		0			417,205
Servicing rights		0		0		1,224			1,224
Total recurring fair value measurements	$	1,609	$	415,596	$	1,224		$	418,429

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

			December 31, 2015
	Quoted Prices		Other
	in Active		Observable		Unobservable			Total
	Markets		Inputs		Inputs			Fair
(In Thousands)	(Level 1)		(Level 2)		(Level 3)			Value

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

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

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

(In Thousands)	Three Months Ended						Six Months Ended
	June 30, 2016			June 30, 2015			June 30, 2016			June 30, 2015
Servicing rights balance, beginning of period	$	1,261		$	1,195		$	1,296		$	1,281
Issuances of servicing rights		71			47			107			78
Unrealized losses included in earnings		(108	)		(33	)		(179	)		(150	)
Servicing rights balance, end of period	$	1,224		$	1,209		$	1,224		$	1,209

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

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

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

Impaired loans:
Commercial:
Commercial loans secured by real estate	$	413	$	125	$	288	Sales comparison	Discount to appraised value		44	%
Commercial and industrial		354		77		277	Sales comparison	Discount to appraised value		54	%
Loans secured by farmland		508		51		457	Sales comparison	Discount to appraised value		55	%
Total impaired loans	$	1,275	$	253	$	1,022
Foreclosed assets held for sale - real estate:
Residential (1-4 family)	$	1,005	$	0	$	1,005	Sales comparison	Discount to appraised value		34	%
Land		1,047		0		1,047	Sales comparison	Discount to appraised value		39	%
Total foreclosed assets held for sale	$	2,052	$	0	$	2,052

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

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

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

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

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

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

DEPOSITS - The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and interest checking accounts, is (by definition) equal to the amount payable on demand at June 30, 2016 and December 31, 2015. The fair value of time deposits, such as certificates of deposit and Individual Retirement Accounts, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered

for deposits of similar remaining maturities. The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

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

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

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

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

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

Financial liabilities:
Deposits with no stated maturity	Level 2		737,817		737,817		713,931		713,931
Time deposits	Level 2		230,134		230,555		221,684		221,891
Short-term borrowings	Level 2		25,702		25,615		53,496		53,398
Long-term borrowings	Level 2		38,615		40,017		38,767		40,166
Accrued interest payable	Level 2		73		73		70		70

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

6. SECURITIES

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

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

Obligations of U.S. Government agencies	$	9,664	$	117	$	0		$	9,781
Obligations of states and political subdivisions:
Tax-exempt		110,702		5,374		(20	)		116,056
Taxable		34,015		1,117		0			35,132
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		64,108		1,299		0			65,407
Residential collateralized mortgage obligations		175,889		2,354		(263	)		177,980
Commercial mortgage-backed securities		11,120		119		0			11,239
Collateralized debt obligations		1		0		0			1
Total debt securities		405,499		10,380		(283	)		415,596
Marketable equity securities		1,171		438		0			1,609
Total	$	406,670	$	10,818	$	(283	)	$	417,205

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

Obligations of states and political subdivisions, Tax-exempt	$	2,875	$	(6	)	$	1,002	$	(14	)	$	3,877	$	(20	)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies,
Residential collateralized mortgage obligations		2,773		(73	)		25,995		(190	)		28,768		(263	)
Total temporarily impaired available-for-sale securities	$	5,648	$	(79	)	$	26,997	$	(204	)	$	32,645	$	(283	)

December 31, 2015	Less Than 12 Months					12 Months or More					Total
(In Thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses

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

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

(In Thousands)	3 Months Ended					6 Months Ended
	June 30,			June 30,		June 30,			June 30,
	2016			2015		2016			2015
Gross realized gains from sales	$	123		$	932	$	506		$	1,006
Gross realized losses from sales		(1	)		0		(1	)		0
Net realized gains	$	122		$	932	$	505		$	1,006

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of June 30, 2016. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
(In Thousands)	Cost		Value

Due in one year or less	$	11,792	$	11,899
Due from one year through five years		73,657		76,144
Due from five years through ten years		44,270		46,349
Due after ten years		24,663		26,578
Sub-total		154,382		160,970
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		64,108		65,407
Residential collateralized mortgage obligations		175,889		177,980
Commercial mortgage-backed securities		11,120		11,239
Total	$	405,499	$	415,596

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

Investment securities carried at $203,791,000 at June 30, 2016 and $228,616,000 at December 31, 2015 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 8 for information concerning securities pledged to secure borrowing arrangements.

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

A summary of information management considered in evaluating debt and equity securities for OTTI at June 30, 2016 is provided below.

Debt Securities

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

Equity Securities

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

The Corporation realized gains from sales of bank stocks totaling $28,000 in the three-month period ended June 30, 2016 and $277,000 during the first six months of 2016. Realized gains from sales of bank stocks totaled $476,000 in the three-month and six-month periods ended June 30, 2015.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheet, was $3,485,000 at June 30, 2016 and $4,527,000 at December 31, 2015. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at June 30, 2016 and December 31, 2015. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

7. LOANS

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

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

Three Months Ended June 30, 2015	March 31,										June 30,
(In Thousands)	2015 Balance		Charge-offs			Recoveries		Provision (Credit)			2015 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	2,774	$	(58	)	$	0	$	59		$	2,775
Residential mortgage loans - junior liens		200		0			0		10			210
Home equity lines of credit		322		0			0		22			344
1-4 Family residential construction		207		0			0		50			257
Total residential mortgage		3,503		(58	)		0		141			3,586
Commercial:
Commercial loans secured by real estate		1,736		0			0		(44	)		1,692
Commercial and industrial		684		0			3		113			800
Commercial construction and land		286		0			0		10			296
Loans secured by farmland		159		0			0		(4	)		155
Multi-family (5 or more) residential		81		0			0		(1	)		80
Agricultural loans		29		0			0		11			40
Other commercial loans		123		0			0		(3	)		120
Total commercial		3,098		0			3		82			3,183
Consumer		139		(19	)		19		(4	)		135
Unallocated		394		0			0		2			396
Total Allowance for Loan Losses	$	7,134	$	(77	)	$	22	$	221		$	7,300

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

Six Months Ended June 30, 2015	Dec. 31,										June 30,
(In Thousands)	2014 Balance		Charge-offs			Recoveries		Provision (Credit)			2015 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	2,941	$	(137	)	$	1	$	(30	)	$	2,775
Residential mortgage loans - junior liens		176		0			0		34			210
Home equity lines of credit		322		0			0		22			344
1-4 Family residential construction		214		0			0		43			257
Total residential mortgage		3,653		(137	)		1		69			3,586
Commercial:
Commercial loans secured by real estate		1,758		(115	)		0		49			1,692
Commercial and industrial		688		(10	)		4		118			800
Commercial construction and land		283		0			0		13			296
Loans secured by farmland		165		0			0		(10	)		155
Multi-family (5 or more) residential		87		0			0		(7	)		80
Agricultural loans		31		0			0		9			40
Other commercial loans		131		0			0		(11	)		120
Total commercial		3,143		(125	)		4		161			3,183
Consumer		145		(37	)		34		(7	)		135
Unallocated		395		0			0		1			396
Total Allowance for Loan Losses	$	7,336	$	(299	)	$	39	$	224		$	7,300

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

June 30, 2016
(In Thousands)			Special
	Pass		Mention		Substandard		Doubtful		Total
Residential Mortgage:
Residential mortgage loans - first liens	$	304,713	$	562	$	9,852	$	64	$	315,191
Residential mortgage loans - junior liens		21,591		154		414		0		22,159
Home equity lines of credit		38,030		423		601		0		39,054
1-4 Family residential construction		22,225		16		0		0		22,241
Total residential mortgage		386,559		1,155		10,867		64		398,645
Commercial:
Commercial loans secured by real estate		135,738		5,941		11,391		0		153,070
Commercial and Industrial		77,197		3,509		1,558		126		82,390
Political subdivisions		41,026		0		0		0		41,026
Commercial construction and land		9,096		60		37		0		9,193
Loans secured by farmland		4,911		169		1,517		18		6,615
Multi-family (5 or more) residential		7,538		0		635		0		8,173
Agricultural loans		3,862		817		13		0		4,692
Other commercial loans		11,828		0		76		0		11,904
Total commercial		291,196		10,496		15,227		144		317,063
Consumer		11,922		1		211		0		12,134
Totals	$	689,677	$	11,652	$	26,305	$	208	$	727,842

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

June 30, 2016	Loans:						Allowance for Loan Losses:
(In Thousands)
	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens	$	824	$	314,367	$	315,191	$	0	$	2,830	$	2,830
Residential mortgage loans - junior liens		71		22,088		22,159		0		239		239
Home equity lines of credit		0		39,054		39,054		0		359		359
1-4 Family residential construction		0		22,241		22,241		0		222		222
Total residential mortgage		895		397,750		398,645		0		3,650		3,650
Commercial:
Commercial loans secured by real estate		5,856		147,214		153,070		125		1,958		2,083
Commercial and industrial		766		81,624		82,390		77		961		1,038
Political subdivisions		0		41,026		41,026		0		0		0
Commercial construction and land		0		9,193		9,193		0		105		105
Loans secured by farmland		1,408		5,207		6,615		51		52		103
Multi-family (5 or more) residential		392		7,781		8,173		0		248		248
Agricultural loans		13		4,679		4,692		0		47		47
Other commercial loans		0		11,904		11,904		0		119		119
Total commercial		8,435		308,628		317,063		253		3,490		3,743
Consumer		0		12,134		12,134		0		138		138
Unallocated												398

Total	$	9,330	$	718,512	$	727,842	$	253	$	7,278	$	7,929

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

									Interest Income Recognized on
	Average Investment in Impaired Loans								Impaired Loans on a Cash Basis
(In Thousands)	3 Months Ended				6 Months Ended				3 Months Ended				6 Months Ended
	June 30,				June 30,				June 30,				June 30,
	2016		2015		2016		2015		2016		2015		2016		2015
Residential mortgage:
Residential mortgage loans - first lien	$	833	$	3,701	$	847	$	3,819	$	12	$	20	$	22	$	58
Residential mortgage loans - junior lien		71		66		72		57		1		1		2		2
Total residential mortgage		904		3,767		919		3,876		13		21		24		60
Commercial:
Commercial loans secured by real estate		5,892		6,286		6,026		6,437		81		90		191		203
Commercial and industrial		754		423		661		513		7		5		10		12
Commercial construction and land		0		41		0		58		0		0		0		0
Loans secured by farmland		1,413		1,447		1,418		1,468		17		26		38		52
Multi-family (5 or more) residential		490		0		590		0		0		0		0		0
Agricultural loans		15		46		15		23		0		2		1		2
Total commercial		8,564		8,243		8,710		8,499		105		123		240		269
Consumer		18		0		15		0		0		0		0		0
Total	$	9,486	$	12,010	$	9,644	$	12,375	$	118	$	144	$	264	$	329

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

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

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

Totals	$	4,654	$	10,504	$	3,229	$	11,517

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The amounts shown in the table immediately above include loans classified as troubled debt restructurings (described in more detail below), if such loans are past due ninety days or more or nonaccrual.

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

	As of June 30, 2016								As of December 31, 2015
	Current &								Current &
(In Thousands)	Past Due		Past Due		Past Due				Past Due		Past Due		Past Due
	Less than		30-89		90+				Less than		30-89		90+
	30 Days		Days		Days		Total		30 Days		Days		Days		Total
Residential mortgage:
Residential mortgage loans - first liens	$	306,697	$	3,852	$	4,642	$	315,191	$	294,703	$	6,156	$	3,924	$	304,783
Residential mortgage loans - junior liens		21,826		289		44		22,159		20,816		251		79		21,146
Home equity lines of credit		38,527		242		285		39,054		38,581		329		130		39,040
1-4 Family residential construction		22,241		0		0		22,241		21,121		0		0		21,121
Total residential mortgage		389,291		4,383		4,971		398,645		375,221		6,736		4,133		386,090

Commercial:
Commercial loans secured by real estate		149,599		2,762		709		153,070		153,427		108		1,244		154,779
Commercial and industrial		81,927		139		324		82,390		75,002		118		76		75,196
Political subdivisions		41,026		0		0		41,026		40,007		0		0		40,007
Commercial construction and land		9,193		0		0		9,193		5,018		104		0		5,122
Loans secured by farmland		5,413		284		918		6,615		5,970		223		826		7,019
Multi-family (5 or more) residential		7,713		68		392		8,173		8,201		0		987		9,188
Agricultural loans		4,560		43		89		4,692		4,642		13		16		4,671
Other commercial loans		11,904		0		0		11,904		12,152		0		0		12,152
Total commercial		311,335		3,296		2,432		317,063		304,419		566		3,149		308,134
Consumer		11,979		81		74		12,134		10,537		48		71		10,656

Totals	$	712,605	$	7,760	$	7,477	$	727,842	$	690,177	$	7,350	$	7,353	$	704,880

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

	Current &
(In Thousands)	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Total
June 30, 2016 Nonaccrual Totals	$	6,866	$	815	$	2,823	$	10,504
December 31, 2015 Nonaccrual Totals	$	7,100	$	293	$	4,124	$	11,517

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

	Current &
(In Thousands)	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Nonaccrual		Total
June 30, 2016 Totals	$	989	$	58	$	81	$	5,021	$	6,149
December 31, 2015 Totals	$	1,186	$	0	$	81	$	5,097	$	6,364

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

Three Months Ended June 30, 2016

Pre-

Post-

(Balances in Thousands)

Modification

Number

Outstanding

Recorded

Contracts

Investment

Commercial,

Commercial and industrial

102

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

The TDR in the three-month period ended June 30, 2016 resulted from an extension of a final maturity date and a lowered interest rate. There was a $30,000 allowance for loan losses on this loan at June 30, 2016 as compared to no allowance for loan losses on the loan prior to the second quarter 2016.

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

Six Months Ended June 30, 2016

Pre-

Post-

(Balances in Thousands)

Modification

Number

Outstanding

Recorded

Contracts

Investment

Commercial,

Commercial and industrial

107

Six Months Ended June 30, 2015

Pre-

Post-

(Balances in Thousands)

Modification

Number

Outstanding

Recorded

Contracts

Investment

Residential mortgage:

Residential mortgage loans - first liens

Residential mortgage loans - junior liens

Consumer

The TDRs in the six-month period ended June 30, 2016 included an extension of a final maturity date and a lowered interest rate on one contract and an extension of a final maturity date on one contract. There was a $30,000 allowance for loan losses on the commercial and industrial loan that included an extension of a final maturity date and a lowered interest rate at June 30, 2016 as compared to no allowance for loan losses on the loan at December 31, 2015. There was no allowance for loan losses at June 30, 2016 on the other commercial and industrial loan (TDR), and no change in the allowance for loan losses resulting from that TDR in the six-month period ended June 30, 2016.

The TDRs in the six-month period ended June 30, 2015 included an extended maturity date and a reduction in interest rate on a residential mortgage – first lien, a lowered interest rate and reduced payment amount on a residential mortgage – junior lien and a lowered interest rate and reduced payment amount on the consumer loan. There was no allowance for loan losses on these loans at June 30, 2015, and no change in the allowance for loan losses resulting from these TDRs.

In the three-month period ended June 30, 2016, defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months were as follows:

	Number
	of		Recorded
	Contracts		Investment
Three Months Ended June 30, 2016
(Balances in Thousands)
Residential mortgage:
Residential mortgage loans - first liens		1	$	242
Residential mortgage loans - junior liens		1		30
Consumer		1		28

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

There were no defaults on loans for which modification considered to be TDRs were entered into within the previous 12 months in the three-month period ended June 30, 2015.

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

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

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

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

In the six-month period ended June 30, 2016, the events of default in the table listed above resulted from the borrowers’ failure to make timely payments under the following circumstances: (1) for one customer relationship included in the Residential first lien mortgage class, timely payment was missed after payment amounts were reduced for six months; (2) for the other customer relationship in the Residential first lien mortgage class, payment was missed after the monthly payment amount was reduced for six months; (3) for the customer relationships in the Residential junior lien mortgage class and the consumer class, timely payments were missed after interest rates and payment amounts were reduced on both loans; and (4) for the Commercial and industrial loan, the borrower failed to pay off the loan at the extended maturity date.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

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

8. BORROWED FUNDS

Short-term borrowings include the following:

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

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

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

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

At June 30, 2016, short-term borrowings from the FHLB-Pittsburgh include 6 advances of approximately $2,090,000 each, maturing monthly throughout the remainder of the year ending December 31, 2016, with a weighted average interest rate of 0.99% and rates ranging from 0.92% to 1.052%. In the first six months 2016, the Corporation repaid six advances of approximately $2,090,000 each, with a weighted average rate of 0.72%.

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average interest rate paid by the Corporation on customer repurchase agreements was 0.10% at June 30, 2016 and December 31, 2015. The carrying value of the underlying securities was $17,218,000 at June 30, 2016 and $12,613,000 at December 31, 2015.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Long-term borrowings are as follows:

(In Thousands)	June 30,		Dec. 31,
	2016		2015
FHLB-Pittsburgh borrowings	$	11,615	$	11,767
Repurchase agreement		27,000		27,000
Total long-term borrowings	$	38,615	$	38,767

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

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