UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

(Mark One)

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

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

For the fiscal year endedDecember 31, ~~2014~~2017

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

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

For the transition period from ~~_______________~~_____________ to ~~_________________________.~~_____________.

Commission file number: 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~~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~~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¨Nox

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¨Nox

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. Yesx 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). YesxNo¨

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~~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.¨x

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, ~~or a~~ smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer, ~~“and~~” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

(Check ~~one:)~~one): Large accelerated filer¨ Accelerated filerx Non-accelerated filer¨ Smaller reporting company¨ Emerging growth company¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.¨

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

Yes¨ Nox

The aggregate market value of the ~~registrant's~~registrant’s common stock held by non-affiliates at June 30, ~~2014,~~2017, the registrant’s most recently completed second fiscal quarter, was ~~$236,364,605.~~$274,571,344.

The number of shares of common stock outstanding at February ~~20, 2015~~8, 2018 was ~~12,263,027~~12,246,834.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant’s proxy statement for the annual meeting of its shareholders to be held April ~~23, 2015~~19, 2018 are incorporated by reference into Parts III and IV of this report.

TABLE OF CONTENTS

	Page(s)
Part I:
Item 1. Business	3-4
Item 1A. Risk Factors	4-7
Item 1B. Unresolved Staff Comments	7
Item 2. Properties	7
Item 3. Legal Proceedings	8
Item 4. Mine Safety Disclosure	8

Part II.
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	8-10
Item 6. Selected Financial Data	11-12
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations	13-38
Item 7A. Quantitative and Qualitative Disclosures About Market Risk	38-40
Item 8. Financial Statements and Supplementary Data	41-87
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	88
Item 9A. Controls and Procedures	88
Item 9B. Other Information	89

Part III:
Item 10. Directors, Executive Officers and Corporate Governance	89
Item 11. Executive Compensation	89
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	89
Item 13. Certain Relationships and Related Transactions, and Director Independence	89
Item 14. Principal Accountant Fees and Services	89

Part IV:
Item 15. Exhibits and Financial Statement Schedules	90-93
Signatures	94

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.

In December 2017, C&N Bank established a new entity, Northern Tier Holding LLC, for the purpose of acquiring, holding and disposing of real property acquired by the Bank. C&N Bank is the sole member of Northern Tier Holding LLC, which had no transactions in 2017.

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~~Chemung 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 ~~2010, repurchased preferred stock of $26.440 million and redeemed a warrant from the TARP Capital Purchase Program;~~

~~merged the operations of First State Bank into C&N Bank and Canisteo Valley Corporation into Citizens & Northern Corporation in 2010;~~

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 ongoing increases in revenues from service charges on deposit accounts, starting primarily in the fourth quarter 2013, and ongoing reductions in electronic funds processing ~~expenses and other benefits over approximately the next five years; and~~expenses;

in 2014, approved a ~~new~~ treasury stock repurchase ~~program. Under the new~~ program ~~the Corporation is authorized to~~for repurchase of up to 622,500 shares of the Corporation’s common stock, or approximately 5% of the Corporation’s outstanding shares at July 16, 2014. In ~~2014, 208,300~~total, 622,500 shares ~~had~~were repurchased for a total cost of $12,140,000, at an average price of $19.50 per share;

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 additional lending personnel to provide more access to commercial and mortgage lending opportunities;

in 2016, approved a new treasury stock repurchase program authorizing repurchase of up to 600,000 shares of the Corporation’s common stock. Through December 31, 2017, there have been ~~repurchased.~~no repurchases of shares under this program; and

in March 2017, opened a loan production office in Elmira, New York.

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 ~~have been~~were significantly affected by an upsurge in natural gas exploration, as technological developments ~~have~~ 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 and this activity continues to have~~area. Through December 31, 2017, the Corporation has not experienced significant credit issues as a ~~significant impact on economic opportunities throughout the area. Over approximately the past five years, a significant portion~~result of the ~~Corporation’s new business opportunities~~expansion and subsequent reduction in ~~lending, Trust and other services arose either directly or indirectly from~~ Marcellus Shale-related activity. Due to its pervasive nature, it is virtually impossible to quantify the aggregate impact of Marcellus Shale-related activity on the Corporation’s financial position at December 31, 2014 and results of operations.

At December 31, ~~2014,~~2017, C&N Bank had total assets of ~~$1,228,210,000,~~$1,262,642,000, total deposits of ~~$978,232,000,~~$1,016,035,000, net loans outstanding of ~~$623,209,000~~$806,857,000 and ~~278full-time~~296 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~~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~~“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~~Chemung 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. As described in the “Business” section of Form 10-K, in recent years the Corporation’s market area has been significantly impacted by natural gas development activities associated with exploration of the Marcellus Shale. While Marcellus Shale-related development has created economic opportunities for business and individuals throughout much of our market area, natural gas exploration activity has slowed somewhat from the level in 2009 through 2011, and the possibility exists that this activity could be further reduced or cease as a result of changes in economic conditions, environmental concerns or other factors. Deterioration in economic conditions ~~including possible effects if Marcellus Shale-related activity were to further diminish or cease,~~ could adversely affect the quality of the ~~Corporation's~~Corporation’s loan portfolio and the demand for its products and services, and accordingly, could have a material adverse effect on the ~~Corporation's~~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~~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~~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~~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~~Corporation’s financial condition, results of operations or liquidity.

Mortgage Banking – ~~In September~~Since 2009, the Corporation ~~entered into an agreement to originate~~has originated and ~~sell~~sold 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. Inprogram. Since 2014, the Corporation ~~entered into an agreement~~has also originated and ~~in June 2014 began to originate and sell~~sold residential mortgage loans to the secondary market through the ~~MPFX~~MPF Original ~~program, which is also~~program. Both of these programs are administered by the Federal Home Loan Banks of Pittsburgh and Chicago. At December 31, ~~2014,~~2017, the total outstanding balance of residential mortgages sold and serviced through the two programs amounted to ~~$152,505,000.~~$169,725,000. The Corporation must strictly adhere to the MPF Xtra and ~~MPFX~~MPF 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, ~~2014,~~2017, the total outstanding balance of residential mortgage loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to ~~$1,802,000.~~$1,805,000. 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.

~~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 the risk factors affecting the banking industry, and that could cause a general market decline in the value of bank stocks. Also, losses could occur in individual stocks held by the Corporation because of specific circumstances related to each bank. These factors could have a material adverse effect on the Corporation’s financial condition, results of operations or liquidity. For additional information regarding equity securities risk, see Part II, Item 7A, "Quantitative and Qualitative Disclosures About Market Risk."

~~Debt~~ Securities ~~Risk~~Markets– ~~In 2009, the Corporation’s earnings were materially impaired by securities losses. Much~~The fair value of the Corporation’s ~~2009 losses~~available-for-sale securities, as well as the revenues the Corporation earns from ~~trust-preferred~~its Trust and Financial Management and brokerage services, are sensitive to price fluctuations and market events.

Declines in the values of the Corporation’s securities ~~and other securities stem~~holdings, combined with adverse changes in the expected cash flows 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 fromthese investments, could result in ~~obligations of states and political subdivisions (also known as municipal bonds) and other debt securities.~~ other-than-temporary impairment charges.

For additional information regarding debt securities, see the “Securities” section of Management’s Discussion and Analysis and Note 7 to the consolidated financial statements.

The Corporation’s Trust and Financial Management revenue is determined, in part, from the value of the underlying investment portfolios. Accordingly, if the values of those investment portfolios decrease, whether due to factors influencing U.S. or international securities markets, in general, or otherwise, the Corporation’s revenue could be negatively impacted. In addition, the Corporation’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of confidence in securities markets.

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 1211 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 1211 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~~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. As a result of lowering assessment levels for the Corporation and other US banks, the Corporation’s 2017 FDIC assessment expense decreased to $376,000 from $488,000 in 2016 and from $603,000 in 2015. Although ~~our~~the Corporation’s total expenses from FDIC assessments have steadily decreased ~~– to $600,000 in 2014~~ from $2,092,000 in 2009, ~~we are~~the Corporation is generally unable to control the ~~amount~~cost of ~~premiums that we are required to pay for FDIC insurance.~~the premiums. If a significant number of bank or financial institution failures occur, wethe Corporation may be required to pay higher FDIC premiums. Future increases in FDIC insurance premiums or additional special assessments may materially adversely affect ~~our~~the Corporation’s results of operations.

Bank Secrecy Act and Related Laws and Regulations -–These laws and regulations have significant implications for all financial institutions. ~~They increase~~In recent years, they have increased due diligence requirements and reporting obligations for financial institutions, ~~create~~created new crimes and penalties, and ~~require~~required 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~~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

Loan production office of Citizens & Northern Bank:

250 East Water Street

Elmira, NY 14901

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~~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, ~~2014,~~2017, there were ~~2,397~~2,206 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 ~~2014~~2017 and ~~2013.~~2016.

		2014			2013				2017						2016
			Dividend			Dividend					Dividend						Dividend
			Declared			Declared					Declared						Declared
			per			per					per						per
	High	Low	Quarter	High	Low	Quarter	High		Low		Quarter		High		Low		Quarter
First quarter	$20.74	$18.19	$0.26	$20.00	$18.65	$0.25	$	26.50	$	22.31	$	0.26	$	20.99	$	19.26	$	0.26
Second quarter	20.10	17.94	0.26	20.46	18.51	0.25		24.40		22.00		0.26		21.00		19.40		0.26
Third quarter	20.10	18.50	0.26	21.45	19.08	0.25		25.42		22.01		0.26		22.67		20.00		0.26
Fourth quarter	21.49	18.83	0.26	21.00	19.37	0.25		26.75		23.02		0.26		26.57		20.54		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,~~April 21, 2016, the ~~Corporation terminated its existing treasury stock repurchase programs and~~Corporation’s Board of Directors approved a ~~new~~ treasury stock repurchase program. Under ~~the new~~this program, the Corporation is authorized to repurchase up to ~~622,500~~600,000 shares of the Corporation’s common stock or ~~approximately~~slightly less than 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~~April 19, 2016. The Board of Directors’ ~~July 17, 2014~~April 21, 2016 authorization provides that: (1) the new treasury stock repurchase program shall be effective when publicly announced and shall continue thereafter until suspended or terminated by the Board of Directors, in its sole discretion; and (2) all shares of common stock repurchased pursuant to

the new program shall be held as treasury shares and be available for use and reissuance for purposes as and when determined by the Board of Directors including, without limitation, pursuant to the Corporation’s Dividend Reinvestment and Stock Purchase Plan and its equity compensation program. ~~Through December 31, 2014, 208,300 shares had~~To date, no purchases have been ~~repurchased at a cost of $4,002,000.~~made under this repurchase program.

The following table sets forth a summary of purchases by the Corporation, onin the open market, of its equity securities during the fourth quarter ~~2014:~~2017:

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, 2014 48,200 $19.34 177,200 445,300
November 1 - 30, 2014 10,600 $19.46 187,800 434,700
December 1 - 31, 2014 20,500 $19.49 208,300 414,200

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, 2017		0	$	-		0		600,000
November 1 - 30, 2017		0	$	-		0		600,000
December 1 - 31, 2017		0	$	-		0		600,000

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, ~~2009~~2012 and ended December 31, ~~2014.~~2017. 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	12/31/12		12/31/13		12/31/14		12/31/15		12/31/16		12/31/17
Citizens & Northern Corporation		100.00		114.68		121.20		129.69		170.12		162.63
Russell 2000 Index		100.00		138.82		145.62		139.19		168.85		193.58
Peer Group		100.00		125.12		137.72		145.57		199.56		229.49

Peer Group includes all publicly traded SEC filing Commercial Banks & Thrifts within NJ, NY, OH and PA with assets between $750M and $3.5B as of 9/30/2017

Index 12/31/09 12/31/10 12/31/11 12/31/12 12/31/13 12/31/14
Citizens & Northern Corporation 100.00 160.82 206.97 221.11 253.58 267.98
Russell 2000 100.00 126.86 121.56 141.43 196.34 205.95
CZNC Peer Group Index* 100.00 113.13 106.47 126.35 158.15 181.07

The Corporation’s peer group consists of banks headquartered in Pennsylvania with total assets of $700 million to $2 billion as of September 30, 2014. This peer group consists of ACNB Corporation, Gettysburg; AmeriServ Financial, Inc., Johnstown; Citizens Financial Services, Inc., Mansfield; Codorus Valley Bancorp, Inc., York; ENB Financial Corp., Ephrata; ESB Financial Corporation, Ellwood; ESSA Bancorp, Inc., Stroudsburg; 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; Integrity Bancshares, Inc., Camp Hill; 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., Narberth; 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, ~~2014.~~2017.

Number of
Number of Weighted- Securities
Securities to be average Remaining
Issued Upon Exercise for Future
Exercise of Price of Issuance Under
Outstanding Outstanding Equity Compen-
Options Options sation Plans
Equity compensation plans
approved by shareholders 316,157 $19.05 317,161

Equity compensation plans
not approved by shareholders 0 N/A 0

					Number of
	Number of		Weighted-		Securities
	Securities to be		average		Remaining
	Issued Upon		Exercise		for Future
	Exercise of		Price of		Issuance Under
	Outstanding		Outstanding		Equity Compen-
	Options		Options		sation Plans
Equity compensation plans approved by shareholders		165,660	$	18.49	287,575

Equity compensation plans not approved by shareholders		0		N/A	0

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) 2014 2013 2012 2011 2010
Interest and fee income $46,009 $48,914 $56,632 $61,256 $62,114
Interest expense 5,122 5,765 9,031 13,556 19,245
Net interest income 40,887 43,149 47,601 47,700 42,869
Provision (credit) for loan losses 476 2,047 288 (285) 1,191
Net interest income after provision (credit) for loan losses 40,411 41,102 47,313 47,985 41,678
Noninterest income excluding securities gains 15,420 16,451 16,383 13,897 13,809
Net impairment losses recognized in earnings from
available-for-sale securities 0 (25) (67) 0 (433)
Net realized gains on available-for-sale securities 1,104 1,743 2,749 2,216 1,262
Loss on prepayment of debt 0 1,023 2,333 0 0
Noninterest expense excluding loss on prepayment of debt 34,157 33,471 32,914 32,016 31,461
Income before income tax provision 22,778 24,777 31,131 32,082 24,855
Income tax provision 5,692 6,183 8,426 8,714 5,800
Net income 17,086 18,594 22,705 23,368 19,055
U.S. Treasury preferred dividends 0 0 0 0 1,474
Net income available to common shareholders $17,086 $18,594 $22,705 $23,368 $17,581

PER COMMON SHARE:
Basic earnings per share $1.38 $1.51 $1.86 $1.92 $1.45
Diluted earnings per share $1.38 $1.50 $1.85 $1.92 $1.45
Cash dividends declared per share $1.04 $1.00 $0.84 $0.58 $0.39
Book value per common share at period-end $15.34 $14.49 $14.89 $13.77 $11.43
Tangible book value per common share at period-end $14.36 $13.51 $13.91 $12.77 $10.42
Weighted average common shares outstanding - basic 12,390,067 12,352,383 12,235,748 12,162,045 12,131,039
Weighted average common shares outstanding - diluted 12,412,050 12,382,790 12,260,208 12,166,768 12,131,039

END OF PERIOD BALANCES (Dollars In Thousands)
Available-for-sale securities $516,807 $482,658 $472,577 $481,685 $443,956
Gross loans 630,545 644,303 683,910 708,315 730,411
Allowance for loan losses 7,336 8,663 6,857 7,705 9,107
Total assets 1,241,963 1,237,695 1,286,907 1,323,735 1,316,588
Deposits 967,989 954,516 1,006,106 1,018,206 1,004,348
Borrowings 78,597 96,723 89,379 130,313 166,908
Stockholders' equity 188,362 179,472 182,786 167,385 138,944
Common shares outstanding 12,279,980 12,390,063 12,274,035 12,155,529 12,153,598

AVERAGE BALANCES (In Thousands)
Total assets 1,239,897 1,237,096 1,305,163 1,313,445 1,326,145
Earning assets 1,155,401 1,145,340 1,199,538 1,208,584 1,205,608
Gross loans 627,753 656,495 700,241 714,421 721,997
Deposits 965,418 964,031 1,008,469 1,001,125 965,615
Stockholders' equity 185,469 181,412 175,822 152,718 150,133

As of or for the Year Ended December 31,
2014 2013 2012 2011 2010
KEY RATIOS
Return on average assets 1.38% 1.50% 1.74% 1.78% 1.44%
Return on average equity 9.21% 10.25% 12.91% 15.30% 12.69%
Average equity to average assets 14.96% 14.66% 13.47% 11.63% 11.32%
Net interest margin (1) 3.80% 4.05% 4.26% 4.22% 3.81%
Efficiency (2) 57.59% 53.27% 48.82% 49.37% 52.64%
Cash dividends as a % of diluted earnings per share 75.36% 66.67% 45.41% 30.21% 26.90%
Tier 1 leverage 13.89% 13.78% 12.53% 10.93% 9.20%
Tier 1 risk-based capital 26.26% 25.15% 22.86% 19.95% 15.87%
Total risk-based capital 27.60% 26.60% 24.01% 21.17% 17.17%
Tangible common equity/tangible assets 14.34% 13.66% 13.39% 11.84% 9.71%
Nonperforming assets/total assets 1.34% 1.53% 0.82% 0.73% 0.92%
Nonperforming loans/total loans 2.45% 2.80% 1.41% 1.19% 1.58%
Allowance for loan losses/total loans 1.16% 1.34% 1.00% 1.09% 1.25%
Net charge-offs/average loans 0.29% 0.04% 0.16% 0.16% 0.05%

ITEM 6. SELECTED FINANCIAL DATA

	As of or for the Year Ended December 31,
INCOME STATEMENT (In Thousands)	2017		2016		2015		2014		2013
Interest and fee income	$	45,863	$	44,098	$	44,519	$	46,009	$	48,914
Interest expense		3,915		3,693		4,602		5,122		5,765
Net interest income		41,948		40,405		39,917		40,887		43,149
Provision for loan losses		801		1,221		845		476		2,047
Net interest income after provision for loan losses		41,147		39,184		39,072		40,411		41,102
Noninterest income excluding securities gains		16,153		15,511		15,478		15,420		16,451
Realized gains on available-for-sale securities, net		257		1,158		2,861		1,104		1,718
Loss on prepayment of debt		0		0		2,573		0		1,023
Noninterest expense excluding loss on prepayment of debt		36,967		34,744		33,030		34,157		33,471
Income before income tax provision		20,590		21,109		21,808		22,778		24,777
Income tax provision		7,156		5,347		5,337		5,692		6,183
Net income	$	13,434	$	15,762	$	16,471	$	17,086	$	18,594
Net income attributable to common shares	$	13,365	$	15,677	$	16,387	$	17,009	$	18,490

PER COMMON SHARE:
Basic earnings per share	$	1.10	$	1.30	$	1.35	$	1.38	$	1.51
Diluted earnings per share	$	1.10	$	1.30	$	1.35	$	1.38	$	1.50
Cash dividends declared per share	$	1.04	$	1.04	$	1.04	$	1.04	$	1.00
Book value per common share at period-end	$	15.43	$	15.36	$	15.39	$	15.34	$	14.49
Tangible book value per common share at period-end	$	14.45	$	14.37	$	14.41	$	14.36	$	13.51
Weighted average common shares outstanding - basic		12,115,840		12,032,820		12,149,252		12,333,933		12,283,426
Weighted average common shares outstanding - diluted		12,155,136		12,063,055		12,171,084		12,355,916		12,313,833
END OF PERIOD BALANCES (Dollars In Thousands)
Available-for-sale securities	$	356,908	$	395,077	$	420,290	$	516,807	$	482,658
Gross loans		815,713		751,835		704,880		630,545		644,303
Allowance for loan losses		8,856		8,473		7,889		7,336		8,663
Total assets		1,276,959		1,242,292		1,223,417		1,241,963		1,237,695
Deposits		1,008,449		983,843		935,615		967,989		954,516
Borrowings		70,955		64,629		92,263		78,597		96,723
Stockholders’ equity		188,443		186,008		187,487		188,362		179,472
Common shares outstanding		12,214,525		12,113,228		12,180,623		12,279,980		12,390,063
AVERAGE BALANCES (In Thousands)
Total assets		1,247,759		1,229,866		1,243,209		1,239,897		1,237,096
Earning assets		1,169,569		1,147,549		1,159,298		1,155,401		1,145,340
Gross loans		780,640		723,076		657,727		627,753		656,495
Deposits		990,917		970,447		968,201		965,418		964,031
Stockholders’ equity		188,958		188,373		188,905		185,469		181,412

ITEM 6. SELECTED FINANCIAL DATA (Continued)

	As of or for the Year Ended December 31,
	2017			2016			2015			2014			2013
KEY RATIOS
Return on average assets		1.08	%		1.28	%		1.32	%		1.38	%		1.50	%
Return on average equity		7.11	%		8.37	%		8.72	%		9.21	%		10.25	%
Average equity to average assets		15.14	%		15.32	%		15.19	%		14.96	%		14.66	%
Net interest margin (1)		3.82	%		3.76	%		3.69	%		3.80	%		4.05	%
Efficiency (2)		60.74	%		59.22	%		56.66	%		57.59	%		53.27	%
Cash dividends as a % of diluted earnings per share		94.55	%		80.00	%		77.04	%		75.36	%		66.67	%
Tier 1 leverage		14.23	%		14.27	%		14.31	%		13.89	%		13.78	%
Tier 1 risk-based capital		21.95	%		22.48	%		23.29	%		26.26	%		25.15	%
Total risk-based capital		23.07	%		23.60	%		24.40	%		27.60	%		26.60	%
Tangible common equity/tangible assets		13.95	%		14.15	%		14.49	%		14.34	%		13.66	%
Nonperforming assets/total assets		1.47	%		1.43	%		1.31	%		1.34	%		1.53	%
Nonperforming loans/total loans		2.10	%		2.07	%		2.09	%		2.45	%		2.80	%
Allowance for loan losses/total loans		1.09	%		1.13	%		1.12	%		1.16	%		1.34	%
Net charge-offs/average loans		0.05	%		0.09	%		0.04	%		0.29	%		0.04	%

(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~~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"~~“should”, “likely”, ~~"expect"~~“expect”, “plan”, ~~"anticipate"~~“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 ~~2014,~~2017, net income totaled ~~$17,086,000,~~$13,434,000, or ~~$1.38~~$1.10 per common share - basic and diluted, as compared to ~~$1.51~~$1.30 per share – basic and ~~$1.50~~diluted in 2016 and $1.35 per share – basic and diluted in ~~2013 and $1.86 per share basic and $1.85 per share – diluted in 2012.~~2015. The results for ~~2014~~2017 represented a return on average assets of ~~1.38%~~1.08% and a return on average equity of ~~9.21%~~7.11%. As described below, 2017 earnings were reduced for a tax charge in 2017 attributable to the recent reduction in the marginal corporate income tax rate.

~~2014~~2017 vs. ~~2013~~2016

~~Net~~In December 2017, the federal corporate income ~~per share – diluted for 2014~~tax rate was ~~8.0% lower than~~lowered to 21% effective January 1, 2018, from the 35% marginal rate in ~~2013. Some~~effect throughout 2017 and 2016. As a result of the ~~more~~reduction in the income tax rate, the 2017 results include an additional income tax provision (expense) of $2,159,000 ($0.18 per share) related to a reduction in the carrying value of the net deferred tax asset. Management expects the Corporation’s income tax provision will be significantly lower in 2018 and on an ongoing basis as a result of the lower tax rate.

Deferred tax assets and liabilities are recognized based on temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities, and are valued using currently enacted tax rates. The reduction in the deferred tax asset in 2017 reflects the reduced expected future net benefit from these differences, and was recognized upon the new tax bill being signed into law in December 2017.

The table below provides a reconciliation of the Corporation’s annual earnings results under U.S. generally accepted accounting principles (U.S. GAAP) to the comparative results excluding the additional tax charge referred to above. Management believes disclosure of 2017 earnings results, adjusted to exclude the additional income tax provision resulting from the change in the tax rate, provides useful information to investors for purposes of comparison with 2016 results.

RECONCILIATION OF NON-U.S. GAAP MEASURE

(Dollars in Thousands, Except Per Share Data)

	Year Ended Dec. 31, 2017				Year Ended Dec. 31, 2016
			Diluted				Diluted
			Earnings per				Earnings per
	Earnings		Share		Earnings		Share
Net Income	$	13,434	$	1.10	$	15,762	$	1.30
Additional Income Tax Provision Resulting from Change in Tax Rate		2,159				0

Net Income, Excluding Effect of Change in Tax Rate	$	15,593	$	1.28	$	15,762	$	1.30

The effective tax rate (income tax provision as a percentage of income before tax) for the year ended December 31, 2017 was 34.75% as compared to 25.33% for 2016. The higher effective tax rate for 2017 resulted mainly from the additional tax provision related to the change in the tax rate. Management estimates the effective tax rate for 2018 to be approximately 15%, reflecting the benefit of a lower corporate rate.

In addition to the income tax provision fluctuation discussed above, significant highlights related to ~~annual~~ earnings in ~~2014~~2017 as compared to ~~2013~~2016 are as follows:

Net interest income ~~totaled $40,887,000~~was $1,543,000 (3.8%) higher 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 20142017 as compared to ~~2013.~~2016. The net interest margin was ~~3.80%~~3.82% for 2017, up from 3.76% for 2016. Average total loans outstanding were up $57.6 million (8.0%) in ~~2014, down from 4.05%~~2017 as compared to 2016, while average total available-for-sale securities were lower by $33.2 million. Average total deposits were $20.5 million (2.1%) higher in ~~2013.~~2017 as compared to 2016.

The provision for loan losses was ~~$476,000~~$801,000 in ~~2014, down from $2,047,000~~2017, which was $420,000 lower than the amount in ~~2013.~~2016. In 2017, the provision included $1,023,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period and a $101,000 increase in the unallocated portion of the allowance, with a reduction in the provision of $323,000 related to the reduction in the collectively determined allowance for loan losses. The ~~higher levels~~reduction in the collectively determined allowance included the effects of ~~expense~~an improvement in ~~2013~~the Corporation’s aggregate net charge-off experience and a reduction in the qualitative factors used to estimate the allowance as of December 31, 2017, partially offset by the effects of loan growth. The net increase in specific allowances in 2017 included ~~a charge of $1,552,000 from loans~~an increase in the allowance related to one real estate secured commercial ~~customer.~~loan of $391,000 to $919,000 at December 31, 2017 as compared to $528,000 at December 31, 2016. The increase in the specific allowance for this loan was based on an updated appraisal. In comparison, the provision of $1,221,000 for 2016 included $491,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period, a $29,000 decrease in the unallocated portion of the allowance and an increase in the provision of $759,000 related to an increase in the collectively determined allowance for loan losses. The increase in the collectively determined portion of the allowance at December 31, 2016 as compared to the end of the preceding year resulted from loan growth and slight increases in the net charge-off and qualitative factors used to estimate the allowance.

~~In 2014, noninterest~~Noninterest revenue ~~excluding~~increased $642,000 (4.1%) in 2017 as compared to 2016. Trust and financial management revenue increased $639,000 (13.4%), reflecting growth in assets under management resulting from market appreciation and new business, as well as a recent increase in fee levels and an estimated $215,000 of additional revenue from changing the frequency of billings to monthly for certain services. Interchange revenue from debit card transactions increased $278,000 (14.3%), reflecting improvements in card-related volumes and processing. Loan servicing fees, net, ~~realized~~increased $141,000, as the fair value of mortgage servicing rights decreased by $168,000 in 2017 as compared to a reduction of $282,000 in 2016. Net gains from sales of loans decreased $211,000 (20.5%) due to a lower volume of sales. Service charges on deposit accounts decreased $207,000 (4.4%), as revenue from consumer overdrafts declined due to lower volume.

Net gains on available-for-sale securities totaled ~~$15,420,000, which was lower than the 2013 amount by $1,031,000 (6.3%). Gains~~$257,000 in 2017, a reduction of $901,000 from $1,158,000 in 2016. In 2016, gains from sales of ~~residential mortgage loans~~bank stocks totaled ~~$768,000~~$1,125,000, as the Corporation completed its program of bank stock sales that had begun in ~~2014, down from $1,969,000~~2015. The Corporation had no remaining investments 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.bank stocks throughout 2017.

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,~~Total noninterest expenses ~~totaled $34,157,000, which was $686,000 (2.0%~~increased $2,223,000 (6.4%) in 2017 as compared to 2016. Other operating expense increased $808,000. Within other operating expense, the largest variances included increases of $208,000 in loan collection expenses, $149,000 in accounting and auditing expense stemming from increased internal audit outsourcing and $130,000 in attorney fees (mainly related to a commercial loan workout situation). Employee benefits expense increased $657,000, including an increase of $594,000 from higher ~~than total 2013 noninterest~~health care expenses ~~excluding~~on the ~~loss on prepayment of borrowings.~~Corporation’s partially self-insured plan. Salaries and wages expense increased ~~$915,000~~$395,000 (2.6%), reflecting the net effects of annual merit-based salary increases, an increase to an average of 292 FTEs in ~~2014 as compared to 2013, mainly as~~2017 from 287 in 2016 and a ~~result~~net decrease in officers’ incentive compensation from corporate plans of severance benefits, and pensions and other employee benefit expenses increased $619,000, mainly due to higher health care costs and the fourth quarter 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.$166,000.

~~2013~~2016 vs. ~~2012~~2015

~~In 2013, net~~Net income per share – diluted ~~of $1.50~~for 2016 was ~~down 18.4% from 2012.~~3.7% lower than in 2015. Some of the more significant ~~earnings-related variances~~highlights related to annual earnings in ~~2013~~2016 as compared to ~~2012~~2015 are as follows:

Net interest income ~~of $43,149,000 in 2013~~ was ~~down $4,452,000 (9.4%~~$488,000 (1.2%) ~~from 2012.~~higher than the comparable total for 2015. The ~~fully taxable equivalent~~ net interest margin was 3.76%, which was 0.07% higher than the margin for 2015, reflecting the benefits of ~~4.05% in 2013~~a lower cost of borrowed funds and a more favorable mix of earning assets. The average balance of total borrowed funds was ~~down 0.21% from 2012, and the~~$62,516,000 at an average interest rate ~~spread (excess~~ of ~~the yield on earning assets over the~~2.57% in 2016, down from average borrowings of $77,642,000 at an average interest rate ~~incurred on interest-bearing liabilities) shrunk by 0.16%.~~of 3.45% in 2015. Average ~~earning assets declined in 2013 by $54.2 million, reflecting a reduction in average~~total loans outstanding ~~of $43.7~~were higher by $65.3 million ~~and~~(9.9%) in 2016 as compared to 2015, while average total available-for-sale securities were lower by $74.2 million. Average total deposits ~~decreased $44.4 million. Also, net interest income in 2012 was enhanced by the recovery of a security that had been written down in prior years, resulting in income (accretion) of $855,000.~~increased $2.2 million (0.2%).

The provision for loan losses was ~~$2,047,000~~$1,221,000 in ~~2013,~~2016, an increase of $376,000 over 2015. In 2016, the provision included the impact of increasing the allowance for loan losses for the effects of loan growth and slight increases in net charge-off experience and qualitative factors used in determining the collectively evaluated portion of the allowance. In comparison, in 2015 the provision also reflected the effects of loan growth, but the qualitative factors used in determining a portion of the collectively determined allowance decreased slightly during the period. Also in 2016, the provision included an increase of $148,000 as compared to ~~$288,000~~2015 from changes in ~~2012. The~~specific allowances on loans individually identified as impaired, adjusted for the impact of net charge-offs.

Total noninterest revenue for 2016 increased $33,000 (0.2%) over 2015. Net gains from sales of loans increased $294,000 (40.0%), reflecting higher volume of sales, and Trust and Financial Management revenue increased $134,000 (2.9%). Other operating income increased $28,000 (2.2%), including an increase of $148,000 from redemptions of tax credits and increases in lending-related fees of $80,000, while this category included a gain of $212,000 from a split-dollar life insurance policy in 2015. Service charges on deposit accounts decreased $169,000 (3.5%) in 2016, reflecting a reduction in consumer overdraft volume. Loan servicing fees, net, decreased $113,000 in 2016 as compared to 2015, including a decrease in the ~~provision~~fair value of mortgage servicing rights of $282,000 in ~~2013 included~~2016, which was a larger decrease by $120,000 as compared to 2015. Brokerage revenue decreased $83,000 (9.9%), as the ~~effects~~volume of ~~establishing an allowance~~sales of ~~$1,552,000 on loans to one commercial borrower.~~annuities declined.

In ~~2013, noninterest revenue, excluding net~~2016, realized gains ~~on available-for-sale~~from securities totaled ~~$16,451,000, which exceeded the total 2012 amount by $68,000. Total Trust and brokerage revenue~~$1,158,000, including gains from sales of ~~$4,871,000 in 2013 was $223,000 (4.8%) higher than the total for 2012.~~bank stocks of $1,125,000. In 2013, the fair value of servicing rights increased $67,000, while the fair value of servicing rights decreased $188,000 in 2012. In 2013, the net loss from disposals of premises and equipment totaled ($16,000) as compared to net gains of $270,000 in 2012, mainly from an insurance recovery in 2012 associated with a flood-related claim.

~~In 2013 and 2012,~~2015, the Corporation generated gains from sales of securities totaling $2,861,000, including gains from sales of bank stocks of $2,220,000, and also incurred losses of $2,573,000 from ~~prepayment~~prepayments of ~~borrowings. Realized gains from securities totaled $1,718,000~~a borrowing in the ~~year ended~~second and fourth quarters totaling $34 million. In the fourth quarter 2016, the Corporation completed its program of bank stock sales that had begun in 2015, and had no remaining investments in bank stocks at December 31, ~~2013 as compared to $2,682,000 in 2012, while losses from prepayment of borrowings amounted to $1,023,000 in 2013 as compared to $2,333,000 in 2012.~~2016.

Noninterest expenses, excluding losses ~~from~~on prepayment of borrowings, ~~totaled $33,471,000~~ in ~~2013, an increase~~2016 exceeded the amount for 2015 by $1,714,000 (5.2%). Salaries and wages expense increased $729,000 (5.0%). Several new positions were established in the latter portion of ~~$557,000 (1.7%) over the corresponding total~~2015 and early 2016, including new positions established for ~~2012. In 2013, the Corporation incurred professional~~lending, lending support, information technology, training, human resources and marketing functions. Professional fees expense ~~of $724,000~~increased $488,000, including increases related to ~~a consulting engagement in which the consulting firm identified recommendations for potential~~employee sales and service training, information technology and marketing. Other operating expense increased $399,000 (7.8%), including increases in ~~revenues, mainly related to service charges on deposit accounts.~~other real estate expenses of $123,000, donations and public relations-related expenses of $94,000 and education and training-related expenses of $60,000. Also, other operating expense was reduced in 2013, the Corporation incurred professional fees expense of $315,000 from a consulting project related to debit card operations and electronic funds processing, for which reductions in electronic funds processing expenses and other benefits are expected to be realized over approximately the next five years. Mainly2015 by $69,000 as a result of a recovery of sales tax previously paid.

The provision for income tax totaled $5,347,000 in 2016, or an effective tax rate of 25.3% of pre-tax income. In comparison, the ~~consulting engagements described above, professional fees expense was $1,048,000~~provision for income tax of $5,337,000 in 2015 represented a 24.5% effective rate. The higher effective tax rate in ~~2013 as compared~~2016 included the impact of a $300,000 reduction in tax-exempt interest income and an increase in the provision for state income tax of $64,000 that resulted mainly from a catch-up adjustment to ~~2012. Pensions and other employee benefit costs were $347,000 lower~~increase New York State taxes for the effect of changes in ~~2013 than~~the tax methodology that first became effective in ~~2012, including a reduction of $171,000 in health insurance expense associated with the Corporation’s partially self-insured plan due to a lower amount of claims.~~2015.

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~~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 ~~2014, 2013,~~2017, 2016, and ~~2012.~~2015. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the tables.

~~2014~~The calculations of fully taxable-equivalent yields on tax-exempt loans and securities in Tables I, II and III reflect inherent tax benefit based on the Corporation’s marginal federal income tax rate of 35% for all periods presented. In 2018, the tax benefit from tax-exempt loans and securities will be reduced as a result of the change to a 21% federal income tax rate. The overall yield on tax-exempt assets, however, in 2018 and future periods will depend on market conditions for new assets originated or purchased and the pace of principal repayments on assets held as of December 31, 2017.

2017 vs. ~~2013~~2016

Fully taxable equivalent net interest income was ~~$43,893,000~~$44,708,000 in ~~2014, which was $2,491,000 (5.3%~~2017, $1,551,000 (3.6%) ~~lower~~higher than in ~~2013. As shown~~2016. Interest income was $1,773,000 higher in ~~Table III, in 2014~~2017 as compared to 2013, interest rate changes had the effect of decreasing net interest income $1,622000, 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 in2016; interest expense ~~of $161,000 attributable to a reduction~~was also higher by $222,000 in comparing 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.~~same periods. As presented in Table II, the Net Interest Margin was 3.82% in 2017 as compared to 3.76% in 2016, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) ~~was~~increased to 3.68% in 2017 from 3.63% in ~~2014 as compared to 3.88% in 2013.~~2016.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled ~~$49,015,000~~$48,623,000 in ~~2014,~~2017, an increase of 3.8% from 2016. Although the average yield on loans fell, the overall yield on earning assets increased to 4.16% in 2017 from 4.08% in 2016 due to a ~~decrease~~change in mix of ~~6.0% from 2013.~~earning assets, as loans increased while available-for-sale securities decreased. Interest and fees on loans receivable increased $2,466,000, or 6.9%, while interest on available-for-sale securities decreased ~~$3,320,000,~~$765,000, or ~~8.8%~~6.9%. The average balance of gross loans receivable increased 8.0% to $780,640,000 in 2017 from $723,076,000 in 2016. The Corporation experienced significant growth in both residential mortgages and commercial loans. The Corporation’s average rate of return on loans receivable declined to 4.87% in 2017 from 4.92% in 2016 as average interest rates on new loans have been lower than the average rates on loans that have been fully or partially paid off.

As indicated in Table II, average available-for-sale securities (at amortized cost) totaled ~~$494,934,000~~$371,825,000 in ~~2014, an increase~~2017, a decrease of ~~$33,370,000 (7.2%~~$33,154,000 (8.2%) from ~~2013. Net increase~~2016. Funds generated from the net decrease 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~~were used, in part, to fund 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.~~loan growth described above. The average rate of return on available-for-sale securities was ~~2.95% for 2014 and 3.12%~~2.79% in ~~2013.~~2017, up from 2.75% in 2016.

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 decreased to $16,634,000 in 2017 from $19,022,000 in 2016, while the average yield increased to ~~$32,510,000~~1.14% in ~~2014~~2017 from ~~$26,159,000~~0.61% in ~~2013.~~2016. This category 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,~~rose $222,000, or ~~11.1%~~6.0%, to ~~$5,122,000~~$3,915,000 in ~~2014~~2017 from ~~$5,765,000~~$3,693,000 in ~~2013.~~2016. Table II shows that the overall cost of funds on interest-bearing liabilities ~~fell~~increased to ~~0.61%~~0.48% in ~~2014~~2017 from ~~0.67%~~0.45% in ~~2013.~~2016.

Total average deposits (interest-bearing and noninterest-bearing) increased ~~0.1%,~~2.1% to ~~$965,418,000~~$990,917,000 in ~~2014~~2017 from ~~$964,031,000~~$970,447,000 in ~~2013. Decreases~~2016. Increases in the average balances of ~~certificates of deposit, Individual Retirement Accounts,~~noninterest-bearing demand deposits, savings and ~~money market accounts~~interest checking were partially offset by ~~increases~~decreases in average balances of ~~interest checking, savings accounts~~money market and ~~non-interest bearing demand deposits. Consistent with continuing low short-term market interest~~Individual Retirement Accounts. The average rate paid on interest-bearing deposits increased to 0.32% in 2017 from 0.28% in 2016. The increase in average rate is mainly due to increases in rates ~~the average rates incurred~~paid on certificates of ~~deposit~~deposits and ~~Individual Retirement Accounts have continued to decrease in 2014 as compared to 2013.~~interest checking accounts.

Total average borrowed funds decreased ~~$2,388,000~~$3,097,000 to ~~$79,940,000~~$59,419,000 in ~~2014~~2017 from ~~$82,328,000~~$62,516,000 in ~~2013.~~2016. The average rate on borrowed funds was ~~3.70%~~2.54% in ~~2014,~~2017, down slightly from 2.57% in 2016. Interest expense on short-term borrowings increased $58,000 in 2017 as compared to ~~3.72%~~2016, reflecting an increase in ~~2013.~~average rate to 0.90% in 2017 from 0.65% in 2016. Interest expense on long-term borrowings decreased $154,000, as the overall reduction in average balance of $2,952,000 included the impact of repayments of two higher-cost borrowings that had been originated in 2007. These borrowings included a $10 million FHLB advance with an interest rate of 3.81% that matured in September 2017 and repurchase agreements with a broker dealer totaling $27 million with an interest rate of 3.595% that matured in December 2017.

~~2013~~2016 vs. ~~2012~~2015

Fully taxable equivalent net interest income was ~~$46,384,000~~$43,157,000 in ~~2013, $4,657,000 (9.1%~~2016, $338,000 (0.8%) ~~lower~~higher than in ~~2012. As shown~~2015. Interest income was $571,000 lower in ~~Table III, in 2013~~2016 as compared to 2012, interest rate changes had the effect of decreasing net interest income $3,743,000, and net changes in volume had the effect of decreasing net interest income $914,000. The most significant components of the rate change in net interest income in 2013 were a decrease in interest income of $2,615,000 attributable to lower rates earned on loans receivable and a decrease in interest income of $2,554,000 attributable to lower rates earned on available-for-sale securities, partially offset by a decrease in2015; interest expense ~~of $1,413,000 due to~~was also lower ~~rates paid on interest-bearing deposits. The most significant components of~~by $909,000 in comparing the volume change in net interest income in 2013 were a decrease in interest income of $2,588,000 attributable to a decline in the balance of loans receivable, a decrease in interest expense of $1,180,000 attributable to a reduction in the balance of borrowed funds, and a decrease in interest expense of $691,000 attributable to a reduction in the balance of interest-bearing deposits (primarily certificates of deposit).same periods. As presented in Table II, the Net Interest Margin was 3.76% in 2016 as compared to 3.69% in 2015, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) ~~was 3.88%~~increased to 3.63% in ~~2013, as compared to 4.04%~~2016 from 3.54% in ~~2012.~~2015.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled ~~$52,149,000~~$46,850,000 in ~~2013,~~2016, a decrease of ~~13.2%~~1.2% from ~~2012.~~2015. Although yields on securities and loans fell, overall yield on earning assets dropped only 0.01% due to a change in mix of earning assets to increase loans and decrease securities. Interest and fees on loans receivable increased $1,695,000, or 5.0%, while interest on available-for-sale securities decreased ~~$5,203,000,~~$2,300,000, or ~~12.2%~~17.1%. The average balance of gross loans receivable increased 9.9% to $723,076,000 in 2016 from $657,727,000 in 2015. The Corporation experienced significant growth in both residential and commercial loans. The Corporation’s average rate of return on loans receivable declined to 4.92% in 2016 from 5.15% in 2015.

As indicated in Table II, average available-for-sale securities (at amortized cost) totaled ~~$461,564,000~~$404,979,000 in ~~2013,~~2016, a decrease of ~~$2,785,000 (0.6%~~$74,169,000 (15.5%) from ~~2012. Net contraction~~2015. Funds generated from the net decrease in the Corporation’s available-for-sale securities portfolio ~~was primarily made up of U.S. Government agency mortgage-backed securities and trust preferred securities. This contraction was partially offset by increases~~were used, in part, to fund the ~~balances of U.S. Government agency bonds, municipal securities, and U.S. Government agency collateralized mortgage obligations.~~loan growth described above. The Corporation’s yield on securities ~~fell~~was lower in ~~2012 and 2013 because of low market interest rates, which had~~2016 than in 2015, primarily due to higher-yielding securities maturing as the effect of increasing the volume of calls on municipal bonds and trust preferred securities, and prepayments on mortgage-backed securities and collateralized mortgage obligations, with new purchases made at lower yields than the yields on the securities being replaced. Also, the yield on available-for-sale securitiesportfolio size was ~~enhanced in 2012 by accretion income of $855,000 from a security for which principal was fully paid in 2012 after OTTI write-downs had been recorded in prior periods.~~reduced. The average rate of return on available-for-sale securities was ~~3.12% for 2013~~2.75% in 2016 and ~~3.67%~~2.81% in ~~2012.~~2015.

The average balance of gross loans receivable decreased 6.2% to $656,495,000 in 2013 from $700,241,000 in 2012. 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 5.73% in 2013 from 6.11% in 2012.

The average balance of interest-bearing due from banks decreased to $26,159,000 in 2013 from $32,337,000 in 2012. 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 ~~$3,266,000,~~$909,000, or ~~36.2%~~19.8%, to ~~$5,765,000~~$3,693,000 in ~~2013~~2016 from ~~$9,031,000~~$4,602,000 in ~~2012.~~2015. Table II shows that the overall cost of funds on interest-bearing liabilities fell to ~~0.67%~~0.45% in ~~2013~~2016 from ~~0.97%~~0.55% in ~~2012.~~2015.

Total average deposits (interest-bearing and noninterest-bearing) ~~decreased 4.4%,~~increased slightly (0.2%) to ~~$964,031,000~~$970,447,000 in ~~2013~~2016 from ~~$1,008,469,000~~$968,201,000 in ~~2012.~~2015. Decreases in the average balances of certificates of deposit and Individual Retirement Accounts ~~and money market accounts~~ were ~~partially~~ offset by increases in average balances of interest checking, money market accounts, savings accounts and ~~savings accounts. Consistent with continuing low short-term market interest rates, the~~noninterest-bearing demand deposits. The average ~~rates incurred~~rate paid on ~~certificates of deposit and Individual Retirement Accounts have decreased significantly~~interest-bearing deposits increased slightly to 0.28% in ~~2013 as compared to 2012.~~2016 from 0.26% in 2015.

Total average borrowed funds decreased ~~$29,723,000~~$15,126,000 to ~~$82,328,000~~$62,516,000 in ~~2013~~2016 from ~~$112,051,000~~$77,642,000 in 2012. During 2012 and 2013, the Corporation has paid off long-term borrowings as they matured using the cash flow received from loans and investment securities. In 2012, the Corporation prepaid principal totaling $17,000,000 on long-term borrowings (repurchase agreements); the Corporation incurred losses from the prepayments totaling $2,333,000. In March 2013, the Corporation prepaid principal of $7,000,000 on a long-term borrowing (repurchase agreement) with a rate of 3.60%; the Corporation incurred a loss from the prepayment totaling $1,023,000, which is reported in Other Expenses in the Consolidated Statements of Income. Management expects that the prepayments will have a favorable effect on the net interest margin in the future. After the effect of the prepayments, the remaining balance of long-term borrowings under repurchase agreements was $61,000,000 at December 31, 2013.2015. The average rate on borrowed funds was ~~3.72%~~2.57% in ~~2013,~~2016 compared to ~~3.77%~~3.45% in ~~2012.~~2015, reflecting a $27,604,000 reduction in the average balance of higher-rate, long-term borrowings resulting from prepayment in the second and fourth quarters of 2015 of a long-term repurchase agreement borrowing with an interest rate of 4.265%. The average balance of short-term borrowings increased $12,478,000 in 2016 over 2015, as average overnight borrowings were higher in 2016 and the Corporation funded the pay-off of the long-term repurchase agreement with a series of short-term advances from the FHLB-Pittsburgh that matured over the course of 2016.

TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE

Years Ended December 31, Increase/(Decrease)
(In Thousands) 2014 2013 2012 2014/2013 2013/2012

INTEREST INCOME
Available-for-sale securities:
Taxable $8,028 $7,105 $9,334 $923 ($2,229)
Tax-exempt 6,577 7,296 7,725 (719) (429)
Total available-for-sale securities 14,605 14,401 17,059 204 (2,658)
Interest-bearing due from banks 125 105 114 20 (9)
Loans held for sale 16 54 107 (38) (53)
Loans receivable:
Taxable 32,127 35,484 40,453 (3,357) (4,969)
Tax-exempt 2,142 2,105 2,339 37 (234)
Total loans receivable 34,269 37,589 42,792 (3,320) (5,203)
Total Interest Income 49,015 52,149 60,072 (3,134) (7,923)

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking 216 211 206 5 5
Money market 286 290 354 (4) (64)
Savings 121 117 108 4 9
Certificates of deposit 1,069 1,522 3,002 (453) (1,480)
Individual Retirement Accounts 470 562 1,136 (92) (574)
Other time deposits 1 1 1 0 0
Total interest-bearing deposits 2,163 2,703 4,807 (540) (2,104)
Borrowed funds:
Short-term 9 9 10 0 (1)
Long-term 2,950 3,053 4,214 (103) (1,161)
Total borrowed funds 2,959 3,062 4,224 (103) (1,162)
Total Interest Expense 5,122 5,765 9,031 (643) (3,266)

Net Interest Income $43,893 $46,384 $51,041 ($2,491) ($4,657)

TABLE I - ANALYSIS OF INTEREST INCOME AND EXPENSE

	Years Ended December 31,						Increase/(Decrease)
(In Thousands)	2017		2016		2015		2017/2016			2016/2015

INTEREST INCOME
Available-for-sale securities:
Taxable	$	5,499	$	5,916	$	7,587	$	(417	)	$	(1,671	)
Tax-exempt		4,892		5,240		5,869		(348	)		(629	)
Total available-for-sale securities		10,391		11,156		13,456		(765	)		(2,300	)
Interest-bearing due from banks		190		116		93		74			23
Loans held for sale		25		27		16		(2	)		11
Loans receivable:
Taxable		34,907		32,827		31,311		2,080			1,516
Tax-exempt		3,110		2,724		2,545		386			179
Total loans receivable		38,017		35,551		33,856		2,466			1,695
Total Interest Income		48,623		46,850		47,421		1,773			(571	)

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		474		293		214		181			79
Money market		355		342		299		13			43
Savings		143		133		128		10			5
Certificates of deposit		996		882		831		114			51
Individual Retirement Accounts		434		434		451		0			(17	)
Other time deposits		1		1		1		0			0
Total interest-bearing deposits		2,403		2,085		1,924		318			161
Borrowed funds:
Short-term		213		155		32		58			123
Long-term		1,299		1,453		2,646		(154	)		(1,193	)
Total borrowed funds		1,512		1,608		2,678		(96	)		(1,070	)
Total Interest Expense		3,915		3,693		4,602		222			(909	)

Net Interest Income	$	44,708	$	43,157	$	42,819	$	1,551		$	338

(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 $1,013,000 in 2014, $1,338,000 in 2013 and $1,427,000 in 2012.~~

TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES
(Dollars in Thousands)
Year Year Year
Ended Rate of Ended Rate of Ended Rate of
12/31/2014 Return/ 12/31/2013 Return/ 12/31/2012 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 $371,125 2.16% $330,980 2.15% $332,911 2.80%
Tax-exempt 123,809 5.31% 130,584 5.59% 131,438 5.88%
Total available-for-sale securities 494,934 2.95% 461,564 3.12% 464,349 3.67%
Interest-bearing due from banks 32,510 0.39% 26,159 0.40% 32,337 0.35%
Federal funds sold 0 0.00% 4 0.00% 0 0.00%
Loans held for sale 204 7.84% 1,118 4.83% 2,611 4.10%
Loans receivable:
Taxable 589,120 5.45% 620,412 5.72% 662,751 6.10%
Tax-exempt 38,633 5.54% 36,083 5.83% 37,490 6.24%
Total loans receivable 627,753 5.46% 656,495 5.73% 700,241 6.11%
Total Earning Assets 1,155,401 4.24% 1,145,340 4.55% 1,199,538 5.01%
Cash 16,865 16,854 17,408
Unrealized gain/loss on securities 6,350 8,875 18,444
Allowance for loan losses (7,992) (7,204) (7,688)
Bank premises and equipment 16,789 18,154 18,956
Intangible Asset - Core Deposit Intangible 70 113 176
Intangible Asset – Goodwill 11,942 11,942 11,942
Other assets 40,472 43,022 46,387
Total Assets $1,239,897 $1,237,096 $1,305,163

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking $183,874 0.12% $174,790 0.12% $163,840 0.13%
Money market 198,990 0.14% 203,023 0.14% 208,814 0.17%
Savings 121,685 0.10% 117,055 0.10% 108,218 0.10%
Certificates of deposit 134,732 0.79% 148,598 1.02% 194,175 1.55%
Individual Retirement Accounts 120,016 0.39% 129,255 0.43% 142,315 0.80%
Other time deposits 1,039 0.10% 1,062 0.09% 1,191 0.08%
Total interest-bearing deposits 760,336 0.28% 773,783 0.35% 818,553 0.59%
Borrowed funds:
Short-term 6,744 0.13% 6,422 0.14% 6,831 0.15%
Long-term 73,196 4.03% 75,906 4.02% 105,220 4.00%
Total borrowed funds 79,940 3.70% 82,328 3.72% 112,051 3.77%
Total Interest-bearing Liabilities 840,276 0.61% 856,111 0.67% 930,604 0.97%
Demand deposits 205,082 190,248 189,916
Other liabilities 9,070 9,325 8,821
Total Liabilities 1,054,428 1,055,684 1,129,341
Stockholders' equity, excluding
other comprehensive income/loss 181,271 175,893 164,316
Other comprehensive income/loss 4,198 5,519 11,506
Total Stockholders' Equity 185,469 181,412 175,822
Total Liabilities and Stockholders' Equity $1,239,897 $1,237,096 $1,305,163
Interest Rate Spread 3.63% 3.88% 4.04%
Net Interest Income/Earning Assets 3.80% 4.05% 4.26%

Total Deposits (Interest-bearing
and Demand) $965,418 $964,031 $1,008,469

(2)

Fees on loans are included with interest on loans and amounted to $883,000 in 2017, $1,000,000 in 2016, and $1,004,000 in 2015.

TABLE II - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES

(Dollars in Thousands)
	Year						Year						Year
	Ended			Rate of			Ended			Rate of			Ended			Rate of
	12/31/2017			Return/			12/31/2016			Return/			12/31/2015			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	$	259,079			2.12	%	$	293,636			2.01	%	$	366,448			2.07	%
Tax-exempt		112,746			4.34	%		111,343			4.71	%		112,700			5.21	%
Total available-for-sale securities		371,825			2.79	%		404,979			2.75	%		479,148			2.81	%
Interest-bearing due from banks		16,634			1.14	%		19,022			0.61	%		22,201			0.42	%
Loans held for sale		470			5.32	%		472			5.72	%		222			7.21	%
Loans receivable:
Taxable		711,901			4.90	%		662,769			4.95	%		603,771			5.19	%
Tax-exempt		68,739			4.52	%		60,307			4.52	%		53,956			4.72	%
Total loans receivable		780,640			4.87	%		723,076			4.92	%		657,727			5.15	%
Total Earning Assets		1,169,569			4.16	%		1,147,549			4.08	%		1,159,298			4.09	%
Cash		17,322						16,570						16,639
Unrealized gain/loss on securities		88						7,166						8,871
Allowance for loan losses		(8,820	)					(8,082	)					(7,380	)
Bank premises and equipment		15,541						15,413						15,911
Intangible Assets		11,957						11,966						11,983
Other assets		42,102						39,284						37,887
Total Assets	$	1,247,759					$	1,229,866					$	1,243,209

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	$	209,893			0.23	%	$	201,357			0.15	%	$	195,940			0.11	%
Money market		191,356			0.19	%		199,405			0.17	%		196,585			0.15	%
Savings		143,575			0.10	%		132,679			0.10	%		128,355			0.10	%
Certificates of deposit		117,366			0.85	%		117,130			0.75	%		121,803			0.68	%
Individual Retirement Accounts		97,519			0.45	%		103,467			0.42	%		110,659			0.41	%
Other time deposits		1,014			0.10	%		1,036			0.10	%		1,031			0.10	%
Total interest-bearing deposits		760,723			0.32	%		755,074			0.28	%		754,373			0.26	%
Borrowed funds:
Short-term		23,761			0.90	%		23,906			0.65	%		11,428			0.28	%
Long-term		35,658			3.64	%		38,610			3.76	%		66,214			4.00	%
Total borrowed funds		59,419			2.54	%		62,516			2.57	%		77,642			3.45	%
Total Interest-bearing Liabilities		820,142			0.48	%		817,590			0.45	%		832,015			0.55	%
Demand deposits		230,194						215,373						213,828
Other liabilities		8,465						8,530						8,461
Total Liabilities		1,058,801						1,041,493						1,054,304
Stockholders’ equity, excluding other comprehensive income/loss		188,756						183,671						183,125
Other comprehensive income/loss		202						4,702						5,780
Total Stockholders’ Equity		188,958						188,373						188,905
Total Liabilities and Stockholders’ Equity	$	1,247,759					$	1,229,866					$	1,243,209
Interest Rate Spread					3.68	%					3.63	%					3.54	%
Net Interest Income/Earning Assets					3.82	%					3.76	%					3.69	%

Total Deposits (Interest-bearing and Demand)	$	990,917					$	970,447					$	968,201

(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 12/31/14 vs. 12/31/13 Year Ended 12/31/13 vs. 12/31/12
Change in Change in Total Change in Change in Total
Volume Rate Change Volume Rate Change
EARNING ASSETS
Available-for-sale securities:
Taxable $868 $55 $923 ($54) ($2,175) ($2,229)
Tax-exempt (369) (350) (719) (50) (379) (429)
Total available-for-sale securities 499 (295) 204 (104) (2,554) (2,658)
Interest-bearing due from banks 24 (4) 20 (24) 15 (9)
Loans held for sale (60) 22 (38) (69) 16 (53)
Loans receivable:
Taxable (1,746) (1,611) (3,357) (2,502) (2,467) (4,969)
Tax-exempt 144 (107) 37 (86) (148) (234)
Total loans receivable (1,602) (1,718) (3,320) (2,588) (2,615) (5,203)
Total Interest Income (1,139) (1,995) (3,134) (2,785) (5,138) (7,923)

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking 11 (6) 5 13 (8) 5
Money market (6) 2 (4) (10) (54) (64)
Savings 5 (1) 4 9 0 9
Certificates of deposit (133) (320) (453) (607) (873) (1,480)
Individual Retirement Accounts (38) (54) (92) (96) (478) (574)
Other time deposits 0 0 0 0 0 0
Total interest-bearing deposits (161) (379) (540) (691) (1,413) (2,104)
Borrowed funds:
Short-term 0 0 0 (1) 0 (1)
Long-term (109) 6 (103) (1,179) 18 (1,161)
Total borrowed funds (109) 6 (103) (1,180) 18 (1,162)
Total Interest Expense (270) (373) (643) (1,871) (1,395) (3,266)

Net Interest Income ($869) ($1,622) ($2,491) ($914) ($3,743) ($4,657)

TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES

(In Thousands)	Year Ended 12/31/17 vs. 12/31/16									Year Ended 12/31/16 vs. 12/31/15
	Change in			Change in			Total			Change in			Change in			Total
	Volume			Rate			Change			Volume			Rate			Change
EARNING ASSETS
Available-for-sale securities:
Taxable	$	(721	)	$	304		$	(417	)	$	(1,472	)	$	(199	)	$	(1,671	)
Tax-exempt		65			(413	)		(348	)		(70	)		(559	)		(629	)
Total available-for-sale securities		(656	)		(109	)		(765	)		(1,542	)		(758	)		(2,300	)
Interest-bearing due from banks		(17	)		91			74			(14	)		37			23
Loans held for sale		0			(2	)		(2	)		15			(4	)		11
Loans receivable:
Taxable		2,412			(332	)		2,080			2,965			(1,449	)		1,516
Tax-exempt		381			5			386			290			(111	)		179
Total loans receivable		2,793			(327	)		2,466			3,255			(1,560	)		1,695
Total Interest Income		2,120			(347	)		1,773			1,714			(2,285	)		(571	)

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		12			169			181			6			73			79
Money market		(14	)		27			13			4			39			43
Savings		11			(1	)		10			4			1			5
Certificates of deposit		2			112			114			(33	)		84			51
Individual Retirement Accounts		(25	)		25			0			(30	)		13			(17	)
Other time deposits		0			0			0			0			0			0
Total interest-bearing deposits		(14	)		332			318			(49	)		210			161
Borrowed funds:
Short-term		(1	)		59			58			56			67			123
Long-term		(109	)		(45	)		(154	)		(1,047	)		(146	)		(1,193	)
Total borrowed funds		(110	)		14			(96	)		(991	)		(79	)		(1,070	)
Total Interest Expense		(124	)		346			222			(1,040	)		131			(909	)

Net Interest Income	$	2,244		$	(693	)	$	1,551		$	2,754		$	(2,416	)	$	338

(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, ~~2014, 2013~~2017, 2016 and ~~2012~~2015

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, $ %
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)

TABLE IV - COMPARISON OF NONINTEREST INCOME

(Dollars In Thousands)

	Years Ended				Years Ended
	December 31,		$	%	December 31,				$			%
	2013	2012	Change		2017		2016		Change			Change
Service charges on deposit accounts	$5,246	$5,322	($76)	(1.4)	$	4,488	$	4,695	$	(207	)		(4.4	)
Service charges and fees	597	643	(46)	(7.2)		417		439		(22	)		(5.0	)
Trust and financial management revenue	4,087	3,847	240	6.2		5,399		4,760		639			13.4
Brokerage revenue	784	801	(17)	(2.1)		797		756		41			5.4
Insurance commissions, fees and premiums	170	221	(51)	(23.1)		115		102		13			12.7
Interchange revenue from debit card transactions	1,941	1,938	3	0.2		2,221		1,943		278			14.3
Net gains from sales of loans	1,969	2,016	(47)	(2.3)		818		1,029		(211	)		(20.5	)
Increase (decrease) in fair value of servicing rights	67	(188)	255	(135.6)
Loan servicing fees, net						244		103		141			136.9
Increase in cash surrender value of life insurance	399	455	(56)	(12.3)		379		382		(3	)		(0.8	)
Net (loss) gain from premises and equipment	(16)	270	(286)	(105.9)
Other operating income	1,207	1,058	149	14.1		1,275		1,302		(27	)		(2.1	)
Total other operating income before realized gains
on available-for-sale securities, net	$16,451	$16,383	$68	0.4
Total noninterest income before realized gains on available-for-sale securities, net					$	16,153	$	15,511	$	642			4.1

	Years Ended
	December 31,				$			%
	2016		2015		Change			Change
Service charges on deposit accounts	$	4,695	$	4,864	$	(169	)		(3.5	)
Service charges and fees		439		494		(55	)		(11.1	)
Trust and financial management revenue		4,760		4,626		134			2.9
Brokerage revenue		756		839		(83	)		(9.9	)
Insurance commissions, fees and premiums		102		109		(7	)		(6.4	)
Interchange revenue from debit card transactions		1,943		1,935		8			0.4
Net gains from sales of loans		1,029		735		294			40.0
Loan servicing fees, net		103		216		(113	)		(52.3	)
Increase in cash surrender value of life insurance		382		386		(4	)		(1.0	)
Other operating income		1,302		1,274		28			2.2
Total noninterest income before realized gains on available-for-sale securities, net	$	15,511	$	15,478	$	33			0.2

Total noninterest income, excluding realized gains on available-for-sale securities, ~~decreased $1,031,000 or 6.3%~~increased $642,000 in ~~2014~~2017 compared to ~~2013.~~2016. In ~~2013,~~2016, total noninterest income increased ~~$68,000 (0.4%)~~$33,000 from ~~2012.~~2015. Changes of significance are discussed in the narrative that follows.

~~2014~~2017 vs. ~~2013~~2016

Trust and financial management revenue increased $639,000 (13.4%), reflecting growth in assets under management resulting from market appreciation and new business, as well as an increase in fee levels and an estimated $215,000 of additional revenue from changing the frequency of billings to monthly for certain services.

Interchange revenue from debit card transactions increased $278,000 (14.3%), reflecting improvements in card-related volumes and processing.

Loan servicing fees, net, increased $141,000. This category includes fees received from servicing residential mortgage loans that have been originated and sold, adjusted for the change in the fair value of servicing rights. The fair value of mortgage servicing rights decreased by $168,000 in 2017 as compared to a reduction of $282,000 in 2016.

Net gains from sales of loans decreased ~~$1,201,000 in 2014. Since December 2009, the Corporation has sold~~$211,000 (20.5%) due to a ~~significant amount~~lower volume 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.sales.

Service charges on deposit accounts ~~were $221,000~~decreased $207,000 (4.4%). Revenue from consumer overdrafts declined $133,000 due to lower volume. Also, fees on noninterest-bearing, business-related checking accounts decreased $53,000 as the earnings crediting rate used to offset the cost of services increased over the year, consistent with increases in ~~2014 than 2013. Consumer and business overdraft fees decreased $543,000~~the Fed Funds rate.

2016 vs. 2015

Net gains from sales of loans increased $294,000 (40.0%), reflecting higher volume of sales. The increase in ~~2014~~volume in 2016 included the impact of employing one additional mortgage lender in a dedicated, full-time capacity throughout most of 2016 as compared to ~~2013. Changes made as a result~~2015.

Trust and Financial Management revenue increased $134,000 (2.9%). The increase in Trust revenue in 2016 reflected, in part, the effect of ~~recommendations made by a consulting firm~~higher value of U.S. equity markets in ~~2013 resulted in service~~the latter portion of the year.

Service charges on deposit accounts decreased $169,000 (3.5%) in 2016, including a $131,000 reduction in consumer overdraft fees due to a lower volume of ~~$611,000 in 2014 as compared to $229,000 in 2013, as most of the recommendations were implemented in the fourth quarter 2013.~~overdrafts.

~~In 2014, Trust and financial management revenue increased $403,000, or 9.9%. The increase~~Loan servicing fees, net, decreased $113,000 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.~~

~~2013 vs. 2012~~

2016. The fair value of mortgage servicing rights decreased $282,000 in 2016, as their valuation was negatively impacted by a reduction in demand by banks for purchasing servicing rights resulting from regulatory changes that have generally increased $67,000 in 2013 as compared to a decrease of $188,000 in 2012. Management’s estimated prepayment speeds on mortgage loans sold and serviced were lower at December 31, 2013 than at December 31, 2012, which had the effect of increasing the estimated fair value of the related servicing rights. Conversely, estimated prepayment speeds at December 31, 2012 were higher than the corresponding speeds at the end of 2011, causingtheir risk-based capital weighting. In comparison, the fair value of mortgage servicing rights ~~to decline~~decreased $162,000 in ~~2012.~~2015.

~~In 2013, Trust and financial management~~Brokerage revenue ~~increased $240,000, or 6.2%. Trust revenue from employee benefit and retirement services was $121,000 higher in 2013~~decreased $83,000 (9.9%), as ~~compared to 2012. The increase in trust revenue in 2013 reflects~~ the ~~impact~~volume of ~~new business obtained as well as higher valuations~~sales of U.S. equities and fixed income securities throughout most of the period. Assets under management by the Corporation’s Trust and financial management group totaled $796,115,000 at December 31, 2013, an increase of 12.5% over the total one year earlier.annuities declined.

~~Other operating income increased $149,000, or 14.1%, in 2013 as compared to 2012, as mortgage servicing revenue increased $127,000 due to a higher volume of mortgage loans sold and serviced.~~

The net gain from premises and equipment of $270,000 in 2012 included a gain of $272,000 from the excess of insurance proceeds received over the historical book value of assets replaced or reconstructed at the Athens, PA branch, which was damaged by a flood in September 2011 and remained closed until it was re-opened in April 2012. The loss of $16,000 in 2013 included charges related to the abandonment of certain communications equipment

NONINTEREST EXPENSE

Years Ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012~~2015

~~As shown~~Total noninterest expenses increased $2,223,000 (6.4%) in ~~Table V below, total~~2017 as compared to 2016. Total noninterest expense decreased $859,000, or 2.4%, in 2016 as compared to 2015; however, excluding losses from prepayment of ~~debt, increased $686,000~~borrowings in ~~2014~~2015, noninterest expense was $1,714,000 (5.2%) higher in 2016 as compared to ~~2013. Excluding losses from prepayment of debt, total noninterest expense was $557,000 (16.9%) higher in 2013 as compared to 2012.~~2015. In ~~2013,~~2015, the Corporation incurred losses totaling ~~$1,023,000 and, in 2012, losses totaling $2,333,000~~$2,573,000 from prepayment of borrowings (repurchase agreements). There were no losses from prepayment of borrowings incurred in ~~2014.~~2017 or 2016. Changes of significance (other than the previously discussed ~~loss~~losses on prepayment of debt) are discussed in the narrative that follows.

TABLE V - COMPARISON OF NONINTEREST EXPENSE
(In Thousands)
$ %
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)

TABLE V - COMPARISON OF NONINTEREST EXPENSE

(Dollars In Thousands)

					Years Ended
			$	%	December 31,				$			%
	2013	2012	Change		2017		2016		Change			Change
Salaries and wages	$14,206	$14,370	($164)	(1.1)	$	15,806	$	15,411	$	395			2.6
Pensions and other employee benefits	4,150	4,497	(347)	(7.7)		5,374		4,717		657			13.9
Occupancy expense, net	2,473	2,476	(3)	(0.1)		2,340		2,340		0			0.0
Furniture and equipment expense	1,948	1,887	61	3.2		1,834		1,730		104			6.0
FDIC Assessments	604	633	(29)	(4.6)		376		488		(112	)		(23.0	)
Pennsylvania shares tax	1,402	1,312	90	6.9		1,329		1,274		55			4.3
Professional fees	1,534	486	1,048	215.6		1,086		1,126		(40	)		(3.6	)
Automated teller machine and interchange expense	1,020	1,136	(116)	(10.2)		1,284		1,137		147			12.9
Software subscriptions	836	890	(54)	(6.1)		1,190		981		209			21.3
Loss on prepayment of debt	1,023	2,333	(1,310)	(56.2)
Other operating expense	5,298	5,227	71	1.4		6,348		5,540		808			14.6
Total Other Expense	$34,494	$35,247	($753)	(2.1)	$	36,967	$	34,744	$	2,223			6.4

	Years Ended
	December 31,				$			%
	2016		2015		Change			Change
Salaries and wages	$	15,411	$	14,682	$	729			5.0
Pensions and other employee benefits		4,717		4,420		297			6.7
Occupancy expense, net		2,340		2,574		(234	)		(9.1	)
Furniture and equipment expense		1,730		1,860		(130	)		(7.0	)
FDIC Assessments		488		603		(115	)		(19.1	)
Pennsylvania shares tax		1,274		1,248		26			2.1
Professional fees		1,126		638		488			76.5
Automated teller machine and interchange expense		1,137		988		149			15.1
Software subscriptions		981		876		105			12.0
Loss on prepayment of borrowings		0		2,573		(2,573	)		(100.0	)
Other operating expense		5,540		5,141		399			7.8
Total Other Expense	$	34,744	$	35,603	$	(859	)		(2.4	)

~~2014 vs. 2013~~2017 vs 2016

~~Salaries~~Other operating expense increased $808,000. Within other operating expense, the largest variances included increases of $208,000 in loan collection expenses, $149,000 in accounting and ~~wages~~auditing expense stemming from increased ~~$915,000, or 6.4%~~internal audit outsourcing and $130,000 in attorney fees (mainly related to a commercial loan workout situation). ~~As noted~~The increased loan collection expenses in 2017 included payments of delinquent property taxes associated with mortgage loans on properties located in New York State and $32,000 for the ~~Earnings Overview section, this increase is primarily the result~~Corporation’s share of ~~severance benefits incurred~~collection expenses on a Multi-family residential participation loan that has been classified as impaired at December 31, 2017 and ~~paid in 2014~~2016.

~~Pensions and other employee~~Employee benefits ~~increased $619,000, or 14.9%. Health care~~ expense increased ~~$415,000 as~~$657,000, including an increase of $594,000 from higher health care expenses from the ~~amount of claims incurred during 2014 was higher than 2013.~~Corporation’s partially self-insured plan. 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.~~party.

~~Occupancy~~Salaries and wages expense increased ~~$155,000, or 6.3%~~$395,000 (2.6%), ~~primarily due~~reflecting the net effects of annual merit-based salary increases, an increase to ~~increased weather related costs such as snow removal, fuel, utilities~~an average of 292 FTEs in 2017 from 287 in 2016 and ~~maintenance.~~a net decrease in officers’ incentive compensation from corporate plans of $166,000.

Professional fees decreased $835,000, or 54.4%. As noted below, 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.Software subscriptions increased $209,000, including costs associated with new applications as well as annual licensing increases.

Automated teller machine and interchange ~~expenses decreased $96,000, or 9.4%, mainly resulting from benefits derived from consulting project noted below.~~expense increased $147,000, including increases in volume-related costs and fraud monitoring costs.

~~2013 vs. 2012~~

~~Professional fees~~Furniture and equipment expenses in 2017 increased $1,048,000, or 215.6%. As noted in the Earnings Overview section, the Corporation incurred professional fee expense of $315,000 in 2013 for a consulting project related to debit card operations and electronic funds processing, for which management expects the consultants’ services to result in increases in noninterest revenue and reductions in noninterest expense going forward, most significantly from an estimated total reduction in expense of $1.9 million for electronic funds processing over approximately the next 5 years. In addition, the Corporation incurred professional fees expense of $724,000 related to a consulting engagement in which the consulting firm identified recommendations for potential increases in revenues, mainly related to service charges on deposit accounts.

Pensions and other employee benefits decreased $347,000, or 7.7%. Health care expense decreased $171,000 as the amount of claims incurred during 2013 was lower than 2012. The Corporation is self-insured for health insurance, up to a cap for catastrophic levels of losses, which are insured by a third party. Postretirement health care expense decreased $156,000, reflecting amendments to the plan that include elimination of the accrual of service time by full-time employees as well as changes to some of the age and length-of-service requirements for participants to receive some of the benefits provided under the plan. Unemployment compensation decreased $51,000$104,000 primarily as a result of ~~a decrease~~higher depreciation and repair costs.

FDIC insurance decreased $112,000 in 2017 reflecting lower assessment levels beginning in the ~~Corporation’s experience-based Pennsylvania rate in 2013.~~third quarter of 2016.

2016 vs 2015

Salaries and wages ~~decreased $164,000, or 1.1%~~expense increased $729,000 (5.0%), reflecting an increase in number of employees. The average number of full-time equivalent employees was 287 in 2016, up from 281 in 2015, including new positions established for lending, lending support, information technology, training and marketing functions.

Pension and other employee benefits expense increased $297,000 (6.7%). The increase resulted mainly from an increase of $214,000 in healthcare expense as a result of ~~reduced incentive bonus compensation.~~increased healthcare claims. Payroll taxes and other expenses within this category increased in 2016, as well, due to the increase in number of employees described above.

Professional fees expense increased $488,000, including increases related to employee sales and service training, information technology and marketing.

Automated teller machine and interchange expense increased $149,000, including the costs of purchasing new debit cards with EMV functionality.

Software subscriptions increased $105,000 as a result of enhancements and new applications initiated in 2015 and continuing into 2016 including costs associated with the network operating system, automated document signatures and marketing-related functionality.

Other operating expense increased $399,000 (7.8%), including increases in other real estate expenses of $123,000, donations and public relations-related expenses of $94,000 and education and training-related expenses of $60,000. Also, other operating expense was reduced in 2015 by $69,000 as a result of a recovery of sales tax previously paid.

Occupancy expenses in 2016 were $234,000 under 2015 primarily as a result of lower depreciation costs as well as lower winter-related expenses such as snow removal and fuel costs.

Furniture and equipment expenses in 2016 were $130,000 under 2015 primarily as a result lower depreciation costs.

FDIC insurance decreased ~~$116,000, or 10.2%, mainly resulting from benefits derived from~~$115,000 in 2016 reflecting lower assessment levels beginning in the ~~consulting project previously noted.~~third quarter of 2016.

INCOME TAXES

The effective income tax rate was ~~approximately 25%~~34.8% of pre-tax income in ~~2014~~2017, up from 25.3% in 2016 and ~~2013, down from approximately 27%~~24.5% in ~~2012.~~2015. The Corporation’s effective tax rates ~~differ~~differed from the statutory rate of 35% in 2016 and 2015 principally because of the effects of tax-exempt interest income. In 2017, the Corporation realized an increase in the income tax provision (expense) due to the write-down of the net deferred tax asset as a result of the recently enacted Tax Cuts and Jobs Act of 2017 that, among other things, lowered the federal corporate income tax rate to 21% effective January 1, 2018, from the 35% marginal tax rate in effect for prior periods. Excluding the effect of the write-down of the deferred tax asset resulting from the change in the federal corporate income tax rate, the effective income tax rate for the year ended December 31, 2017 would have been 24.3%. Further, management estimates that had the recently enacted 21% federal tax rate been in effect throughout 2017 and 2016, the effective federal tax rate would have been 14.5% in 2017 and 15% in 2016. Management estimates the effective tax rate for 2018 will be approximately 15%. In developing these estimates, no adjustments have been made to 2017 and 2016 historical data for reinvestment of additional funds or for any changes to the composition of the Corporation’s assets and liabilities.

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, ~~2014,~~2017, the net deferred tax asset was ~~$1,668,000, down~~$3,289,000, a decrease from the balance at December 31, ~~2013~~2016 of ~~$6,344,000.~~$5,117,000. The ~~largest changes~~primary reason for the decrease was the write-down of the deferred tax asset based on the decrease in ~~temporary difference components were~~the federal tax rate as ~~follows:~~described above. The total amount of the write-down of the net deferred tax asset was $2,159,000, including $325,000 associated with items included in Accumulated Other Comprehensive Loss in the consolidated balance sheet.

At December 31, 2014, net unrealized gains on available-for-securities resulted in a deferred tax liability of $2,844,000. In contrast, at December 31, 2013, the deferred tax asset associated with unrealized losses on available-for-sale securities was $541,000. The increase in fair value of available-for-securities in 2014 was caused primarily by decreases in long-term interest rates.

The deferred tax asset representing the credit for alternative minimum tax paid fell to $537,000 at December 31, 2014, a reduction of $1,368,000 from December 31, 2013, as the Corporation’s federal taxable income in 2014 exceeded alternative minimum taxable income.

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. Further, the value of the benefit from realization of deferred tax assets would be impacted if income tax rates were changed from currently enacted levels.

Management believes the recorded net deferred tax asset at December 31, ~~2014~~2017 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, ~~2014, 2013~~2017, 2016 and ~~2012.~~2015. Comparison of the amortized cost totals of available-for-sale securities at each year-end presented reflects ~~an increase~~a decrease of ~~$29,422,000~~$19,917,000 to ~~$484,203,000~~$396,538,000 at December 31, ~~2013~~2016 from December 31, ~~2012.~~2015. This change was followed by ~~an increase~~a decrease of ~~$24,479,000~~$37,221,000 to ~~$508,682,000~~$359,317,000 at December 31, ~~2014.~~2017. The continued decrease in securities in 2017 reflects the use of cash generated from the investment portfolio to help fund the increase in ~~securities over this period reflects, in part, the reinvestment~~loans outstanding. The Corporation’s holdings of cash received due to the reduction in loans outstanding (discussed below). Over the two-year period, the largest change in the composition of the portfolio was an increase of $59,850,000 in collateralized mortgage-backed ~~obligations (CMOs)~~securities issued or guaranteed by U.S. Government ~~agencies. The increase~~agencies or sponsored agencies have decreased to $221,187,000 at December 31, 2017 from $237,654,000 at December 31, 2016 and $266,372,000 at December 31, 2015. Within that overall category, in CMOs reflects management’s effort to maintain a monthly return of cash flow from the portfolio that is somewhat consistent in order to provide ongoing opportunities to reinvest at higher interest rates if rates were to rise. As discussed in more detail in Note 7 to the financial statements,2017, the Corporation ~~reported net realized gains from available-for-sale~~had some commercial mortgage-backed securities for which the underlying collateral consists of ~~$1,104,000 in 2014, $1,718,000 in 2013, and $2,682,000 in 2012.~~multi-family properties. The total amortized cost of commercial mortgage-backed securities held at December 31, 2017 was $33,881,000.

As reflected in Table VI, the fair value of available-for-sale securities as of December 31, ~~2014~~2017 was ~~$8,125,000,~~$2,409,000, or ~~1.6%~~0.67%, ~~higher~~less than the total amortized cost basis. ~~The~~In comparison, the aggregate unrealized loss position at December 31, 2016 was $1,461,000, or 0.37% of the total amortized cost basis. .. Modest increases in intermediate-term and long-term interest rates over the course of 2016 and 2017, as well as market expectations of further rate increases, have contributed to the decrease in fair values of debt securities. Also, the fair values of tax-exempt municipal bonds have been negatively impacted by the reduced benefit of their tax-exempt nature as a result of the reduction in the federal corporate income tax rate. At December 31, 2015, the aggregate unrealized gain position ~~at December 31, 2014 included~~was $3,835,000, or 0.92% of total amortized cost, including an unrealized gain of ~~$5,076,000 on debt securities as well as an unrealized gain of $3,049,000~~$706,000 on marketable equity securities (bank stocks). ~~Decreases~~The Corporation liquidated its investments in ~~intermediate-term~~bank stocks in 2015 and ~~long-term interest rates~~2016, and held no investments in ~~2014 led to an increase~~bank stocks in ~~the aggregate fair value~~2017. The Corporation reported net realized gains from sales of ~~debt~~available-for-sale securities of $257,000 in ~~2014~~2017. In comparison, net realized gains from sales of available-for-sale securities totaled $1,158,000 in ~~comparison to historical cost basis.~~ 2016 and $2,861,000 in 2015, including realized gains from sales of bank stocks of $1,125,000 in 2016 and $2,220,000 in 2015.

Management has reviewed the Corporation’s holdings as of December 31, ~~2014~~2017 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 ~~2015.~~2018.

TABLE VI - INVESTMENT SECURITIES
As of December 31,
2014 2013 2012
Amortized Fair Amortized Fair Amortized Fair
(In Thousands) Cost Value Cost Value Cost Value

AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies $27,221 $26,676 $47,382 $45,877 $30,695 $31,217
Obligations of states and political subdivisions:
Tax-exempt 120,086 124,839 127,748 128,426 130,168 137,020
Taxable 33,637 33,878 35,154 34,471 24,426 24,817
Mortgage-backed securities 82,479 83,903 84,849 86,208 76,368 80,196
Collateralized mortgage obligations,
Issued by U.S. Government agencies 239,620 238,823 182,372 178,092 179,770 183,510
Trust preferred securities issued by individual institutions 0 0 0 0 5,167 5,171
Collateralized debt obligations:
Pooled trust preferred securities - senior tranches 0 0 0 0 1,615 1,613
Other collateralized debt obligations 34 34 660 660 660 660
Total debt securities 503,077 508,153 478,165 473,734 448,869 464,204
Marketable equity securities 5,605 8,654 6,038 8,924 5,912 8,373
Total $508,682 $516,807 $484,203 $482,658 $454,781 $472,577

TABLE VI - INVESTMENT SECURITIES

					As of December 31,
	2017				2016				2015
	Amortized		Fair		Amortized		Fair		Amortized		Fair
(In Thousands)	Cost		Value		Cost		Value		Cost		Value

AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$	8,026	$	7,873	$	9,671	$	9,541	$	10,663	$	10,483
Obligations of states and political subdivisions:
Tax-exempt		103,673		105,111		118,140		119,037		103,414		107,757
Taxable		25,431		25,573		30,073		30,297		34,317		34,597
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		52,992		52,347		58,922		58,404		73,227		73,343
Residential collateralized mortgage obligations		134,314		131,814		147,915		146,608		193,145		191,715
Commercial mortgage-backed securities		33,881		33,219		30,817		30,219		0		0
Other collateralized debt obligations		0		0		0		0		9		9
Total debt securities		358,317		355,937		395,538		394,106		414,775		417,904
Marketable equity securities		1,000		971		1,000		971		1,680		2,386
Total	$	359,317	$	356,908	$	396,538	$	395,077	$	416,455	$	420,290

The following table presents the contractual maturities and the weighted-average yields (calculated based on amortized cost) of investment securities as of December 31, ~~2014.~~2017. 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				Within					One-					Five-					After
	One		Five		Ten		Ten				One					Five					Ten					Ten
	Year	Yield	Years	Yield	Years	Yield	Years	Yield	Total	Yield	Year		Yield			Years		Yield			Years		Yield			Years		Yield			Total		Yield

AVAILABLE-FOR-SALE SECURITIES:
Obligations of U.S. Government agencies	$0	0.00%	$14,171	1.34%	$13,050	1.49%	$0	0.00%	$27,221	1.41%	$	0		0.00	%	$	8,026		1.42	%	$	0		0.00	%	$	0		0.00	%	$	8,026		1.42	%
Obligations of states and political subdivisions:
Tax-exempt	5,464	3.50%	26,918	1.92%	32,470	2.68%	55,234	4.61%	120,086	3.43%		6,247		1.55	%		45,184		3.00	%		32,822		2.21	%		19,420		3.60	%		103,673		2.78	%
Taxable	2,445	2.39%	14,410	1.99%	16,217	2.79%	565	3.60%	33,637	2.43%		5,103		1.97	%		16,064		2.51	%		4,264		3.12	%		0		0.00	%		25,431		2.51	%
Other collateralized debt obligations	0	0.00%	0	0.00%	0	0.00%	34	0.00%	34	0.00%
Subtotal	$7,909	3.16%	$55,499	1.79%	$61,737	2.46%	$55,833	4.59%	$180,978	2.94%
Mortgage-backed securities									82,479	2.33%
Collateralized mortgage obligations,
Issued by U.S. Government agencies									239,620	2.05%
Sub-total											$	11,350		1.74	%	$	69,274		2.71	%	$	37,086		2.32	%	$	19,420		3.60	%		137,130		2.65	%
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities																																52,992		2.24	%
Residential collateralized mortgage obligations																																134,314		2.12	%
Commercial mortgage-backed securities																																33,881		2.39	%
Total									$503,077	2.42%																					$	358,317		2.36	%

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.~~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

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, 2014, 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.

~~The total of~~Gross loans outstanding ~~(without consideration of the allowance~~(excluding mortgage loans held for ~~loan losses)~~sale) were $815,713,000 at December 31, ~~2014 reflects a total decrease of $99,866,000 (13.7%)~~2017, up 8.5% from ~~the balance~~$751,835,000 at December 31, ~~2010 to the~~2016. The total outstanding balances of ~~$630,545,000~~residential mortgage segment loans at December 31, 2014. Loan volumes are heavily dependent on economic conditions in the Corporation’s market area, and are significantly influenced by interest rates. Since the end of 2010, the Corporation experienced a net decrease in total loans outstanding under the residential mortgage segment ($39,418,000) with more residential mortgage originations than in previous years sold into the secondary market. In 2009, the Corporation initiated participation in the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago for the sale of mortgage loans to the secondary market. In 2014, the Corporation initiated participation in the MPF Original program, which is also a Federal Home Loan Bank program. At December 31, 2014, the outstanding balance of residential mortgage loans originated by the Corporation, and sold with servicing retained under these two programs was $152,505,000. Total commercial segment loans outstanding decreased ($55,686,000) at December 31, 20142017 increased $26,513,000 (6.3%) as compared to December 31, ~~2010, including a reduction~~2016, and the total outstanding balances of ~~$8,336,000~~commercial segment loans at December 31, ~~2014~~2017 increased $36,148,000 (11.4%) as compared to December 31, 2016. The 2017 loan growth followed growth in loans outstanding in 2016 of 6.7% from ~~year-end 2013~~December 31, 2015. Total outstanding commercial loans were higher by $9,206,000 (3.0%), and ~~a reduction of $26,176,000~~residential mortgage segment loans were up $34,683,000 (9.0%), at December 31, ~~2013 from year-end 2012. Also,~~2016 as compared to December 31, 2015.

The increases in loans outstanding in 2016 and 2017 included increases in commercial participation loans. Participation loans represent portions of larger commercial transactions for which other institutions are the “lead banks”. Although not the lead bank, the Corporation conducts detailed underwriting and monitoring of participation loan opportunities. Participation loans are included in the ~~last four years, consumer~~“Commercial and industrial,” “Commercial loans ~~have steadily decreased ($4,762,000)~~secured by real estate” and “Political subdivisions” classes in the loan tables presented in this Form 10-K. Total participation loans outstanding amounted to ~~the~~$61,245,000 at December 31, ~~2014~~2017, up from $47,508,000 at December 31, 2016. At December 31, 2017, the balance of ~~$10,234,000.~~participation loans outstanding includes a total of $53,756,000 to businesses located outside of the Corporation’s market area, including $10,063,000 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 at the time of origination the businesses have demonstrated strong cash flow performance in their recent histories. At December 31, 2017, total leveraged participation loans, including loans originated through the network and four loans to two borrowers originated through another lead institution, totaled $15,328,000, up slightly from $15,207,000 at December 31, 2016. At December 31, 2017, there was a leveraged loan with an outstanding balance of $324,000 classified as impaired with a specific allowance for loan losses of $96,000. With the exception of the loan identified in the preceding sentence, there were no loans classified as impaired at December 31, 2017 and 2016, and all of the leveraged loans (including the loan classified as impaired) were current as to payments of principal and interest as of December 31, 2017 and 2016.

Table VIII presents loan maturity data as of December 31, ~~2014.~~2017. The interest rate simulation model used to prepare Table VIII classifies certain loans under different categories ~~than they~~from the categories that 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 ~~37%~~38% of the loan portfolio. Of the ~~63%~~62% of the portfolio made up of variable-rate loans, a significant portion ~~(45%~~(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 secured 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.

Short-term borrowings totaled $61,766,000 at December 31, 2017, up from $26,175,000 at December 31, 2016. Within this category, overnight borrowing from FHLB-Pittsburgh of $29,000,000 was up from $21,000,000 at December 31, 2016. Also at December 31, 2017, the balance of short-term borrowings included a series of advances from FHLB-Pittsburgh totaling $29,000,000, including advances maturing monthly from January through October 2018 with a weighted average interest rate of 1.69% and rates ranging from 1.23% to 1.89%.

Long-term borrowings of $9,189,000 at December 31, 2017 were down from the balance at December 31, 2016 of $38,454,000. In 2017, the Corporation paid off two higher-cost borrowings totaling $37,000,000, including an advance from FHLB-Pittsburgh of $10,000,000 with a rate of 3.81% in October and repurchase agreements totaling $27,000,000 with a rate of 3.595% in December. Repayment of these borrowings was funded by advances from FHLB-Pittsburgh, including the short-term advances described above and an additional $8,000,000 of advances included in long-term borrowings at December 31, 2017. The advances included in long-term borrowings at December 31, 2017 had initial maturities of greater than one year, with varying maturities through February 2019 and interest rates ranging from 1.35% to 1.83%.

Other significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the “Net Interest Income” section of Management’s Discussion and Analysis. Other significant balance sheet items, including securities, the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis.

Total ~~future capital~~ purchases of bank premises and equipment in ~~2015~~2018 are estimated at approximately ~~$2.6~~$3.0 million. Management does not expect ~~capital expenditures~~the amount of purchases of bank premises and equipment to have a material, detrimental effect on the Corporation’s financial condition ~~during 2015.~~in 2018.

TABLE VII - Five-year Summary of Loans by Type

(In Thousands)
2014 % 2013 % 2012 % 2011 % 2010 %
Residential mortgage:
Residential mortgage loans - first liens $291,882 46.3 $299,831 46.5 $311,627 45.6 $331,015 46.7 $333,012 45.6
Residential mortgage loans - junior liens 21,166 3.4 23,040 3.6 26,748 3.9 28,851 4.1 31,590 4.3
Home equity lines of credit 36,629 5.8 34,530 5.4 33,017 4.8 30,037 4.2 26,853 3.7
1-4 Family residential construction 16,739 2.7 13,909 2.2 12,842 1.9 9,959 1.4 14,379 2.0
Total residential mortgage 366,416 58.1 371,310 57.6 384,234 56.2 399,862 56.5 405,834 55.6
Commercial:
Commercial loans secured by real estate 145,878 23.1 147,215 22.8 158,413 23.2 156,388 22.1 167,094 22.9
Commercial and industrial 50,157 8.0 42,387 6.6 48,442 7.1 57,191 8.1 59,005 8.1
Political subdivisions 17,534 2.8 16,291 2.5 31,789 4.6 37,620 5.3 36,480 5.0
Commercial construction 6,938 1.1 17,003 2.6 28,200 4.1 23,518 3.3 24,004 3.3
Loans secured by farmland 7,916 1.3 10,468 1.6 11,403 1.7 10,949 1.5 11,353 1.6
Multi-family (5 or more) residential 8,917 1.4 10,985 1.7 6,745 1.0 6,583 0.9 7,781 1.1
Agricultural loans 3,221 0.5 3,251 0.5 3,053 0.4 2,987 0.4 3,472 0.5
Other commercial loans 13,334 2.1 14,631 2.3 362 0.1 552 0.1 392 0.1
Total commercial 253,895 40.3 262,231 40.7 288,407 42.2 295,788 41.8 309,581 42.4
Consumer 10,234 1.6 10,762 1.7 11,269 1.6 12,665 1.8 14,996 2.1
Total 630,545 100.0 644,303 100.0 683,910 100.0 708,315 100.0 730,411 100.0
Less: allowance for loan losses (7,336) (8,663) (6,857) (7,705) (9,107)
Loans, net $623,209 $635,640 $677,053 $700,610 $721,304

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 quasi-government entity. 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 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, 2017, the total outstanding balance of loans the Corporation has repurchased as a result of identified instances of noncompliance amounted to $1,805,000, and the corresponding total outstanding balance repurchased at December 31, 2016 was $1,852,000.

At December 31, 2017, outstanding balances of loans sold and serviced through the two programs totaled $169,725,000, including loans sold through the MPF Xtra program of $107,117,000 and loans sold through the Original program of $62,608,000. At December 31, 2016, outstanding balances of loans sold and serviced through the two programs totaled $163,296,000, including loans sold through the MPF Xtra program of $116,978,000 and loans sold through the Original Program of $46,318,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of December 31, 2017 and December 31, 2016.

For loans sold under the Original program, the Corporation provides a credit enhancement whereby the Corporation would assume credit losses in excess of a defined First Loss Account (“FLA”) balance, up to specified amounts. The FLA is funded by the Federal Home Loan Bank of Pittsburgh based on a percentage of the outstanding balance of loans sold. At December 31, 2017, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $5,742,000, and the Corporation has recorded a related allowance for credit losses in the amount of $260,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets. At December 31, 2016, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $4,664,000, and the related allowance for credit losses was $196,000. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

TABLE VII - Five-year Summary of Loans by Type

(Dollars In Thousands)

	2017			%		2016			%		2015			%		2014			%		2013			%
Residential mortgage:
Residential mortgage loans - first liens	$	359,987			44.1	$	334,102			44.4	$	304,783			43.2	$	291,882			46.3	$	299,831			46.5
Residential mortgage loans - junior liens		25,325			3.1		23,706			3.2		21,146			3.0		21,166			3.4		23,040			3.6
Home equity lines of credit		35,758			4.4		38,057			5.1		39,040			5.5		36,629			5.8		34,530			5.4
1-4 Family residential construction		26,216			3.2		24,908			3.3		21,121			3.0		16,739			2.7		13,909			2.2
Total residential mortgage		447,286			54.8		420,773			56.0		386,090			54.8		366,416			58.1		371,310			57.6
Commercial:
Commercial loans secured by real estate		159,266			19.5		150,468			20.0		154,779			22.0		145,878			23.1		147,215			22.8
Commercial and industrial		88,276			10.8		83,854			11.2		75,196			10.7		50,157			8.0		42,387			6.6
Political subdivisions		59,287			7.3		38,068			5.1		40,007			5.7		17,534			2.8		16,291			2.5
Commercial construction		14,527			1.8		14,287			1.9		5,122			0.7		6,938			1.1		17,003			2.6
Loans secured by farmland		7,255			0.9		7,294			1.0		7,019			1.0		7,916			1.3		10,468			1.6
Multi-family (5 or more) residential		7,713			0.9		7,896			1.1		9,188			1.3		8,917			1.4		10,985			1.7
Agricultural loans		6,178			0.8		3,998			0.5		4,671			0.7		3,221			0.5		3,251			0.5
Other commercial loans		10,986			1.3		11,475			1.5		12,152			1.7		13,334			2.1		14,631			2.3
Total commercial		353,488			43.3		317,340			42.2		308,134			43.7		253,895			40.3		262,231			40.7
Consumer		14,939			1.8		13,722			1.8		10,656			1.5		10,234			1.6		10,762			1.7
Total		815,713			100.0		751,835			100.0		704,880			100.0		630,545			100.0		644,303			100.0
Less: allowance for loan losses		(8,856	)				(8,473	)				(7,889	)				(7,336	)				(8,663	)
Loans, net	$	806,857				$	743,362				$	696,991				$	623,209				$	635,640

TABLE VIII – LOAN MATURITY DISTRIBUTION

~~(In Thousands)~~

~~As of December 31, 2014~~

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 $644 $16,154 $161,132 $177,930 $69,359 $194,051 $61,178 $324,588
Commercial 11,371 19,757 11,470 42,598 47,178 27,089 740 75,007
Consumer 2,630 4,541 3,074 10,245 56 73 48 177
Total $14,645 $40,452 $175,676 $230,773 $116,593 $221,213 $61,966 $399,772

(In Thousands)	As of December 31, 2017

	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	$	6,076	$	25,336	$	174,902	$	206,314	$	122,028	$	172,436	$	123,684	$	418,148
Commercial		12,724		34,971		40,389		88,084		55,832		29,152		3,511		88,495
Consumer		1,842		9,589		3,188		14,619		45		0		8		53
Total	$	20,642	$	69,896	$	218,479	$	309,017	$	177,905	$	201,588	$	127,203	$	506,696

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 ~~$7,336,000~~$8,856,000 at December 31, ~~2014, down~~2017, up from ~~$8,663,000~~$8,473,000 at December 31, ~~2013. As shown in~~2016. Table X shows total specific allowances on impaired loans ~~totaled $769,000~~increased $605,000 to $1,279,000 at December 31, ~~2014, which was $1,564,000 lower than the total of specific allowances on impaired loans~~2017 from $674,000 at December 31, ~~2013.~~2016. The net increase in specific allowances ~~on impaired loans~~ in ~~2013~~2017 included an increase of $391,000 in the allowance ~~of $1,552,000 established on loans~~related to one real estate secured commercial ~~borrower.~~loan. The increase in the specific allowance for this loan was based on an updated appraisal received in 2017 as well as principal reductions from scheduled payments. At December 31, 2017, the outstanding balance of this loan was $2,641,000, and the related allowance was $919,000.

Table X also shows that the collectively determined portion of the allowance related to commercial loans decreased $295,000, to $3,078,000 at December 31, 2017 from $3,373,000 at December 31, 2016. The decrease in the ~~allowance in 2014 included the effect of a charge-off of $1,486,000 on these loans in 2014. Table X also shows the~~ collectively determined ~~component of the~~ allowance ~~for~~on commercial loans was $149,000 higher and for residential mortgages was $139,000 higher at December 31, 2014 than at December 31, 2013. The allowance for the commercial and residential mortgage loan segments were affected by increasesresulted from an aggregate improvement (reduction) in the net charge-off ~~percentage~~experience and qualitative factors used to ~~determine a portion~~value the allowance on commercial loans, partially offset by the impact of an increase in outstanding loans. The aggregate net charge-off experience factor used in the ~~collectively determined~~ allowance ~~which~~calculation on commercial loans was ~~higher~~0.09% lower at December 31, 2014 than at December 31, 2013. In addition, the collectively evaluated components of the allowance for the residential and commercial segments were also affected by increases in qualitative factors at December 31, 20142017 as compared to December 31, ~~2013, while~~2016. The Corporation’s aggregate net charge-off rate on commercial loans has been improving over the past several quarters, as the effects on the overall rate of a large ($1,486,000) charge-off in 2014 on a commercial loan secured by real estate has gradually diminished. The qualitative factors used in the allowance calculation for commercial loans were 0.07% lower at December 31, 2017 as compared to December 31, 2016, reflecting a pattern of overall improvement in loan ~~balances had~~delinquency levels and a reduction in the ~~effect of decreasing the collectively evaluated components~~unemployment rate throughout most of the ~~allowance~~Corporation’s market area over the previous 12-18 months.

Throughout 2016 and at March 31, 2017, a rolling three-year average net charge-off rate was used for all ~~segments.~~loan classes. Beginning with the quarter ending June 30, 2017, a five-year average net charge-off rate was used for commercial loans secured by real estate and for multi-family residential loans, while a three-year average net charge-off rate was used for all other loan classes. The change in time period for these two loan classes was based on management’s evaluation of an appropriate time period that captures an historical loss experience relevant to the current portfolio.

~~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 ~~2014, 2013~~2017, 2016 and ~~2012~~2015 is as follows:

(In Thousands)
	2017		2016			2015
Residential mortgage	$	251	$	542		$	(19	)
Commercial		316		687			816
Consumer		133		21			16
Unallocated		101		(29	)		32
Total	$	801	$	1,221		$	845

(In Thousands)
2014 2013 2012
Residential mortgage $250 $559 $149
Commercial 227 1,507 20
Consumer 2 24 112
Unallocated (3) (43) 7
Total $476 $2,047 $288

The provision for loan losses for the two largest lending segments, Residential mortgage and Commercial, is further detailed as follows:

Residential mortgage segment
(In thousands)
	2017			2016			2015
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	300		$	69		$	(141	)

Increase (decrease) in collectively determined portion of the allowance attributable to:
Loan growth		233			325			196
Changes in historical loss experience factors		(53	)		(6	)		(111	)
Changes in qualitative factors		(229	)		154			37

Total provision (credit) for loan losses - Residential mortgage segment	$	251		$	542		$	(19	)

Commercial segment
(In thousands)
	2017			2016		2015
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	611		$	417	$	445

Increase (decrease) in collectively determined portion of the allowance attributable to:
Loan growth		183			114		437
Changes in historical loss experience factors		(268	)		75		(42	)
Changes in qualitative factors		(210	)		81		(24	)

Total provision for loan losses - Commercial segment	$	316		$	687	$	816

For each year shown in the table immediately above, the provision related to increases or decreases in specific allowances on impaired loans was ~~$476,000~~affected by changes in ~~2014,~~the results of management’s assessment of the amount of probable or actual (charged-off) losses associated with a small number of larger, individual loans. This line item also includes net charge-offs or recoveries from smaller loans that had not been individually evaluated for impairment prior to charge-off.

In the table immediately above, the portion of the net change in ~~comparison~~the collectively determined allowance attributable to aloan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding year to the net increase in loans outstanding (excluding loans specifically evaluated for impairment) for the year. The table shows that the provision for both the Residential mortgage and Commercial segments included the effects of loan ~~losses~~growth in 2017, 2016 and 2015.

The effect on the provision of ~~$2,047,000~~changes in ~~2013~~historical loss experience and aqualitative factors, as shown in the table above, was determined by: (1) calculating the net change in each factor used in determining the allowance at the end of the year as compared to the preceding year, and (2) applying the net change in each factor to the outstanding balance of loans at the end of the preceding year (excluding loans specifically evaluated for impairment).

As discussed above, the Corporation’s overall net charge-off experience has improved in 2017, consistent with the reductions in the provision for ~~loan losses of $288,000 in 2012. As shown in~~both the Residential mortgage and Commercial segments. Table XII shows the average ~~provision for loan losses for~~rate of net charge-offs as a percentage of loans was 0.05% in 2017, with an average over the five-year period ended December 31, ~~2014 was $743,000.~~ 2017 of 0.10%, and annual average rates ranging from lows of 0.04% in 2013 and 2015 to a high of 0.29% in 2014.

The ~~total amount of~~table above also shows the provision for ~~loan losses for each period is determined based on~~both the ~~amount required to maintain an appropriate allowance~~Residential mortgage and Commercial segments in ~~light of all of the factors described above.~~

In 2014, the provision for loan losses related to the commercial segment was $227,000 compared to $1,507,000 in 2013 and $20,000 in 2012. In 2014, the provision for the commercial segment included the effects of increases 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. The 2013 provision for loan losses related to the commercial segment included a provision of $1,552,000 from the establishment of an allowance on loans to one borrower. In 2012, the Corporation’s provision for loan losses for the commercial segment included a net provision of $464,000 related to a commercial relationship for which charge-offs totaling $760,000 were recorded, while the provision2017 was reduced by the ~~net decrease~~effect of a reduction in qualitative factors. As discussed above, the reduced qualitative factors is consistent with the overall pattern of improving loan delinquency and charge-off levels and an improved local economy as evidenced by a reduction in the ~~collectively evaluated portion~~unemployment rate throughout most of the ~~allowance for loan losses as a result of a lower balance of outstanding loans.~~Corporation’s market area. In ~~2014,~~2016, the provision for both the ~~residential~~Residential mortgage ~~segment~~and Commercial segments included the effect of slight increases in ~~average net charge-offs and~~ qualitative factors used to estimate a portion of the collectively determined allowance, partially offset by lower loan balances. The provision for loan losses for the residential mortgage segment increased in 2013, mainly as a result of the increase in average net charge-offs used to estimate a portion of the collectively determined allowance.factors.

Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). Total nonperforming loans as a percentage of outstanding loans was 2.10% at December 31, 2017, up slightly from 2.07% at December 31, 2016. Nonperforming assets as a percentage of total assets was 1.47% at December 31, 2017, also up slightly from 1.43% at December 31, 2016. Table XI ~~shows~~presents data at the end of each of the years ended December 31, 2013 through 2017. For the range of dates presented in Table XI, total nonperforming loans as a percentage of loans has ranged from a low of 2.07% at December 31, 2016 to a high of 2.80% at December 31, 2013, and total nonperforming assets as a percentage of assets has ranged from a low of 1.31% at December 31, 2015 to a high of 1.53% at December 31, 2013.

Total impaired loans of ~~$12,316,000~~$9,511,000 at December 31, ~~2014,~~2017, are down $1,349,000 from the corresponding amount at December 31, ~~2013~~2016 of ~~$16,321,000. Though down~~$10,860,000. Table XI shows that over the period 2013-2017, the year-end total outstanding balance of impaired loans has ranged from ~~year-end 2013,~~a low of $9,511,000 in 2017 to a high of $16,321,000 in 2013.

Total nonperforming assets of $18,726,000 at December 31, 2017 are up $972,000 from the corresponding amount at December 31, 2016. The total amount of nonperforming assets exceeds the amount of total impaired loans ~~(as well as~~because the nonperforming category includes, in addition to impaired loans, ~~as reflected~~foreclosed assets held for sale and loans 90 days or more past due or in nonaccrual status with outstanding balances lower than the minimum amounts that are individually evaluated for impairment. A summary of changes in the ~~table)~~components of nonperforming assets at December 31, ~~2014 is significantly higher than it was from 2010 through 2012. The increase in impaired and nonperforming loans at December 31, 2014 and December 31, 2013~~2017 as compared to ~~the other periods presented reflected the classification as nonperforming of two large commercial loan relationships with outstanding balances totaling $6,995,000 at~~ December 31, 2014 and $7,599,000 at December 31, 2013. The total of the specific allowance for loan losses on those two relationships amounted to $211,000 at December 31, 2014 and $1,624,000 at December 31, 2013. As described in the following paragraph, during the second quarter 2014, a charge-off of $1,486,000 was made related to one of these2016 is as follows:

~~commercial loan relationships resulting in the decrease in the specific allowance as well as total impaired loans with a valuation allowance.~~

Nonaccrual loans totaled $13,404,000 at December 31, 2017, up from $8,736,000 at December 31, 2016. The net increase in nonaccrual loans included the effect of classifying a commercial loan with a recorded investment of $2,811,000 at December 31, 2017 as nonaccrual in 2017. The increase also included the effect of an increase in total residential mortgage loans in nonaccrual status to $5,417,000 at December 31, 2017 from $3,781,000 at December 31, 2016.

Total loans past due 90 days or more and still accruing interest amounted to $3,724,000 at December 31, 2017, a decrease of $3,114,000 from $6,838,000 at December 31, 2016. The decrease in 2017 in the balance of loans past due 90 days or more and still accruing interest included the commercial loan described above moving to nonaccrual status. At December 31, 2017, total residential mortgage loans that were more than 90 days past due but deemed to be well secured and in the process of collection amounted to $2,648,000, down from $3,456,000 at December 31, 2016. The Corporation reviews the status of loans past due 90 days or more each quarter to determine if it is appropriate to continue to accrue interest, and has determined the loans included in this category are well secured and that ultimate collection of all principal and interest is probable.

Foreclosed assets held for sale consisted of real estate, and totaled $1,598,000 at December 31, 2017, a decrease of $582,000 from $2,180,000 at December 31, 2016. At December 31, 2017, the Corporation held 16 such properties for sale, with total carrying values of $721,000 related to residential real estate, $632,000 of land and $245,000 related to commercial real estate. At December 31, 2016, the Corporation held 19 such properties for sale, with total carrying values of $1,102,000 related to residential real estate, $650,000 of land and $428,000 related to commercial real estate. The Corporation evaluates the carrying values of foreclosed assets each quarter based on the most recent market activity or appraisals for each property.

As shown in Table XI, loans classified as TDRs ~~increased~~decreased to ~~$7,195,000~~$3,663,000 at December 31, ~~2014~~2017 from ~~$4,175,000~~$8,677,000 at December 31, ~~2013. This increase relates mainly to~~2016. The decrease resulted primarily from removing one commercial ~~borrower. The~~relationship from TDR status in 2017. At December 31, 2017, the outstanding contractual balances of loans to this borrower totaled $6,425,000, and the recorded investments totaled $4,593,000. In 2014, the Corporation entered into a forbearance agreement with this commercial borrower which ~~includes a reduction~~was extended for two additional twelve-month periods, most recently 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.July 2016. The Corporation recorded a charge-off of $1,486,000 in ~~the second quarter~~ 2014 as a result of these modifications, as the payment amounts based on the forbearance agreement ~~are~~were not sufficient to fully amortize the contractual amount of principal outstanding on the loans. ~~The amount of~~In December 2016, the ~~charge-off was determined based on~~Corporation and the ~~excess of~~borrower entered into a modification agreement, terminating the ~~contractual principal due over~~forbearance agreement and establishing loan terms with essentially the ~~present value of the~~same interest rate and monthly payment amounts as had been in effect under the forbearance agreement. The interest rates provided for in the modification agreement were equal to or greater than rates the Corporation would be willing to accept for loans with comparable terms to borrowers with a comparable risk profile at the time of modification. The borrower has made all required payments on the loans in accordance with the terms of the forbearance agreement, ~~assuming~~as extended, and the ~~revised payment amounts would continue until maturity, at~~modification agreement. Accordingly, the ~~contractual interest rates.~~

~~Table XI reflects a lower amount of total~~ loans ~~past due 30-89 days and still accruing interest~~were restored to full accrual status at December 31, ~~2014 of $7,121,000~~2016 and are no longer included in the amounts reported as compared to the December 31, 2013 total of $8,305,000, mainly due to a lower amount of past due residential mortgage loans. Total loans past due 90 days or more and still in accrual status decreased to $2,843,000TDRs at December 31, ~~2014~~2017. Table XI shows that over the period 2013-2017, the year-end total outstanding balance of TDRs has ranged from ~~$3,131,000 at December 31, 2013. Interest continues~~a low of $3,663,000 in 2017 to ~~be accrued on loans 90 days or more past due that management deems to be well secured and~~a high of $8,677,000 in ~~the process of collection, and for which no loss is anticipated.~~ 2016.

Over the period ~~2010-2014,~~2013-2017, 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, ~~2014.~~2017. 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~~

TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands) Years Ended December 31,
2014 2013 2012 2011 2010
Balance, beginning of year $8,663 $6,857 $7,705 $9,107 $8,265
Charge-offs:
Residential mortgage (327) (95) (552) (100) (340)
Commercial (1,715) (459) (498) (1,189) (91)
Consumer (97) (117) (171) (157) (188)
Total charge-offs (2,139) (671) (1,221) (1,446) (619)
Recoveries:
Residential mortgage 25 24 18 3 55
Commercial 264 348 8 255 113
Consumer 47 58 59 71 102
Total recoveries 336 430 85 329 270
Net charge-offs (1,803) (241) (1,136) (1,117) (349)
Provision (credit) for loan losses 476 2,047 288 (285) 1,191
Balance, end of period $7,336 $8,663 $6,857 $7,705 $9,107

Net charge-offs as a % ofaverage loans 0.29% 0.04% 0.16% 0.16% 0.05%

~~TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES~~

~~(In Thousands)~~

As of December 31,
2014 2013 2012 2011 2010
ASC 310 - Impaired loans $769 $2,333 $623 $1,126 $2,288
ASC 450 - Collective segments:
Commercial 2,732 2,583 2,594 2,811 3,047
Residential mortgage 3,295 3,156 3,011 3,130 3,227
Consumer 145 193 188 204 232
Unallocated 395 398 441 434 313
Total Allowance $7,336 $8,663 $6,857 $7,705 $9,107

(Dollars In Thousands)				Years Ended December 31,
	2017			2016			2015			2014			2013
Balance, beginning of year	$	8,473		$	7,889		$	7,336		$	8,663		$	6,857
Charge-offs:
Residential mortgage		(197	)		(73	)		(217	)		(327	)		(95	)
Commercial		(132	)		(597	)		(251	)		(1,715	)		(459	)
Consumer		(150	)		(87	)		(94	)		(97	)		(117	)
Total charge-offs		(479	)		(757	)		(562	)		(2,139	)		(671	)
Recoveries:
Residential mortgage		19			3			1			25			24
Commercial		4			35			214			264			348
Consumer		38			82			55			47			58
Total recoveries		61			120			270			336			430
Net charge-offs		(418	)		(637	)		(292	)		(1,803	)		(241	)
Provision for loan losses		801			1,221			845			476			2,047
Balance, end of period	$	8,856		$	8,473		$	7,889		$	7,336		$	8,663

Net charge-offs as a % of average loans		0.05	%		0.09	%		0.04	%		0.29	%		0.04	%

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)
	As of December 31,
	2017		2016		2015		2014		2013
ASC 310 - Impaired loans	$	1,279	$	674	$	820	$	769	$	2,333
ASC 450 - Collective segments:
Commercial		3,078		3,373		3,103		2,732		2,583
Residential mortgage		3,841		3,890		3,417		3,295		3,156
Consumer		159		138		122		145		193
Unallocated		499		398		427		395		398
Total Allowance	$	8,856	$	8,473	$	7,889	$	7,336	$	8,663

TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS
AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
(Dollars In Thousands)
	As of December 31,
	2017			2016			2015			2014			2013
Impaired loans with a valuation allowance	$	4,100		$	3,372		$	1,933		$	3,241		$	9,889
Impaired loans without a valuation allowance		5,411			7,488			8,041			9,075			6,432
Total impaired loans	$	9,511		$	10,860		$	9,974		$	12,316		$	16,321
Total loans past due 30-89 days and still accruing	$	9,449		$	7,735		$	7,057		$	7,121		$	8,305

Nonperforming assets:
Total nonaccrual loans	$	13,404		$	8,736		$	11,517		$	12,610		$	14,934
Total loans past due 90 days or more and still accruing		3,724			6,838			3,229			2,843			3,131
Total nonperforming loans		17,128			15,574			14,746			15,453			18,065
Foreclosed assets held for sale (real estate)		1,598			2,180			1,260			1,189			892
Total nonperforming assets	$	18,726		$	17,754		$	16,006		$	16,642		$	18,957

Loans subject to troubled debt restructurings (TDRs):
Performing	$	636		$	5,803		$	1,186		$	1,807		$	3,267
Nonperforming		3,027			2,874			5,178			5,388			908
Total TDRs	$	3,663		$	8,677		$	6,364		$	7,195		$	4,175

Total nonperforming loans as a % of loans		2.10	%		2.07	%		2.09	%		2.45	%		2.80	%
Total nonperforming assets as a % of assets		1.47	%		1.43	%		1.31	%		1.34	%		1.53	%
Allowance for loan losses as a % of total loans		1.09	%		1.13	%		1.12	%		1.16	%		1.34	%
Allowance for loan losses as a % of nonperforming loans		51.70	%		54.40	%		53.50	%		47.47	%		47.95	%

~~TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS~~

~~AND TROUBLED DEBT RESTRUCTURINGS (TDRs)~~

~~(In Thousands)~~

As of December 31,
2014 2013 2012 2011 2010
Impaired loans with a valuation allowance $3,241 $9,889 $2,710 $3,433 $5,457
Impaired loans without a valuation allowance 9,075 6,432 4,719 4,431 3,191
Total impaired loans $12,316 $16,321 $7,429 $7,864 $8,648

Total loans past due 30-89 days and still accruing $7,121 $8,305 $7,756 $7,898 $7,125

Nonperforming assets:
Total nonaccrual loans $12,610 $14,934 $7,353 $7,197 $10,809
Total loans past due 90 days or more and still accruing 2,843 3,131 2,311 1,267 727
Total nonperforming loans 15,453 18,065 9,664 8,464 11,536
Foreclosed assets held for sale (real estate) 1,189 892 879 1,235 537
Total nonperforming assets $16,642 $18,957 $10,543 $9,699 $12,073

Loans subject to troubled debt restructurings (TDRs):
Performing $1,807 $3,267 $906 $1,064 $645
Nonperforming 5,388 908 1,155 2,413 0
Total TDRs $7,195 $4,175 $2,061 $3,477 $645

Total nonperforming loans as a % of loans 2.45% 2.80% 1.41% 1.19% 1.58%
Total nonperforming assets as a % of assets 1.34% 1.53% 0.82% 0.73% 0.92%
Allowance for loan losses as a % of total loans 1.16% 1.34% 1.00% 1.09% 1.25%
Allowance for loan losses as a % of nonperforming loans 47.47% 47.95% 70.95% 91.03% 78.94%

~~TABLE XII - FIVE-YEAR HISTORY OF LOAN LOSSES~~

~~(In Thousands)~~

2014 2013 2012 2011 2010 Average
Average gross loans $627,753 $656,495 $700,241 $714,421 $721,997 $684,181
Year-end gross loans 630,545 644,303 683,910 708,315 730,411 679,497
Year-end allowance for loan losses 7,336 8,663 6,857 7,705 9,107 7,934
Year-end nonaccrual loans 12,610 14,934 7,353 7,197 10,809 10,581
Year-end loans 90 days or more
  past due and still accruing 2,843 3,131 2,311 1,267 727 2,056
Net charge-offs 1,803 241 1,136 1,117 349 929
Provision (credit) for loan losses 476 2,047 288 (285) 1,191 743
Earnings coverage of charge-offs 9 77 20 21 55 22
Allowance coverage of charge-offs 4 36 6 7 26 9
Net charge-offs as a % of
  provision (credit) for loan losses 378.78% 11.77% 394.44% -391.93% 29.30% 125.03%
Net charge-offs as a % of
  average gross loans 0.29% 0.04% 0.16% 0.16% 0.05% 0.14%
Net income 17,086 18,594 22,705 23,368 19,055 20,162

2934

TABLE XII - FIVE-YEAR HISTORY OF LOAN LOSSES
(Dollars In Thousands)
	2017			2016			2015			2014			2013			Average
Average gross loans	$	780,640		$	723,076		$	657,727		$	627,753		$	656,495		$	689,138
Year-end gross loans		815,713			751,835			704,880			630,545			644,303		$	709,455
Year-end allowance for loan losses		8,856			8,473			7,889			7,336			8,663		$	8,243
Year-end nonaccrual loans		13,404			8,736			11,517			12,610			14,934		$	12,240
Year-end loans 90 days or more past due and still accruing		3,724			6,838			3,229			2,843			3,131			3,953
Net charge-offs		418			637			292			1,803			241			678
Provision for loan losses		801			1,221			845			476			2,047			1,078
Earnings coverage of charge-offs		56	x		37	x		85	x		14	x		116	x		37	x
Allowance coverage of charge-offs		21	x		13	x		27	x		4	x		36	x		12	x
Net charge-offs as a % of provision for loan losses		52.18	%		52.17	%		34.56	%		378.78	%		11.77	%		62.89	%
Net charge-offs as a % of average gross loans		0.05	%		0.09	%		0.04	%		0.29	%		0.04	%		0.10	%
Income before income taxes on a fully taxable equivalent basis		23,350			23,861			24,710			25,784			28,012			25,143

CONTRACTUAL OBLIGATIONS AND OFF-BALANCE SHEET ARRANGEMENTS

Table XIII presents the Corporation’s significant fixed and determinable contractual obligations as of December 31, ~~2014~~2017 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		1 Year		1-3		3-5		Over 5
	or Less	Years			Total	or Less		Years		Years		Years		Total
Time deposits	$128,966	$84,704	$20,837	$4,430	$238,937	$	112,563	$	79,933	$	18,459	$	2,716	$	213,671
Short-term borrowings:
Federal Home Loan Bank of Pittsburgh	0						58,000		0		0		0		58,000
Customer repurchase agreements	5,537	0			5,537		3,766		0		0		0		3,766
Long-term borrowings:
Federal Home Loan Bank of Pittsburgh	0	10,123	0	1,937	12,060		6,000		2,463		0		726		9,189
Repurchase agreements	0	61,000	0		61,000
Total	$134,503	$155,827	$20,837	$6,367	$317,534	$	180,329	$	82,396	$	18,459	$	3,442	$	284,626

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 ~~$729,052,000~~$794,778,000 at December 31, ~~2014.~~2017.

The Corporation’s operating lease and other commitments at December 31, ~~2014~~2017 are immaterial. The Corporation’s significant off-balance sheet arrangements ~~consist of~~include commitments to extend credit and standby letters of credit. Off-balance sheet arrangements are described in Note 16 to the consolidated financial statements.

As described in more detail in the “Financial Condition” section of Management’s Discussion and Analysis, the Corporation sells residential mortgage loans for which 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. At December 31, 2017, outstanding balances of such loans sold totaled $169,725,000.

Also, for loans sold under the MPF Original program, the Corporation provides a credit enhancement. At December 31, 2017, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $5,742,000, and the Corporation has recorded a related allowance for credit losses in the amount of $260,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance sheets.

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, ~~2014,~~2017, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling ~~$26,084,000.~~$11,340,000.

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 ~~$26,092,000~~$16,301,000 at December 31, ~~2014.~~2017.

The Corporation’s outstanding, available, and total credit facilities at December 31, ~~2014~~2017 and ~~December 31, 2013~~2016 are as follows:

	Outstanding		Available		Total Credit		Outstanding				Available				Total Credit
(In Thousands)	Dec. 31,		Dec. 31,	Dec. 31,	Dec. 31,	Dec. 31,	Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,		Dec. 31,
	2014	2013	2014	2013	2014	2013	2017		2016		2017		2016		2017		2016
Federal Home Loan Bank of Pittsburgh	$12,060	$34,335	$311,007	$304,875	$323,067	$339,210	$	67,189	$	32,454	$	295,441	$	306,767	$	362,630	$	339,221
Federal Reserve Bank Discount Window	0		25,367	26,078	25,367	26,078		0		0		15,877		15,636		15,877		15,636
Other correspondent banks	0		45,000					0		0		45,000		45,000		45,000		45,000
Total credit facilities	$12,060	$34,335	$381,374	$375,953	$393,434	$410,288	$	67,189	$	32,454	$	356,318	$	367,403	$	423,507	$	399,857

At December 31, ~~2014,~~2017, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of $29,000,000, short-term borrowings of $29,000,000 and long-term borrowings with a total amount of ~~$12,060,000.~~$9,189,000. At December 31, ~~2013,~~2016, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of ~~a short-term borrowing~~overnight borrowings of ~~$20,000,000,~~$21,000,000 and long-term borrowings with a total amount of ~~$12,338,000 and a letter of credit in the amount of $1,997,000.~~$11,454,000. 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, ~~2014,~~2017, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was ~~$282,456,000.~~$196,810,000.

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, ~~2014~~2017 and ~~2013, the ratios of total capital to risk-weighted assets, tier 1 capital to risk-weighted assets and tier 1 capital to average total assets are well in excess of regulatory capital requirements.~~

~~Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. In addition,~~2016, the Corporation and C&N Bank meet all capital adequacy requirements to which they are subject ~~to restrictions on the amount of dividends~~and maintain capital conservation buffers that ~~may be paid without approval of banking regulatory authorities. These restrictions are described in Note 18 to the consolidated financial statements.~~

~~Management expects~~allow 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 effectavoid limitations on capital ~~ratios. See the discussion of future changes in regulatory capital requirements in the “New Capital Rule” section below.~~

~~The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale securities. The difference between amortized cost~~distributions, including dividend payments 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 relatedcertain discretionary bonus payments to unrealized gains (losses) on available-for-sale securities, net of deferred income tax, amounted to $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, 2014.

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

~~NEW CAPITAL RULE~~certain executive officers.

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~~were 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~~current (new) capital rule provides that, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted ~~assets. Phase-in of~~assets and is added to the minimum required risk-based capital ratios (as defined) for common equity tier 1 capital, tier 1 capital and total capital. The minimum capital conservation buffer ~~requirements will begin January 1, 2016. The~~needed in 2017 in order to fully avoid limitations on capital distributions, along with the remaining 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 of January 1:
	2017			2018			2019
Common equity tier 1 capital conservation buffer		1.25	%		1.875	%		2.5	%

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%

At December 31, 2017, the Corporation’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was 15.07%. C&N Bank’s Capital Conservation Buffer (also determined based on the minimum total capital ratio) was 12.47%.

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 ($1,566,000) at December 31, 2017, ($949,000) at December 31, 2016 and $2,493,000 at December 31, 2015. 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, 2017.

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 (Loss) related to defined benefit plans, net of deferred income tax, was $59,000 at December 31, 2017, $51,000 at December 31, 2016 and $35,000 at December 31, 2015.

COMPREHENSIVE INCOME

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

Comprehensive Income totaled ~~$23,439,000~~$12,825,000 in ~~2014~~2017 as compared to ~~$6,598,000~~$12,336,000 in ~~2013,~~2016 and ~~$23,548,000~~$13,639,000 in ~~2012.~~2015. In ~~2014,~~2017, Comprehensive Income included: (1) Net Income of ~~$17,086,000,~~$13,434,000, which was ~~$1,508,000~~$2,328,000 lower than in ~~2013~~2016 and ~~$5,619,000~~$3,037,000 lower than in ~~2012;~~2015; (2) Other Comprehensive ~~Gain~~Loss from unrealized ~~gains~~losses on available-for-sale securities, net of deferred income tax, of ~~$6,285,000~~($617,000) as compared to Other Comprehensive Loss of ($~~12,572,000)~~3,442,000) in ~~2013~~2016 and Other Comprehensive ~~Gain~~Loss of ~~$777,000~~($2,788,000) in ~~2012;~~2015; and (3) Other Comprehensive Income from defined benefit plans of ~~$68,000~~$8,000 in ~~2014~~2017 as compared to Other Comprehensive Income of ~~$576,000~~$16,000 in ~~2013~~2016 and Other Comprehensive ~~Income~~Loss of ~~$66,000~~($44,000) in ~~2012.~~2015. Fluctuations in interest rates significantly affected fair values of available-for-sale securities in ~~2012~~2015 through ~~2014,~~2017, and accordingly ~~have~~had 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~~Since September 2007, ~~in response to concerns about weakness in the U.S. economy,~~ the Federal Reserve ~~lowered~~has maintained the fed funds target rate ~~numerous times; in December 2008, it established a target range~~at extremely low levels by historical standards. Further, throughout the period of ~~0% to 0.25%, which it has maintained through 2014. Also,~~low interest rates, the Federal Reserve has injected massive amounts of liquidity into the nation’s monetary system through a variety of programs. ~~The~~Since late 2015, the Federal Reserve has ~~purchased large amounts of securities~~begun to move its fed funds target rate higher, in an effort to ~~keep interest rates low~~re-establish a more normalized level by historical standards, with 0.25% increases in December 2015 and ~~stimulate economic growth. Beginning~~2016, March 2017, June 2017 and December 2017, resulting in ~~late 2013,~~the current range of 1.25% to 1.50%. Inflation has remained subdued, measured for most of 2016 and through 2017 at levels below the Federal ~~Reserve began reducing~~Open Market Committee’s 2% longer run objective, though there have been some reports of wage pressure as the ~~amount of securities purchased under its asset purchase program and then ended~~U.S. employment picture has gradually improved over 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 is expected to continue its highly accommodative monetary policy in the form of low short-term interest rates for the foreseeable future, though many observers believe the fed funds target rate may be raised above its current level in 2015.past several years.

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~~category of market risk, ~~are~~ interest rate risk, ~~and equity securities risk, which are~~is discussed in the following ~~sections.~~section.

INTEREST RATE RISK

Business risk arising from changes in interest rates is an inherent factor in operating a bank. ~~The~~A significant portion of 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 ~~October 31, 2014 and~~ December 31, ~~2013. The table~~2017 and 2016. Table XIV reflects two significant changes to the analysis using December 31, 2017 data as compared to the analysis based on December 31, 2016 data, as follows:

Management lowered assumptions of sensitivity of market interest rate changes on some types of the Corporation’s deposits. This change resulted in a reduction in the amount of increase in interest expense in the rising rate scenarios presented in Table XIV. The reduction in estimated sensitivity was based on data showing the Corporation’s prior sensitivity assumptions were higher than may be expected based on industry norms.

The policy limits for present value of equity volatility were lowered based on a determination that the prior levels were so high they would be unlikely to be approached, thereby limiting their effectiveness as a tool for timely identification of long-term interest rate risk.

Table XIV 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

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%

December 31, 2013 Data
(In Thousands) Period Ending December 31, 2014

Basis Point Interest Interest Net Interest NII NII
Change in Rates Income Expense Income (NII) % Change Risk Limit
+400 $53,993 $23,975 $30,018 -24.4% 25.0%
+300 51,748 18,975 32,773 -17.4% 20.0%
+200 49,496 14,091 35,405 -10.8% 15.0%
+100 47,146 9,552 37,594 -5.3% 10.0%
0 44,821 5,123 39,698 0.0% 0.0%
-100 42,432 4,897 37,535 -5.4% 10.0%
-200 40,747 4,895 35,852 -9.7% 15.0%
-300 40,059 4,895 35,164 -11.4% 20.0%
-400 39,968 4,895 35,073 -11.7% 25.0%

Market Value of Portfolio Equity at December 31, 2013

Present Present Present
Basis Point Value Value Value
Change in Rates Equity % Change Risk Limit
+400 $161,652 -28.5% 50.0%
+300 175,176 -22.6% 45.0%
+200 192,513 -14.9% 35.0%
+100 209,428 -7.4% 25.0%
0 226,204 0.0% 0.0%
-100 230,189 1.8% 25.0%
-200 233,902 3.4% 35.0%
-300 250,451 10.7% 45.0%

~~EQUITY SECURITIES RISK~~

December 31, 2017 Data
(Dollars In Thousands)	Period Ending December 31, 2018

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 2014. The Corporation recognized OTTI losses of $25,000 in 2013 and $67,000 in 2012.

Basis Point	Interest		Interest		Net Interest		NII			NII
Change in Rates	Income		Expense		Income (NII)		% Change			Risk Limit
+400	$	57,619	$	19,730	$	37,889		-10.8	%		25.0	%
+300		54,978		15,852		39,126		-7.9	%		20.0	%
+200		52,334		11,974		40,360		-5.0	%		15.0	%
+100		49,620		8,095		41,525		-2.2	%		10.0	%
0		46,717		4,243		42,474		0.0	%		0.0	%
-100		43,581		2,781		40,800		-3.9	%		10.0	%
-200		41,290		2,216		39,074		-8.0	%		15.0	%
-300		40,463		2,191		38,272		-9.9	%		20.0	%
-400		40,194		2,191		38,003		-10.5	%		25.0	%

Equity securities held as of December 31, 2014 and 2013 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, 2014.

Market Value of Portfolio Equity at December 31, 2017

~~TABLE XV - EQUITY SECURITIES RISK~~

~~(In Thousands)~~

	Present		Present			Present
Basis Point	Value		Value			Value
Change in Rates	Equity		% Change			Risk Limit
+400	$	195,385		-16.8	%		40.0	%
+300		203,648		-13.3	%		30.0	%
+200		213,689		-9.0	%		25.0	%
+100		224,389		-4.4	%		15.0	%
0		234,759		0.0	%		0.0	%
-100		236,030		0.5	%		15.0	%
-200		234,863		0.0	%		25.0	%
-300		252,464		7.5	%		30.0	%
-400		292,124		24.4	%		40.0	%

Dec. 31, Dec. 31,
2014 2013
Cost $5,605 $6,038
Fair Value 8,654 8,924
Hypothetical 10% Decline In Market Value (865) (892)
Hypothetical 20% Decline In Market Value (1,731) (1,785)
ITEM 8. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data) December 31, December 31,
2014 2013
ASSETS
Cash and due from banks:
Noninterest-bearing $14,812 $15,917
Interest-bearing 21,235 28,702
Total cash and due from banks 36,047 44,619
Available-for-sale securities, at fair value 516,807 482,658
Loans held for sale 0 54

Loans receivable 630,545 644,303
Allowance for loan losses (7,336) (8,663)
Loans, net 623,209 635,640
Bank-owned life insurance 22,119 21,743
Accrued interest receivable 3,908 4,146
Bank premises and equipment, net 16,256 17,430
Foreclosed assets held for sale 1,189 892
Deferred tax asset, net 1,668 6,344
Intangible asset - Core deposit intangibles 52 87
Intangible asset – Goodwill 11,942 11,942
Other assets 8,766 12,140
TOTAL ASSETS $1,241,963 $1,237,695

LIABILITIES
Deposits:
Noninterest-bearing $212,439 $191,245
Interest-bearing 755,550 763,271
Total deposits 967,989 954,516
Short-term borrowings 5,537 23,385
Long-term borrowings 73,060 73,338
Accrued interest and other liabilities 7,015 6,984
TOTAL LIABILITIES 1,053,601 1,058,223

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference
per share; no shares issued at December 31, 2014 and December 31, 2013 0 0
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2014 and
2013; issued 12,655,171 at December 31, 2014 and 12,596,540 at December 31, 2013 12,655 12,596
Paid-in capital 71,541 70,105
Retained earnings 105,550 101,216
Treasury stock, at cost; 375,191 shares at December 31, 2014
and 206,477 shares at December 31, 2013 (6,744) (3,452)
Sub-total 183,002 180,465
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities 5,281 (1,004)
Defined benefit plans gain 79 11
Total accumulated other comprehensive income (loss) 5,360 (993)
TOTAL STOCKHOLDERS' EQUITY 188,362 179,472
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY $1,241,963 $1,237,695

December 31, 2016 Data
(Dollars In Thousands)		Period Ending December 31, 2017

~~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)
INTEREST INCOME 2014 2013 2012
Interest and fees on loans $32,127 $35,484 $40,453
Interest on balances with depository institutions 125 105 114
Interest on loans to political subdivisions 1,403 1,381 1,539
Interest on mortgages held for sale 16 54 107
Income from available-for-sale securities:
      Taxable 7,721 6,810 9,029
      Tax-exempt 4,310 4,785 5,085
      Dividends 307 295 305
Total interest and dividend income 46,009 48,914 56,632
INTEREST EXPENSE
Interest on deposits 2,163 2,703 4,807
Interest on short-term borrowings 9 9 10
Interest on long-term borrowings 2,950 3,053 4,214
Total interest expense 5,122 5,765 9,031
Net interest income 40,887 43,149 47,601
Provision for loan losses 476 2,047 288
Net interest income after provision for loan losses 40,411 41,102 47,313
OTHER INCOME
Service charges on deposit accounts 5,025 5,246 5,322
Service charges and fees 538 597 643
Trust and financial management revenue 4,490 4,087 3,847
Brokerage revenue 901 784 801
Insurance commissions, fees and premiums 118 170 221
Interchange revenue from debit card transactions 1,959 1,941 1,938
Net gains from sale of loans 768 1,969 2,016
(Decrease) increase in fair value of servicing rights (27) 67 (188)
Increase in cash surrender value of life insurance 376 399 455
Net gain (loss) from premises and equipment 8 (16) 270
Other operating income 1,264 1,207 1,058
Sub-total 15,420 16,451 16,383
Total other-than-temporary impairment losses on available-for-sale securities 0 (25) (67)
  Portion of (gain) recognized in other comprehensive loss (before taxes) 0 0 0
Net impairment losses recognized in earnings 0 (25) (67)
Realized gains on available-for-sale securities, net 1,104 1,743 2,749
Total other income 16,524 18,169 19,065
OTHER EXPENSES
Salaries and wages 15,121 14,206 14,370
Pensions and other employee benefits 4,769 4,150 4,497
Occupancy expense, net 2,628 2,473 2,476
Furniture and equipment expense 1,859 1,948 1,887
FDIC Assessments 600 604 633
Pennsylvania shares tax 1,350 1,402 1,312
Professional fees 699 1,534 486
Automated teller machine and interchange expense 924 1,020 1,136
Software subscriptions 784 836 890
Loss on prepayment of debt 0 1,023 2,333
Other operating expense 5,423 5,298 5,227
Total other expenses 34,157 34,494 35,247
Income before income tax provision 22,778 24,777 31,131
Income tax provision 5,692 6,183 8,426
NET INCOME $17,086 $18,594 $22,705
NET INCOME PER SHARE - BASIC $1.38 $1.51 $1.86
NET INCOME PER SHARE - DILUTED $1.38 $1.50 $1.85

Basis Point	Interest		Interest		Net Interest		NII			NII
Change in Rates	Income		Expense		Income (NII)		% Change			Risk Limit
+400	$	53,712	$	22,315	$	31,397		-20.5	%		25.0	%
+300		51,128		17,545		33,583		-15.0	%		20.0	%
+200		48,500		12,809		35,691		-9.6	%		15.0	%
+100		45,845		8,102		37,743		-4.4	%		10.0	%
0		43,132		3,643		39,489		0.0	%		0.0	%
-100		40,581		2,978		37,603		-4.8	%		10.0	%
-200		38,881		2,949		35,932		-9.0	%		15.0	%
-300		38,269		2,936		35,333		-10.5	%		20.0	%
-400		38,104		2,936		35,168		-10.9	%		25.0	%

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

39Market Value of Portfolio Equity at December 31, 2016

	Present		Present			Present
Basis Point	Value		Value			Value
Change in Rates	Equity		% Change			Risk Limit
+400	$	168,600		-24.6	%		50.0	%
+300		180,500		-19.3	%		45.0	%
+200		194,471		-13.1	%		35.0	%
+100		208,830		-6.7	%		25.0	%
0		223,744		0.0	%		0.0	%
-100		227,806		1.8	%		25.0	%
-200		229,602		2.6	%		35.0	%
-300		252,118		12.7	%		45.0	%
-400		290,792		30.0	%		50.0	%

Consolidated Statements of Comprehensive Income
(In Thousands) Years Ended December 31,
2014 2013 2012
Net income $17,086 $18,594 $22,705

Unrealized gains (losses) on available-for-sale securities:
Unrealized holding gains (losses) on available-for-sale securities 10,774 (17,623) 4,128
Reclassification adjustment for gains realized in income (1,104) (1,718) (2,682)
Other comprehensive gain (loss) on available-for-sale securities 9,670 (19,341) 1,446

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses
included in accumulated other comprehensive (loss) gain (79) 885 8
Amortization of net transition obligation, prior service cost, net
actuarial loss and loss on settlement included in net periodic benefit cost 184 2 77
Other comprehensive gain on unfunded retirement obligations 105 887 85

Other comprehensive income (loss) before income tax 9,775 (18,454) 1,531
Income tax related to other comprehensive (income) loss (3,422) 6,458 (688)

Net other comprehensive income (loss) 6,353 (11,996) 843

Comprehensive income $23,439 $6,598 $23,548

~~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
(Loss)
Balance, January 1, 2012 12,460,920 305,391 $12,461 $67,568 $82,302 $10,160 ($5,106) $167,385
Net income 22,705 22,705
Other comprehensive income, net 843 843
Cash dividends declared on common
  stock, $.84 per share (10,272) (10,272)
Shares issued for dividend reinvestment
     Plan 64,491 64 1,147 1,211
Shares issued from treasury related to
     exercise of stock options (15,023) (22) 251 229
Restricted stock granted (42,552) (711) 711 0
Forfeiture of restricted stock 3,560 59 (59) 0
Stock-based compensation expense 567 567
Tax effect of stock option exercises 14 14
Tax benefit from employee benefit plan 104 104
Balance, December 31, 2012 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 and redeemed
     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 effect of stock option exercises (1) (1)
Tax benefit from dividends on restricted stock 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

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

CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31,
(In Thousands) 2014 2013 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $17,086 $18,594 $22,705
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 476 2,047 288
Realized gains on available-for-sale securities, net (1,104) (1,718) (2,682)
Loss on prepayment of debt 0 1,023 2,333
Realized (gain) loss on foreclosed assets (136) 71 66
(Gain) loss on disposition of premises and equipment (8) 16 (270)
Depreciation expense 1,940 2,020 1,939
Accretion and amortization on securities, net 1,375 1,836 1,581
Accretion and amortization on loans and deposits, net (27) (32) (49)
Decrease (increase) in fair value of servicing rights 27 (67) 188
Increase in cash surrender value of life insurance (376) (399) (455)
Stock-based compensation 565 696 567
Amortization of core deposit intangibles 35 51 74
Deferred income taxes 1,254 1,839 3,760
Gains on sales of loans, net (768) (1,969) (2,016)
Origination of loans for sale (21,680) (58,427) (62,829)
Proceeds from sales of loans 22,317 62,436 62,821
Decrease (increase) in accrued interest receivable and other assets 1,395 3,234 (1,043)
(Decrease) increase in accrued interest payable and other liabilities (90) (679) 674
Net Cash Provided by Operating Activities 22,281 30,572 27,652
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposit 2,560 480 0
Purchase of certificates of deposit (960) (1,688) (1,060)
Proceeds from sales of available-for-sale securities 56,269 25,500 24,228
Proceeds from calls and maturities of available-for-sale securities 78,101 97,123 114,247
Purchase of available-for-sale securities (158,894) (152,163) (126,820)
Redemption of Federal Home Loan Bank of Pittsburgh stock 2,804 2,680 1,931
Purchase of Federal Home Loan Bank of Pittsburgh stock (602) (1,624) 0
Net decrease in loans 10,317 39,059 22,320
Purchase of premises and equipment (801) (801) (1,622)
Proceeds from disposition of premises and equipment 43 42 456
Purchase of investment in limited liability entity 0 (147) (538)
Return of principal on limited liability entity investments 173 164 114
Proceeds from sale of foreclosed assets 1,504 255 1,380
Net Cash (Used in) Provided by Investing Activities (9,486) 8,880 34,636
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits 13,473 (51,590) (12,106)
Net (decrease) increase in short-term borrowings (17,848) 17,818 617
Repayments of long-term borrowings (278) (11,497) (43,884)
Purchase of treasury stock (4,002) 0 0
Sale of treasury stock 123 184 229
Tax benefit from compensation plans 157 124 118
Common dividends paid (11,392) (10,916) (9,061)
Net Cash Used in Financing Activities (19,767) (55,877) (64,087)
(DECREASE) IN CASH AND CASH EQUIVALENTS (6,972) (16,425) (1,799)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 38,591 55,016 56,815
CASH AND CASH EQUIVALENTS, END OF YEAR $31,619 $38,591 $55,016

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through foreclosure of real estate loans $1,665 $339 $1,004
Accrued purchase of available-for-sale securities $226 $0 $0
Interest paid $5,138 $5,782 $9,246
Income taxes paid $4,432 $4,213 $4,250

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data)	December 31,			December 31,
	2017			2016
ASSETS
Cash and due from banks:
Noninterest-bearing	$	25,664		$	17,551
Interest-bearing		14,580			14,558
Total cash and due from banks		40,244			32,109
Available-for-sale securities, at fair value		356,908			395,077
Loans held for sale		765			142

Loans receivable		815,713			751,835
Allowance for loan losses		(8,856	)		(8,473	)
Loans, net		806,857			743,362

Bank-owned life insurance		20,083			19,704
Accrued interest receivable		4,048			3,963
Bank premises and equipment, net		15,432			15,397
Foreclosed assets held for sale		1,598			2,180
Deferred tax asset, net		3,289			5,117
Intangible assets - Goodwill and core deposit intangibles		11,954			11,959
Other assets		15,781			13,282
TOTAL ASSETS	$	1,276,959		$	1,242,292

LIABILITIES
Deposits:
Noninterest-bearing	$	241,214		$	224,175
Interest-bearing		767,235			759,668
Total deposits		1,008,449			983,843
Short-term borrowings		61,766			26,175
Long-term borrowings		9,189			38,454
Accrued interest and other liabilities		9,112			7,812
TOTAL LIABILITIES		1,088,516			1,056,284

STOCKHOLDERS’ EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued		0			0
Common stock, par value $1.00 per share; authorized 20,000,000 shares; issued 12,655,171; outstanding 12,214,525 at December 31, 2017 and 12,113,228 December 31, 2016		12,655			12,655
Paid-in capital		72,035			71,730
Retained earnings		113,608			112,790
Treasury stock, at cost; 440,646 shares at December 31, 2017 and 541,943 shares at December 31, 2016		(8,348	)		(10,269	)
Accumulated other comprehensive loss		(1,507	)		(898	)
TOTAL STOCKHOLDERS’ EQUITY		188,443			186,008
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY	$	1,276,959		$	1,242,292

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

Consolidated Statements of Income

(In Thousands Except Per Share Data)	Years Ended December 31,
	2017		2016		2015
INTEREST INCOME
Interest and fees on loans:
Taxable	$	34,907	$	32,827	$	31,311
Tax-exempt		2,037		1,783		1,668
Interest on mortgages held for sale		25		27		16
Interest on balances with depository institutions		190		116		93
Income from available-for-sale securities:
Taxable		5,478		5,846		7,303
Tax-exempt		3,205		3,429		3,844
Dividends		21		70		284
Total interest and dividend income		45,863		44,098		44,519
INTEREST EXPENSE
Interest on deposits		2,403		2,085		1,924
Interest on short-term borrowings		213		155		32
Interest on long-term borrowings		1,299		1,453		2,646
Total interest expense		3,915		3,693		4,602
Net interest income		41,948		40,405		39,917
Provision for loan losses		801		1,221		845
Net interest income after provision for loan losses		41,147		39,184		39,072
OTHER INCOME
Service charges on deposit accounts		4,488		4,695		4,864
Service charges and fees		417		439		494
Trust and financial management revenue		5,399		4,760		4,626
Brokerage revenue		797		756		839
Insurance commissions, fees and premiums		115		102		109
Interchange revenue from debit card transactions		2,221		1,943		1,935
Net gains from sale of loans		818		1,029		735
Loan servicing fees, net		244		103		216
Increase in cash surrender value of life insurance		379		382		386
Other operating income		1,275		1,302		1,274
Sub-total		16,153		15,511		15,478
Realized gains on available-for-sale securities, net		257		1,158		2,861
Total other income		16,410		16,669		18,339
OTHER EXPENSES
Salaries and wages		15,806		15,411		14,682
Pensions and other employee benefits		5,374		4,717		4,420
Occupancy expense, net		2,340		2,340		2,574
Furniture and equipment expense		1,834		1,730		1,860
FDIC Assessments		376		488		603
Pennsylvania shares tax		1,329		1,274		1,248
Professional fees		1,086		1,126		638
Automated teller machine and interchange expense		1,284		1,137		988
Software subscriptions		1,190		981		876
Loss on prepayment of debt		0		0		2,573
Other operating expense		6,348		5,540		5,141
Total other expenses		36,967		34,744		35,603
Income before income tax provision		20,590		21,109		21,808
Income tax provision		7,156		5,347		5,337
NET INCOME	$	13,434	$	15,762	$	16,471
EARNINGS PER COMMON SHARE - BASIC	$	1.10	$	1.30	$	1.35
EARNINGS PER COMMON SHARE - DILUTED	$	1.10	$	1.30	$	1.35

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

Consolidated Statements of Comprehensive Income

(In Thousands)	Years Ended December 31,
		2017			2016			2015
Net income		$	13,434		$	15,762		$	16,471

Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities			(691	)		(4,138	)		(1,429	)
Reclassification adjustment for gains realized in income			(257	)		(1,158	)		(2,861	)
Other comprehensive loss on available-for-sale securities			(948	)		(5,296	)		(4,290	)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive gain (loss)			36			46			(135	)
Amortization of net transition obligation, prior service cost, net actuarial (gain) loss and loss on settlement included in net periodic benefit cost			(24	)		(22	)		67
Other comprehensive gain (loss) on unfunded retirement obligations			12			24			(68	)

Other comprehensive loss before income tax			(936	)		(5,272	)		(4,358	)
Income tax related to other comprehensive loss			327			1,846			1,526

Net other comprehensive loss			(609	)		(3,426	)		(2,832	)

Comprehensive income		$	12,825		$	12,336		$	13,639

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
														Comprehensive
	Common		Treasury			Common		Paid-in			Retained			Income			Treasury
	Shares		Shares			Stock		Capital			Earnings			(Loss)			Stock			Total

Balance, January 1, 2015		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 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 benefit from compensation plans									16			143									159
Balance, December 31, 2015		12,655,171		474,548			12,655		71,654			109,454			2,528			(8,804	)		187,487
Net income												15,762									15,762
Other comprehensive loss, net															(3,426	)					(3,426	)
Cash dividends declared on common stock, $1.04 per share												(12,578	)								(12,578	)
Shares issued for dividend reinvestment plan				(68,571	)				170									1,296			1,466
Treasury stock purchased				187,300														(3,723	)		(3,723	)
Shares issued from treasury related to exercise of stock options				(19,113	)				(98	)								361			263
Restricted stock granted				(35,427	)				(658	)								658			0
Forfeiture of restricted stock				3,431					61									(61	)		0
Stock-based compensation expense									578												578
Other stock-based expense				(225	)													4			4
Tax benefit from compensation plans									23			152									175
Balance, December 31, 2016		12,655,171		541,943			12,655		71,730			112,790			(898	)		(10,269	)		186,008
Net income												13,434									13,434
Other comprehensive loss, net															(609	)					(609	)
Cash dividends declared on common stock, $1.04 per share												(12,616	)								(12,616	)
Shares issued for dividend reinvestment plan				(63,066	)				276									1,195			1,471
Shares issued from treasury related to exercise of stock options				(11,780	)				(100	)								227			127
Restricted stock granted				(30,782	)				(583	)								583			0
Forfeiture of restricted stock				4,406					85									(85	)		0
Stock-based compensation expense									627												627
Other stock-based expense				(75	)													1			1
Balance, December 31, 2017		12,655,171		440,646		$	12,655	$	72,035		$	113,608		$	(1,507	)	$	(8,348	)	$	188,443

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

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)	Years Ended December 31,
	2017			2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	13,434		$	15,762		$	16,471
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		801			1,221			845
Realized gains on available-for-sale securities, net		(257	)		(1,158	)		(2,861	)
Loss on prepayment of debt		0			0			2,573
Depreciation expense		1,639			1,589			1,888
Accretion and amortization on securities, net		1,157			1,462			1,562
Increase in cash surrender value of life insurance		(379	)		(382	)		(386	)
Gain on life insurance benefits		0			0			(212	)
Stock-based compensation and other expense		628			582			606
Deferred income taxes		2,155			(156	)		79
Decrease in fair value of servicing rights		168			282			162
Gains on sales of loans, net		(818	)		(1,029	)		(735	)
Origination of loans for sale		(25,129	)		(29,296	)		(21,823	)
Proceeds from sales of loans		25,119			30,215			22,101
Increase in accrued interest receivable and other assets		(595	)		(410	)		(1,697	)
Increase (decrease) in accrued interest payable and other liabilities		1,312			(216	)		1,195
Other		139			44			(82	)
Net Cash Provided by Operating Activities		19,374			18,510			19,686
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposit		348			1,540			1,780
Purchase of certificates of deposit		(100	)		(2,280	)		(100	)
Proceeds from sales of available-for-sale securities		24,118			37,032			44,504
Proceeds from calls and maturities of available-for-sale securities		63,679			74,477			89,159
Purchase of available-for-sale securities		(51,476	)		(91,896	)		(40,363	)
Redemption of Federal Home Loan Bank of Pittsburgh stock		7,288			5,277			5,029
Purchase of Federal Home Loan Bank of Pittsburgh stock		(9,418	)		(5,046	)		(8,102	)
Net increase in loans		(65,225	)		(49,085	)		(77,129	)
Proceeds from bank owned life insurance		0			1,442			1,953
Purchase of premises and equipment		(1,697	)		(1,580	)		(1,039	)
Proceeds from sale of foreclosed assets		1,387			539			2,536
Other		191			181			181
Net Cash (Used in) Provided by Investing Activities		(30,905	)		(29,399	)		18,409
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		24,606			48,228			(32,374	)
Net increase (decrease) in short-term borrowings		35,591			(27,321	)		47,959
Proceeds from long-term borrowings		8,000			0			0
Repayments of long-term borrowings		(37,265	)		(313	)		(36,866	)
Purchase of treasury stock		0			(3,723	)		(4,415	)
Sale of treasury stock		127			263			381
Tax benefit from compensation plans		0			175			159
Common dividends paid		(11,145	)		(11,112	)		(11,245	)
Net Cash Provided by (Used in) Financing Activities		19,914			6,197			(36,401	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		8,383			(4,692	)		1,694
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		28,621			33,313			31,619
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	37,004		$	28,621		$	33,313

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through foreclosure of real estate loans	$	940	$	1,508	$	2,523
Interest paid	$	3,934	$	3,698	$	4,636
Income taxes paid	$	4,913	$	5,129	$	4,827

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. In December 2017, C&N Bank established a new entity, Northern Tier Holding LLC, for the purpose of acquiring, holding and disposing of real property acquired by the Bank. C&N Bank is the sole member of Northern Tier Holding LLC, which had no transactions in 2017. 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.~~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 (loss), 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~~– Credit-related 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 (OTTI) 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,~~consolidated balance sheets, and dividends received on restricted securities are included in Other Income in the ~~Consolidated Statement~~consolidated statements of ~~Income.~~income.

LOANS HELD FOR SALE~~-Mortgage~~– 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~~– 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~~collection 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, ~~2014~~2017 and ~~2013,~~2016, 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. The time period used in determining the average historical net charge-off rate for each loan class is based on management’s evaluation of an appropriate time period that captures an historical loss experience relevant to the current portfolio. 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~~losses 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 ~~67%~~53% at December 31, ~~2014)~~2017) 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~~aging data 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. Loans classified as troubled debt restructurings are designated as impaired. Non-accrual troubled debt restructurings may be restored to accrual status if the ultimately collectability of principal and interest payments under the modified terms ~~are current~~is not in doubt, and there has been a period (generally, for at least six consecutive ~~months~~months) of satisfactory payment performance by the borrower either immediately before or after ~~modification. Loans classified as troubled debt restructurings are designated as impaired.~~the restructuring.

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 2014, 2013, and 2012 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~~Loan Servicing Fees, Net, in the consolidated statements of ~~operations.~~income. 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 $1,281,000 at December 31, 2014 and $1,123,000 at December 31, 2013.~~sheets.

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.~~U.S. GAAP. 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:~~PRONOUNCEMENTS

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

In July 2013, the FASB issued ASU 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists. The amendments in this standard clarify that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. For the Corporation, the amendments in this Update were effective beginning in the first quarter 2014. The Corporation will be affected by these amendments if unrecognized tax benefits arise in future periods.

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. Currently, under U.S. GAAP, a reporting entity that invests in a qualified affordable housing project may 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 are 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 are effective for the Corporation for annual and interim periods beginning in the first quarter 2015, and the Corporation is in the process of determining how it will apply the amendments to its accounting and reporting practices.

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. ~~The~~Several additional ASUs have been issued subsequent to ASU ~~will be~~2014-09 to provide clarifying guidance related to various revenue recognition areas and to defer the effective date of the standard by a year, making it applicable for ~~all annual and interim periods beginning~~the Corporation in the first quarter ~~2017.~~2018 and for the annual period ending December 31, 2018. More than 70% of the Corporation’s revenue comes from net interest income and is explicitly out of the scope of ASU 2014-09. The ~~amendments in~~Corporation’s largest sources of noninterest revenue which are subject to the guidance include Trust and financial management revenue, service charges on deposit accounts and interchange revenue from debit card transactions. Management has evaluated the Corporation’s noninterest revenue streams and adoption of ASU 2014-09 using the modified retrospective method had no effect on the Corporation’s revenue recognition practices. Additionally, the ASU ~~should be applied either retrospectively~~requires expanded disclosures to ~~each prior reporting period presented or retrospectively with~~help users of financial statements better understand the ~~cumulative effect~~nature, amount, timing, and uncertainty of ~~initially applying this ASU recognized at the date of initial application. The Corporation~~revenue that is recognized. Management is in the process of ~~evaluating~~reviewing the ~~potential impact of adopting this ASU, including determining which transition method~~Corporation’s business processes, systems and controls to ~~apply.~~support the expanded disclosure requirements that will be effective in the first quarter 2018.

In ~~June 2014,~~January 2016, the FASB issued ASU ~~2014-11, Repurchase-to-Maturity Transactions, Repurchase Financings,~~2016-01, Recognition and ~~Disclosures. In addition~~Measurement of Financial Assets and Liabilities. This makes significant changes in U.S. GAAP related to ~~various other amendments~~certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The changes provided for in this Update that ~~will affect accounting and disclosures for transactions in which~~are applicable to the Corporation ~~has not engaged to date, this Update requires expanded disclosures for repurchase agreements that~~ are as follows: (1) require equity investments (except those accounted for ~~as secured borrowings, including: (1) a disaggregation~~under the equity method of accounting or those that result in consolidation of the ~~gross obligation by~~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 ~~class of collateral pledged, (2) the remaining contractual tenor~~identical or a similar investment of the ~~agreements~~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) ~~a discussion~~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 ~~potential risks associated with the agreements and the related collateral pledged, including obligations arising from a decline~~total change 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 beginninga liability resulting from a change in the ~~second quarter 2015. Information concerning~~instrument-specific credit risk when the ~~Corporation’s repurchase agreements is provided~~entity has elected to measure the liability at fair value 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 ofaccordance with the fair value option for financial instruments (at December 31, 2017 and 2016, 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 ~~real estate is fixed.~~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 ~~are~~will become effective for the Corporation for annual and interim periods beginning in the first quarter ~~2015.~~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. The Corporation’s current exposure related to investments in marketable equity securities and other issues considered in ASU 2016-01 is limited, and accordingly, initial adoption of this ASU had no effect on the Corporation’s financial position. Management is in the process of reviewing the changes in disclosure requirements that will become effective in the first quarter 2018.

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

In March 2016, the FASB issued ASU No. 2016-07, Investments – Equity Method and Joint Ventures. This ASU eliminates the requirement that when an investment qualifies for the equity method as a result of an increase in the level of ownership interest or influence, an investor must adjust the investment, results of operations and retained earnings retroactively as if the equity method had been in effect during all previous periods the investment had been held. The ASU requires the equity method investor to add the cost of acquiring an additional interest in the investee to the basis of the investor’s previously held interest and adopt the equity method of accounting as of the date the investment becomes qualified for the equity method. The ASU further requires that an entity that has an available-for-sale equity security that becomes qualified for the equity method recognize through earnings the unrealized gain or loss in accumulated other comprehensive income at the date the investment becomes qualified for use of the equity method. The amendments in this Update were effective for the Corporation for annual and interim periods beginning in the first quarter 2017. Initial adoption of this ASU in 2017 did not have a significant impact on the Corporation.

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. This ASU changes several aspects of accounting for share-based payment transactions, and includes some changes that apply only to nonpublic companies. This Update includes amendments that currently apply, or may apply in the future, to the Corporation related to the following: (1) accounting for the difference between the deduction for tax purposes and the amount of compensation cost recognized for financial reporting purposes; (2) classification of excess tax benefits on the statement of cash flows; (3) accounting for forfeitures; (4) accounting for awards partially settled in cash in excess of the employer’s minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments in this Update were effective for the Corporation for annual and interim periods beginning in the first quarter 2017. The ASU provides separate transition provisions for each of the amendments. Initial adoption of this ASU in 2017 did not have a significant impact on the Corporation.

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

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

The amendments in the Update retain many of the disclosure requirements related to credit quality in current U.S. GAAP, updated to reflect the change from an incurred loss methodology to an expected credit loss methodology.

In addition, the Update requires that disclosure of credit quality indicators in relation to the amortized cost of financing receivables, a current requirement, be further disaggregated by year of origination.

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

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

The Corporation is in the early stages of evaluating the potential impact of adopting this amendment.

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

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) to simplify the accounting for goodwill impairment. This guidance, among other things, removes step 2 of the goodwill impairment test thus eliminating the need to determine the fair value of individual assets and liabilities of the reporting unit. Upon adoption of this ASU, goodwill impairment will be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. This may result in more or less impairment being recognized than under current guidance. This Update will become effective for the Corporation’s annual and interim goodwill impairment tests beginning in the first quarter of 2020.

In March 2017, the FASB issued ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). This Update will shorten the amortization period for certain callable debt securities held at a premium. Under current U.S. GAAP, entities generally amortize the premium over the contractual life of the instrument. This Update requires the premium be amortized to the earliest call date. Discounts will continue to be amortized to maturity. The Corporation expects to adopt the amendments in this Update through a cumulative-effect adjustment directly to retained earnings in 2018, and does not expect the amount of the adjustment to be significant.

3. COMPREHENSIVE INCOME

Comprehensive income ~~(loss)~~ is the total of (1) net income, ~~(loss),~~ 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, ~~(loss),~~ and the related tax effects, are as follows:

(In Thousands) Before-Tax Income Tax Net-of-Tax
Amount Effect Amount
2014
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities $10,774 ($3,771) $7,003
Reclassification adjustment for (gains) realized in income (1,104) 386 (718)
Other comprehensive income on available-for-sale securities 9,670 (3,385) 6,285

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income (79) 28 (51)
Amortization of net transition obligation, prior service cost, net actuarial loss and loss on settlement included in net periodic benefit cost 184 (65) 119
Other comprehensive income on unfunded retirement obligations 105 (37) 68

Total other comprehensive income $9,775 ($3,422) $6,353

(In Thousands)	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
2017
Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities	$	(691	)	$	242		$	449	)
Reclassification adjustment for (gains) realized in income		(257	)		89			(168	)
Other comprehensive loss on available-for-sale securities		(948	)		331			(617	)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income		36			(12	)		24
Amortization of net transition obligation, prior service cost and net actuarial gain included in net periodic benefit cost		(24	)		8			(16	)
Other comprehensive income on unfunded retirement obligations		12			(4	)		8
Total other comprehensive loss	$	(936	)	$	327		$	609	)

(In Thousands) Before-Tax Income Tax Net-of-Tax
Amount Effect Amount
2013
Unrealized losses gains on available-for-sale securities:
Unrealized holding losses on available-for-sale securities ($17,623) $6,168 ($11,455)
Reclassification adjustment for (gains) realized in income (1,718) 601 (1,117)
Other comprehensive loss on available-for-sale securities (19,341) 6,769 (12,572)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income 885 (310) 575
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost 2 (1) 1
Other comprehensive incomeon unfunded retirement obligations 887 (311) 576

Total other comprehensive loss ($18,454) $6,458 ($11,996)
(In Thousands) Before-
Tax Income
Tax Net-of-
Tax
Amount Effect Amount
2012
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities $4,128 ($1,608) $2,520
Reclassification adjustment for (gains) realized in income (2,682) 939 (1,743)
Other comprehensive gain on available-for-sale securities 1,446 (669) 777

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income 8 (2) 6
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost 77 (17) 60
Other comprehensive gain on unfunded retirement obligations 85 (19) 66

Total other comprehensive income $1,531 ($688) $843

(In Thousands)	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
2016
Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities	$	(4,138	)	$	1,448		$	2,690	)
Reclassification adjustment for (gains) realized in income		(1,158	)		406			(752	)
Other comprehensive loss on available-for-sale securities		(5,296	)		1,854			(3,442	)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income		46			(16	)		30
Amortization of net transition obligation, prior service cost and net actuarial gain included in net periodic benefit cost		(22	)		8			(14	)
Other comprehensive income on unfunded retirement obligations		24			(8	)		16

Total other comprehensive loss	$	(5,272	)	$	1,846		$	(3,426	)

(In Thousands)	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
2015
Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities	$	(1,429	)	$	500		$	(929	)
Reclassification adjustment for (gains) realized in income		(2,861	)		1,002			(1,859	)
Other comprehensive loss on available-for-sale securities		(4,290	)		1,502			(2,788	)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive loss		(135	)		47			(88	)
Amortization of net transition obligation, prior service cost, net actuarial loss and loss on settlement included in net period benefit cost		67			(23	)		44
Other comprehensive loss on unfunded retirement obligations		(68	)		24			(44	)

Total other comprehensive loss	$	(4,358	)	$	1,526		$	(2,832	)

Changes in the components of accumulated other comprehensive (loss) income, ~~(loss),~~ included in stockholders’ equity, are as follows:

(In Thousands) Unrealized Unfunded Accumulated
Holding Gains Pension and Other
(Losses) Postretirement Comprehensive
on Securities Obligations Income (Loss)
2014
Balance, beginning of period ($1,004) $11 ($993)
Other comprehensive income before reclassifications 7,003 (51) 6,952
Amounts reclassified from accumulated other comprehensive income (718) 119 (599)
Other comprehensive income 6,285 68 6,353
Balance, end of period $5,281 $79 $5,360

2013
Balance, beginning of period $11,568 ($565) $11,003
Other comprehensive (loss) income before reclassifications (11,455) 575 (10,880)
Amounts reclassified from accumulated other comprehensive loss (1,117) 1 (1,116)
Other comprehensive (loss) income (12,572) 576 (11,996)
Balance, end of period ($1,004) $11 ($993)

2012
Balance, beginning of period $10,791 ($631) $10,160
Other comprehensive income before reclassifications 2,520 6 2,526
Amounts reclassified from accumulated other comprehensive income (1,743) 60 (1,683)
Other comprehensive income 777 66 843
Balance, end of period $11,568 ($565) $11,003

(In Thousands)	Unrealized						Accumulated
	Holding (Losses)			Unfunded			Other
	Gains on			Retirement			Comprehensive
	Securities			Obligations			(Loss) Income
2017
Balance, beginning of period	$	(949	)	$	51		$	(898	)
Change during year ended December 31, 2017		(617	)		8			(609	)
Balance, end of period	$	(1,566	)	$	59		$	(1,507	)

2016
Balance, beginning of period	$	2,493		$	35		$	2,528
Change during year ended December 31, 2016		(3,442	)		16			(3,426	)
Balance, end of period	$	(949	)	$	51		$	(898	)

2015
Balance, beginning of period	$	5,281		$	79		$	5,360
Change during year ended December 31, 2015		(2,788	)		(44	)		(2,832	)
Balance, end of period	$	2,493		$	35		$	2,528

Items reclassified out of each component of accumulated other comprehensive (loss) income are as follows:

For the Year Ended December 31, 2017
(In Thousands)
	Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Consolidated
Comprehensive Loss Components	Comprehensive Loss			Statements of Income
Unrealized gains and losses on available-for-sale securities	$	(257	)	Realized gains on available-for-sale securities, net
		89		Income tax provision
		(168	)	Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost		(31	)	Pensions and other employee benefits
Actuarial loss		7		Pensions and other employee benefits
		(24	)	Total before tax
		8		Income tax provision
		(16	)	Net of tax
Total reclassifications for the period	$	(184	)

~~For the Year Ended December 31, 2014~~
~~(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~~	~~($1,104)~~	~~Realized gains on available-for-sale securities, net~~
	~~386~~	~~Income tax provision~~
	~~(718)~~	~~Net of tax~~
~~Amortization of defined benefit pension and postretirement items:~~
~~Prior service cost~~	~~(31)~~	~~Pensions and other employee benefits~~
~~Actuarial loss~~	19	~~Pensions and other employee benefits~~
~~Loss on settlement~~	~~196~~	~~Pensions and other employee benefits~~
	~~184~~	~~Total before tax~~
	~~(65)~~	~~Income tax provision~~
	~~119~~	~~Net of tax~~
~~Total reclassifications for the period~~	~~($599)~~53

~~For the Year Ended December 31, 2013~~
~~(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~~	~~$25~~	~~Total other-than-temporary impairment losses on~~
		~~available-for-sale securities~~
	~~(1,743)~~	~~Realized gains on available-for-sale securities, net~~
	~~(1,718)~~	~~Total before tax~~
	~~601~~	~~Income tax provision~~
	~~(1,117)~~	~~Net of tax~~
~~Amortization of defined benefit pension and postretirement items:~~
~~Prior service cost~~	~~(31)~~	~~Pensions and other employee benefits~~
~~Actuarial loss~~	33	~~Pensions and other employee benefits~~
	2	~~Total before tax~~
	~~(1)~~	~~Income tax provision~~
	1	~~Net of tax~~
~~Total reclassifications for the period~~	~~($1,116)~~

For the Year Ended December 31, 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	$	(1,158	)	Realized gains on available-for-sale securities, net
		406		Income tax provision
		(752	)	Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost		(31	)	Pensions and other employee benefits
Actuarial loss		9		Pensions and other employee benefits
		(22	)	Total before tax
		8		Income tax provision
		(14	)	Net of tax
Total reclassifications for the period	$	(766	)

For the Year Ended December 31, 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	$	(2,861	)	Realized gains on available-for-sale securities, net
		1,002		Income tax provision
		(1,859	)	Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost		(31	)	Pensions and other employee benefits
Actuarial loss		11		Pensions and other employee benefits
Loss on settlement		87		Pensions and other employee benefits
		67		Total before tax
		(23	)	Income tax provision
		44		Net of tax
Total reclassifications for the period	$	(1,815	)

4. PER SHARE DATA

~~Net~~Basic earnings per common share are calculated using the two-class method to determine income ~~per share is based on~~attributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the ~~weighted-average number~~two-class method. Distributed dividends and an allocation of ~~shares of common stock outstanding. The following data show the amounts used in computing basic and diluted~~undistributed net income ~~per share. As shown in~~to participating securities reduce the ~~table that follows, diluted~~amount of income attributable to common shareholders. Income attributable to common shareholders is then divided by weighted-average common shares outstanding for the period to determine basic earnings per common share.

Diluted earnings per common share are calculated under the more dilutive of either the treasury method or the two-class method. Diluted earnings per common share is computed using ~~weighted average~~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~~Corporation’s common stock during the period.

Weighted-
Average Earnings
Net Common Per
Income Shares Share
2014
Earnings per share – basic $17,086,000 12,390,067 $1.38
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options 224,015
Hypothetical share repurchase at $19.41 (202,032)
Earnings per share – diluted $17,086,000 12,412,050 $1.38

2013
Earnings per share – basic $18,594,000 12,352,383 $1.51
Dilutive effect of potential common stock
arising from stock options:
Exercise of outstanding stock options 250,236
Hypothetical share repurchase at $19.86 (219,829)
Earnings per share – diluted $18,594,000 12,382,790 $1.50

2012
Earnings per share – basic $22,705,000 12,235,748 $1.86
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options 200,589
Hypothetical share repurchase at $19.16 (176,129)
Earnings per share – diluted $22,705,000 12,260,208 $1.85

	Years Ended
	Dec. 31,			Dec. 31,			Dec. 31,
	2017			2016			2015
Basic
Net income	$	13,434,000		$	15,762,000		$	16,471,000
Less: Dividends and undistributed earnings allocated to participating securities		(69,000	)		(85,000	)		(84,000	)
Net income attributable to common shares	$	13,365,000		$	15,677,000		$	16,387,000
Basic weighted-average common shares outstanding		12,115,840			12,032,820			12,149,252
Basic earnings per common share (a)	$	1.10		$	1.30		$	1.35

Diluted
Net income attributable to common shares	$	13,365,000		$	15,677,000		$	16,387,000
Basic weighted-average common shares outstanding		12,115,840			12,032,820			12,149,252
Dilutive effect of potential common stock arising from stock options		39,296			30,235			21,832
Diluted weighted-average common shares outstanding		12,155,136			12,063,055			12,171,084
Diluted earnings per common share (a)	$	1.10		$	1.30		$	1.35

(a)

Basic and diluted earnings per share under the two-class method are determined on net income reported on the income statement less earnings allocated to nonvested restricted shares with nonforfeitable dividends (participating securities).

The weighted-average number of nonvested restricted shares outstanding was 62,329 shares in 2017, 65,309 shares in 2016 and 62,689 shares in 2015.

Stock options that were anti-dilutive were excluded from net income per share calculations. There were no anti-dilutive instruments in 2017. Weighted-average common shares available from anti-dilutive instruments totaled ~~151,310~~31,153 shares in ~~2014, 88,521~~2016 and 61,590 shares in ~~2013 and 145,333 shares in 2012.~~2015.

5. CASH AND DUE FROM BANKS

Cash and due from banks at December 31, ~~2014~~2017 and ~~2013~~2016 include the following:

(In thousands)	Dec. 31,		Dec. 31,		Dec. 31,
	2014	2013	2017		2016
Cash and cash equivalents	$31,619	$38,591	$	37,004	$	28,621
Certificates of deposit	4,428	6,028		3,240		3,488
Total cash and due from banks	$36,047	$44,619	$	40,244	$	32,109

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. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were ~~$16,853,000~~$17,178,000 at December 31, ~~2014~~2017 and ~~$15,318,000~~$16,654,000 at December 31, ~~2013.~~2016.

6. 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.

At December 31, ~~2014~~2017 and ~~2013,~~2016, assets measured at fair value and the valuation methods used are as follows:

December 31, 2014
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 $26,676 $0 $26,676
Obligations of states and political subdivisions:
Tax-exempt 0 124,839 0 124,839
Taxable 0 33,878 0 33,878
Mortgage-backed securities 0 83,903 0 83,903
Collateralized mortgage obligations, Issued by U.S. Government agencies 0 238,823 0 238,823
Collateralized debt obligations 0 34 0 34
Total debt securities 0 508,153 0 508,153
Marketable equity securities 8,654 0 0 8,654
Total available-for-sale securities 8,654 508,153 0 516,807
Servicing rights 0 0 1,281 1,281
Total recurring fair value measurements $8,654 $508,153 $1,281 $518,088

Nonrecurring fair value measurements
Impaired loans with a valuation allowance $0 $0 $3,241 $3,241
Valuation allowance 0 0 (769) (769)
Impaired loans, net 0 0 2,472 2,472
Foreclosed assets held for sale 0 0 1,189 1,189
Total nonrecurring fair value measurements $0 $0 $3,661 $3,661
December 31, 2013
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 $45,877 $0 $45,877
Obligations of states and political subdivisions:
Tax-exempt 0 128,426 0 128,426
Taxable 0 34,471 0 34,471
Mortgage-backed securities 0 86,208 0 86,208
Collateralized mortgage obligations, Issued by U.S. Government agencies 0 178,092 0 178,092
Collateralized debt obligations 0 660 0 660
Total debt securities 0 473,734 0 473,734
Marketable equity securities 8,924 0 0 8,924
Total available-for-sale securities 8,924 473,734 0 482,658
Servicing rights 0 0 1,123 1,123
Total recurring fair value measurements $8,924 $473,734 $1,123 $483,781

Nonrecurring fair value measurements
Impaired loans with a valuation allowance $0 $0 $9,889 $9,889
Valuation allowance 0 0 (2,333) (2,333)
Impaired loans, net 0 0 7,556 7,556
Foreclosed assets held for sale 0 0 892 892
Total nonrecurring fair value measurements $0 $0 $8,448 $8,448

			December 31, 2017
	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	$	7,873	$	0		$	7,873
Obligations of states and political subdivisions:
Tax-exempt		0		105,111		0			105,111
Taxable		0		25,573		0			25,573
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		52,347		0			52,347
Residential collateralized mortgage obligations		0		131,814		0			131,814
Commercial mortgage-backed securities		0		33,219		0			33,219
Total debt securities		0		355,937		0			355,937
Marketable equity securities		971		0		0			971
Total available-for-sale securities		971		355,937		0			356,908
Servicing rights		0		0		1,299			1,299
Total recurring fair value measurements	$	971	$	355,937	$	1,299		$	358,207

Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$	0	$	0	$	3,776		$	3,776
Valuation allowance		0		0		(1,183	)		(1,183	)
Impaired loans, net		0		0		2,593			2,593
Foreclosed assets held for sale		0		0		1,598			1,598
Total nonrecurring fair value measurements	$	0	$	0	$	4,191		$	4,191

			December 31, 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	$	9,541	$	0		$	9,541
Obligations of states and political subdivisions:
Tax-exempt		0		119,037		0			119,037
Taxable		0		30,297		0			30,297
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		58,404		0			58,404
Residential collateralized mortgage obligations		0		146,608		0			146,608
Commercial mortgage-backed securities		0		30,219		0			30,219
Total debt securities		0		394,106		0			394,106
Marketable equity securities		971		0		0			971
Total available-for-sale securities		971		394,106		0			395,077
Servicing rights		0		0		1,262			1,262
Total recurring fair value measurements	$	971	$	394,106	$	1,262		$	396,339

Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$	0	$	0	$	3,372		$	3,372
Valuation allowance		0		0		(674	)		(674	)
Impaired loans, net		0		0		2,698			2,698
Foreclosed assets held for sale		0		0		2,180			2,180
Total nonrecurring fair value measurements	$	0	$	0	$	4,878		$	4,878

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. The following table shows quantitative information regarding significant techniques and inputs used at December 31, 2017 and 2016 for servicing rights assets measured using unobservable inputs (Level 3 methodologies) on a recurring basis:

	Fair Value at
	12/31/17		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				12/31/17
Servicing rights	$	1,299	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		140.00	%	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

	Fair Value at
	12/31/16		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				12/31/16
Servicing rights	$	1,262	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		138.00	%	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 (servicing rights) measured at fair value on a recurring basis:

(In Thousands)	Years Ended December 31,
	2017			2016			2015
Balance, beginning of period	$	1,262		$	1,296		$	1,281
Issuances of servicing rights		205			248			177
Unrealized losses included in earnings		(168	)		(282	)		(162	)
Balance, end of period	$	1,299		$	1,262		$	1,296

~~Management’s evaluation~~At December 31, 2017 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. The following table shows2016, quantitative information regarding significant techniques and inputs used ~~at December 31, 2014 and 2013~~ for ~~servicing rights assets measured~~nonrecurring fair value measurements using unobservable inputs (Level 3 methodologies) ~~on a recurring basis:~~

Fair Value at
12/31/14 Valuation Unobservable Method or Value As of
Asset (In Thousands) Technique Input(s) 12/31/14
Servicing rights $1,281 Discounted cash flow Discount rate 10.00% Rate used through modeling period

Loan prepayment speeds 156.00% 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

Fair Value at
12/31/13 Valuation Unobservable Method or Value As of
Asset (In Thousands) Technique Input(s) 12/31/13
Servicing rights $1,123 Discounted cash flow Discount rate 12.00% Rate used through modeling period

Loan prepayment speeds 152.00% 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

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

(In Thousands, Except									Weighted-
Percentages)			Valuation						Average
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at
Asset	12/31/17		12/31/17		12/31/17		Technique	Inputs	12/31/17

Impaired loans:
Residential mortgage loans - first liens	$	515	$	122	$	393	Sales comparison	Discount to appraised value		26	%
Commercial:
Commercial loans secured by real estate		2,641		919		1,722	Sales comparison	Discount to appraised value		16	%
Commercial and industrial		126		92		34	Sales comparison	Discount to appraised value		72	%
Loans secured by farmland		494		50		444	Sales comparison	Discount to appraised value		53	%
Total impaired loans	$	3,776	$	1,183	$	2,593
Foreclosed assets held for sale - real estate:
Residential (1-4 family)	$	721	$	0	$	721	Sales comparison	Discount to appraised value		37	%
Land		632		0		632	Sales comparison	Discount to appraised value		35	%
Commercial real estate		245		0		245	Sales comparison	Discount to appraised value		71	%
Total foreclosed assets held for sale	$	1,598	$	0	$	1,598

	~~Year Ended~~ ~~December 31,~~ ~~2014~~58
~~(In Thousands)~~	~~Servicing~~
	~~Rights~~
~~Balance, beginning of period~~	~~$1,123~~
~~Issuances of servicing rights~~	~~185~~
~~Unrealized losses included in earnings~~	~~(27)~~
~~Balance, end of period~~	~~$1,281~~

Year Ended December 31, 2013
Pooled Trust Pooled Trust
Preferred Preferred
Securities - Securities -
(In Thousands) Senior Mezzanine Servicing
Tranches Tranches Rights Total
Balance, beginning of period $1,613 $0 $605 $2,218
Issuances of servicing rights 0 0 451 451
Accretion and amortization, net (2) 0 0 (2)
Proceeds from sales and calls (1,636) (571) 0 (2,207)
Realized gains, net 23 571 0 594
Unrealized gains included in earnings 0 0 67 67
Unrealized gains included in other comprehensive income 2 0 0 2
Balance, end of period $0 $0 $1,123 $1,123

Year Ended December 31, 2012
Pooled Trust Pooled Trust
Preferred Preferred
Securities - Securities -
Senior Mezzanine Servicing
Tranches Tranches Rights Total
Balance, beginning of period $4,638 $730 $375 $5,743
Issuances of servicing rights 0 0 418 418
Accretion and amortization, net (8) 0 0 (8)
Proceeds from sales and calls (3,429) (1,835) 0 (5,264)
Realized gains, net 56 1,835 0 1,891
Unrealized losses included in earnings 0 0 (188) (188)
Unrealized gains (losses) included in other comprehensive income 356 (730) 0 (374)
Balance, end of period $1,613 $0 $605 $2,218

~~No other-than-temporary impairment losses on securities valued using Level 3 methodologies were recorded in 2014, 2013 or 2012.~~

(In Thousands, Except									Weighted-
Percentages)			Valuation						Average
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at
Asset	12/31/16		12/31/16		12/31/16		Technique	Inputs	12/31/16

Impaired loans:
Commercial:
Commercial loans secured by real estate	$	2,773	$	528	$	2,245	Sales comparison	Discount to appraised value		7	%
Commercial and industrial		95		95		0	Sales comparison	Discount to appraised value		100	%
Loans secured by farmland		504		51		453	Sales comparison	Discount to appraised value		55	%
Total impaired loans	$	3,372	$	674	$	2,698
Foreclosed assets held for sale - real estate:
Residential (1-4 family)	$	1,102	$	0	$	1,102	Sales comparison	Discount to appraised value		35	%
Land		650		0		650	Sales comparison	Discount to appraised value		33	%
Commercial real estate		428		0		428	Sales comparison	Discount to appraised value		50	%
Total foreclosed assets held for sale	$	2,180	$	0	$	2,180

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,~~sheets, 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 Original or Xtra program.

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-rate 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.

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 at December 31, ~~2014~~2017 and ~~2013.~~2016. 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 December 31, 2014 December 31, 2014
Method(s) Carrying Fair Carrying Fair
Used Amount Value Amount Value
Financial assets:
Cash and cash equivalents Level 1 $31,619 $31,619 $38,591 $38,591
Certificates of deposit Level 2 4,428 4,443 6,028 6,057
Available-for-sale securities See Above 516,807 516,807 482,658 482,658
Restricted equity securities (included in Other Assets) Level 2 1,584 1,584 3,786 3,786
Loans held for sale Level 2 0 0 54 54
Loans, net Level 3 623,209 629,267 635,640 634,937
Accrued interest receivable Level 2 3,908 3,908 4,146 4,146
Servicing rights Level 3 1,281 1,281 1,123 1,123

Financial liabilities:
Deposits with no stated maturity Level 2 729,052 729,052 693,479 693,479
Time deposits Level 2 238,937 239,712 261,037 262,376
Short-term borrowings Level 2 5,537 5,473 23,385 23,356
Long-term borrowings Level 2 73,060 78,866 73,338 79,400
Accrued interest payable Level 2 104 104 120 120

(In Thousands)	Valuation	December 31, 2017				December 31, 2016
	Method(s)	Carrying		Fair		Carrying		Fair
	Used	Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents	Level 1	$	37,004	$	37,004	$	28,621	$	28,621
Certificates of deposit	Level 2		3,240		3,234		3,488		3,481
Available-for-sale securities	See Above		356,908		356,908		395,077		395,077
Restricted equity securities (included in Other Assets)	Level 2		6,556		6,556		4,426		4,426
Loans held for sale	Level 2		765		765		142		142
Loans, net	Level 3		806,857		789,891		743,362		725,787
Accrued interest receivable	Level 2		4,048		4,048		3,963		3,963
Servicing rights	Level 3		1,299		1,299		1,262		1,262

Financial liabilities:
Deposits with no stated maturity	Level 2		794,778		794,778		771,625		771,625
Time deposits	Level 2		213,671		213,734		212,218		212,274
Short-term borrowings	Level 2		61,766		61,643		26,175		26,024
Long-term borrowings	Level 2		9,189		9,256		38,454		39,062
Accrued interest payable	Level 2		46		46		65		65

7. SECURITIES

Amortized cost and fair value of available-for-sale securities at December 31, ~~2014~~2017 and ~~2013~~2016 are summarized as follows:

	December 31, 2014						December 31, 2017
		Gross					Gross		Gross
		Unrealized					Unrealized		Unrealized
	Amortized	Holding		Fair	Amortized		Holding		Holding			Fair
(In Thousands)	Cost	Gains	Losses	Value	Cost		Gains		Losses			Value

Obligations of U.S. Government agencies	$27,221	$38	($583)	$26,676	$	8,026	$	0	$	(153	)	$	7,873
Obligations of states and political subdivisions:
Tax-exempt	120,086	5,134	(381)	124,839		103,673		2,291		(853	)		105,111
Taxable	33,637	415	(174)	33,878		25,431		226		(84	)		25,573
Mortgage-backed securities	82,479	1,493	(69)	83,903
Collateralized mortgage obligations, Issued by U.S. Government agencies	239,620	1,239	(2,036)	238,823
Collateralized debt obligations:	34	0		34
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities						52,992		79		(724	)		52,347
Residential collateralized mortgage obligations						134,314		110		(2,610	)		131,814
Commercial mortgage-backed securities						33,881		4		(666	)		33,219
Total debt securities	503,077	8,319	(3,243)	508,153		358,317		2,710		(5,090	)		355,937
Marketable equity securities	5,605	3,058	(9)	8,654		1,000		0		(29	)		971
Total	$508,682	$11,377	($3,252)	$516,807	$	359,317	$	2,710	$	(5,119	)	$	356,908

December 31, 2013
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
(In Thousands) Cost Gains Losses Value

Obligations of U.S. Government agencies $47,382 $282 ($1,787) $45,877
Obligations of states and political subdivisions:
Tax-exempt 127,748 2,766 (2,088) 128,426
Taxable 35,154 206 (889) 34,471
Mortgage-backed securities 84,849 1,819 (460) 86,208
Collateralized mortgage obligations, Issued by U.S. Government agencies 182,372 761 (5,041) 178,092
Collateralized debt obligations: 660 0 0 660
Total debt securities 478,165 5,834 (10,265) 473,734
Marketable equity securities 6,038 2,886 0 8,924
Total $484,203 $8,720 ($10,265) $482,658

			December 31, 2016
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding			Fair
(In Thousands)	Cost		Gains		Losses			Value

Obligations of U.S. Government agencies	$	9,671	$	5	$	(135	)	$	9,541
Obligations of states and political subdivisions:
Tax-exempt		118,140		2,592		(1,695	)		119,037
Taxable		30,073		303		(79	)		30,297
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		58,922		306		(824	)		58,404
Residential collateralized mortgage obligations		147,915		408		(1,715	)		146,608
Commercial mortgage-backed securities		30,817		0		(598	)		30,219
Total debt securities		395,538		3,614		(5,046	)		394,106
Marketable equity securities		1,000		0		(29	)		971
Total	$	396,538	$	3,614	$	(5,075	)	$	395,077

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 December 31, ~~2014~~2017 and ~~2013:~~2016:

December 31, 2014 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 $24,020 ($583) $24,020 ($583)
Obligations of states and political subdivisions:
Tax-exempt 11,898 (289) 6,991 (92) 18,889 (381)
Taxable 4,240 (22) 9,159 (152) 13,399 (174)
Mortgage-backed securities 0 0 4,160 (69) 4,160 (69)
Collateralized mortgage obligations, Issued by U.S. Government agencies 58,812 (396) 60,897 (1,640) 119,709 (2,036)
Total debt securities 74,950 (707) 105,227 (2,536) 180,177 (3,243)
Marketable equity securities 134 (9) 0 0 134 (9)
Total temporarily impaired available-for-sale securities $75,084 ($716) $105,227 ($2,536) $180,311 ($3,252)

December 31, 2013 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 $22,489 ($1,337) $4,598 ($450) $27,087 ($1,787)
Obligations of states and political subdivisions:
Tax-exempt 44,285 (1,425) 5,808 (663) 50,093 (2,088)
Taxable 20,873 (766) 2,378 (123) 23,251 (889)
Mortgage-backed securities 34,377 (460) 0 0 34,377 (460)
Collateralized debt obligations, Issued by U.S. Government agencies 113,204 (4,608) 7,399 (433) 120,603 (5,041)
Total temporarily impaired available-for-sale securities $235,228 ($8,596) $20,183 ($1,669) $255,411 ($10,265)

December 31, 2017	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		$	7,873	$	(153	)	$	7,873	$	(153	)
Obligations of states and political subdivisions:
Tax-exempt		19,050		(135	)		24,391		(718	)		43,441		(853	)
Taxable		9,279		(45	)		2,116		(39	)		11,395		(84	)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		25,255		(242	)		22,549		(482	)		47,804		(724	)
Residential collateralized mortgage obligations		50,812		(589	)		68,558		(2,021	)		119,370		(2,610	)
Commercial mortgage-backed securities		14,713		(173	)		14,569		(493	)		29,282		(666	)
Total debt securities		119,109		(1,184	)		140,056		(3,906	)		259,165		(5,090	)
Marketable equity securities		0		0			971		(29	)		971		(29	)
Total temporarily impaired available-for-sale securities	$	119,109	$	(1,184	)	$	141,027	$	(3,935	)	$	260,136	$	(5,119	)

December 31, 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 U.S. Government agencies	$	7,899	$	(135	)	$	0	$	0		$	7,899	$	(135	)
Obligations of states and political subdivisions:
Tax-exempt		54,479		(1,676	)		1,278		(19	)		55,757		(1,695	)
Taxable		9,594		(79	)		0		0			9,594		(79	)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		48,674		(824	)		0		0			48,674		(824	)
Residential collateralized mortgage obligations		85,198		(1,124	)		16,073		(591	)		101,271		(1,715	)
Commercial mortgage-backed securities		30,219		(598	)		0		0			30,219		(598	)
Total debt securities		236,063		(4,436	)		17,351		(610	)		253,414		(5,046	)
Marketable equity securities		1,000		(29	)		0		0			1,000		(29	)
Total temporarily impaired available-for-sale securities	$	237,063	$	(4,465	)	$	17,351	$	(610	)	$	254,414	$	(5,075	)

Gross realized gains and losses from available-for-sale securities ~~(including OTTI losses in gross realized losses)~~ and the related income tax provision were as follows:

(In Thousands)
	2014	2013	2012	2017			2016			2015
Gross realized gains from sales	$1,328	$1,918	$2,798	$	315		$	1,392		$	2,972
Gross realized losses from sales	(224)	(175)	(49)		(58	)		(234	)		(111	)
Losses from OTTI Impairment	0	(25)	(67)
Net realized gains	$1,104	$1,718	$2,682	$	257		$	1,158		$	2,861
Income tax provision related to net realized gains	$386	$601	$939	$	89		$	406		$	1,002

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of December 31, ~~2014.~~2017. 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.

			December 31, 2017
	Amortized	Fair	Amortized		Fair
(In Thousands)	Cost	Value	Cost		Value

Due in one year or less	$7,909	$7,992	$	11,350	$	11,347
Due from one year through five years	55,499	55,826		69,274		70,016
Due from five years through ten years	61,737	62,306		37,086		37,089
Due after ten years	55,833	59,303		19,420		20,105
Subtotal	180,978	185,427
Mortgage-backed securities	82,479	83,903
Collateralized mortgage obligations, Issued by U.S. Government agencies	239,620	238,823
Sub-total				137,130		138,557
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities				52,992		52,347
Residential collateralized mortgage obligations				134,314		131,814
Commercial mortgage-backed securities				33,881		33,219
Total	$503,077	$508,153	$	358,317	$	355,937

Investment securities carried at ~~$369,945,000~~$217,925,000 at December 31, ~~2014~~2017 and ~~$323,613,000~~$230,803,000 at December 31, ~~2013~~2016 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 12 for information concerning securities pledged to secure borrowing arrangements.

Management evaluates securities for 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.

The Corporation recognized no net impairment losses in earnings ~~as follows:~~for the years ended December 31, 2017, 2016 and 2015.

(In Thousands)
2014 2013 2012
Marketable equity securities (bank stocks) $0 ($25) ($67)

A summary of information management considered in evaluating debt and equity securities for OTTI at December 31, ~~2014~~2017 and 2016 is provided below.

Debt Securities

At December 31, ~~2014,~~2017 and 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 these debt securities ~~including municipal bonds with no external ratings,~~ at December 31, ~~2014~~2017 and 2016 to be temporary.

At December 31, 2014, the total amortized cost basis of municipal bonds with no external credit ratings was $15,854,000, with an aggregate unrealized gain of $1,000. At the time of purchase, each of these bonds was considered investment grade and had been rated by at least one credit rating agency. Most of the bonds for which credit rating agencies have withdrawn their ratings were insured by an entity that has reported significant financial problems and declines in its regulatory capital ratios, and most of the ratings were removed in the fourth quarter 2009. However, the insurance remains in effect on the bonds. In the third quarter 2013, a credit rating agency withdrew its ratings on several bonds due to changes in its rating methodology related to credit enhancement programs provided by issuers’ state governments. However, the credit enhancement remains in effect on the bonds. None of the unrated municipal bonds has failed to make a scheduled payment.

During the second quarter 2013, the Corporation’s holding of the senior tranche of MMCAPS Funding I, Ltd., a pooled trust preferred security, was fully redeemed primarily due to prepayments of debt by the underlying issuers in the pool. The Corporation received aggregate proceeds of $1,636,000, which included a realized pretax gain of $23,000. Also during the second quarter 2013, Astoria Financial Corporation redeemed (called) the trust preferred security held by the Corporation. The Corporation received aggregate proceeds of $5,171,000, which included a realized pretax gain of $13,000.

During the first quarter 2013, management sold the Corporation’s holding of the mezzanine tranche of ALESCO Preferred Funding IX, Ltd. for aggregate pretax proceeds of $571,000, which was recorded as a gain on the sale of securities.

During the third quarter 2012, management sold the Corporation’s holdings of the mezzanine tranches of U.S. Capital Funding II, Ltd. The securities were sold for aggregate pretax proceeds of $1,754,000, which was recorded as a gain on the sale of securities.

Equity Securities

The Corporation’s marketable equity securities at December 31, ~~2014~~2017 and ~~2013~~2016 consisted exclusively of ~~stocks of banking companies.~~one mutual fund. The Corporation recognized no other-than-temporary impairment losses related to ~~bank stocks~~equities in 2014. In 2013, the Corporation recognized an other-than-temporary impairment loss related to a bank stock of $25,000. In 2012, the Corporation recognized an other-than-temporary impairment loss related to a bank stock of $67,000. Management’s decisions to recognize other-than-temporary impairment losses followed evaluations of the issuers’ published financial results in which management determined that the recovery of the Corporation’s cost basis within the foreseeable future was uncertain. As a result of this determination, the Corporation recognized impairment losses to write each stock down to the most recent trade price at the end of the quarter in which each loss was recognized.2017, 2016 or 2015. At December 31, ~~2014,~~2017, the mutual fund held by the Corporation ~~held three stocks with~~had an ~~aggregate~~ unrealized loss of ~~$9,000~~$29,000 for which management determined an OTTI charge was not required.

There were no realized gains or losses on equity securities in 2017. Realized gains from sales of ~~bank stocks~~equity securities (bank stocks) totaled ~~$363,000~~$1,125,000 in ~~2014, $1,018,000~~2016 and $2,220,000 in ~~2013, and $538,000 in 2012.~~2015.

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 1211 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,~~sheets, was ~~$1,454,000~~$6,426,000 at December 31, ~~2014~~2017 and ~~$3,656,000~~$4,296,000 at December 31, ~~2013.~~2016. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at December 31, ~~2014~~2017 and December 31, ~~2013.~~2016. 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.

8. LOANS

Loans outstanding at December 31, ~~2014~~2017 and ~~2013~~2016 are summarized as follows:

Summary of Loans by Type
(In Thousands)	Dec. 31,	Dec. 31,	Dec. 31,			Dec. 31,
	2014	2013	2017			2016
Residential mortgage:
Residential mortgage loans - first liens	$291,882	$299,831	$	359,987		$	334,102
Residential mortgage loans - junior liens	21,166	23,040		25,325			23,706
Home equity lines of credit	36,629	34,530		35,758			38,057
1-4 Family residential construction	16,739	13,909		26,216			24,908
Total residential mortgage	366,416	371,310		447,286			420,773
Commercial:
Commercial loans secured by real estate	145,878	147,215		159,266			150,468
Commercial and industrial	50,157	42,387		88,276			83,854
Political subdivisions	17,534	16,291		59,287			38,068
Commercial construction and land	6,938	17,003		14,527			14,287
Loans secured by farmland	7,916	10,468		7,255			7,294
Multi-family (5 or more) residential	8,917	10,985		7,713			7,896
Agricultural loans	3,221	3,251		6,178			3,998
Other commercial loans	13,334	14,631		10,986			11,475
Total commercial	253,895	262,231		353,488			317,340
Consumer	10,234	10,762		14,939			13,722
Total	630,545	644,303		815,713			751,835
Less: allowance for loan losses	(7,336)	(8,663)		(8,856	)		(8,473	)
Loans, net	$623,209	$635,640	$	806,857		$	743,362

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 make up 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 December 31, ~~2014.~~2017.

Transactions within the allowance for loan losses, summarized by segment and class, were as follows:

Year Ended December 31, 2014	Dec. 31,				Dec. 31,
Year Ended December 31, 2017						Dec. 31,										Dec. 31,
						2016							Provision			2017
(In Thousands)	2013 Balance	Charge-offs	Recoveries	Provision (Credit)	2014 Balance	Balance		Charge-offs			Recoveries		(Credit)			Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$2,974	($164)	$25	$106	$2,941	$	3,033	$	(167	)	$	15	$	319		$	3,200
Residential mortgage loans - junior liens	294	(101)	0	(17)	176		258		(16	)		4		(22	)		224
Home equity lines of credit	269	(62)	0	115	322		350		(14	)		0		(40	)		296
1-4 Family residential construction	168	0		46	214		249		0			0		(6	)		243
Total residential mortgage	3,705	(327)	25	250	3,653		3,890		(197	)		19		251			3,963
Commercial:
Commercial loans secured by real estate	3,123	(1,521)	250	(94)	1,758		2,380		(96	)		0		300			2,584
Commercial and industrial	591	(24)	9	112	688		999		(36	)		4		98			1,065
Political subdivisions	0
Commercial construction and land	267	(170)	5	181	283		162		0			0		(12	)		150
Loans secured by farmland	115	0		50	165		110		0			0		(5	)		105
Multi-family (5 or more) residential	103	0		(16)	87		241		0			0		(69	)		172
Agricultural loans	30	0		1	31		40		0			0		17			57
Other commercial loans	138	0		(7)	131		115		0			0		(13	)		102
Total commercial	4,367	(1,715)	264	227	3,143		4,047		(132	)		4		316			4,235
Consumer	193	(97)	47	2	145		138		(150	)		38		133			159
Unallocated	398	0		(3)	395		398		0			0		101			499

Total Allowance for Loan Losses	$8,663	($2,139)	$336	$476	$7,336	$	8,473	$	(479	)	$	61	$	801		$	8,856

Year Ended December 31, 2013
(In Thousands) Dec. 31, Dec. 31,
2012 Provision 2013
Balance Charge-offs Recoveries (Credit) Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens $2,619 ($84) $24 $415 $2,974
Residential mortgage loans - junior liens 247 0 0 47 294
Home equity lines of credit 255 0 0 14 269
1-4 Family residential construction 96 (11) 0 83 168
Total residential mortgage 3,217 (95) 24 559 3,705
Commercial:
Commercial loans secured by real estate 1,930 (169) 344 1,018 3,123
Commercial and industrial 581 (286) 4 292 591
Political subdivisions 0 0 0 0 0
Commercial construction and land 234 (4) 0 37 267
Loans secured by farmland 129 0 0 (14) 115
Multi-family (5 or more) residential 67 0 0 36 103
Agricultural loans 27 0 0 3 30
Other commercial loans 3 0 0 135 138
Total commercial 2,971 (459) 348 1,507 4,367
Consumer 228 (117) 58 24 193
Unallocated 441 0 0 (43) 398

Total Allowance for Loan Losses $6,857 ($671) $430 $2,047 $8,663
Year Ended December 31, 2012
(In Thousands) Dec. 31, Dec. 31,
2011 Provision 2012
Balance Charge-offs Recoveries (Credit) Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens $3,026 ($543) $18 $118 $2,619
Residential mortgage loans - junior liens 266 (9) 0 (10) 247
Home equity lines of credit 231 0 0 24 255
1-4 Family residential construction 79 0 0 17 96
Total residential mortgage 3,602 (552) 18 149 3,217
Commercial:
Commercial loans secured by real estate 2,004 0 1 (75) 1,930
Commercial and industrial 946 (57) 7 (315) 581
Political subdivisions 0 0 0 0 0
Commercial construction and land 267 (441) 0 408 234
Loans secured by farmland 126 0 0 3 129
Multi-family (5 or more) residential 66 0 0 1 67
Agricultural loans 27 0 0 0 27
Other commercial loans 5 0 0 (2) 3
Total commercial 3,441 (498) 8 20 2,971
Consumer 228 (171) 59 112 228
Unallocated 434 0 0 7 441

Total Allowance for Loan Losses $7,705 ($1,221) $85 $288 $6,857

Year Ended December 31, 2016	Dec. 31										Dec. 31
	2015							Provision			2016
(In Thousands)	Balance		Charge-offs			Recoveries		(Credit)			Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	2,645	$	(73	)	$	3	$	458		$	3,033
Residential mortgage loans - junior liens		219		0			0		39			258
Home equity lines of credit		347		0			0		3			350
1-4 Family residential construction		207		0			0		42			249
Total residential mortgage		3,418		(73	)		3		542			3,890
Commercial:
Commercial loans secured by real estate		1,939		0			2		439			2,380
Commercial and industrial		981		(2	)		3		17			999
Political subdivisions		0		0			0		0			0
Commercial construction and land		58		0			30		74			162
Loans secured by farmland		106		0			0		4			110
Multi-family (5 or more) residential		675		(595	)		0		161			241
Agricultural loans		45		0			0		(5	)		40
Other commercial loans		118		0			0		(3	)		115
Total commercial		3,922		(597	)	��	35		687			4,047
Consumer		122		(87	)		82		21			138
Unallocated		427		0			0		(29	)		398
Total Allowance for Loan Losses	$	7,889	$	(757	)	$	120	$	1,221		$	8,473

Year Ended December 31, 2015	Dec. 31,										Dec. 31,
	2014							Provision			2015
(In Thousands)	Balance		Charge-offs			Recoveries		(Credit)			Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	2,941	$	(175	)	$	1	$	(122	)	$	2,645
Residential mortgage loans - junior liens		176		(42	)		0		85			219
Home equity lines of credit		322		0			0		25			347
1-4 Family residential construction		214		0			0		(7	)		207
Total residential mortgage		3,653		(217	)		1		(19	)		3,418
Commercial:
Commercial loans secured by real estate		1,758		(115	)		208		88			1,939
Commercial and industrial		688		(21	)		6		308			981
Political subdivisions		0		0			0		0			0
Commercial construction and land		283		(115	)		0		(110	)		58
Loans secured by farmland		165		0			0		(59	)		106
Multi-family (5 or more) residential		87		0			0		588			675
Agricultural loans		31		0			0		14			45
Other commercial loans		131		0			0		(13	)		118
Total commercial		3,143		(251	)		214		816			3,922
Consumer		145		(94	)		55		16			122
Unallocated		395		0			0		32			427
Total Allowance for Loan Losses	$	7,336	$	(562	)	$	270	$	845		$	7,889

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.

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 December 31, ~~2014~~2017 and ~~2013:~~2016:

December 31, 2014
(In Thousands) Special
Pass Mention Substandard Doubtful Total
Residential Mortgage:
Residential mortgage loans - first liens $280,094 $1,246 $10,464 $78 $291,882
Residential mortgage loans - junior liens 20,502 112 552 0 21,166
Home equity lines of credit 35,935 294 400 0 36,629
1-4 Family residential construction 16,719 20 0 0 16,739
Total residential mortgage 353,250 1,672 11,416 78 366,416
Commercial:
Commercial loans secured by real estate 133,204 2,775 9,899 0 145,878
Commercial and Industrial 41,751 7,246 1,042 118 50,157
Political subdivisions 17,534 0 0 0 17,534
Commercial construction and land 4,650 266 2,022 0 6,938
Loans secured by farmland 5,990 433 1,468 25 7,916
Multi-family (5 or more) residential 8,629 288 0 0 8,917
Agricultural loans 3,196 0 25 0 3,221
Other commercial loans 13,248 86 0 0 13,334
Total commercial 228,202 11,094 14,456 143 253,895
Consumer 10,095 22 117 0 10,234
Totals $591,547 $12,788 $25,989 $221 $630,545

December 31, 2013
(In Thousands) Special
Pass Mention Substandard Doubtful Total
Residential Mortgage:
Residential mortgage loans - first liens $286,144 $1,876 $11,629 $182 $299,831
Residential mortgage loans - junior liens 21,694 351 995 0 23,040
Home equity lines of credit 33,821 295 414 0 34,530
1-4 Family residential construction 13,837 0 72 0 13,909
Total residential mortgage 355,496 2,522 13,110 182 371,310
Commercial:
Commercial loans secured by real estate 129,834 5,866 11,368 147 147,215
Commercial and Industrial 32,317 6,697 3,138 235 42,387
Political subdivisions 16,291 0 0 0 16,291
Commercial construction and land 13,792 427 2,036 748 17,003
Loans secured by farmland 8,279 758 1,402 29 10,468
Multi-family (5 or more) residential 10,665 316 4 0 10,985
Agricultural loans 3,169 34 48 0 3,251
Other commercial loans 14,532 99 0 0 14,631
Total commercial 228,879 14,197 17,996 1,159 262,231
Consumer 10,587 6 169 0 10,762
Totals $594,962 $16,725 $31,275 $1,341 $644,303

December 31, 2017
(In Thousands)			Special
	Pass		Mention		Substandard		Doubtful		Total
Residential Mortgage:
Residential mortgage loans - first liens	$	350,609	$	307	$	9,019	$	52	$	359,987
Residential mortgage loans - junior liens		24,795		104		426		0		25,325
Home equity lines of credit		35,233		61		464		0		35,758
1-4 Family residential construction		26,216		0		0		0		26,216
Total residential mortgage		436,853		472		9,909		52		447,286
Commercial:
Commercial loans secured by real estate		150,806		936		7,524		0		159,266
Commercial and Industrial		82,724		3,896		1,645		11		88,276
Political subdivisions		59,287		0		0		0		59,287
Commercial construction and land		14,449		0		78		0		14,527
Loans secured by farmland		5,283		581		1,379		12		7,255
Multi-family (5 or more) residential		7,130		0		583		0		7,713
Agricultural loans		5,203		270		705		0		6,178
Other commercial loans		10,913		0		73		0		10,986
Total commercial		335,795		5,683		11,987		23		353,488
Consumer		14,853		0		86		0		14,939
Totals	$	787,501	$	6,155	$	21,982	$	75	$	815,713

December 31, 2016
(In Thousands)			Special
	Pass		Mention		Substandard		Doubtful		Total
Residential Mortgage:
Residential mortgage loans - first liens	$	324,377	$	408	$	9,258	$	59	$	334,102
Residential mortgage loans - junior liens		23,274		132		300		0		23,706
Home equity lines of credit		37,360		123		574		0		38,057
1-4 Family residential construction		24,820		0		88		0		24,908
Total residential mortgage		409,831		663		10,220		59		420,773
Commercial:
Commercial loans secured by real estate		139,358		3,092		8,018		0		150,468
Commercial and Industrial		79,202		4,180		461		11		83,854
Political subdivisions		38,068		0		0		0		38,068
Commercial construction and land		14,136		70		81		0		14,287
Loans secured by farmland		5,745		129		1,404		16		7,294
Multi-family (5 or more) residential		7,277		0		619		0		7,896
Agricultural loans		3,208		0		790		0		3,998
Other commercial loans		11,401		0		74		0		11,475
Total commercial		298,395		7,471		11,447		27		317,340
Consumer		13,546		0		176		0		13,722
Totals	$	721,772	$	8,134	$	21,843	$	86	$	751,835

The scope of loans ~~evaluated~~reviewed individually ~~for impairment~~each quarter to determine if they are impaired include all commercial loan relationships greater than $200,000 for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. ~~Also, all~~In the fourth quarter 2017, the scope was expanded to include any residential mortgage or consumer 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~~$400,000 or more ~~are individually evaluated for impairment.~~with a credit grade of Special Mention, Substandard or Doubtful. Loans that are individually ~~evaluated for impairment,~~reviewed, but which are ~~not~~ determined to not 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,~~reviewed, but which have ~~not~~ been determined to not be impaired, are included in the “Collectively Evaluated” column in the table summarizing the allowance and associated loan balances as of December 31, ~~2014~~2017 and ~~2013.~~2016. All loans classified as troubled debt restructurings (discussed in more detail below) and all commercial loan relationships less than $200,000 or other loan relationships less than $400,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment.

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 December 31, ~~2014~~2017 and ~~2013:~~2016:

December 31, 2014 Loans: Allowance for Loan Losses:
(In Thousands)
Individually Collectively Individually Collectively
Evaluated Evaluated Totals Evaluated Evaluated Totals
Residential mortgage:
Residential mortgage loans - first liens $1,665 $290,217 $291,882 $358 $2,583 $2,941
Residential mortgage loans - junior liens 17 21,149 21,166 0 176 176
Home equity lines of credit 0 36,629 36,629 0 322 322
1-4 Family residential construction 0 16,739 16,739 0 214 214

Total residential mortgage 1,682 364,734 366,416 358 3,295 3,653
Commercial:
Commercial loans secured by real estate 6,537 139,341 145,878 16 1,742 1,758
Commercial and industrial 663 49,494 50,157 82 606 688
Political subdivisions 0 17,534 17,534 0 0 0
Commercial construction and land 1,939 4,999 6,938 211 72 283
Loans secured by farmland 1,470 6,446 7,916 102 63 165
Multi-family (5 or more) residential 0 8,917 8,917 0 87 87
Agricultural loans 25 3,196 3,221 0 31 31
Other commercial loans 0 13,334 13,334 0 131 131

Total commercial 10,634 243,261 253,895 411 2,732 3,143
Consumer 0 10,234 10,234 0 145 145
Unallocated 395

Total $12,316 $618,229 $630,545 $769 $6,172 $7,336
December 31, 2013 Loans: Allowance for Loan Losses:
(In Thousands)
Individually Collectively Individually Collectively
Evaluated Evaluated Totals Evaluated Evaluated Totals
Residential mortgage:
Residential mortgage loans - first liens $2,727 $297,104 $299,831 $449 $2,525 $2,974
Residential mortgage loans - junior liens 183 22,857 23,040 100 194 294
Home equity lines of credit 0 34,530 34,530 0 269 269
1-4 Family residential construction 0 13,909 13,909 0 168 168

Total residential mortgage 2,910 368,400 371,310 549 3,156 3,705
Commercial:
Commercial loans secured by real estate 7,988 139,227 147,215 1,577 1,546 3,123
Commercial and industrial 1,276 41,111 42,387 106 485 591
Political subdivisions 0 16,291 16,291 0 0 0
Commercial construction and land 2,776 14,227 17,003 72 195 267
Loans secured by farmland 1,318 9,150 10,468 29 86 115
Multi-family (5 or more) residential 0 10,985 10,985 0 103 103
Agricultural loans 48 3,203 3,251 0 30 30
Other commercial loans 0 14,631 14,631 0 138 138

Total commercial 13,406 248,825 262,231 1,784 2,583 4,367
Consumer 5 10,757 10,762 0 193 193
Unallocated 398

Total $16,321 $627,982 $644,303 $2,333 $5,932 $8,663

December 31, 2017	Loans:						Allowance for Loan Losses:
(In Thousands)
	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens	$	984	$	359,003	$	359,987	$	0	$	3,200	$	3,200
Residential mortgage loans - junior liens		302		25,023		25,325		122		102		224
Home equity lines of credit		0		35,758		35,758		0		296		296
1-4 Family residential construction		0		26,216		26,216		0		243		243
Total residential mortgage		1,286		446,000		447,286		122		3,841		3,963
Commercial:
Commercial loans secured by real estate		5,873		153,393		159,266		919		1,665		2,584
Commercial and industrial		568		87,708		88,276		188		877		1,065
Political subdivisions		0		59,287		59,287		0		0		0
Commercial construction and land		0		14,527		14,527		0		150		150
Loans secured by farmland		1,365		5,890		7,255		50		55		105
Multi-family (5 or more) residential		392		7,321		7,713		0		172		172
Agricultural loans		7		6,171		6,178		0		57		57
Other commercial loans		0		10,986		10,986		0		102		102
Total commercial		8,205		345,283		353,488		1,157		3,078		4,235
Consumer		20		14,919		14,939		0		159		159
Unallocated												499

Total	$	9,511	$	806,202	$	815,713	$	1,279	$	7,078	$	8,856

December 31, 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	$	753	$	333,349	$	334,102	$	0	$	3,033	$	3,033
Residential mortgage loans - junior liens		68		23,638		23,706		0		258		258
Home equity lines of credit		0		38,057		38,057		0		350		350
1-4 Family residential construction		0		24,908		24,908		0		249		249
Total residential mortgage		821		419,952		420,773		0		3,890		3,890
Commercial:
Commercial loans secured by real estate		8,005		142,463		150,468		528		1,852		2,380
Commercial and industrial		212		83,642		83,854		95		904		999
Political subdivisions		0		38,068		38,068		0		0		0
Commercial construction and land		0		14,287		14,287		0		162		162
Loans secured by farmland		1,394		5,900		7,294		51		59		110
Multi-family (5 or more) residential		392		7,504		7,896		0		241		241
Agricultural loans		13		3,985		3,998		0		40		40
Other commercial loans		0		11,475		11,475		0		115		115
Total commercial		10,016		307,324		317,340		674		3,373		4,047
Consumer		23		13,699		13,722		0		138		138
Unallocated												398

Total	$	10,860	$	740,975	$	751,835	$	674	$	7,401	$	8,473

Summary information related to impaired loans as of December 31, ~~2014~~2017 and ~~2013~~2016 is as follows:

(In Thousands) 2014 2013
Impaired loans with a valuation allowance $3,241 $9,889
Impaired loans without a valuation allowance 9,075 6,432
Total impaired loans $12,316 $16,321

Valuation allowance related to impaired loans $769 $2,333

(In Thousands)	December 31, 2017						December 31, 2016
	Unpaid						Unpaid
	Principal		Recorded		Related		Principal		Recorded		Related
	Balance		Investment		Allowance		Balance		Investment		Allowance
With no related allowance recorded:
Residential mortgage loans - first liens	$	740	$	711	$	0	$	783	$	753	$	0
Residential mortgage loans - junior liens		60		60		0		68		68		0
Commercial loans secured by real estate		3,230		3,230		0		6,975		5,232		0
Commercial and industrial		119		119		0		117		117		0
Loans secured by farmland		871		871		0		890		890		0
Multi-family (5 or more) residential		987		392		0		987		392		0
Agricultural loans		8		8		0		13		13		0
Consumer		20		20		0		23		23		0
Total with no related allowance recorded		6,035		5,411		0		9,856		7,488		0

With a related allowance recorded:
Residential mortgage loans - first liens		273		273		0		0		0		0
Residential mortgage loans - junior liens		242		242		122		0		0		0
Commercial loans secured by real estate		2,641		2,641		919		2,773		2,773		528
Commercial and industrial		449		449		188		95		95		95
Loans secured by farmland		495		495		50		504		504		51
Total with a related allowance recorded		4,100		4,100		1,279		3,372		3,372		674
Total	$	10,135	$	9,511	$	1,279	$	13,228	$	10,860	$	674

~~Additional summary information related~~In the table immediately above, two loans to one borrower are presented under the Residential mortgage loans – first liens and Residential mortgage loans – junior liens classes. These loans are collateralized by one property, and the allowance associated with these loans was determined based on an analysis of the total amounts of the Corporation’s exposure in comparison to the estimated net proceeds if the Corporation were to sell the property.

The average balance of impaired loans ~~for 2014, 2013~~ and ~~2012~~interest income recognized on impaired loans is as follows:

(In Thousands) 2014 2013 2012
Average investment in impaired loans $14,359 $9,690 $7,209
Interest income recognized on impaired loans $703 $426 $278
Interest income recognized on a cash basis on impaired loans $703 $426 $278

							Interest Income Recognized on
	Average Investment in Impaired Loans						Impaired Loans on a Cash Basis
(In Thousands)	Year Ended December 31,						Year Ended December 31,
	2017		2016		2015		2017		2016		2015
Residential mortgage:
Residential mortgage loans - first lien	$	857	$	806	$	2,206	$	52	$	43	$	86
Residential mortgage loans - junior lien		112		71		64		15		3		4
Total residential mortgage		969		877		2,270		67		46		90
Commercial:
Commercial loans secured by real estate		6,272		6,806		6,357		173		495		380
Commercial and industrial		301		547		438		24		20		20
Commercial construction and land		0		0		40		0		0		0
Loans secured by farmland		1,379		1,409		1,459		45		94		103
Multi-family (5 or more) residential		392		511		790		0		0		0
Agricultural loans		10		14		21		1		1		3
Total commercial		8,354		9,287		9,105		243		610		506
Consumer		26		21		0		1		1		0
Total	$	9,349	$	10,185	$	11,375	$	311	$	657	$	596

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)	December 31, 2014		December 31, 2013		December 31, 2017				December 31, 2016
	Past Due		Past Due		Past Due				Past Due
	90+ Days and		90+ Days and		90+ Days and				90+ Days and
	Accruing	Nonaccrual	Accruing	Nonaccrual	Accruing		Nonaccrual		Accruing		Nonaccrual
Residential mortgage:
Residential mortgage loans - first liens	$1,989	$3,440	$2,016	$3,533	$	2,340	$	5,131	$	3,022	$	3,770
Residential mortgage loans - junior liens	82	50	187	110		105		242		114		0
Home equity lines of credit	49	22	87	62		203		44		320		11
1-4 Family residential construction	0		0	72
Total residential mortgage	2,120	3,512	2,290	3,777		2,648		5,417		3,456		3,781
Commercial:
Commercial loans secured by real estate	653	5,804	744	7,096		175		5,645		2,774		3,080
Commercial and industrial	5	379	17	434		603		517		286		119
Commercial construction and land	35	1,915	5	2,663		26		52		0		0
Loans secured by farmland	0	951	0	902		271		1,308		219		1,331
Multi-family (5 or more) residential						0		392		0		392
Agricultural loans	0	25	0	35		0		7		0		13
Total commercial	693	9,074	766	11,130		1,075		7,921		3,279		4,935
Consumer	30	24	75	27		1		66		103		20

Totals	$2,843	$12,610	$3,131	$14,934	$	3,724	$	13,404	$	6,838	$	8,736

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

The tables below present a summary of the contractual aging of loans as of December 31, ~~2014~~2017 and ~~2013:~~2016:

	As of December 31, 2014				As of December 31, 2013				As of December 31, 2017								As of December 31, 2016
	Current &				Current &				Current &								Current &
(In Thousands)	Past Due				Past Due				Past Due		Past Due		Past Due				Past Due		Past Due		Past Due
	Less than	30-89	90+		Less than	30-89	90+		Less than		30-89		90+				Less than		30-89		90+
	30 Days	Days		Total	30 Days	Days		Total	30 Days		Days		Days		Total		30 Days		Days		Days		Total
Residential mortgage:
Residential mortgage loans - first liens	$282,766	$5,443	$3,673	$291,882	$289,483	$6,776	$3,572	$299,831	$	347,032	$	7,967	$	4,988	$	359,987	$	321,670	$	6,695	$	5,737	$	334,102
Residential mortgage loans - junior liens	20,853	190	123	21,166	22,247	506	287	23,040		25,133		87		105		25,325		23,268		324		114		23,706
Home equity lines of credit	36,300	258	71	36,629	34,263	118	149	34,530		34,789		732		237		35,758		37,603		134		320		38,057
1-4 Family residential construction	16,739	0		16,739	13,837	0	72	13,909		25,667		549		0		26,216		24,567		341		0		24,908
Total residential mortgage	356,658	5,891	3,867	366,416	359,830	7,400	4,080	371,310		432,621		9,335		5,330		447,286		407,108		7,494		6,171		420,773

Commercial:
Commercial loans secured by real estate	143,713	883	1,282	145,878	145,055	405	1,755	147,215		155,917		311		3,038		159,266		147,464		82		2,922		150,468
Commercial and industrial	49,994	43	120	50,157	41,730	434	223	42,387		87,306		303		667		88,276		83,364		185		305		83,854
Political subdivisions	17,534	0		17,534	16,291	0		16,291		59,287		0		0		59,287		38,068		0		0		38,068
Commercial construction and land	4,897	91	1,950	6,938	14,303	32	2,668	17,003		14,400		49		78		14,527		14,199		88		0		14,287
Loans secured by farmland	6,811	254	851	7,916	9,267	329	872	10,468		6,226		12		1,017		7,255		6,181		83		1,030		7,294
Multi-family (5 or more) residential	8,720	197	0	8,917	10,985	0		10,985		7,321		0		392		7,713		7,439		65		392		7,896
Agricultural loans	3,105	91	25	3,221	3,203	13	35	3,251		6,114		57		7		6,178		3,981		4		13		3,998
Other commercial loans	13,334	0		13,334	14,631	0		14,631		10,986		0		0		10,986		11,475		0		0		11,475
Total commercial	248,108	1,559	4,228	253,895	255,465	1,213	5,553	262,231		347,557		732		5,199		353,488		312,171		507		4,662		317,340
Consumer	10,164	40	30	10,234	10,516	171	75	10,762		14,760		123		56		14,939		13,446		153		123		13,722

Totals	$614,930	$7,490	$8,125	$630,545	$625,811	$8,784	$9,708	$644,303	$	794,938	$	10,190	$	10,585	$	815,713	$	732,725	$	8,154	$	10,956	$	751,835

Nonaccrual loans are included in the contractual aging immediately above. A summary of the contractual aging of nonaccrual loans at December 31, ~~2014~~2017 and ~~2013~~2016 is as follows:

Current &
(In Thousands) Past Due Past Due Past Due
Less than 30-89 90+
30 Days Days Days Total
December 31, 2014 Nonaccrual Totals $6,959 $369 $5,282 $12,610
December 31, 2013 Nonaccrual Totals $7,878 $479 $6,577 $14,934

	Current &
(In Thousands)	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Total
December 31, 2017 Nonaccrual Totals	$	5,802	$	741	$	6,861	$	13,404
December 31, 2016 Nonaccrual Totals	$	4,199	$	419	$	4,118	$	8,736

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.~~impaired and reviewed each quarter to determine if a specific allowance for loan losses is required. The outstanding balance of loans subject to TDRs, as well as the contractual aging information at December 31, ~~2014~~2017 and ~~2013~~2016 is as follows:

Troubled Debt Restructurings (TDRs):
	Current &					Current &
(In Thousands)	Past Due					Past Due		Past Due		Past Due
	Less than	30-89	90+			Less than		30-89		90+
	30 Days	Days		Nonaccrual	Total	30 Days		Days		Days		Nonaccrual		Total
December 31, 2014 Totals	$1,725	$82	$0	$5,388	$7,195
December 31, 2013 Totals	$3,254	$13	$0	$908	$4,175
December 31, 2017 Totals						$	636	$	0	$	0	$	3,027	$	3,663
December 31, 2016 Totals						$	5,453	$	350	$	0	$	2,874	$	8,677

At December 31, 2017 and 2016, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

There were no TDRs that occurred during 2017. A summary of TDRs that occurred during ~~2014, 2013~~2016 and ~~2012~~2015 is as follows:

Year Ended December 31, 2014 Pre- Post-
(Balances in Thousands) Modification Modification
Number Outstanding Outstanding
of Recorded Recorded
Contracts Investment Investment
Residential mortgage,
Residential mortgage loans - first liens 3 $150 $150
Commercial:
Commercial loans secured by real estate 5 6,679 5,193
Commercial and industrial 1 80 80

Year Ended December 31, 2013 Pre- Post-
(Balances in Thousands) Modification Modification
Number Outstanding Outstanding
of Recorded Recorded
Contracts Investment Investment
Residential mortgage:
Residential mortgage loans - first liens 6 $677 $677
Residential mortgage loans - junior liens 3 102 102
Commercial:
Commercial loans secured by real estate 2 866 866
Commercial and industrial 3 701 701
Loans secured by farmland 4 512 512
Agricultural loans 1 13 13
Consumer 1 6 6
Year Ended December 31, 2012 Pre- Post-
(Balances in Thousands) Modification Modification
Number Outstanding Outstanding
of Recorded Recorded
Contracts Investment Investment
Commercial,
Commercial and industrial 1 $65 $65

(Balances in Thousands)
	2016				2015
			Post-				Post-
	Number		Modification		Number		Modification
	of		Recorded		of		Recorded
	Loans		Investment		Loans		Investment
Residential mortgage - first liens:
Extended maturity with interest rate reduction		1	$	71		1	$	56
Extended maturity with reduced monthly payments		1		26		0		0
Reduced monthly payments for a six-month period		0		0		1		242
Residential mortgage - junior liens,
Interest rate and monthly payment reduction		0		0		1		32
Commercial loans secured by real estate,
Interest only payments for a period of one year		1		2,773		0		0
Commercial and industrial,
Extended maturity		1		5		0		0
Consumer:
Interest rate and monthly payment reduction		0		0		1		30
New unsecured loan after short-fall from sale
of property		1		24		0		0
Total		5	$	2,899		4	$	360

~~The~~There were no differences between the outstanding contractual amounts and the recorded investments in receivables resulting from TDRs that occurred in ~~2014 related to residential mortgage loans that included a reduction in payment amount on one contract, an interest only period on one contract~~2016 and a reduction in interest rate and payment on one contract. The TDRs related to commercial loans in the period ended December 31, 2014 relate to six contracts associated with one relationship. 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. 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. After the effect of the $1,486,000 charge-off related to loans to one commercial borrower described above, there was no allowance for loan losses on loans to that borrower at December 31, 2014, while the allowance on the loans amounted to $1,552,000 at December 31, 2013. There were no other changes in the allowance for loan losses related to TDRs that occurred during the year ended December 31, 2014.2015.

The TDRs in 2013 included interest only payments for an extended period of time on fourteen contracts, extensions of the final maturity date on three contracts, reduction in interest rate on two contracts, and reduction in payment amount for one year on one contract. There was no allowance for loan losses on these loans at December 31, 2013 and no change in the allowance for loan losses resulting from these TDRs in the year ended December 31, 2013.

The TDR in 2012 was an extension of the final maturity date and reduction of monthly payments required on the commercial loan. There was no allowance for loan losses on this loan at December 31, 2012. This loan was charged off in 2013, and there had been no allowance for loan losses on this loan prior to charge-off.

~~In 2012,~~For 2017, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months. For ~~2014~~2016 and ~~2013,~~2015, defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months are summarized as follows:

Number
Of Recorded
Contracts Investment
Year Ended December 31, 2014
(Balances in Thousands)
Residential mortgage:
Residential mortgage loans - first liens 3 $257
Residential mortgage loans - junior liens 1 62
Commercial:
Commercial loans secured by real estate 1 429
Commercial construction and land 1 25
Loans secured by farmland 4 490
Agricultural loans 1 13
Number
Of Recorded
Contracts Investment
Year Ended December 31, 2013
(Balances in Thousands)
Residential mortgage,
Residential mortgage loans - first liens 1 $85
Commercial,
Commercial loans secured by real estate 2 588
Commercial construction and land 1 110
Agricultural loans 1 13

The events of default in 2014 in the table listed above included the borrowers’ failure to make timely payments under the following circumstances: (1) for one customer relationship including one of the first lien Residential mortgages, the junior lien Residential mortgage, the Loans secured by farmland and the Agricultural loan, monthly payments of interest only were missed; however, in the fourth quarter 2014, the total principal balance of all of the loans except one of the Loans secured by farmland were fully paid off, and the balance on that loan was paid down to a balance at December 31, 2014 of $75,000; (2) for one of the Residential mortgage loans, monthly payments were missed after the interest rate and monthly payment amount had been reduced; (3) for one of the Residential mortgage loans and the Commercial loan secured by real estate, monthly payments of interest only were missed; and (4) for the Commercial construction and land loan, a monthly payment was missed after the term of the loan had been extended. There were no allowances for loan losses recorded on these loans at December 31, 2014.

(Balances in Thousands)
	2016				2015
	Number				Number
	of		Recorded		of		Recorded
	Loans		Investment		Loans		Investment
Residential mortgage - first liens		2	$	294		1	$	32
Residential mortgage - junior liens		1		29		0		0
Commercial and industrial		1		5		0		0
Consumer		1		27		0		0
Total		5	$	355		1	$	32

The ~~events~~carrying amount of default in 2013 in the table above included the borrowers’ failure to make timely payments under the following circumstances: (1) for the Residential mortgage loan, the monthly payment amount had been reduced, (2) for the two Commercial loans secured byforeclosed residential real estate monthly payments of interest only were missed, (3) for the Commercial construction and land loan, a monthly payment was missed after the term of the loan had been extended, and (4) for the Agricultural loan, payment at maturity was not made on a loan that had been in interest only status. There were no adjustments to the allowance for loan losses in 2013properties held as a result of ~~these events of default.~~obtaining physical possession (included in Foreclosed assets held for sale in the consolidated balance sheets) is as follows:

(In Thousands)	Dec. 31,		Dec. 31,
	2017		2016
Foreclosed residential real estate	$	721	$	1,102

~~At December 31, 2014 and 2013, the Corporation evaluated~~

The recorded investment of consumer mortgage loans to the borrowers who defaulted subsequent to restructurings, in determining the specific allowance for loan loss amounts related to the underlying loans. Based on the estimated value of the underlying collateral, net of estimated costs to sell the collateral, the Corporation determined that no allowance for loan losses was required at December 31, 2014 and 2013 for loanssecured by residential real properties for which ~~an event of default had occurred subsequent to restructuring.~~formal foreclosure proceedings were in process is as follows:

(In Thousands)	Dec. 31,		Dec. 31,
	2017		2016
Residential real estate in process of foreclosure	$	1,789	$	2,738

9. BANK PREMISES AND EQUIPMENT

~~Bank premises and equipment are summarized as follows:~~

(In Thousands)	December 31,		December 31,
	2014	2013	2017			2016
Land	$2,818		$	2,818		$	2,818
Buildings and improvements	26,973	26,869		28,285			27,619
Furniture and equipment	17,412	17,087		15,578			18,741
Construction in progress	98	2		268			392
Total	47,301	46,776		46,949			49,570
Less: accumulated depreciation	(31,045)	(29,346)		(31,517	)		(34,173	)
Net	$16,256	$17,430	$	15,432		$	15,397

Depreciation expense included in occupancy expense and furniture and equipment expense was as follows:

(In Thousands)	2014	2013	2012	2017		2016		2015
Occupancy expense	$998	$1,022	$1,050	$	801	$	804	$	954
Furniture and equipment expense	942	998	889		838		785		934
Total	$1,940	$2,020	$1,939	$	1,639	$	1,589	$	1,888

10. INTANGIBLE ASSETS

There were no changes in the carrying amount of goodwill in ~~2014~~2017 and ~~2013.~~2016. The balance in goodwill was $11,942,000 at December 31, ~~2014~~2017 and ~~2013.~~2016. The Corporation did not complete any acquisitions in ~~2014~~2017 or ~~2013.~~2016.

~~The Corporation has adopted ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment.~~ In testing goodwill for impairment as of December 31, ~~2014,~~2017, the Corporation assessed qualitative factors to determine whether it is more likely than not that the fair value of its only reporting unit, its community banking operation, is less than its carrying amount. The qualitative factors assessed included the Corporation’s recent financial performance, economic conditions in the Corporation’s market area, macroeconomic conditions and other factors. Based on the assessment of qualitative factors, the Corporation determined that it is not more likely than not that the fair value of the community banking operation has fallen below its carrying value, and therefore, the Corporation did not perform the more detailed, two-step goodwill impairment test described in Topic 350. Accordingly, there was no goodwill impairment as of December 31, ~~2014.~~

2017.

Information related to the core deposit intangibles is as follows:

	December 31,		December 31,
(In Thousands)	2014	2013	2017			2016
Gross amount	$2,034		$	2,034		$	2,034
Less: accumulated amortization	(1,982)	(1,947)		(2,022	)		(2,017	)
Net	$52	$87	$	12		$	17

Amortization expense was ~~$35,000~~$5,000 in ~~2014, $51,000~~2017, $13,000 in ~~2013~~2016 and ~~$74,000~~$22,000 in ~~2012. Estimated~~2015. The amount of amortization expense ~~for~~to be recognized each of the ensuing five years is ~~as follows:~~not significant.

(In Thousands)

2015 $22
2016 12
2017 6
2018 4
2019 3

11. DEPOSITS

At December 31, ~~2014,~~2017, the scheduled maturities of time deposits are as follows:

(In Thousands)
2015 $128,966
2016 64,850
2017 19,854
2018 12,128
2019 8,709
Thereafter 4,430
$238,937

(In Thousands)
2018	$	112,563
2019		57,097
2020		22,836
2021		7,975
2022		10,484
Thereafter		2,716
Total	$	213,671

~~Included in interest-bearing~~Time deposits ~~are time deposits in the amount~~ of ~~$100,000 or more.~~more than $250,000 totaled $12,653,000 at December 31, 2017 and $7,929,000 at December 31, 2016. As of December 31, ~~2014,~~2017, the remaining maturities or time to next re-pricing of time deposits ~~of $100,000 or~~ more ~~are~~than $250,000 was as follows:

~~(In Thousands)~~
~~Three months or less~~	~~$38,620~~
~~Over 3 months through 12 months~~	~~8,910~~
~~Over 1 year through 3 years~~	~~11,478~~
~~Over 3 years~~	~~8,786~~
~~Total~~	~~$67,794~~

~~Interest expense from time deposits of $100,000 or more amounted to $563,000 in 2014, $721,000 in 2013 and $1,846,000 in 2012.~~

(In Thousands)
Three months or less	$	4,833
Over 3 months through 12 months		5,375
Over 1 year through 3 years		1,148
Over 3 years		1,297
Total	$	12,653

12. BORROWED FUNDS

SHORT-TERM BORROWINGS

Short-term borrowings include the following:

(In Thousands) Dec. 31, Dec. 31,
2014 2013
FHLB-Pittsburgh borrowings $0 $20,000
Customer repurchase agreements 5,537 3,385
Total short-term borrowings $5,537 $23,385

Short-term borrowings (initial maturity within one year) include the following:

(In Thousands)	Dec. 31,		Dec. 31,
	2017		2016
FHLB-Pittsburgh borrowings	$	58,000	$	21,000
Customer repurchase agreements		3,766		5,175
Total short-term borrowings	$	61,766	$	26,175

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

(In Thousands)	Dec. 31,		Dec. 31
	2017		2016
Overnight borrowing	$	29,000	$	21,000
Other short-term advances		29,000		0
Total short-term FHLB-Pittsburgh borrowings	$	58,000	$	21,000

The weighted average interest rate on total short-term borrowings outstanding was ~~0.10%~~1.52% at December 31, ~~2014~~2017 and ~~0.22%~~0.61% at December 31, ~~2013.~~2016. The maximum amount of total short-term borrowings outstanding at any month-end was ~~$7,919,000~~$61,766,000 in ~~2014, $23,385,000~~2017, $47,005,000 in ~~2013~~2016 and ~~$20,120,000~~$53,496,000 in ~~2012.~~2015.

The Corporation had available credit with other correspondent banks totaling $45,000,000 at December 31, ~~2014~~2017 and ~~2013.~~2016. These lines of credit are primarily unsecured. No amounts were outstanding at December 31, ~~2014~~2017 or ~~December 31, 2013.~~2016.

The Corporation has a line of credit with the Federal Reserve Bank of Philadelphia’s Discount Window. At December 31, ~~2014,~~2017, the Corporation had available credit in the amount of ~~$25,367,000~~$15,877,000 on this line with no outstanding advances. At December 31, ~~2013~~2016, the Corporation had available credit in the amount of ~~$26,078,000~~$15,636,000 on this line with no outstanding advances. As collateral for this line, the Corporation has pledged available-for-sale securities with ~~the~~a carrying value of ~~$26,092,000~~$16,301,000 at December 31, ~~2014~~2017 and ~~$27,188,000~~$17,690,000 at December 31, ~~2013.~~2016.

The FHLB-Pittsburgh loan ~~facilities are~~facility is collateralized by qualifying loans secured by real estate with a book value totaling ~~$446,780,000~~$488,889,000 at December 31, ~~2014~~2017 and ~~$453,792,000~~$471,454,000 at December 31, ~~2013.~~2016. Also, the FHLB-Pittsburgh loan ~~facilities require~~facility requires 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 ~~$1,454,000~~$6,426,000 at December 31, ~~2014~~2017 and ~~$3,656,000~~$4,296,000 at December 31, ~~2013.~~

2016. The Corporation’s total credit facility with FHLB-Pittsburgh was $362,630,000 at December 31, 2017, including an unused (available) amount of $295,441,000. At December 31, ~~2013,~~2016, the ~~Corporation had a short-term borrowing~~Corporation’s total credit facility with FHLB-Pittsburgh was $339,221,000, including an unused (available) amount of $306,767,000.

Overnight borrowings from ~~the~~ FHLB-Pittsburgh ~~of $20,000,000. This borrowing matured in January 2014 and~~ had an interest rate of ~~0.24%~~1.54% at December 31, 2017 and 0.74% at December 31, 2016. At December 31, 2017, the other short-term advances included 9 advances of $3,000,000 and 1 advance of $2,000,000, each maturing monthly from January through October 2018, with a weighted average interest rate of 1.69% and rates ranging from 1.23% to 1.89%.

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 rate paid by the Corporation on customer repurchase agreements was 0.10% at December 31, ~~2014~~2017 and December 31, ~~2013.~~2016. The carrying value of the underlying securities was ~~$15,229,000~~$12,158,000 at December 31, ~~2014~~2017 and ~~$11,269,000~~$15,019,000 at December 31, ~~2013.~~2016.

LONG-TERM BORROWINGS

Long-term borrowings are as follows:
(In Thousands) Dec. 31, Dec. 31,
2014 2013
FHLB-Pittsburgh borrowings $12,060 $12,338
Repurchase agreements 61,000 61,000
Total long-term borrowings $73,060 $73,338

Long-term borrowings from FHLB - Pittsburgh are as follows:
(In Thousands) Dec. 31, Dec. 31,
2014 2013
Loan maturing in 2016 with a rate of 6.86% $107 $153
Loan maturing in 2017 with a rate of 6.83% 16 22
Loan maturing in 2017 with a rate of 3.81% 10,000 10,000
Loan maturing in 2020 with a rate of 4.79% 987 1,146
Loan maturing in 2025 with a rate of 4.91% 950 1,017
Total long-term FHLB-Pittsburgh borrowings $12,060 $12,338

Repurchase agreements included in long-term borrowings are as follows:

(In Thousands) Dec. 31, Dec. 31,
2014 2013
Agreement maturing in 2017 with a rate of 3.595% $27,000 $27,000
Agreement maturing in 2017 with a rate of 4.265% 34,000 34,000
Total long-term repurchase agreements $61,000 $61,000

~~Each~~LONG-TERM BORROWINGS

Long-term borrowings (initial maturity of ~~the~~greater than one year) are as follows:

(In Thousands)	Dec. 31,		Dec. 31,
	2017		2016
FHLB-Pittsburgh borrowings	$	9,189	$	11,454
Repurchase agreements		0		27,000
Total long-term borrowings	$	9,189	$	38,454

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

(In Thousands)	Dec. 31,		Dec. 31,
	2017		2016
Loan matured in 2017 with a rate of 6.83%	$	0	$	4
Loan matured in 2017 with a rate of 3.81%		0		10,000
Loan maturing in 2018 with a rate of 1.63%		3,000		0
Loan maturing in 2018 with a rate of 1.35%		3,000		0
Loan maturing in 2019 with a rate of 1.83%		2,000		0
Loan maturing in 2020 with a rate of 4.79%		463		646
Loan maturing in 2025 with a rate of 4.91%		726		804
Total long-term FHLB-Pittsburgh borrowings	$	9,189	$	11,454

The repurchase ~~agreements is putable by the issuer at quarterly intervals. The Corporation incurred a loss of $1,023,000~~agreement included in ~~2013 on prepayment of $7,000,000 of the agreement with~~long-term borrowings had an interest rate of 3.595%. In 2012, the Corporation incurred losses totaling $2,333,000 from prepayment of repurchase agreement obligations, including a loss of $2,190,000 on prepayment of a total $12,000,000 of the agreements shown and matured in ~~the table above.~~December 2017.

Securities sold under repurchase agreements were delivered to the broker-dealer who iswas the counter-party to the transactions. The broker-dealer may have sold, loaned or otherwise disposed of such securities to other parties in the normal course of their operations, and ~~has agreed to resell~~resold to the Corporation substantially identical securities at the maturities of the agreements. The Master Repurchase Agreement between the Corporation and the broker-dealer provides that the Agreement constitutes a “netting contract,” as defined; however, the Corporation and the broker-dealer have no other obligations to one another and accordingly, no netting has occurred. The carrying value of the underlying securities sold under the repurchase agreements with the broker dealer was ~~$70,982,000~~$0 at December 31, ~~2014~~2017 and ~~$79,814,000~~$31,494,000 at December 31, ~~2013.~~ 2016, as detailed in the following table:

(In Thousands)	Dec. 31,		Dec. 31,
	2017		2016
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities	$	0	$	18,181
Residential collateralized mortgage obligations		0		13,313
Total	$	0	$	31,494

Average daily repurchase agreement borrowings amounted to ~~$61,000,000~~$26,112,000 in ~~2014, $62,630,000~~2017, $27,000,000 in ~~2013~~2016 and ~~$78,790,000~~$54,304,000 in ~~2012.~~2015. The maximum amounts of outstanding borrowings under repurchase agreements with broker-dealers were $27,000,000 in 2017 and 2016, and $61,000,000 in ~~2014, $68,000,000 in 2013 and $85,000,000 in 2012.~~2015. The weighted average interest rate on repurchase agreements was ~~4.02%~~3.60% in ~~2014, 4.01%~~2017 and 2016, and 3.99% in ~~2013 and 3.97% in 2012.~~2015.

13. EMPLOYEE AND POSTRETIREMENT BENEFIT PLANS

DEFINED BENEFIT PLANS

The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. ~~Effective January 1, 2013, this plan was amended so that full-time~~Full-time employees no longer accrue service time toward the Corporation-subsidized portion of the medical benefits. The ~~plan was also amended effective January 1, 2013 to change some of the age and length-of-service requirements for participants to receive some of the benefits provided under the plan. This~~ plan contains a cost-sharing feature which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at December 31, ~~2014~~2017 and December 31, ~~2013,~~2016, and are not expected to significantly affect the ~~Corporation's~~Corporation’s future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.

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

The following table shows the funded status of the defined benefit plans:

~~(In Thousands)~~

(In Thousands)
	Pension						Postretirement
	2017			2016			2017			2016
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year	$	713		$	722		$	1,555		$	1,539
Service cost		0			0			36			37
Interest cost		24			26			57			62
Plan participants’ contributions		0			0			211			215
Actuarial loss (gain)		127			3			(103	)		(30	)
Benefits paid		(14	)		(38	)		(259	)		(268	)
Benefit obligation at end of year	$	850		$	713		$	1,497		$	1,555

CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year	$	846		$	839		$	0		$	0
Actual return on plan assets		91			45			0			0
Employer contribution		0			0			48			53
Plan participants’ contributions		0			0			211			215
Benefits paid		(14	)		(38	)		(259	)		(268	)
Fair value of plan assets at end of year	$	923		$	846		$	0		$	0

Funded status at end of year	$	73		$	133		$	(1,497	)	$	(1,555	)

Pension: Postretirement:
2014 2013 2014 2013
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year $1,733 $1,783 $1,391 $2,081
Service cost 0 0 34 41
Interest cost 73 71 57 55
Plan participants' contributions 0 0 198 208
Actuarial loss (gain) 76 (104) (48) (171)
Plan amendments 0 0 0 (557)
Benefits paid (16) (17) (254) (266)
Settlement of plan obligation (781) 0 0 0
Benefit obligation at end of year $1,085 $1,733 $1,378 $1,391

CHANGE IN PLAN ASSETS:
Fair value of plan assets at
beginning of year $1,968 $1,842 $0 $0
Actual return on plan assets 37 143 0 0
Employer contribution 0 0 56 58
Plan participants' contributions 0 0 198 208
Benefits paid (16) (17) (254) (266)
Settlement of plan obligation (781) 0 0 0
Fair value of plan assets at end of year $1,208 $1,968 $0 $0
Funded (underfunded) status at end of year $123 $235 ($1,378) ($1,391)

In 2014, there was a distribution from the plan of $781,000, or approximately 42% of the plan’s total accumulated benefit obligation prior to the distribution. The Corporation recognized a loss of $196,000 (included in net periodic benefit cost) in 2014 as a result of this settlement.

At December 31, ~~2014~~2017 and ~~2013,~~2016, the following pension plan and postretirement plan asset and liability amounts were recognized in the consolidated balance ~~sheet:~~sheets:

Assets and liabilities:
(In Thousands)	Pension:		Postretirement:		Pension				Postretirement
	2014	2013	2014	2013	2017		2016		2017		2016
Other assets	$123	$235			$	73	$	133
Accrued interest and other liabilities			$1,378	$1,391					$	1,497	$	1,555

At December 31, ~~2014~~2017 and ~~2013,~~2016, the following items included in accumulated other comprehensive income ~~(loss)~~ had not been recognized as components of expense:

Items not yet recognized as a component
of net periodic benefit cost:
(In Thousands)	Pension:		Postretirement:		Pension				Postretirement
	2014	2013	2014	2013	2017		2016		2017			2016
Prior service cost	$0		($402)	($433)	$	0	$	0	$	(309	)	$	(340	)
Net actuarial loss	269	357	11	59
Net actuarial loss (gain)						221		161		(2	)		101
Total	$269	$357	($391)	($374)	$	221	$	161	$	(311	)	$	(239	)

For the defined benefit pension plan, amortization of the net actuarial loss is expected to be ~~$10,000~~$13,000 in ~~2015.~~2018. For the postretirement plan, the estimated amount of prior service cost that will be amortized from accumulated other comprehensive ~~income~~loss into net periodic benefit cost in ~~2015~~2018 is a reduction in expense of $31,000, and no net actuarial ~~loss~~gain is expected to be amortized in ~~2015.~~2018.

The accumulated benefit obligation for the defined benefit pension plan was ~~$1,085,000~~$850,000 at December 31, ~~2014~~2017 and ~~$1,733,000~~$713,000 at December 31, ~~2013.~~2016.

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

(In Thousands)	Pension:			Postretirement:			Pension									Postretirement
	2014	2013	2012	2014	2013	2012	2017			2016			2015			2017			2016			2015
Service cost	$0			$34	$41	$91	$	0		$	0		$	0		$	36		$	37		$	38
Interest cost	73	71	72	57	55	81		24			26			36			57			62			57
Expected return on plan assets	(88)	(90)	(72)	0				(31	)		(26	)		(45	)		0			0			0
Amortization of transition (asset) obligation	0					37
Amortization of prior service cost	0			(31)		13		0			0			0			(31	)		(31	)		(31	)
Recognized net actuarial loss	19	32	27	0	1	0		7			9			11			0			0			0
Loss on settlement	196	0						0			0			87			0			0			0
Total net periodic benefit cost	$200	$13	$27	$60	$66	$222	$	0		$	9		$	89		$	62		$	68		$	64

In 2015, there was a distribution from the pension plan of $337,000, or 32% of the plan’s total accumulated benefit obligation prior to the distribution. The Corporation recognized a loss of $87,000 (included in net periodic benefit cost) in 2015 as a result of this settlement.

The weighted-average assumptions used to determine net periodic benefit cost are as follows:

	Pension:			Postretirement:			Pension									Postretirement
	2014	2013	2012	2014	2013	2012	2017			2016			2015			2017			2016			2015
Citizens Trust Company Retirement Plan
and postretirement plan:
Discount rate	4.50%	4.00%	4.50%	4.00%		4.50%		4.05	%		4.30	%		3.75	%		3.75	%		4.25	%		4.00	%
Expected return on plan assets	5.31%		7.50%	N/A				6.00	%		5.00	%		5.31	%		N/A			N/A			N/A
Rate of compensation increase	N/A							N/A			N/A			N/A			N/A			N/A			N/A

The weighted-average assumptions used to determine benefit obligations as of December 31, ~~2014~~2017 and ~~2013~~2016 are as follows:

	Pension:		Postretirement:		Pension						Postretirement
	2014	2013	2014	2013	2017			2016			2017			2016
Discount rate	3.75%	4.50%	4.00%	4.75%		3.55	%		4.05	%		3.75	%		4.25	%
Rate of compensation increase	N/A					N/A			N/A			N/A			N/A

Estimated future benefit payments, including only estimated employer contributions for the postretirement plan, which reflect expected future service, are as follows:

(In Thousands) Pension Postretirement
2015 $235 $88
2016 41 87
2017 16 88
2018 401 97
2019 38 98
2020-2024 208 515

(In Thousands)	Pension		Postretirement
2018	$	312	$	96
2019		41		96
2020		13		104
2021		12		101
2022		14		105
2023-2027		226		516

No estimated minimum contribution to the defined benefit pension plan is required in ~~2015,~~2018, though the Corporation may make discretionary contributions.

The expected return on pension plan ~~(Citizens Trust Company Retirement Plan)~~ assets is a significant assumption used in the calculation of net periodic benefit cost. This assumption reflects the average long-term rate of earnings expected on the funds invested or to be invested to provide for the benefits included in the projected benefit obligation.

The fair values of pension plan assets at December 31, ~~2014~~2017 and ~~2013~~2016 are as follows:

	2014	2013	2017			2016
Mutual funds invested principally in:
Cash and cash equivalents	3%	36%		2	%		2	%
Debt securities	37%	24%		37	%		38	%
Equity securities	47%	30%		45	%		44	%
Alternative funds	13%	10%		16	%		16	%
Total	100%			100	%		100	%

C&N Bank’s Trust and Financial Management Department manages the investment of the ~~Citizens Trust Company Retirement Plan (pension plan)~~pension plan assets. ~~Most of the~~The Plan’s securities ~~are mutual funds, including mutual funds principally invested in debt securities,~~include mutual funds invested principally in debt securities, a diversified mix of large, mid- and small-capitalization U.S. stocks, foreign stocks and ~~mutual funds invested in~~ alternative asset classes such as real estate, commodities, and inflation-protected securities. The fair values of plan assets are determined based on Level 1 inputs (as described in Note 6). At December 31, ~~2014 and 2013,~~2017, the targeted asset allocation of mutual funds for the pension plan was ~~26%~~45% equity securities, ~~61%~~37% debt securities, ~~11%~~16% alternative assets, and 2% cash. At December 31, 2016, the targeted asset allocation of mutual funds for the pension plan was 44% equity securities, 38% debt securities, 16% alternative assets and 2% cash. The pension plan’s assets do not include any shares of the Corporation’s common stock.

PROFIT SHARING AND DEFERRED COMPENSATION PLANS

The Corporation has a profit sharing plan that incorporates the deferred salary savings provisions of Section 401(k) of the Internal Revenue Code. The Corporation’s matching contributions to the Plan depend upon the tax deferred contributions of employees. The Corporation’s total basic and matching contributions were ~~$595,000~~$681,000 in ~~2014, $557,000~~2017, $646,000 in ~~2013~~2016 and ~~$587,000~~$609,000 in ~~2012.~~2015.

The Corporation has an Employee Stock Ownership Plan (ESOP). Contributions to the ESOP are discretionary, and the ESOP uses funds contributed to purchase Corporation stock for the accounts of ESOP participants. These purchases are made on the market (not directly from the Corporation), and employees are not permitted to purchase Corporation stock under the ESOP. The ESOP includes a diversification feature, which allows participants, upon reaching age 55 and 10 years of service (as defined), to sell up to 50% of their Corporation shares ~~back to the ESOP~~ over a period of 6 years. As of December 31, ~~2014~~2017 and ~~2013,~~2016, there were no shares allocated for repurchase by the ESOP.

Dividends paid on shares held by the ESOP are charged to retained earnings. All Corporation shares owned through the ESOP are included in the calculation of weighted-average shares outstanding for purposes of calculating earnings per share - basic and diluted. The ESOP held ~~409,197~~419,067 shares of Corporation stock at December 31, ~~2014~~2017 and ~~362,888~~417,753 shares at December 31, ~~2013,~~2016, all of which had been allocated to Plan participants. The Corporation’s contributions to the ESOP totaled ~~$512,000~~$588,000 in ~~2014, $509,000~~2017, $549,000 in ~~2013~~2016 and ~~$507,000~~$522,000 in ~~2012.~~2015.

The Corporation ~~also~~ has a nonqualified supplemental deferred compensation arrangement with its key officers. Charges to operating expense for officers’ supplemental deferred compensation were ~~$138,000~~$200,000 in ~~2014, $186,000~~2017, $184,000 in ~~2013~~2016 and ~~$140,000~~$167,000 in ~~2012.~~2015.

In December 2015, the Corporation established a nonqualified deferred compensation plan that allows selected officers, beginning in 2016, the option to defer receipt of cash compensation, including base salary and any cash bonuses or other cash incentives. This nonqualified deferred compensation plan does not provide for Corporation contributions.

STOCK-BASED COMPENSATION PLANS

The Corporation has a Stock Incentive Plan for a selected group of senior officers. A total of 850,000 shares of common stock may be issued under the Stock Incentive Plan. Awards may be made under the Stock Incentive Plan in the form of qualified options (“Incentive Stock Options,” as defined in the Internal Revenue Code), nonqualified options, stock appreciation rights or restricted stock. Historically through December 31, ~~2014,~~2017, all awards made under this Plan have consisted of Incentive Stock Options or restricted stock. Incentive Stock Options have an exercise price equal to the market value of the stock at the date of grant, vest after 6 months and expire after 10 years. Restricted stock awards issued under the Stock Incentive Plan vest ratably over terms ranging from 3-4 years, and most of the restricted stock awards issued under this Plan in 2014, 2013 and 2012 include a condition that the Corporation must meet an annual targeted return on average equity (“ROAE”) performance ratio, as defined, in order for participants to vest. The Corporation met the ROAE target for the 2014, 2013 and 2012 plan years. For 2014 restricted stock awards to individuals who are substantially involved in mortgage lending, vesting is not dependent on the Corporation’s ROAE. There are ~~286,386~~270,179 shares available for issuance under the Stock Incentive Plan as of December 31, ~~2014.~~2017.

Also, the Corporation has an Independent Directors Stock Incentive Plan. This plan permits awards of nonqualified stock options and/or restricted stock to non-employee directors. A total of 135,000 shares of common stock may be issued under the Independent Directors Stock Incentive Plan. The recipients’ rights to exercise stock options under this plan expire 10 years from the date of grant. The exercise prices of all stock options awarded under the Independent Directors Stock Incentive Plan are equal to market value as of the dates of grant. ~~The restricted stock awards granted through the end of 2014 vest ratably over 3 years.~~ There are ~~30,775~~17,396 shares available for issuance under the Independent Directors Stock Incentive Plan as of December 31, ~~2014.~~

~~The Corporation records stock option expense based on estimated fair value calculated using the Black-Scholes-Merton option-pricing model with the following assumptions:~~

2014 2013 2012
Volatility 39% 41% 41%
Expected option lives 8 Years 8 Years 7 Years
Risk-free interest rate 2.85% 1.60% 1.53%
Dividend yield 4.33% 3.69% 3.97%

Management estimated the lives for options based on the Corporation’s average historical experience with both plans. The Corporation utilized its historical volatility and dividend yield over the immediately prior 8-year period to estimate future levels of volatility and dividend yield for the 2014 and 2013 awards, and utilized its historical volatility and dividend yield over the immediately prior 7-year period in estimating the value of the 2012 awards. The risk-free interest rate was based on the published yield of zero-coupon U.S. Treasury strips as of the grant date, with a maturity coinciding with the estimated option lives.2017.

Total stock-based compensation expense is as follows:

(In Thousands) 2014 2013 2012
Stock options $153 $242 $247
Restricted stock 412 454 320
Total $565 $696 $567

~~A summary of stock option activity is presented below:~~

(In Thousands)	2017		2016		2015
Restricted stock	$	627	$	578	$	606
Stock options		0		0		0
Total	$	627	$	578	$	606

2014 2013 2012
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding, beginning of year 358,176 $19.03 337,670 $19.08 301,797 $19.05
Granted 39,027 $20.45 64,050 $19.21 64,757 $18.54
Exercised (50,415) $17.57 (10,656) $17.22 (17,284) $16.20
Forfeited (16,424) $20.03 (14,135) $20.13 (6,830) $21.51
Expired (14,207) $26.59 (18,753) $20.73 (4,770) $17.00
Outstanding, end of year 316,157 $19.05 358,176 $19.03 337,670 $19.08
Options exercisable at year-end 316,157 $19.05 358,176 $19.03 337,670 $19.08
Weighted-average fair value of options granted $5.50 $5.56 $5.15
Weighted-average fair value of options forfeited $4.89 $3.77 $4.03

The weighted-average remaining contractual term of outstanding stock options at December 31, 2014 was 5.4 years. The aggregate intrinsic value of stock options outstanding (excluding options issued at exercise prices greater than the final closing price of the Corporation’s stock in 2014) was $668,000 at December 31, 2014. The total intrinsic value of options exercised was $90,000 in 2014, $29,000 in 2013 and $72,000 in 2012.

The following summarizes non-vested ~~stock options and~~ restricted stock activity ~~as of and~~ for the year ended December 31, ~~2014:~~2017:

	Stock Options		Restricted Stock					Weighted
		Weighted		Weighted				Average
		Average		Average	Number			Grant Date
	Number	Grant Date	Number	Grant Date	of Shares			Fair Value
	of Shares	Fair Value	of Shares	Fair Value
Outstanding, December 31, 2013	0		67,878	$18.67
Outstanding, December 31, 2016						63,362		$	20.35
Granted	39,027	$5.50	16,711	$20.40		30,782		$	25.97
Vested	(39,027)	$5.50	(24,695)	$18.18		(28,981	)	$	20.21
Forfeited	0		(7,458)	$19.47		(4,406	)	$	21.74
Outstanding, December 31, 2014	0		52,436	$19.34
Outstanding, December 31, 2017						60,757		$	23.17

Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting ~~period.~~period, adjusted for estimated and actual forfeitures. As of December 31, ~~2014,~~2017, there was ~~$604,000~~$671,000 total unrecognized compensation ~~costs~~cost related to restricted stock, which is expected to be recognized over a weighted average period of ~~1.5~~1.3 years.

In 2017 and 2016, the ~~first two months~~Corporation awarded shares of restricted stock under the Stock Incentive Plan, as follows:

	2017		2016
Executive Officers		14,897		17,289
Other employees		7,415		10,304
Total		22,312		27,593

Restricted stock awards in 2017 and 2016 to employees other than executive officers vest over a three-year term, subject to continued employment and satisfactory job performance, with no additional performance conditions (time vesting). Restricted stock awards in 2017 and 2016 to Executive Officers vest over a three-year term, with vesting for half of the shares based on time vesting and vesting for half of the shares based on time vesting and upon the Corporation meeting an annual return on average equity (“ROAE”) performance ratio, as defined. The minimum level for satisfying the performance condition defined in the 2017 and 2016 awards was an ROAE at the 50^th percentile of the defined Peer Group’s results. The Corporation did not meet the performance condition defined in the 2017 and 2016 awards, as the Corporation’s return on average equity ROAE was in the 37^th percentile of the Peer Group’s results for the 12-month period ended September 30, 2017 and in the 47^th percentile of the Peer Group’s results for the 12-month period ended September 30, 2016. For purposes of the 2017 and 2016 awards, the Peer Group included all publicly traded commercial banks and bank holding companies with headquarters in Pennsylvania, New York, New Jersey and Ohio, and total assets ranging between $750 million and $3.5 billion as of the beginning of the applicable period.

Most of the restricted stock awards issued under this Plan prior to 2016, for which a portion of the awards vested in 2017 and 2016, include a condition that the Corporation must meet an annual targeted ROAE performance ratio, as defined, in order for participants to vest. In 2017, 2016 and 2015, the Corporation met the ROAE target applicable to these awards, which is based on the Corporation’s ROAE for 12-month periods ended September 30 of each year as compared to the applicable peer group of bank holding companies based in Pennsylvania and one local competitor based in New York with total assets of $750 million to $2 billion as of the beginning of each applicable period.

In 2017, a total of 8,470 restricted shares were granted under the Independent Directors Stock Incentive Plan, subject to time vesting over a term of one year. In 2016, a total of 7,834 restricted shares were granted under the Independent Directors Stock Incentive Plan, also with time vesting over a term of one year.

There were no stock options granted in 2017, 2016 or 2015. A summary of stock option activity is presented below:

	2017					2016					2015
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding, beginning of year		202,037		$	18.58		248,486		$	18.59		316,157		$	19.05
Granted		0					0					0
Exercised		(24,976	)	$	17.50		(35,880	)	$	18.86		(29,557	)	$	17.56
Forfeited		(635	)	$	19.88		(10,569	)	$	18.03		(20,211	)	$	19.76
Expired		(10,766	)	$	22.33		0					(17,903	)	$	27.00
Outstanding, end of year		165,660		$	18.49		202,037		$	18.58		248,486		$	18.59
Options exercisable at year-end		165,660		$	18.49		202,037		$	18.58		248,486		$	18.59
Weighted-average fair value of options forfeited				$	4.21				$	4.04				$	4.86

The weighted-average remaining contractual term of outstanding stock options at December 31, 2017 was 3.5 years. The aggregate intrinsic value of stock options outstanding was $913,000 at December 31, 2017. The total intrinsic value of options exercised was $164,000 in 2017, $183,000 in 2016 and $77,000 in 2015.

The Corporation has issued shares from treasury stock for almost all stock option exercises through December 31, 2017. Management does not anticipate that stock repurchases will be necessary to accommodate stock option exercises in 2018.

In January 2018, the Corporation awarded ~~22,496~~25,416 shares of restricted stock under the Stock Incentive Plan and ~~7,130~~9,086 shares of restricted stock under the Independent Directors Stock Incentive Plans. The ~~2015~~2018 restricted stock awards under the Stock Incentive Plan vest ratably over ~~four~~three years, and vesting for ~~20,298~~one-half of the 16,578 restricted shares awarded to Executive Officers depends on the Corporation meeting a ROAE target each year. The ~~2015~~2018 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year. Total estimated stock-based compensation for ~~2015~~2018 is ~~$628,000.~~$716,000. The restricted stock awards made in ~~the first two months of 2015~~January 2018 are not included in the tables above.

The Corporation has issued shares from treasury stock for almost all stock option exercises through December 31, 2014. Management does not anticipate that stock repurchases will be necessary to accommodate stock option exercises in 2015.

14. INCOME TAXES

The net deferred tax asset at December 31, ~~2014~~2017 and ~~2013~~2016 represents the following temporary difference components:

	December 31,		December 31,			December 31,
(In Thousands)	2014	2013	2017			2016
Deferred tax assets:
Unrealized holding losses on securities	$0	$541
Net realized losses on securities	144	91
Unrealized holding losses on securities:
Included in accumulated other comprehensive loss			$	843		$	512
Included in retained earnings				(337	)		0
Allowance for loan losses	2,568	3,032		1,894			2,998
Credit for alternative minimum tax paid	537	1,905
Other deferred tax assets	2,595	2,332		1,726			2,658
Total deferred tax assets	5,844	7,901		4,126			6,168

Deferred tax liabilities:
Unrealized holding gains on securities	2,844	0
Defined benefit plans - ASC 835	43	6
Defined benefit plans - ASC 835:
Included in accumulated other comprehensive loss				31			27
Included in retained earnings				(12	)		0
Bank premises and equipment	1,134	1,314		751			913
Core deposit intangibles	18	30		3			6
Other deferred tax liabilities	137	207		64			105
Total deferred tax liabilities	4,176	1,557		837			1,051
Deferred tax asset, net	$1,668	$6,344	$	3,289		$	5,117

The provision for income taxes includes the following:

(In thousands)	2014	2013	2012	2017		2016			2015
Currently payable	$4,280	$4,125	$4,545	$	4,938	$	5,328		$	5,097
Tax expense resulting from allocations
of certain tax benefits to equity or as a
reduction in other assets	158	219	121
Tax expense resulting from allocations of certain tax benefits to equity or as a reduction in other assets					63		175			161
Deferred	1,254	1,839	3,760		2,155		(156	)		79
Total provision	$5,692	$6,183	$8,426	$	7,156	$	5,347		$	5,337

A reconciliation of income tax at the statutory rate to the Corporation’s effective rate is as follows (amounts in thousands):

(Amounts in thousands)	2014		2013		2012		2017						2016						2015
	Amount	%	Amount	%	Amount	%	Amount			%			Amount			%			Amount			%
Expected provision	$7,973	35.00	$8,672	35.00	$10,896	35.00	$	7,207			35.00		$	7,388			35.00		$	7,633			35.00
Tax-exempt interest income	(1,982)	(8.70)	(2,137)	(8.62)	(2,287)	(7.35)		(1,817	)		(8.82	)		(1,801	)		(8.53	)		(1,914	)		(8.78	)
Nondeductible interest expense	56	0.25	60	0.24	92	0.30		42			0.20			40			0.19			51			0.23
Dividends received deduction	(79)	(0.35)	(76)	(0.31)	(78)	(0.25)		(7	)		(0.03	)		(22	)		(0.10	)		(75	)		(0.34	)
Increase in cash surrender value of life insurance	(132)	(0.58)	(140)	(0.57)	(159)	(0.51)		(133	)		(0.65	)		(134	)		(0.63	)		(135	)		(0.62	)
Employee stock option compensation	41	0.18	67	0.27	62	0.20		8			0.04			0			0.00			0			0.00
ESOP Dividends								(154	)		(0.75	)		0			0.00			0			0.00
Tax benefit from limited partnership investment	(83)	(0.36)	(85)	(0.34)	0	0.00		(73	)		(0.35	)		(76	)		(0.36	)		(80	)		(0.37	)
Effect of tax rate change								2,159			10.49			0			0.00			0			0.00
Other, net	(101)	(0.45)	(178)	(0.72)	(100)	(0.32)		(76	)		(0.37	)		(48	)		(0.23	)		(143	)		(0.66	)
Effective income tax provision	$5,692	24.99	$6,183	24.95	$8,426	27.07	$	7,156			34.75		$	5,347			25.33		$	5,337			24.47

In 2017, the Corporation recognized a reduction in the carrying value of the net deferred tax asset of $2,159,000 as a result of the December 2017 enactment of a reduction in the federal corporate income tax rate to 21% effective January 1, 2018, from the 35% marginal tax rate in effect throughout 2017, 2016 and 2015. Included in the total related provision was $325,000 associated with items included in Accumulated Other Comprehensive Loss in the consolidated balance sheets. Management believes the Corporation’s accounting for the effects of the reduction in the federal income tax rate is materially complete at December 31, 2017.

The Corporation has investments in three limited partnerships that manage affordable housing projects that have qualified for the federal low-income housing tax credit. The Corporation’s expected return from these investments is based on the receipt of tax credits and tax benefits from deductions of operating losses. The Corporation uses the effective yield method to account for these investments, with the benefits recognized as a reduction of the provision for income taxes. For two of the three limited partnership investments, the tax credits have been received in full in prior years, and the Corporation has fully realized the benefits of the credits and amortized its initial investments in the partnerships. The most recent affordable housing project was completed in 2013, and the Corporation received tax credits in 2013 through 2017 and expects to continue to receive tax credits ~~over a 10-year period beginning in 2013. At December 31, 2014, the~~annually through 2022. The carrying amount of the Corporation’s investment is ~~$906,000~~$608,000 at December 31, 2017 and $713,000 at December 31, 2016 (included in Other Assets in the consolidated balance sheets). For 2017, the estimated amount of tax credits and other tax benefits to be received is $157,000 and the amount recognized as a reduction of the provision for income taxes is $73,000. In ~~2013,~~2016, the Corporation received tax credits and other tax benefits totaling $158,000, and recognized a reduction of the provision for income tax of $76,000. In 2015, the Corporation received tax credits and other tax benefits totaling $160,000, and recognized a reduction of the provision for income tax of ~~$85,000. The estimated amount of tax credits and other tax benefits to be received for 2014 is $159,000, and the amount recognized as a reduction of the provision for income taxes for 2014 is $83,000.~~$80,000.

The Corporation has no unrecognized tax benefits, nor pending examination issues related to tax positions taken in preparation of its income tax returns. With limited exceptions, the Corporation is no longer subject to examination by the Internal Revenue Service for years prior to ~~2011.~~2014.

15. RELATED PARTY TRANSACTIONS

Loans to executive officers, directors of the Corporation and its subsidiaries and any associates of the foregoing persons are as follows:

(In Thousands) Beginning New Other Ending
Balance Loans Repayments Changes Balance
12 directors, 8 executive officers 2014 $12,547 $188 ($1,358) $646 $12,023
11 directors, 8 executive officers 2013 14,125 1,110 (2,723) 35 12,547
11 directors, 7 executive officers 2012 12,997 2,517 (1,424) 35 14,125

(In Thousands)	Beginning		New					Other			Ending
	Balance		Loans		Repayments			Changes			Balance
12 directors, 7 executive officers 2017	$	11,414	$	2,128	$	(2,061	)	$	2,931		$	14,412
12 directors, 7 executive officers 2016		10,246		307		(1,160	)		2,021			11,414
11 directors, 7 executive officers 2015		12,023		52		(808	)		(1,021	)		10,246

~~The~~In the table above, ~~transactions were made in the ordinary course of business on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with~~ other ~~persons and do not involve more than normal risks of collectability. Other~~ changes represent net ~~increases~~changes in the balance of existing lines of credit and transfers in and out of the related party category.

Deposits from related parties held by the Corporation amounted to ~~$3,203,000~~$7,171,000 at December 31, ~~2014~~2017 and ~~$3,897,000~~$6,261,000 at December 31, ~~2013.~~2016.

16. OFF-BALANCE SHEET RISK

The Corporation is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financial needs of its customers. These financial instruments include commitments to extend credit and standby letters of credit. These instruments involve, to varying degrees, elements of credit, interest rate or liquidity risk in excess of the amount recognized in the consolidated balance ~~sheet.~~sheets. The contract amounts of these instruments express the extent of involvement the Corporation has in particular classes of financial instruments.

The Corporation’s exposure to credit loss from nonperformance by the other party to the financial instruments for commitments to extend credit and standby letters of credit is represented by the contractual amount of these instruments. The Corporation uses the same credit policies in making commitments and conditional obligations as it does for on-balance sheet instruments.

Financial instruments whose contract amounts represent credit risk at December 31, ~~2014~~2017 and ~~2013~~2016 are as follows:

(In Thousands)	2014	2013	2017		2016
Commitments to extend credit	$143,863	$139,866	$	187,919	$	180,768
Standby letters of credit	13,415	21,590		7,445		9,025

Commitments to extend credit are legally binding agreements to lend to customers. Commitments generally have fixed expiration dates or other termination clauses and may require payment of fees. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future liquidity requirements. The Corporation evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Corporation, for extensions of credit is based on management’s credit assessment of the counterparty.

Standby letters of credit are conditional commitments issued by the Corporation guaranteeing performance by a customer to a third party. Those guarantees are issued primarily to support public and private borrowing arrangements, including commercial paper, bond financing and similar transactions. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. Some of the standby letters of credit are collateralized by real estate or other assets, and others are unsecured. The extent to which proceeds from liquidation of collateral would be expected to cover the maximum potential amount of future payments related to standby letters of credit is not estimable. The Corporation has recorded no liability associated with standby letters of credit as of December 31, ~~2014~~2017 and ~~2013.~~2016.

Standby letters of credit as of December 31, ~~2014~~2017 expire as follows:

Amount
Year of Expiration (In Thousands)
2015 $8,932
2016 2,183
2017 60
2019 30
2020 and Thereafter 2,210
Total $13,415

Year of Expiration	(In Thousands)
2018	$	7,042
2019		355
2020		48
Total	$	7,445

17. CONTINGENCIES

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

18. REGULATORY MATTERS

The Corporation (on a consolidated basis) and C&N Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory - and possibly additional discretionary - actions by regulators that, if undertaken, could have a direct material effect on the Corporation’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and C&N Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. ~~Prompt corrective action provisions are not applicable to bank holding companies.~~

Quantitative measures established by regulation to ensure capital adequacy require the Corporation and C&N Bank to maintain minimum amounts and ratios (set forth in the following table) of total ~~and~~capital, Tier I capital (as defined in the regulations) and Common equity Tier 1 capital (as defined) to risk-weighted assets (as defined) and of Tier I capital (as defined) to average assets (as defined). Management believes, as of December 31, ~~2014~~2017 and ~~2013,~~2016, that the Corporation and C&N Bank meet all capital adequacy requirements (described in more detail below) to which they are ~~subject.~~subject and maintain capital conservation buffers that allow the Corporation and C&N Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to certain executive officers.

To be categorized as well capitalized, an institution must maintain minimum total risk based, Tier I risk based, Common equity risk based and Tier I leverage ratios as set forth in the following table. The Corporation’s and C&N Bank’s actual capital amounts and ratios are also presented in the following table:

					Minimum To Be Well
(Dollars in Thousands)			Minimum		Capitalized Under															Minimum To Be Well
			Capital		Prompt Corrective		Actual									Minimum To Maintain				Capitalized Under				Minimum To Meet
	Actual		Requirement		Action Provisions							Minimum				Capital Conservation				Prompt Corrective				the Corporation’s
	Amount	Ratio	Amount	Ratio	Amount	Ratio	Actual					Capital Requirement				Buffer at Reporting Date				Action Provisions				Policy Thresholds
December 31, 2014:
							Amount		Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
December 31, 2017:
Total capital to risk-weighted assets:
Consolidated	$179,588	27.60%	$52,051	³8%	n/a	n/a	$	187,097		23.07	%	$	64,872		³8%	$	75,008		³9.25%	$	81,090		³10%	$	85,144		³10.5%
C&N Bank	156,420	24.33%	51,442	³8%	$64,303	³10%		165,142		20.47	%		64,528		³8%		74,611		³9.25%		80,661		³10%		84,694		³10.5%
Tier 1 capital to risk-weighted assets:
Consolidated	170,880	26.26%	26,026	³4%	n/a			177,981		21.95	%		48,654		³6%		58,790		³7.25%		64,872		³8%		68,926		³8.5%
C&N Bank	149,055	23.18%	25,721	³4%	38,582	³6%		156,026		19.34	%		48,396		³6%		58,479		³7.25%		64,528		³8%		68,561		³8.5%
Common equity tier 1 capital to risk-weighted assets:
Consolidated								177,981		21.95	%		36,490		³4.5%		46,626		³5.75%		52,708		³6.5%		56,763		³7%
C&N Bank								156,026		19.34	%		36,297		³4.5%		46,380		³5.75%		52,429		³6.5%		56,462		³7%
Tier 1 capital to average assets:
Consolidated	170,880	13.89%	49,224	³4%	n/a			177,981		14.23	%		50,023		³4%		N/A		N/A		62,529		³5%		62,529		³5%
C&N Bank	149,055	12.22%	48,798	³4%	60,998	³5%		156,026		12.63	%		49,418		³4%		N/A		N/A		61,772		³5%		61,772		³5%

December 31, 2013:
December 31, 2016:
Total capital to risk-weighted assets:
Consolidated	$177,693	26.60%	$53,449	³8%	n/a	n/a	$	183,597		23.60	%	$	62,245		³8%	$	67,108		³8.625%	$	77,806		³10%	$	81,697		³10.5%
C&N Bank	162,610	24.65%	52,783	³8%	$65,979	³10%		162,705		21.03	%		61,894		³8%		66,730		³8.625%		77,368		³10%		81,236		³10.5%
Tier 1 capital to risk-weighted assets:
Consolidated	168,039	25.15%	26,724	³4%	n/a			174,928		22.48	%		46,684		³6%		51,547		³6.625%		62,245		³8%		66,135		³8.5%
C&N Bank	154,323	23.39%	26,392	³4%	39,588	³6%		154,036		19.91	%		46,421		³6%		51,256		³6.625%		61,894		³8%		65,762		³8.5%
Common equity tier 1 capital to risk-weighted assets:
Consolidated								174,928		22.48	%		35,013		³4.5%		39,876		³5.125%		50,574		³6.5%		54,464		³7%
C&N Bank								154,036		19.91	%		34,815		³4.5%		39,651		³5.125%		50,289		³6.5%		54,157		³7%
Tier 1 capital to average assets:
Consolidated	168,039	13.78%	48,783	³4%	n/a			174,928		14.27	%		49,026		³4%		N/A		N/A		61,282		³5%		61,282		³5%
C&N Bank	154,323	12.77%	48,348	³4%	60,435	³5%		154,036		12.73	%		48,404		³4%		N/A		N/A		60,506		³5%		60,506		³5%

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

The current (new) capital rule provides that, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of common equity tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. The 2017 minimum required capital ratios and capital conservation buffer needed in order to fully avoid limitations on capital distributions, along with the remaining transition schedule for new ratios and the capital conservation buffer, is as follows:

	As of January 1:
	2017			2018			2019
Minimum common equity tier 1 capital ratio		4.5	%		4.5	%		4.5	%
Common equity tier 1 capital conservation buffer		1.25	%		1.875	%		2.5	%
Minimum common equity tier 1 capital ratio plus capital conservation buffer		5.75	%		6.375	%		7.0	%
Phase-in of most deductions from common equity tier 1 capital		80	%		100	%		100	%
Minimum tier 1 capital ratio		6.0	%		6.0	%		6.0	%
Minimum tier 1 capital ratio plus capital conservation buffer		7.25	%		7.875	%		8.5	%
Minimum total capital ratio		8.0	%		8.0	%		8.0	%
Minimum total capital ratio plus capital
conservation buffer		9.25	%		9.875	%		10.5	%

Capital Conservation Buffer		Maximum Payout
(as a % of risk-weighted assets)		(as a % of eligible retained income)
Greater than 2.5%		No payout limitation applies
≤2.5% and >1.875%		60%
≤1.875% and >1.25%		40%
≤1.25% and >0.625%		20%
≤0.625%		0%

Banking regulators limit the amount of dividends that may be paid by C&N Bank to the Corporation. Retained earnings against which dividends may be paid without prior approval of the banking regulators amounted to approximately ~~$84,022,000~~$88,980,000 at December 31, ~~2014,~~2017, subject to the minimum capital ratio requirements noted above.

Restrictions imposed by federal law prohibit the Corporation from borrowing from C&N Bank unless the loans are secured in specific amounts. Such secured loans to the Corporation are generally limited to 10% of C&N Bank’s tangible stockholder’s equity (excluding accumulated other comprehensive ~~income)~~loss) or ~~$15,580,000~~$15,604,000 at December 31, ~~2014.~~2017.

19. PARENT COMPANY ONLY

The following is condensed financial information for Citizens & Northern Corporation:

CONDENSED BALANCE SHEET December 31,
(In Thousands) 2014 2013
ASSETS
Cash $9,624 $2,297
Investment in subsidiaries:
     Citizens & Northern Bank 164,551 163,711
     Citizens & Northern Investment Corporation 10,822 10,216
     Bucktail Life Insurance Company 3,336 3,254
Other assets 36 0
TOTAL ASSETS $188,369 $179,478

LIABILITIES AND STOCKHOLDERS' EQUITY
Other liabilities $7 $6
Stockholders' equity 188,362 179,472
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $188,369 $179,478
CONDENSED INCOME STATEMENT
(In Thousands) 2014 2013 2012
Dividends from Citizens & Northern Bank $22,608 $11,108 $9,245
Expenses (112) (108) (105)
Income before equity in undistributed income
  of subsidiaries 22,496 11,000 9,140
Equity in undistributed (loss) income of subsidiaries (5,410) 7,594 13,565
NET INCOME $17,086 $18,594 $22,705

CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)
2014 2013 2012
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income $17,086 $18,594 $22,705
  Adjustments to reconcile net income to net
    cash provided by operating activities:
     Equity in undistributed net loss (income) of
       Subsidiaries 5,410 (7,594) (13,565)
     (Increase) decrease in other assets (36) 7 116
     Increase in other liabilities 1 0 6
     Net Cash Provided by Operating Activities 22,461 11,007 9,262

CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from sale of treasury stock 123 184 229
  Tax benefit from compensation plans, net 137 127 104
  Purchase of treasury stock (4,002) 0 0
  Dividends paid (11,392) (10,916) (9,061)
     Net Cash Used in Financing Activities (15,134) (10,605) (8,728)

INCREASE IN CASH AND CASH EQUIVALENTS 7,327 402 534
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 2,297 1,895 1,361
CASH AND CASH EQUIVALENTS, END OF YEAR $9,624 $2,297 $1,895

CONDENSED BALANCE SHEET	December 31,
(In Thousands)	2017		2016
ASSETS
Cash	$	6,790	$	6,033
Investment in subsidiaries:
Citizens & Northern Bank		166,576		165,397
Citizens & Northern Investment Corporation		11,588		11,168
Bucktail Life Insurance Company		3,488		3,419
Other assets		15		4
TOTAL ASSETS	$	188,457	$	186,021
LIABILITIES AND STOCKHOLDERS’ EQUITY
Other liabilities	$	14	$	13
Stockholders’ equity		188,443		186,008
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	188,457	$	186,021

CONDENSED INCOME STATEMENT
(In Thousands)	2017			2016			2015
Dividends from Citizens & Northern Bank	$	12,022		$	14,960		$	11,569
Expenses		(233	)		(367	)		(234	)
Income before equity in undistributed income of subsidiaries		11,789			14,593			11,335
Equity in undistributed income of subsidiaries		1,645			1,169			5,136
NET INCOME	$	13,434		$	15,762		$	16,471

CONDENSED STATEMENT OF CASH FLOWS
(In Thousands)
	2017			2016			2015
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	13,434		$	15,762		$	16,471
Adjustments to reconcile net income to net
cash provided by operating activities:
Equity in undistributed net income of subsidiaries		(1,645	)		(1,169	)		(5,136	)
(Increase) decrease in other assets		(11	)		20			12
Increase (decrease) in other liabilities		1			(6	)		12
Net Cash Provided by Operating Activities		11,779			14,607			11,359
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of treasury stock		128			263			381
Tax (cost) benefit from compensation plans, net		(5	)		151			143
Purchase of treasury stock		0			(3,723	)		(4,415	)
Dividends paid		(11,145	)		(11,112	)		(11,245	)
Net Cash Used in Financing Activities		(11,022	)		(14,421	)		(15,136	)
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		757			186			(3,777	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		6,033			5,847			9,624
CASH AND CASH EQUIVALENTS, END OF YEAR	$	6,790		$	6,033		$	5,847

20. SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA (Unaudited)

The following table presents summarized quarterly financial data for ~~2014~~2017 and ~~2013:~~2016:

2014 Quarter Ended
Mar. 31, June 30, Sept. 30, Dec. 31,
Interest income $11,406 $11,563 $11,572 $11,468
Interest expense 1,288 1,290 1,287 1,257
Net interest income 10,118 10,273 10,285 10,211
(Credit) provision for loan losses (311) 446 218 123
Net interest income after (credit) provision for loan losses 10,429 9,827 10,067 10,088
Other income 3,751 3,980 3,887 3,802
Net gains on available-for-sale securities 31 103 760 210
Other expenses 8,524 8,347 9,036 8,250
Income before income tax provision 5,687 5,563 5,678 5,850
Income tax provision 1,399 1,400 1,411 1,482
Net income available to common shareholders $4,288 $4,163 $4,267 $4,368
Net income per share – basic $0.35 $0.33 $0.34 $0.36
Net income per share – diluted $0.34 $0.33 $0.34 $0.35
2013 Quarter Ended
Mar. 31, June 30, Sept. 30, Dec. 31,
Interest income $12,647 $12,355 $12,027 $11,885
Interest expense 1,600 1,415 1,396 1,354
Net interest income 11,047 10,940 10,631 10,531
Provision for loan losses 183 66 239 1,559
Net interest income after provision for loan losses 10,864 10,874 10,392 8,972
Other income 3,843 4,191 4,293 4,124
Net gains on available-for-sale securities 1,159 100 193 266
Loss on prepayment of debt 1,023 0 0 0
Other expenses 8,553 8,520 8,610 7,788
Income before income tax provision 6,290 6,645 6,268 5,574
Income tax provision 1,584 1,671 1,579 1,349
Net income available to common shareholders $4,706 $4,974 $4,689 $4,225
Net income per share – basic $0.38 $0.40 $0.38 $0.34
Net income per share – diluted $0.38 $0.40 $0.38 $0.34

SUMMARY OF QUARTERLY CONSOLIDATED FINANCIAL DATA
(In Thousands Except Per Share Data) (Unaudited)
	2017 Quarter Ended
	Mar. 31,		June 30,		Sept. 30,		Dec. 31,
	2017		2017		2017		2017
Interest income	$	11,112	$	11,340	$	11,626	$	11,785
Interest expense		953		978		985		999
Net interest income		10,159		10,362		10,641		10,786
Provision for loan losses		452		4		322		23
Net interest income after provision for loan losses		9,707		10,358		10,319		10,763
Other income		3,864		4,106		4,066		4,117
Net gains on available-for-sale securities		145		107		5		0
Other expenses		9,298		9,076		9,192		9,401
Income before income tax provision		4,418		5,495		5,198		5,479
Income tax provision		984		1,374		1,262		3,536
Net income	$	3,434	$	4,121	$	3,936	$	1,943
Net income attributable to common shares	$	3,416	$	4,100	$	3,916	$	1,933
Net income per share – basic	$	0.28	$	0.34	$	0.32	$	0.16
Net income per share – diluted	$	0.28	$	0.34	$	0.32	$	0.16

	2016 Quarter Ended
	Mar. 31,		June 30,		Sept. 30,		Dec. 31,
	2016		2016		2016		2016
Interest income	$	10,937	$	10,924	$	11,131	$	11,106
Interest expense		904		925		944		920
Net interest income		10,033		9,999		10,187		10,186
Provision (credit) for loan losses		368		318		538		(3	)
Net interest income after provision (credit) for loan losses		9,665		9,681		9,649		10,189
Other income		3,690		3,906		3,884		4,031
Net gains on available-for-sale securities		383		122		584		69
Other expenses		9,072		8,535		8,579		8,558
Income before income tax provision		4,666		5,174		5,538		5,731
Income tax provision		1,093		1,303		1,451		1,500
Net income	$	3,573	$	3,871	$	4,087	$	4,231
Net income attributable to common shares	$	3,553	$	3,850	$	4,065	$	4,209
Net income per share – basic	$	0.29	$	0.32	$	0.34	$	0.35
Net income per share – diluted	$	0.29	$	0.32	$	0.34	$	0.35

Report of Independent Registered Public Accounting Firm

Stockholders and Board of Directors of

Citizens & Northern ~~Corporation:~~Corporation

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Citizens & Northern Corporation and subsidiaries (collectively, the “Corporation”) as of December 31, ~~2014~~2017 and ~~2013~~2016 and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows, for each of the three years in the ~~three-year~~ period ended December 31, ~~2014. Citizens & Northern~~2017, and the related notes (collectively referred to as the “consolidated financial statements”). We have also audited the Corporation’s internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control-Integrated Framework (2013)issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Corporation as of December 31, 2017 and ~~subsidiaries’~~2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Corporation maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017, based on criteria established inInternal Control-Integrated Framework (2013)issued by COSO.

Basis for Opinion

The Corporation’s management is responsible for these consolidated financial ~~statements.~~statements, for maintaining effective control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on ~~these~~the Corporation’s consolidated financial statements and an opinion on the Corporation’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the ~~Public Company Accounting Oversight Board (United States).~~PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material ~~misstatement.~~misstatement, whether due to error or fraud and whether effective internal control over financial reporting was maintained. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. ~~An audit~~

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also ~~includes assessing~~included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial ~~statement presentation.~~statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Citizens & Northern Corporation and subsidiaries as of December 31, 2014 and 2013, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2014 in conformity with accounting principles generally accepted in the United States of America.

~~We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Citizens & Northern Corporation and subsidiaries’~~A company’s internal control over financial reporting asis a process designed to provide reasonable assurance regarding the reliability of ~~December 31, 2014, based on criteria established~~financial reporting and the preparation of financial statements for external purposes in~~Internal Control-Integrated Framework~~ ~~(2013) issued by~~ accordance with generally accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the ~~Committee~~maintenance of ~~Sponsoring Organizations~~records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the ~~Treadway Commission (COSO),~~assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and ~~our report dated February 26, 2015 expressed an unqualified opinion.~~that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/ Baker Tilly Virchow Krause, LLP

Williamsport, Pennsylvania

We have served as the Corporation’s auditor since 1979.

February ~~26, 2015~~15, 2018

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

ITEM 9A. CONTROLS AND PROCEDURES

EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES

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

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

MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING

The Corporation’s management is responsible for establishing and maintaining ~~adequate~~effective internal control over financial reporting, as that term is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). The Corporation’s system of internal control over financial reporting has been designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation and fair presentation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. The Corporation’s internal control over financial reporting includes those policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the Corporation’s assets; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Corporation are being made only in accordance with authorizations of the Corporation’s management and directors; and (3) provide reasonable assurance regarding prevention, or timely detection and correction of unauthorized acquisition, use or disposition of the Corporation’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect and correct misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies and procedures may deteriorate.

The Corporation’s management ~~has~~ assessed the effectiveness of the Corporation’s internal control over financial reporting as of December 31, ~~2014. To make this assessment, we used~~2017, based on the ~~criteria for effective internal control over financial reporting described in~~~~Internal Control – Integrated Framework~~~~(2013~~), ~~issued~~framework set forth by the Committee of Sponsoring Organizations of the Treadway ~~Commission.~~Commission inInternal Control – Integrated Framework(2013). Based on ~~our~~that assessment, ~~and based on such criteria,~~ we ~~believe~~concluded that, as of December 31, ~~2014,~~2017, the Corporation’s internal control over financial reporting ~~was effective.~~is effective based on the criteria established inInternal Control – Integrated Framework(2013).

Baker Tilly Virchow Krause, LLP, the independent registered public accounting firm that audited the Corporation’s consolidated financial statements, has issued an audit report on the Corporation’s internal control over financial reporting as of December 31, ~~2014.~~2017. That report appears ~~below.~~immediately prior to this report.

February ~~26, 2015~~15, 2018	By:	~~/s/ Mark A. Hughes~~/s/ J. Bradley Scovill
Date		~~Interim~~ President and Chief Executive Officer

February ~~26, 2015~~15, 2018	By:	~~/s/ Anthony Peluso~~/s/ Mark A. Hughes
Date		~~Interim~~ Treasurer and Chief Financial Officer

~~Report Of Independent Registered Public Accounting Firm~~

~~Stockholders and Board of Directors of Citizens & Northern Corporation:~~

~~We have audited Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting as of December 31, 2014, based on criteria established in~~ ~~Internal Control-Integrated Framework~~ (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Citizens & Northern Corporation and subsidiaries’ management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on Citizens & Northern Corporation and subsidiaries’ internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

In our opinion, Citizens and Northern Corporation and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014, based on criteria established in~~Internal Control – Integrated Framework~~ ~~(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).~~

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets and the related consolidated statements of income, comprehensive income, changes in stockholders’ equity, and cash flows of Citizens & Northern Corporation and subsidiaries, and our report dated February 26, 2015 expressed an unqualified opinion.

~~/s/ Baker Tilly Virchow Krause, LL~~

~~Williamsport, Pennsylvania~~
~~February 26, 2015~~

ITEM 9B. OTHER INFORMATION

There was no information the Corporation was required to disclose in a report on Form 8-K during the fourth quarter ~~2014~~2017 that was not disclosed.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information concerning Directors and Executive Officers is incorporated herein by reference to disclosure under the captions “Proposal 1 - Election of Directors,” “Executive Officers,” “Information Concerning Security Ownership” and “Meetings and Committees of the Board of Directors” of the Corporation’s proxy statement dated March ~~13, 2015~~9, 2018 for the annual meeting of stockholders to be held on April ~~23, 2015.~~19, 2018.

The Corporation’s Board of Directors has adopted a Code of Ethics, available on the Corporation’s web site atwww.cnbankpa.com for the Corporation’s employees, officers and directors. (The provisions of the Code of Ethics are also included in the Corporation’s employee handbook.)

ITEM 11. EXECUTIVE COMPENSATION

Information concerning executive compensation is incorporated herein by reference to disclosure under the captions “Compensation Discussion and Analysis” and “Executive Compensation Tables” of the Corporation’s proxy statement dated March ~~13, 2015~~9, 2018 for the annual meeting of stockholders to be held on April ~~23, 2015.~~19, 2018.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information concerning security ownership of certain beneficial owners and management is incorporated herein by reference to disclosure under the caption “Beneficial Ownership of Executive Officers and Directors” of the Corporation’s proxy statement dated March ~~13, 2015~~9, 2018 for the annual meeting of stockholders to be held on April ~~23, 2015.~~19, 2018.

“Equity Compensation Plan Information” as required by Item 201(d) of Regulation S-K is incorporated by reference herein from Item 5 (Market for Registrant’s Common Equity and Related Stockholder Matters) of this Form 10-K.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information concerning loans and ~~deposits~~deposit balances with Directors and Executive Officers is provided in Note 15 to the Consolidated Financial Statements, which is included in Part II, Item 8 of this Annual Report on Form 10-K. Additional information, including information concerning director independence, is incorporated herein by reference to disclosure appearing under the captions “Director Independence” and ~~"Related~~“Related Person Transaction and ~~Policies"~~Policies” of the ~~Corporation's~~Corporation’s proxy statement dated March ~~13, 2015~~9, 2018 for the annual meeting of stockholders to be held on April ~~23, 2015.~~19, 2018.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information concerning services provided by the Corporation’s independent auditor Baker Tilly Virchow Krause, LLP, , the audit committee’s pre-approval policies and procedures for such services, and fees paid by the Corporation to that firm, is incorporated herein by reference to disclosure under the caption “Fees of Independent Public Accountants” of the Corporation’s proxy statement dated March ~~13, 2015~~9, 2018 for the annual meeting of stockholders to be held on April ~~23, 2015.~~19, 2018.

PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) (1). The following consolidated financial statements are set forth in Part II, Item 8:

	Page
Report of Independent Registered Public Accounting Firm	8386-87

Financial Statements:
Consolidated Balance Sheets - December 31, ~~2014~~2017 and ~~2013~~2016	3841
Consolidated Statements of Income - Years Ended December 31, 2017, 2016 and 2015	42
~~December 31, 2014, 2013 and 2012~~	39
Consolidated Statements of Comprehensive Income - Years
Ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012~~2015	4043
Consolidated Statements of Changes in ~~Stockholders'~~Stockholders’ Equity -
Years Ended December 31, ~~2014, 2013~~2017, 2016 and ~~2012~~2015	4144
Consolidated Statements of Cash Flows - Years Ended December 31, 2017, 2016 and 2015	45
~~December 31, 2014, 2013 and 2012~~	42
Notes to Consolidated Financial Statements	~~43-82~~46-85

(a)(2) Financial statement schedules are not applicable or included in the financial statements or related notes.

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

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

3. (ii) By-laws		Incorporated by reference to Exhibit ~~3.2~~3.1 of the
		~~Corporation's~~ Corporation’s Form 8-K filed ~~September 21, 2009~~April 19, 2013

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

9. Voting trust agreement		Not applicable

10. Material contracts:
10.1 Form of Restricted Stock agreement dated January ~~5, 2015~~		~~Filed herewith~~
3, 2018 between the Corporation and ~~certain officers~~Executive Officers pursuant to
the Citizens & Northern Corporation Stock Incentive Plan		Filed herewith

10.2 Form of Restricted Stock agreement dated January ~~5, 2015~~		~~Filed herewith~~
3, 2018 between the Corporation and certain ~~mortgage lending~~non-executive officers
pursuant to the Citizens & Northern Corporation Stock Incentive Plan
~~Incentive Plan~~		Filed herewith

10.3 Form of Restricted Stock agreement dated January ~~5, 2015~~		~~Filed herewith~~
3, 2018 between the Corporation and its independent directors
pursuant to the Citizens & Northern Corporation
Independent Directors Stock Incentive Plan		Filed herewith

10.4 ~~Form of Restricted Stock agreement dated February 5, 2015~~2018 Annual Performance Incentive Award Plan		Filed herewith
~~between the Corporation and Mark A. Hughes pursuant to~~
~~the Citizens & Northern Corporation Stock Incentive Plan~~

10.5 2018 Annual Performance Incentive Award Plan - Mortgage Lenders		Filed herewith

10.6 Form of Indemnification Agreement dated January 9, 2018 between the Corporation and Tracy E. Watkins		Filed herewith

10.7 Change in Control Agreement dated January 9, 2018 between the Corporation and Tracy E. Watkins		Filed herewith

10.8 Deferred Compensation Agreement dated December 17, 2015		Filed herewith

10.9 Employment agreement dated ~~September 19, 2013~~March 2, 2015 between the Corporation and J. Bradley Scovill		Incorporated by reference to Exhibit 10.1 filed with
~~the Corporation and Charles H. Updegraff, Jr.~~		Corporation’s Form 8-K on ~~September 19, 2013~~February 9, 2015

~~10.6~~
10.10 Employment agreement dated September 19, 2013 between the Corporation and Mark A. Hughes	Incorporated by reference to Exhibit 10.2 filed with
~~the Corporation and Mark A. Hughes~~	Corporation’s Form 8-K on September 19, 2013

~~10.7~~10.11 Employment agreement dated September 19, 2013 between the Corporation and Harold F. Hoose, III	Incorporated by reference to Exhibit 10.3 filed with
~~the Corporation and Harold F. Hoose, III~~	Corporation’s Form 8-K on September 19, 2013

~~10.8~~10.12 Employment agreement dated September 19, 2013 between the Corporation and Deborah E. Scott	Incorporated by reference to Exhibit 10.4 filed with
~~the Corporation and Deborah E. Scott~~	Corporation’s Form 8-K on September 19, 2013

~~10.9~~10.13 Form of Indemnification Agreement dated February 9,	~~Filed herewith~~
11, 2015 between the Corporation and Stan R. Dunsmore		Incorporated by reference to Exhibit 10.9 filed with Corporation’s Form 10-K on February 26, 2015

~~10.10~~10.14 Form of Indemnification Agreement dated January 2, 2013 between the Corporation and Shelley L. D’Haene	Incorporated by reference to Exhibit 10.5 filed with
~~between the Corporation and Shelley L. D'Haene~~	Corporation’s Form 10-K on February 21, 2013

~~10.11~~10.15 Form of Indemnification Agreement dated January 19,	~~Incorporated by reference to Exhibit 10.6 filed~~
2011 between the Corporation and John M. Reber	Incorporated by reference to Exhibit 10.6 filed with ~~Corporation's~~Corporation’s Form 10-K on Feb. 28, 2011

~~10.12 Change in Control Agreement dated January 2, 2013~~	~~Incorporated by reference to Exhibit 10.7 filed with~~
~~between the Corporation and Shelley L. D'Haene~~	~~Corporation’s Form 10-K on February 21, 2013~~

~~10.13 Change in Control Agreement dated April 15, 2008~~	~~Incorporated by reference to Exhibit 10.9~~
~~between the Corporation and George M. Raup~~	~~filed with the Corporation's Form 10-K~~
	~~on March 6, 2009~~

~~10.14~~10.16 Form of Indemnification Agreements dated May 2004	~~Incorporated by reference to Exhibit 10.1~~
between the Corporation and the Directors and certain officers	~~filed with the Corporation's Form 10-K~~
	Incorporated by reference to Exhibit 10.1 filed with Corporation’s 10-K on March ~~11,~~14, 2005

~~10.15~~10.17 Change in Control Agreement dated March 17, 2015 between the Corporation and Stan R. Dunsmore	Incorporated by reference to Exhibit 10.1 filed with Corporation’s Form 10-Q on May 8, 2015

10.18 Change in Control Agreement dated January 2, 2013 between the Corporation and Shelley L. D’Haene	Incorporated by reference to Exhibit 10.7 filed with Corporation’s Form 10-K on February 21, 2013

10.19 Change in Control Agreement dated January 20, 2005 between the Corporation and John M. Reber	Incorporated by reference to Exhibit 10.18 filed with Corporation’s Form 10-K on February 18, 2016

10.20 Change in Control Agreement dated December 31, 2003	~~Incorporated by reference to Exhibit 10.2~~
between the Corporation and Thomas L. Rudy, Jr.	~~filed with the Corporation's Form 10-K~~
~~10.16 Employment Agreement to be effective as of March 2, 2015~~ ~~between the Corporation, Citizens & Northern Bank and~~ ~~J. Bradley Scovill~~	~~on March 11, 2005~~ Incorporated by reference to Exhibit ~~10.1~~ 10.2 filed with the Corporation’s Form ~~8-K~~10-K on ~~February 9, 2015~~ March 14, 2005

~~10.17~~10.21 Executive Compensation Recoupment Policy dated September 19, 2013	Incorporated by reference to Exhibit 10.5 filed with Corporation’s Form 8-K on September 19, 2013

10.22 Fourth Amendment to Citizens & Northern Corporation Stock Incentive Plan and Annual Incentive Plan	Incorporated by reference to Exhibit 10.6 filed with Corporation’s Form 8-K on September 19, 2013

10.23 Third Amendment to Citizens & Northern Corporation Stock Incentive Plan	Incorporated by reference to Exhibit A to
~~Stock Incentive Plan~~	the ~~Corporation's~~Corporation’s proxy statement
	dated March 18, 2008 for the annual meeting
	of stockholders held on April 15, 2008

~~10.18~~10.24 Second Amendment to Citizens & Northern Corporation Stock Incentive Plan	Incorporated by reference to Exhibit 10.5
~~Stock Incentive Plan~~	filed with the ~~Corporation's~~Corporation’s Form 10-K
	on March 10, 2004

10.25 First Amendment to Citizens & Northern Corporation Stock Incentive Plan		Incorporated by reference to Exhibit 10.6 filed with the Corporation’s Form 10-K on March 10, 2004

~~10.19 First Amendment to~~10.26 Citizens & Northern Corporation Stock Incentive Plan		Incorporated by reference to Exhibit ~~10.6~~
~~Stock Incentive Plan~~		10.7 filed with the ~~Corporation's~~Corporation’s Form 10-K
		on March 10, 2004

~~10.20~~10.27 First Amendment to Citizens & Northern Corporation Independent Directors Stock Incentive Plan		Incorporated by reference to Exhibit ~~10.7~~
		~~filed with~~B to the ~~Corporation's Form 10-K~~
		Corporation’s proxy statement dated March 18, 2008 for the annual meeting of stockholders held on ~~March 10, 2004~~April 15, 2008

~~10.21 First Amendment to Citizens & Northern Corporation~~		~~Incorporated by reference to Exhibit B to~~
~~Independent Directors Stock Incentive Plan~~		~~the Corporation's proxy statement~~
		~~dated March 18, 2008 for the annual~~
		~~meeting of stockholders held on April 15, 2008~~

~~10.22~~10.28 Citizens & Northern Corporation Independent Directors Stock Incentive Plan		Incorporated by reference to Exhibit A to
~~Stock Incentive Plan~~		the ~~Corporation's~~Corporation’s proxy statement
		dated March 19, 2001 for the annual
		meeting of stockholders held on
		April 17, 2001.

~~10.23~~10.29 Citizens & Northern Corporation Supplemental Executive Retirement Plan (as amended and restated)		Incorporated by reference to Exhibit 10.21
~~Retirement Plan (as amended and restated)~~		filed with the ~~Corporation's~~Corporation’s Form 10-K
		on March 6, 2009

11. Statement re: computation of per share earnings		Information concerning the computation of
		earnings per share is provided in Note 4
		to the Consolidated Financial Statements,
		which is included in Part II, Item 8 of Form 10-K

12. Statements re: computation of ratios		Not applicable

13. Annual report to security holders, Form 10-Q or		~~Not applicable~~
quarterly report to security holders		Not applicable

14. Code of ethics		The Code of Ethics is available through the
		~~Corporation's~~ Corporation’s website at www.cnbankpa.com.
		To access the Code of Ethics, click on
		~~"Investor~~ “Investor Relations,"” followed by ~~"Corporate~~
		~~Governance"~~“Pages within Investor Relations,” “Corporate Governance Policies,” and ~~"Code~~“Code of Ethics."”

16. Letter re: change in certifying accountant		~~Incorporated by reference to Exhibit~~
		~~16 filed with the Corporation’s Form 8-K on October 2, 2014.~~
~~18. Letter re: change in accounting principles~~		Not applicable

18. Letter re: change in accounting principles		Not applicable

21. Subsidiaries of the registrant		Filed herewith

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

23. ~~Consents~~Consent of ~~experts and counsel~~Independent Registered Public Accounting Firm		Filed herewith

24. Power of attorney		Not applicable

31. Rule 13a-14(a)/15d-14(a) certifications:
31.1 Certification of Chief Executive Officer		Filed herewith
31.2 Certification of Chief Financial Officer		Filed herewith

32. Section 1350 certifications		Filed herewith

33. Report on assessment of compliance with servicing criteria for
asset-backed securities		Not applicable

34. Attestation report on assessment of compliance with servicing
criteria for asset-backed securities		Not applicable

35. Service compliance statement		Not applicable

99. Additional exhibits:
99.1 Additional information mailed or made available online to		~~Filed herewith~~
shareholders with proxy statement and Form 10-K on March 9, 2018
~~March 13, 2015~~		Filed herewith

100. XBRL-related documents		Not applicable

101. Interactive data file		Filed herewith

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ~~Citizens & Northern Corporation has duly caused~~ this report ~~to be~~has been signed ~~on its behalf~~below by the ~~undersigned, thereunto duly authorized:~~following persons on behalf of the registrant and in the capacities indicated.

By: /s/ ~~Mark A. Hughes~~J. Bradley Scovill
~~Interim~~ President and Chief Executive Officer

Date: February ~~26, 2015~~15, 2018

By: /s/ ~~Anthony Peluso~~Mark A. Hughes
~~Interim~~ Treasurer and Principal Accounting Officer

~~Date: February 26, 2015~~

Date: February 15, 2018

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

BOARD OF DIRECTORS

/s/	Dennis F. Beardslee	/s/	Edward H. Owlett, III
	Dennis F. Beardslee		Edward H. Owlett, III
	Date: February ~~26, 2015~~15, 2018		Date: February ~~26, 2015~~	15, 2018

/s/	Jan E. Fisher	/s/	~~Leonard Simpson~~	J. Bradley Scovill
	Jan E. Fisher		~~Leonard Simpson~~	J. Bradley Scovill
	Date: February ~~26, 2015~~15, 2018		Date: February ~~26, 2015~~	15, 2018

/s/	R. Bruce Haner	/s/	~~James E. Towner~~	Leonard Simpson
	R. Bruce Haner		~~James E. Towner~~	Leonard Simpson
	Date: February ~~26, 2015~~15, 2018		Date: February ~~26, 2015~~	15, 2018

/s/	Susan E. Hartley	/s/	~~Ann M. Tyler~~	James E. Towner
	Susan E. Hartley		~~Ann M. Tyler~~	James E. Towner
	Date: February ~~26, 2015~~15, 2018		Date: February ~~26, 2015~~	15, 2018

/s/	Leo F. Lambert	/s/	~~Mark A. Hughes~~	Aaron K. Singer
	Leo F. Lambert		~~Mark A. Hughes~~	Aaron K. Singer
	Date: February ~~26, 2015~~15, 2018		Date: February ~~26, 2015~~15, 2018

/s/	Terry L. Lehman	/s/	Frank G. Pellegrino
	Terry L. Lehman		Frank G. Pellegrino
	Date: February 15, 2018		Date: February 15, 2018


*Index*	12/31/09	12/31/10	12/31/11	12/31/12	12/31/13	12/31/14
Citizens & Northern Corporation	100.00	160.82	206.97	221.11	253.58	267.98
Russell 2000	100.00	126.86	121.56	141.43	196.34	205.95
CZNC Peer Group Index*	100.00	113.13	106.47	126.35	158.15	181.07

TABLE III - ANALYSIS OF VOLUME AND RATE CHANGES
(In Thousands)	Year Ended 12/31/14 vs. 12/31/13			Year Ended 12/31/13 vs. 12/31/12
	Change in	Change in	Total	Change in	Change in	Total
	Volume	Rate	Change	Volume	Rate	Change
EARNING ASSETS
Available-for-sale securities:
Taxable	$868	$55	$923	($54)	($2,175)	($2,229)
Tax-exempt	(369)	(350)	(719)	(50)	(379)	(429)
Total available-for-sale securities	499	(295)	204	(104)	(2,554)	(2,658)
Interest-bearing due from banks	24	(4)	20	(24)	15	(9)
Loans held for sale	(60)	22	(38)	(69)	16	(53)
Loans receivable:
Taxable	(1,746)	(1,611)	(3,357)	(2,502)	(2,467)	(4,969)
Tax-exempt	144	(107)	37	(86)	(148)	(234)
Total loans receivable	(1,602)	(1,718)	(3,320)	(2,588)	(2,615)	(5,203)
Total Interest Income	(1,139)	(1,995)	(3,134)	(2,785)	(5,138)	(7,923)

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	11	(6)	5	13	(8)	5
Money market	(6)	2	(4)	(10)	(54)	(64)
Savings	5	(1)	4	9	0	9
Certificates of deposit	(133)	(320)	(453)	(607)	(873)	(1,480)
Individual Retirement Accounts	(38)	(54)	(92)	(96)	(478)	(574)
Other time deposits	0	0	0	0	0	0
Total interest-bearing deposits	(161)	(379)	(540)	(691)	(1,413)	(2,104)
Borrowed funds:
Short-term	0	0	0	(1)	0	(1)
Long-term	(109)	6	(103)	(1,179)	18	(1,161)
Total borrowed funds	(109)	6	(103)	(1,180)	18	(1,162)
Total Interest Expense	(270)	(373)	(643)	(1,871)	(1,395)	(3,266)

Net Interest Income	($869)	($1,622)	($2,491)	($914)	($3,743)	($4,657)

	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%

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%

December 31, 2013 Data
(In Thousands)		Period Ending December 31, 2014

Basis Point	Interest	Interest	Net Interest	NII	NII
Change in Rates	Income	Expense	Income (NII)	% Change	Risk Limit
+400	$53,993	$23,975	$30,018	-24.4%	25.0%
+300	51,748	18,975	32,773	-17.4%	20.0%
+200	49,496	14,091	35,405	-10.8%	15.0%
+100	47,146	9,552	37,594	-5.3%	10.0%
0	44,821	5,123	39,698	0.0%	0.0%
-100	42,432	4,897	37,535	-5.4%	10.0%
-200	40,747	4,895	35,852	-9.7%	15.0%
-300	40,059	4,895	35,164	-11.4%	20.0%
-400	39,968	4,895	35,073	-11.7%	25.0%

	Market Value of Portfolio Equity at December 31, 2013

	Present	Present	Present
Basis Point	Value	Value	Value
Change in Rates	Equity	% Change	Risk Limit
+400	$161,652	-28.5%	50.0%
+300	175,176	-22.6%	45.0%
+200	192,513	-14.9%	35.0%
+100	209,428	-7.4%	25.0%
0	226,204	0.0%	0.0%
-100	230,189	1.8%	25.0%
-200	233,902	3.4%	35.0%
-300	250,451	10.7%	45.0%

ITEM 8. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS
(In Thousands, Except Share and Per Share Data)	December 31,	December 31,
	2014	2013
ASSETS
Cash and due from banks:
Noninterest-bearing	$14,812	$15,917
Interest-bearing	21,235	28,702
Total cash and due from banks	36,047	44,619
Available-for-sale securities, at fair value	516,807	482,658
Loans held for sale	0	54

Loans receivable	630,545	644,303
Allowance for loan losses	(7,336)	(8,663)
Loans, net	623,209	635,640
Bank-owned life insurance	22,119	21,743
Accrued interest receivable	3,908	4,146
Bank premises and equipment, net	16,256	17,430
Foreclosed assets held for sale	1,189	892
Deferred tax asset, net	1,668	6,344
Intangible asset - Core deposit intangibles	52	87
Intangible asset – Goodwill	11,942	11,942
Other assets	8,766	12,140
TOTAL ASSETS	$1,241,963	$1,237,695

LIABILITIES
Deposits:
Noninterest-bearing	$212,439	$191,245
Interest-bearing	755,550	763,271
Total deposits	967,989	954,516
Short-term borrowings	5,537	23,385
Long-term borrowings	73,060	73,338
Accrued interest and other liabilities	7,015	6,984
TOTAL LIABILITIES	1,053,601	1,058,223

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference
per share; no shares issued at December 31, 2014 and December 31, 2013	0	0
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2014 and
2013; issued 12,655,171 at December 31, 2014 and 12,596,540 at December 31, 2013	12,655	12,596
Paid-in capital	71,541	70,105
Retained earnings	105,550	101,216
Treasury stock, at cost; 375,191 shares at December 31, 2014
and 206,477 shares at December 31, 2013	(6,744)	(3,452)
Sub-total	183,002	180,465
Accumulated other comprehensive income (loss):
Unrealized gain (loss) on available-for-sale securities	5,281	(1,004)
Defined benefit plans gain	79	11
Total accumulated other comprehensive income (loss)	5,360	(993)
TOTAL STOCKHOLDERS' EQUITY	188,362	179,472
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$1,241,963	$1,237,695

(In Thousands)	Before- Tax	Income Tax	Net-of- Tax
	Amount	Effect	Amount
2012
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities	$4,128	($1,608)	$2,520
Reclassification adjustment for (gains) realized in income	(2,682)	939	(1,743)
Other comprehensive gain on available-for-sale securities	1,446	(669)	777

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income	8	(2)	6
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost	77	(17)	60
Other comprehensive gain on unfunded retirement obligations	85	(19)	66

Total other comprehensive income	$1,531	($688)	$843

	Year Ended December 31, 2013
	Pooled Trust	Pooled Trust
	Preferred	Preferred
	Securities -	Securities -
(In Thousands)	Senior	Mezzanine	Servicing
	Tranches	Tranches	Rights	Total
Balance, beginning of period	$1,613	$0	$605	$2,218
Issuances of servicing rights	0	0	451	451
Accretion and amortization, net	(2)	0	0	(2)
Proceeds from sales and calls	(1,636)	(571)	0	(2,207)
Realized gains, net	23	571	0	594
Unrealized gains included in earnings	0	0	67	67
Unrealized gains included in other comprehensive income	2	0	0	2
Balance, end of period	$0	$0	$1,123	$1,123

	Year Ended December 31, 2012
	Pooled Trust	Pooled Trust
	Preferred	Preferred
	Securities -	Securities -
	Senior	Mezzanine	Servicing
	Tranches	Tranches	Rights	Total
Balance, beginning of period	$4,638	$730	$375	$5,743
Issuances of servicing rights	0	0	418	418
Accretion and amortization, net	(8)	0	0	(8)
Proceeds from sales and calls	(3,429)	(1,835)	0	(5,264)
Realized gains, net	56	1,835	0	1,891
Unrealized losses included in earnings	0	0	(188)	(188)
Unrealized gains (losses) included in other comprehensive income	356	(730)	0	(374)
Balance, end of period	$1,613	$0	$605	$2,218

Year Ended December 31, 2014		Pre-	Post-
(Balances in Thousands)		Modification	Modification
	Number	Outstanding	Outstanding
	of	Recorded	Recorded
	Contracts	Investment	Investment
Residential mortgage,
Residential mortgage loans - first liens	3	$150	$150
Commercial:
Commercial loans secured by real estate	5	6,679	5,193
Commercial and industrial	1	80	80

Year Ended December 31, 2013		Pre-	Post-
(Balances in Thousands)		Modification	Modification
	Number	Outstanding	Outstanding
	of	Recorded	Recorded
	Contracts	Investment	Investment
Residential mortgage:
Residential mortgage loans - first liens	6	$677	$677
Residential mortgage loans - junior liens	3	102	102
Commercial:
Commercial loans secured by real estate	2	866	866
Commercial and industrial	3	701	701
Loans secured by farmland	4	512	512
Agricultural loans	1	13	13
Consumer	1	6	6

SHORT-TERM BORROWINGS

Short-term borrowings include the following:

(In Thousands)	Dec. 31,	Dec. 31,
	2014	2013
FHLB-Pittsburgh borrowings	$0	$20,000
Customer repurchase agreements	5,537	3,385
Total short-term borrowings	$5,537	$23,385

LONG-TERM BORROWINGS

Long-term borrowings are as follows:
(In Thousands)	Dec. 31,	Dec. 31,
	2014	2013
FHLB-Pittsburgh borrowings	$12,060	$12,338
Repurchase agreements	61,000	61,000
Total long-term borrowings	$73,060	$73,338

Long-term borrowings from FHLB - Pittsburgh are as follows:
(In Thousands)	Dec. 31,	Dec. 31,
	2014	2013
Loan maturing in 2016 with a rate of 6.86%	$107	$153
Loan maturing in 2017 with a rate of 6.83%	16	22
Loan maturing in 2017 with a rate of 3.81%	10,000	10,000
Loan maturing in 2020 with a rate of 4.79%	987	1,146
Loan maturing in 2025 with a rate of 4.91%	950	1,017
Total long-term FHLB-Pittsburgh borrowings	$12,060	$12,338

Repurchase agreements included in long-term borrowings are as follows:

(In Thousands)	Dec. 31,	Dec. 31,
	2014	2013
Agreement maturing in 2017 with a rate of 3.595%	$27,000	$27,000
Agreement maturing in 2017 with a rate of 4.265%	34,000	34,000
Total long-term repurchase agreements	$61,000	$61,000

	2014 Quarter Ended
	Mar. 31,	June 30,	Sept. 30,	Dec. 31,
Interest income	$11,406	$11,563	$11,572	$11,468
Interest expense	1,288	1,290	1,287	1,257
Net interest income	10,118	10,273	10,285	10,211
(Credit) provision for loan losses	(311)	446	218	123
Net interest income after (credit) provision for loan losses	10,429	9,827	10,067	10,088
Other income	3,751	3,980	3,887	3,802
Net gains on available-for-sale securities	31	103	760	210
Other expenses	8,524	8,347	9,036	8,250
Income before income tax provision	5,687	5,563	5,678	5,850
Income tax provision	1,399	1,400	1,411	1,482
Net income available to common shareholders	$4,288	$4,163	$4,267	$4,368
Net income per share – basic	$0.35	$0.33	$0.34	$0.36
Net income per share – diluted	$0.34	$0.33	$0.34	$0.35

	2013 Quarter Ended
	Mar. 31,	June 30,	Sept. 30,	Dec. 31,
Interest income	$12,647	$12,355	$12,027	$11,885
Interest expense	1,600	1,415	1,396	1,354
Net interest income	11,047	10,940	10,631	10,531
Provision for loan losses	183	66	239	1,559
Net interest income after provision for loan losses	10,864	10,874	10,392	8,972
Other income	3,843	4,191	4,293	4,124
Net gains on available-for-sale securities	1,159	100	193	266
Loss on prepayment of debt	1,023	0	0	0
Other expenses	8,553	8,520	8,610	7,788
Income before income tax provision	6,290	6,645	6,268	5,574
Income tax provision	1,584	1,671	1,579	1,349
Net income available to common shareholders	$4,706	$4,974	$4,689	$4,225
Net income per share – basic	$0.38	$0.40	$0.38	$0.34
Net income per share – diluted	$0.38	$0.40	$0.38	$0.34