xQUARTERLY 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

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

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 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).

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

Large accelerated filer¨Accelerated filerxNon-accelerated filer¨Smaller reporting 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).

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited) – September 30, ~~2017~~2018 and December 31, ~~2016~~2017		Page 3

Consolidated Statements of Income (Unaudited) – Three-month and Nine-month Periods Ended September 30, ~~2017~~2018 and ~~2016~~2017		Page 4

Consolidated Statements of Comprehensive Income (Unaudited) - Three-month and Nine-month Periods Ended September 30, ~~2017~~2018 and ~~2016~~2017		Page 5

Consolidated Statements of Cash Flows (Unaudited) – Nine-month Periods Ended September 30, ~~2017~~2018 and ~~2016~~2017		Page 6

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) ~~- Nine Months~~– Nine-month Periods Ended September 30, ~~2017~~2018 and ~~2016~~2017		Page 7

Notes to Unaudited Consolidated Financial Statements		Pages 8 – 38

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		Pages 39 – 6064

Item 3. Quantitative and Qualitative Disclosures About Market Risk		Pages 6064 – 6266

Item 4. Controls and Procedures		Page 6367

Part II. Other Information		Pages 6468 – 6569

Signatures		Page 6670

Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification ~~-Chief~~- Chief Executive Officer		~~Page 67~~

Exhibit 31.2. Rule 13a-14(a)/15d-14(a) Certification - Chief Financial Officer		~~Page 68~~

Exhibit 32. Section 1350 Certifications		~~Page 69~~

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 1. FINANCIAL STATEMENTS

CONSOLIDATED BALANCE SHEETS

(In Thousands, Except Share and Per Share Data) (Unaudited)

	September 30,			December 31,			September 30,			December 31,
	2017			2016			2018			2017
ASSETS
Cash and due from banks:
Noninterest-bearing	$	19,902		$	17,551		$	20,978		$	25,664
Interest-bearing		12,948			14,558			17,363			14,580
Total cash and due from banks		32,850			32,109			38,341			40,244
Available-for-sale securities, at fair value		365,086			395,077
Available-for-sale debt securities, at fair value								358,706			355,937
Marketable equity security								941			971
Loans held for sale		437			142			551			765

Loans receivable		801,012			751,835			822,532			815,713
Allowance for loan losses		(8,900	)		(8,473	)		(8,815	)		(8,856	)
Loans, net		792,112			743,362			813,717			806,857

Bank-owned life insurance		19,985			19,704			18,935			20,083
Accrued interest receivable		4,027			3,963			4,279			4,048
Bank premises and equipment, net		15,366			15,397			14,824			15,432
Foreclosed assets held for sale		1,650			2,180			2,678			1,598
Deferred tax asset, net		4,319			5,117			5,122			3,289
Intangible assets - Goodwill and core deposit intangibles		11,956			11,959			11,951			11,954
Other assets		12,133			13,282			15,394			15,781
TOTAL ASSETS	$	1,259,921		$	1,242,292		$	1,285,439		$	1,276,959

LIABILITIES
Deposits:
Noninterest-bearing	$	236,758		$	224,175		$	260,961		$	241,214
Interest-bearing		784,867			759,668			782,986			767,235
Total deposits		1,021,625			983,843			1,043,947			1,008,449
Short-term borrowings		7,739			26,175			8,421			61,766
Long-term borrowings		31,256			38,454			32,985			9,189
Accrued interest and other liabilities		8,288			7,812			10,099			9,112
TOTAL LIABILITIES		1,068,908			1,056,284			1,095,452			1,088,516

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 12,197,527 at September 30, 2017 and
12,113,228 December 31, 2016		12,655			12,655
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 12,297,274 at September 30, 2018 and 12,214,525 December 31, 2017								12,655			12,655
Paid-in capital		71,818			71,730			72,197			72,035
Retained earnings		114,836			112,790			120,283			113,608
Treasury stock, at cost; 457,644 shares at September 30, 2017 and 541,943
shares at December 31, 2016		(8,670	)		(10,269	)
Accumulated other comprehensive income (loss)		374			(898	)
Treasury stock, at cost; 357,897 shares at September 30, 2018 and 440,646 shares at December 31, 2017								(6,780	)		(8,348	)
Accumulated other comprehensive loss								(8,368	)		(1,507	)
TOTAL STOCKHOLDERS' EQUITY		191,013			186,008			189,987			188,443
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	1,259,921		$	1,242,292		$	1,285,439		$	1,276,959

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Income	3 Months Ended					9 Months Ended
(In Thousands Except Per Share Data) (Unaudited)	Sept. 30,			Sept. 30,		Sept. 30,			Sept. 30,
	2018			2017		2018			2017
INTEREST INCOME
Interest and fees on loans:
Taxable	$	9,754		$	8,889	$	28,530		$	25,872
Tax-exempt		561			531		1,677			1,482
Interest on mortgages held for sale		3			10		9			20
Interest on balances with depository institutions		173			67		319			140
Income from available-for-sale debt securities:
Taxable		1,624			1,335		4,368			4,090
Tax-exempt		680			789		2,105			2,459
Dividends on marketable equity security		5			5		16			15
Total interest and dividend income		12,800			11,626		37,024			34,078
INTEREST EXPENSE
Interest on deposits		1,033			639		2,641			1,735
Interest on short-term borrowings		39			9		320			131
Interest on long-term borrowings		169			337		352			1,050
Total interest expense		1,241			985		3,313			2,916
Net interest income		11,559			10,641		33,711			31,162
Provision for loan losses		60			322		332			778
Net interest income after provision for loan losses		11,499			10,319		33,379			30,384
NONINTEREST INCOME
Trust and financial management revenue		1,427			1,292		4,375			3,969
Brokerage revenue		235			187		718			551
Insurance commissions, fees and premiums		15			26		72			98
Service charges on deposit accounts		1,331			1,186		3,837			3,399
Service charges and fees		95			97		263			263
Interchange revenue from debit card transactions		660			561		1,880			1,649
Net gains from sale of loans		164			297		514			651
Loan servicing fees, net		74			35		263			162
Increase in cash surrender value of life insurance		100			97		295			281
Other noninterest income		361			288		1,340			1,013
Sub-total		4,462			4,066		13,557			12,036
Gain on restricted equity security		571			0		2,321			0
Realized (losses) gains on available-for-sale debt securities, net		(2	)		5		(284	)		257
Total noninterest income		5,031			4,071		15,594			12,293
NONINTEREST EXPENSE
Salaries and wages		4,263			3,985		12,580			11,825
Pensions and other employee benefits		1,237			1,209		4,047			3,870
Occupancy expense, net		648			580		1,898			1,758
Furniture and equipment expense		317			340		901			968
Data processing expenses		667			595		2,002			1,785
Automated teller machine and interchange expense		347			346		988			945
Pennsylvania shares tax		326			336		998			1,008
Professional fees		305			224		860			599
Telecommunications		177			143		567			409
Directors' fees		197			177		549			548
Other noninterest expense		1,349			1,257		4,022			3,851
Total noninterest expense		9,833			9,192		29,412			27,566
Income before income tax provision		6,697			5,198		19,561			15,111
Income tax provision		1,111			1,262		3,229			3,620
NET INCOME	$	5,586		$	3,936	$	16,332		$	11,491
EARNINGS PER COMMON SHARE - BASIC	$	0.45		$	0.32	$	1.33		$	0.94
EARNINGS PER COMMON SHARE - DILUTED	$	0.45		$	0.32	$	1.33		$	0.94

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Comprehensive Income	Three Months Ended						Nine Months Ended
(In Thousands) (Unaudited)	September 30,						September 30,
	2018			2017			2018			2017
Net income	$	5,586		$	3,936		$	16,332		$	11,491

Unrealized (losses) gains on available-for-sale securities:
Unrealized holding (losses) gains on available-for-sale securities		(2,567	)		(213	)		(8,698	)		2,067
Reclassification adjustment for losses (gains) realized in income		2			(5	)		284			(257	)
Other comprehensive (loss) gain on available-for-sale securities		(2,565	)		(218	)		(8,414	)		1,810

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive gain		0			0			93			166
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(3	)		(6	)		(13	)		(18	)
Other comprehensive (loss) gain on unfunded retirement obligations		(3	)		(6	)		80			148

Other comprehensive (loss) income before income tax		(2,568	)		(224	)		(8,334	)		1,958
Income tax related to other comprehensive loss (income)		539			78			1,750			(686	)

Net other comprehensive (loss) income		(2,029	)		(146	)		(6,584	)		1,272

Comprehensive income	$	3,557		$	3,790		$	9,748		$	12,763

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~Consolidated Statements of Income~~

~~(In Thousands Except Per Share Data) (Unaudited)~~

3 Months Ended 9 Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2017 2016 2017 2016
INTEREST INCOME
Interest and fees on loans:
Taxable $ 8,889 $ 8,347 $ 25,872 $ 24,407
Tax-exempt 531 457 1,482 1,357
Interest on mortgages held for sale 10 7 20 21
Interest on balances with depository institutions 67 29 140 89
Income from available-for-sale securities:
Taxable 1,335 1,429 4,090 �� 4,474
Tax-exempt 789 835 2,459 2,578
Dividends 5 27 15 66
Total interest and dividend income 11,626 11,131 34,078 32,992
INTEREST EXPENSE
Interest on deposits 639 549 1,735 1,550
Interest on short-term borrowings 9 30 131 133
Interest on long-term borrowings 337 365 1,050 1,090
Total interest expense 985 944 2,916 2,773
Net interest income 10,641 10,187 31,162 30,219
Provision for loan losses 322 538 778 1,224
Net interest income after provision for loan losses 10,319 9,649 30,384 28,995
OTHER INCOME
Service charges on deposit accounts 1,168 1,221 3,346 3,523
Service charges and fees 115 118 316 335
Trust and financial management revenue 1,292 1,172 3,969 3,567
Brokerage revenue 187 216 551 569
Insurance commissions, fees and premiums 26 26 98 74
Interchange revenue from debit card transactions 561 481 1,649 1,431
Net gains from sale of loans 297 236 651 699
Loan servicing fees, net 35 28 162 39
Increase in cash surrender value of life insurance 97 97 281 286
Other operating income 288 289 1,013 957
Sub-total 4,066 3,884 12,036 11,480
Realized gains on available-for-sale securities, net 5 584 257 1,089
Total other income 4,071 4,468 12,293 12,569
OTHER EXPENSES
Salaries and wages 3,985 3,901 11,825 11,701
Pensions and other employee benefits 1,216 1,060 3,890 3,499
Occupancy expense, net 580 601 1,758 1,770
Furniture and equipment expense 471 435 1,372 1,301
FDIC Assessments 93 151 283 448
Pennsylvania shares tax 336 287 1,008 932
Professional fees 269 245 750 816
Automated teller machine and interchange expense 346 291 945 807
Software subscriptions 299 237 870 729
Other operating expense 1,597 1,371 4,865 4,183
Total other expenses 9,192 8,579 27,566 26,186
Income before income tax provision 5,198 5,538 15,111 15,378
Income tax provision 1,262 1,451 3,620 3,847
NET INCOME $ 3,936 $ 4,087 $ 11,491 $ 11,531
EARNINGS PER COMMON SHARE - BASIC $ 0.32 $ 0.34 $ 0.94 $ 0.95
EARNINGS PER COMMON SHARE - DILUTED $ 0.32 $ 0.34 $ 0.94 $ 0.95

CONSOLIDATED STATEMENTS OF CASH FLOWS	9 Months Ended
(In Thousands) (Unaudited)	Sept. 30,			Sept. 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	16,332		$	11,491
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		332			778
Realized losses (gains) on available-for-sale securities, net		284			(257	)
Unrealized loss on marketable equity security		30			0
Gain on restricted equity security		(2,321	)		0
Depreciation and amortization expense		1,317			1,239
Accretion and amortization on securities, net		747			866
Increase in cash surrender value of life insurance		(295	)		(281	)
Stock-based compensation and other expense		500			475
Deferred income taxes		(83	)		112
Decrease in fair value of servicing rights		58			145
Gains on sales of loans, net		(514	)		(651	)
Origination of loans for sale		(16,029	)		(19,277	)
Proceeds from sales of loans		16,617			19,473
Decrease in accrued interest receivable and other assets		138			207
Increase in accrued interest payable and other liabilities		1,067			624
Other		277			86
Net Cash Provided by Operating Activities		18,457			15,030
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposit		2,280			348
Purchase of certificates of deposit		(1,350	)		(100	)
Proceeds from sales of available-for-sale securities		17,755			24,118
Proceeds from calls and maturities of available-for-sale securities		36,648			47,285
Purchase of available-for-sale securities		(66,617	)		(40,211	)
Redemption of Federal Home Loan Bank of Pittsburgh stock		4,283			5,487
Purchase of Federal Home Loan Bank of Pittsburgh stock		(2,874	)		(4,725	)
Net increase in loans		(9,674	)		(50,128	)
Proceeds from sale of restricted equity security		884			0
Proceeds from bank owned life insurance		1,443			0
Purchase of premises and equipment		(962	)		(1,209	)
Proceeds from sale of foreclosed assets		1,381			1,035
Other		128			144
Net Cash Used in Investing Activities		(16,675	)		(17,956	)
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits		35,498			37,782
Net decrease in short-term borrowings		(53,345	)		(18,436	)
Proceeds from long-term borrowings		24,000			3,000
Repayments of long-term borrowings		(204	)		(10,198	)
Sale of treasury stock		93			98
Common dividends paid		(8,797	)		(8,331	)
Net Cash (Used in) Provided by Financing Activities		(2,755	)		3,915
(DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(973	)		989
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		37,004			28,621
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	36,031		$	29,610

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Accrued sale of restricted equity security	$	1,437		$	0
Assets acquired through foreclosure of real estate loans	$	2,489		$	608
Interest paid	$	3,245		$	2,942
Income taxes paid	$	2,777		$	3,163

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

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

~~Consolidated Statements of Comprehensive Income~~

~~(In Thousands) (Unaudited)~~

Three Months Ended Nine Months Ended
Sept. 30, Sept. 30,
2017 2016 2017 2016
Net income $ 3,936 $ 4,087 $ 11,491 $ 11,531

Unrealized (losses) gains on available-for-sale securities:
Unrealized holding (losses) gains on available-for-sale securities (213 ) (1,661 ) 2,067 5,544
Reclassification adjustment for gains realized in income (5 ) (584 ) (257 ) (1,089 )
Other comprehensive (loss) gain on available-for-sale securities (218 ) (2,245 ) 1,810 4,455

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in accumulated other comprehensive gain 0 0 166 26
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost (6 ) (5 ) (18 ) (15 )
Other comprehensive (loss) gain on unfunded retirement obligations (6 ) (5 ) 148 11

Other comprehensive (loss) income before income tax (224 ) (2,250 ) 1,958 4,466
Income tax related to other comprehensive income 78 786 (686 ) (1,564 )

Net other comprehensive (loss) income (146 ) (1,464 ) 1,272 2,902

Comprehensive income $ 3,790 $ 2,623 $ 12,763 $ 14,433

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

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

~~CONSOLIDATED STATEMENTS OF CASH FLOWS~~

~~(In Thousands) (Unaudited)~~

9 Months Ended
Sept. 30, Sept. 30,
2017 2016
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 11,491 $ 11,531
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 778 1,224
Realized gains on available-for-sale securities, net (257 ) (1,089 )
Depreciation expense 1,239 1,188
Accretion and amortization on securities, net 866 1,065
Increase in cash surrender value of life insurance (281 ) (286 )
Stock-based compensation and other expense 475 484
Deferred income taxes 112 7
Decrease in fair value of servicing rights 145 247
Gains on sales of loans, net (651 ) (699 )
Origination of loans for sale (19,277 ) (19,366 )
Proceeds from sales of loans 19,473 19,565
Decrease (increase) in accrued interest receivable and other assets 207 (305 )
Increase in accrued interest payable and other liabilities 624 187
Other 86 84
Net Cash Provided by Operating Activities 15,030 13,837
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from maturities of certificates of deposit 348 1,060
Purchase of certificates of deposit (100 ) (2,280 )
Proceeds from sales of available-for-sale securities 24,118 21,573
Proceeds from calls and maturities of available-for-sale securities 47,285 54,472
Purchase of available-for-sale securities (40,211 ) (59,582 )
Redemption of Federal Home Loan Bank of Pittsburgh stock 5,487 3,661
Purchase of Federal Home Loan Bank of Pittsburgh stock (4,725 ) (2,364 )
Net increase in loans (50,128 ) (39,647 )
Proceeds from bank owned life insurance 0 1,442
Purchase of premises and equipment (1,209 ) (1,188 )
Proceeds from sale of foreclosed assets 1,035 361
Other 144 115
Net Cash Used in Investing Activities (17,956 ) (22,377 )
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase in deposits 37,782 56,265
Net decrease in short-term borrowings (18,436 ) (38,906 )
Proceeds from long-term borrowings 3,000 0
Repayments of long-term borrowings (10,198 ) (229 )
Purchase of treasury stock 0 (3,723 )
Sale of treasury stock 98 126
Tax benefit from compensation plans 0 129
Common dividends paid (8,331 ) (8,333 )
Net Cash Provided by Financing Activities 3,915 5,329
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 989 (3,211 )
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR 28,621 33,313
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 29,610 $ 30,102

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Accrued purchase of available-for-sale securities $ 0 $ 1,494
Assets acquired through foreclosure of real estate loans $ 608 $ 1,508
Interest paid $ 2,942 $ 2,764
Income taxes paid $ 3,163 $ 3,185

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Consolidated Statements of Changes in Stockholders' Equity

(In Thousands Except Share and Per Share Data)

(Unaudited)

Accumulated
Other
Common Treasury Common Paid-in Retained Comprehensive Treasury
Shares Shares Stock Capital Earnings (Loss) Income Stock Total
Nine Months Ended September 30, 2017
Balance, December 31, 2016 12,655,171 541,943 $ 12,655 $ 71,730 $ 112,790 $ (898 ) $ (10,269 ) $ 186,008
Net income 11,491 11,491
Other comprehensive income, net 1,272 1,272
Cash dividends declared on common stock, $0.78 per share (9,445 ) (9,445 )
Shares issued for dividend reinvestment Plan (48,092 ) 203 911 1,114
Shares issued from treasury and redeemed related to exercise of stock options (9,681 ) (86 ) 184 98
Restricted stock granted (30,782 ) (583 ) 583 0
Forfeiture of restricted stock 4,256 79 (79 ) 0
Stock-based compensation expense 475 475
Balance, September 30, 2017 12,655,171 457,644 $ 12,655 $ 71,818 $ 114,836 $ 374 $ (8,670 ) $ 191,013

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

														Accumulated
														Other
	Common		Treasury			Common		Paid-in			Retained			Comprehensive			Treasury
	Shares		Shares			Stock		Capital			Earnings			(Loss) Income			Stock			Total
Nine Months Ended September 30, 2018
Balance, December 31, 2017		12,655,171		440,646		$	12,655	$	72,035		$	113,608		$	(1,507	)	$	(8,348	)	$	188,443
Impact of change in enacted income tax rate (a)												325			(325	)					0
Impact of change in method of premium amortization of callable debt securities (b)												(26	)		26						0
Impact of change in method of accounting for marketable equity security (c)												(22	)		22						0
Net income												16,332									16,332
Other comprehensive loss, net															(6,584	)					(6,584	)
Cash dividends declared on common stock, $0.81 per share												(9,934	)								(9,934	)
Shares issued for dividend reinvestment plan				(45,283	)				279									858			1,137
Shares issued from treasury and redeemed related to exercise of stock options				(10,853	)				(110	)								203			93
Restricted stock granted				(34,552	)				(655	)								655			0
Forfeiture of restricted stock				7,939					148									(148	)		0
Stock-based compensation expense									500												500
Balance, September 30, 2018		12,655,171		357,897		$	12,655	$	72,197		$	120,283		$	(8,368	)	$	(6,780	)	$	189,987

Nine Months Ended September 30, 2017
Balance, December 31, 2016		12,655,171		541,943		$	12,655	$	71,730		$	112,790		$	(898	)	$	(10,269	)	$	186,008
Net income												11,491									11,491
Other comprehensive income, net															1,272						1,272
Cash dividends declared on common stock, $0.78 per share												(9,445	)								(9,445	)
Shares issued for dividend reinvestment plan				(48,092	)				203									911			1,114
Shares issued from treasury and redeemed related to exercise of stock options				(9,681	)				(86	)								184			98
Restricted stock granted				(30,782	)				(583	)								583			0
Forfeiture of restricted stock				4,256					79									(79	)		0
Stock-based compensation expense									475												475
Balance, September 30, 2017		12,655,171		457,644		$	12,655	$	71,818		$	114,836		$	374		$	(8,670	)	$	191,013

(a)

As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 1, this reclassification resulted from adoption of Accounting Standards Update (ASU) 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, effective January 1, 2018.

(b)

As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 1, this reclassification resulted from adoption of ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20), effective January 1, 2018.

(c)

As described in more detail in the Recent Accounting Pronouncements - Adopted section of Note 1, this reclassification resulted from adoption of ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities, effective January 1, 2018.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION AND STATUS OF RECENT ACCOUNTING PRONOUNCEMENTS

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. All material intercompany balances and transactions have been eliminated in consolidation.

The consolidated financial information included herein, with the exception of the consolidated balance sheet dated December 31, ~~2016,~~2017, is unaudited. Such information reflects all adjustments (consisting solely of normal recurring adjustments) that are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations, comprehensive income, cash flows and changes in stockholders’ equity for the interim periods; however, the information does not include all disclosures required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for a complete set of financial statements. Certain ~~2016~~2017 information has been reclassified for consistency with the ~~2017~~2018 presentation.

Operating results reported for the three-month and nine-month periods ended September 30, ~~2017~~2018 might not be indicative of the results for the year ending December 31, ~~2017.~~2018. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

RECENT ACCOUNTING PRONOUNCEMENTS

The 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.

Recent Accounting Pronouncements - Adopted

Effective January 1, 2018, the Corporation adopted ASU 2014-09, Revenue from Contracts with Customers (Topic 606).Under the ASU, as modified by subsequent ASUs, revenue is recognized when a customer obtains control of promised services in an amount that reflects the consideration the entity expects to receive in exchange for those services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers. The Corporation applied the five-step method outlined in the ASU to all revenue streams scoped-in by the ASU and elected the modified retrospective implementation method. Substantially all of the Corporation’s interest income and certain noninterest income were not impacted by the adoption of this ASU because the revenue from those contracts with customers is covered by other guidance in U.S. GAAP. The 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. Adoption of ASU 2014-09 did not change the timing and pattern of the Corporation’s revenue recognition related to scoped-in noninterest income. New disclosures required by the ASU have been included in Note 13.

In February 2018, the FASB issued ASU 2018-02, Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, which permits, but does not require, entities to reclassify tax effects stranded in accumulated other comprehensive income resulting from the Tax Cuts and Jobs Act of 2017 to retained earnings. Companies that elect to reclassify these amounts must reclassify stranded tax effects for all items accounted for in accumulated other comprehensive income. The Corporation elected early adoption and adopted this standard update, effective January 1, 2018. The Corporation’s stranded tax effects were related to valuation of the net deferred tax asset attributable to items of accumulated other comprehensive income (loss), which are unrealized gains (losses) on available-for-sale securities and unfunded defined benefit plan obligations. Adoption resulted in a reclassification between two categories of stockholders’ equity at January 1, 2018, with an increase of $325,000 in retained earnings and a decrease in accumulated other comprehensive loss for the same amount (no net change in stockholders’ equity).

Effective January 1, 2018, the Corporation elected early adoption of ASU 2017-08, Receivables – Nonrefundable Fees and Other Costs (Subtopic 310-20). This Update shortens the amortization period for certain callable debt securities held at a premium. Discounts will continue to be amortized to maturity. Adoption resulted in a reduction in retained earnings and corresponding increase in accumulated other comprehensive loss (no net change in stockholders’ equity) of $26,000 at January 1, 2018 for the cumulative after-tax impact of the change in accounting for debt securities held as of that date.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Effective January 1, 2018, the Corporation adopted ASU 2016-01, Recognition and Measurement of Financial Assets and Liabilities. The guidance affects the accounting for equity investments, financial liabilities under the fair value option and the presentation and disclosure requirements of financial instruments. ASU 2016-01 was effective for the Corporation on January 1, 2018 and resulted in the following changes:

A marketable equity security previously included in available-for-sale securities on the consolidated balance sheets is presented as a separate asset.

Changes in the fair value of the marketable equity security are captured in the consolidated statements of income.

Retained earnings was reduced and a corresponding increase in accumulated other comprehensive loss was recognized (no net change in stockholders’ equity) of $22,000 at January 1, 2018 for the after-tax impact of the change in accounting for the unrealized loss on the marketable equity security.

As described in more detail in Note 6, in the second quarter 2018, an unrealized gain of $866,000 (pre-tax) was recognized in the unaudited, consolidated statements of income on a restricted equity security (Visa Class B stock). As required by ASU 2016-01, the Corporation considered the pricing of observable transactions in determining the carrying value of this equity security that does not have a readily determinable fair value. In the third quarter 2018, the Corporation sold the shares held as of June 30, 2018, recording an additional gain of $571,000 as the proceeds of $1,437,000 exceeded the carrying value of the restricted equity security of $866,000 prior to the sale.

Adoption of ASU 2016-01 also resulted in the use of an exit price to determine the fair value of financial instruments not measured at fair value in the consolidated balance sheets. Further information regarding valuation of financial instruments is provided in Note 5.

Recently Issued But Not Yet Effective Accounting Pronouncements

ASU 2016-02, Leases (Topic 842) changes current GAAP by requiring that lease assets and liabilities arising from operating leases be recognized on the balance sheet. In July 2018, the FASB issued ASU 2018-10 and ASU 2018-11, Codification Improvements to Topic 842, Leases, amending various aspects of Topic 842. 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. 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 will become effective for the Corporation for annual and interim periods beginning in the first quarter 2019. Adoption of Topic 842 is not expected to have a material impact on the Corporation’s consolidated financial statements. The Corporation leases certain properties and equipment under operating leases that will result in the recognition of lease assets and lease liabilities on the consolidated balance sheet under Topic 842; however, the majority of the Corporation’s properties and equipment are owned, not leased.

ASU 2016-13, Financial Instruments-Credit Losses (Topic 326), changes accounting for credit losses on loans receivable and debt securities from an incurred loss methodology to an expected credit loss methodology. Among other things, ASU 2016-13 requires the measurement of all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. Accordingly, ASU 2016-13 requires the use of forward-looking information to form credit loss estimates. Many of the loss estimation techniques applied today will still be permitted, though the inputs to those techniques will change to reflect the full amount of expected credit losses. In addition, ASU 2016-13 amends the accounting for credit losses on debt securities and purchased financial assets with credit deterioration. The amendments in ASU 2016-13 will be effective for the Corporation beginning in the first quarter 2020. Earlier adoption is permitted beginning in the first quarter 2019; however, the Corporation does not currently plan to early adopt the ASU. The Corporation has formed a cross functional management team that is assessing alternative loss estimation methodologies and the Corporation’s data and system needs in order to evaluate the impact that adoption of this standard will have on the Corporation’s financial condition and results of operations. 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.

ASU 2017-04, Intangibles – Goodwill and Other (Topic 350) simplifies 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 2020. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ASU 2018-13, Fair Value Measurement (Topic 820) modifies disclosure requirements on fair value measurements. This ASU removes requirements to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, the policy for timing of transfers between levels and the valuation processes for Level 3 fair value measurements. ASU 2018-13 clarifies that disclosure regarding measurement uncertainty is intended to communicate information about the uncertainty in measurement as of the reporting date. ASU 2018-13 adds certain disclosure requirements, including disclosure of changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period and the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for the Corporation beginning in the first quarter 2020. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty should be applied prospectively, while all other amendments should be applied retrospectively for all periods presented. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial position or results of operations.

ASU 2018-14, Compensation - Retirement Benefits - Defined Benefit Plans – General (Subtopic 715-20) modifies the disclosure requirements for defined benefit and other postretirement plans. This ASU eliminates certain disclosures associated with accumulated other comprehensive income, plan assets, related parties, and the effects of interest rate basis point changes on assumed health care costs; while other disclosures have been added to address significant gains and losses related to changes in benefit obligations. This ASU also clarifies disclosure requirements for projected benefit and accumulated benefit obligations. The amendments in this ASU are effective for the Corporation beginning in the first quarter 2021. Adoption on a retrospective basis for all periods presented is required. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic 350-40) was issued to help entities evaluate the accounting for fees paid by a customer in a cloud computing arrangement (hosting arrangement) by providing guidance for determining when the arrangement includes a software license. The amendments align the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal use software license). The accounting for the service element of a hosting arrangement that is a service contract is not affected by the amendments. This guidance will become effective for the Corporation beginning in the first quarter 2020, with early adoption permitted. The Corporation does not expect adoption of this ASU to have a material impact on its consolidated financial statements.

2. PER SHARE DATA

Basic earnings per common share are calculated using the two-class method to determine income attributable to common shareholders. Unvested restricted stock awards that contain nonforfeitable rights to dividends are considered participating securities under the two-class method. Distributed dividends and an allocation of undistributed net income to participating securities reduce the 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 common shares outstanding, plus weighted-average common shares available from the exercise of all dilutive stock options, less the number of shares that could be repurchased with the proceeds of stock option exercises based on the average share price of the Corporation's common stock during the period.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

	3 Months Ended						9 Months Ended						3 Months Ended						9 Months Ended
	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Basic
Net income	$	3,936,000		$	4,087,000		$	11,491,000		$	11,531,000		$	5,586,000		$	3,936,000		$	16,332,000		$	11,491,000
Less: Dividends and undistributed earnings allocated to participating securities		(20,000	)		(22,000	)		(59,000	)		(63,000	)		(28,000	)		(20,000	)		(83,000	)		(59,000	)
Net income attributable to common shares	$	3,916,000		$	4,065,000		$	11,432,000		$	11,468,000		$	5,558,000		$	3,916,000		$	16,249,000		$	11,432,000
Basic weighted-average common shares outstanding		12,124,854			12,014,267			12,105,673			12,032,619			12,228,833			12,124,854			12,209,879			12,105,673
Basic earnings per common share (a)	$	0.32		$	0.34		$	0.94		$	0.95		$	0.45		$	0.32		$	1.33		$	0.94

Diluted
Net income attributable to common shares	$	3,916,000		$	4,065,000		$	11,432,000		$	11,468,000		$	5,558,000		$	3,916,000		$	16,249,000		$	11,432,000
Basic weighted-average common shares outstanding		12,124,854			12,014,267			12,105,673			12,032,619			12,228,833			12,124,854			12,209,879			12,105,673
Dilutive effect of potential common stock arising from stock options		37,409			29,799			40,624			24,020			42,703			37,409			38,790			40,624
Diluted weighted-average common shares outstanding		12,162,263			12,044,066			12,146,297			12,056,639			12,271,536			12,162,263			12,248,669			12,146,297
Diluted earnings per common share (a)	$	0.32		$	0.34		$	0.94		$	0.95		$	0.45		$	0.32		$	1.33		$	0.94

Weighted-average non-vested restricted shares outstanding														60,462			61,233			62,262			62,825

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

The weighted-average number of nonvested restricted shares outstanding was 61,233 shares in the three-month period ended September 30, 2017 and 64,130 shares in the three-month period ended September 30, 2016. The weighted-average number of nonvested restricted shares outstanding was 62,825 shares in the nine-month period ended September 30, 2017 and 65,935 shares in the nine-month period ended September 30, 2016.

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

~~Stock~~Anti-dilutive stock options ~~that were anti-dilutive were~~are excluded from net income per share calculations. There were no anti-dilutive instruments in the three-month or nine-month periods ended September 30, ~~2017. Weighted-average common shares available from anti-dilutive instruments totaled 22,715 shares in the third quarter 2016~~2018 and ~~39,054 shares in the nine-month period ended September 30, 2016.~~2017.

3. COMPREHENSIVE INCOME

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

(In Thousands) Before-Tax Income Tax Net-of-Tax
Amount Effect Amount
Nine Months Ended September 30, 2017
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities $ 2,067 $ (723 ) $ 1,344
Reclassification adjustment for (gains) realized in income (257 ) 89 (168 )
Other comprehensive income on available-for-sale securities 1,810 (634 ) 1,176

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses
included in other comprehensive income 166 (58 ) 108
Amortization of net transition obligation, prior service cost and net
actuarial loss included in net periodic benefit cost (18 ) 6 (12 )
Other comprehensive income on unfunded retirement obligations 148 (52 ) 96

Total other comprehensive income $ 1,958 $ (686 ) $ 1,272

(In Thousands) Before-Tax Income Tax Net-of-Tax
Amount Effect Amount
Nine Months Ended September 30, 2016
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities $ 5,544 $ (1,941 ) $ 3,603
Reclassification adjustment for (gains) realized in income (1,089 ) 381 (708 )
Other comprehensive income on available-for-sale securities 4,455 (1,560 ) 2,895

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

Total other comprehensive income $ 4,466 $ (1,564 ) $ 2,902

(In Thousands)	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
Nine Months Ended September 30, 2018
Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities	$	(8,698	)	$	1,826		$	(6,872	)
Reclassification adjustment for losses realized in income		284			(59	)		225
Other comprehensive loss on available-for-sale securities		(8,414	)		1,767			(6,647	)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income		93			(19	)		74
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(13	)		2			(11	)
Other comprehensive income on unfunded retirement obligations		80			(17	)		63

Total other comprehensive loss	$	(8,334	)	$	1,750		$	(6,584	)

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(In Thousands) Before-Tax Income Tax Net-of-Tax
Amount Effect Amount
Three Months Ended September 30, 2017
Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities $ (213 ) $ 75 $ (138 )
Reclassification adjustment for (gains) realized in income (5 ) 1 (4 )
Other comprehensive loss on available-for-sale securities (218 ) 76 (142 )

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses
included in other comprehensive income 0 0 0
Amortization of net transition obligation, prior service cost and net
actuarial loss included in net periodic benefit cost (6 ) 2 (4 )
Other comprehensive loss on unfunded retirement obligations (6 ) 2 (4 )

Total other comprehensive loss $ (224 ) $ 78 $ (146 )

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

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

Total other comprehensive loss $ (2,250 ) $ 786 $ (1,464 )

(In Thousands)	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
Nine Months Ended September 30, 2017
Unrealized gains on available-for-sale securities:	��
Unrealized holding gains on available-for-sale securities	$	2,067		$	(723	)	$	1,344
Reclassification adjustment for (gains) realized in income		(257	)		89			(168	)
Other comprehensive income on available-for-sale securities		1,810			(634	)		1,176

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income		166			(58	)		108
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(18	)		6			(12	)
Other comprehensive income on unfunded retirement obligations		148			(52	)		96

Total other comprehensive income	$	1,958		$	(686	)	$	1,272

(In Thousands)	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
Three Months Ended September 30, 2018
Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities	$	(2,567	)	$	539		$	(2,028	)
Reclassification adjustment for losses realized in income		2			(0	)		2
Other comprehensive loss on available-for-sale securities		(2,565	)		539			(2,026	)
Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income		0			0			0
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(3	)		0			(3	)
Other comprehensive loss on unfunded retirement obligations		(3	)		0			(3	)

Total other comprehensive loss	$	(2,568	)	$	539		$	(2,029	)

(In Thousands)	Before-Tax			Income Tax		Net-of-Tax
	Amount			Effect		Amount
Three Months Ended September 30, 2017
Unrealized losses on available-for-sale securities:
Unrealized holding losses on available-for-sale securities	$	(213	)	$	75	$	(138	)
Reclassification adjustment for (gains) realized in income		(5	)		1		(4	)
Other comprehensive loss on available-for-sale securities		(218	)		76		(142	)

Unfunded pension and postretirement obligations:
Changes from plan amendments and actuarial gains and losses included in other comprehensive income		0			0		0
Amortization of prior service cost and net actuarial loss included in net periodic benefit cost		(6	)		2		(4	)
Other comprehensive loss on unfunded retirement obligations		(6	)		2		(4	)

Total other comprehensive loss	$	(224	)	$	78	$	(146	)

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(In Thousands)	Unrealized						Accumulated			Unrealized						Accumulated
	Holding Gains			Unfunded			Other			(Losses)			Unfunded			Other
	(Losses)			Retirement			Comprehensive			Gains			Retirement			Comprehensive
	on Securities			Obligations			Income			on Securities			Obligations			Loss
Nine Months Ended September 30, 2018
Balance, beginning of period										$	(1,566	)	$	59		$	(1,507	)
Impact of change in enacted income tax rate											(337	)		12			(325	)
Impact of change in the method of premium amortization of callable debt securities											26			0			26
Impact of change in the method of accounting for marketable equity security											22			0			22
Other comprehensive (loss) income during nine months ended September 30, 2018											(6,647	)		63			(6,584	)
Balance, end of period										$	(8,502	)	$	134		$	(8,368	)

Nine Months Ended September 30, 2017
Balance, beginning of period	$	(949	)	$	51		$	(898	)	$	(949	)	$	51		$	(898	)
Change during nine months ended September 30, 2017		1,176			96			1,272
Other comprehensive income during nine months ended September 30, 2017											1,176			96			1,272
Balance, end of period	$	227		$	147		$	374		$	227		$	147		$	374

Nine Months Ended September 30, 2016
Three Months Ended September 30, 2018
Balance, beginning of period	$	2,493		$	35		$	2,528		$	(6,476	)	$	137		$	(6,339	)
Change during nine months ended September 30, 2016		2,895			7			2,902
Other comprehensive (loss) during three months ended September 30, 2018											(2,026	)		(3	)		(2,029	)
Balance, end of period	$	5,388		$	42		$	5,430		$	(8,502	)	$	134		$	(8,368	)

Three Months Ended September 30, 2017
Balance, beginning of period	$	369		$	151		$	520		$	369		$	151		$	520
Change during three months ended September 30, 2017		(142	)		(4	)		(146	)
Other comprehensive (loss) during three months ended September 30, 2017											(142	)		(4	)		(146	)
Balance, end of period	$	227		$	147		$	374		$	227		$	147		$	374

Three Months Ended September 30, 2016
Balance, beginning of period	$	6,849		$	45		$	6,894
Change during three months ended September 30, 2016		(1,461	)		(3	)		(1,464	)
Balance, end of period	$	5,388		$	42		$	5,430

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

For the Nine Months Ended September 30, 2017
(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 $ (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 (23 ) Pensions and other employee benefits
Actuarial loss 5 Pensions and other employee benefits
(18 ) Total before tax
6 Income tax provision
(12 ) Net of tax
Total reclassifications for the period $ (180 )

For the Nine Months Ended September 30, 2018
(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	$	284		Realized losses on available-for-sale debt securities, net
		(59	)	Income tax provision
		225		Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost		(23	)	Other noninterest expense
Actuarial loss		10		Other noninterest expense
		(13	)	Total before tax
		2		Income tax provision
		(11	)	Net of tax
Total reclassifications for the period	$	214

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

For the Nine Months Ended September 30, 2016
For the Nine Months Ended September 30, 2017
(In Thousands)
	Reclassified from				Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Consolidated	Accumulated Other			Affected Line Item in the Consolidated
Comprehensive Income Components	Comprehensive Income			Statements of Income
Comprehensive Loss Components					Comprehensive Loss			Statements of Income
Unrealized gains and losses on available-for-sale securities	$	(1,089	)	Realized gains on available-for-sale securities, net	$	(257	)	Realized gains on available-for-sale debt securities, net
		381		Income tax provision		89		Income tax provision
		(708	)	Net of tax		(168	)	Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost		(23	)	Pensions and other employee benefits		(23	)	Other noninterest expense
Actuarial loss		8		Pensions and other employee benefits		5		Other noninterest expense
		(15	)	Total before tax		(18	)	Total before tax
		5		Income tax provision		6		Income tax provision
		(10	)	Net of tax		(12	)	Net of tax
Total reclassifications for the period	$	(718	)		$	(180	)

For the Three Months Ended September 30, 2017
For the Three Months Ended September 30, 2018
(In Thousands)
	Reclassified from				Reclassified from
Details about Accumulated Other	Accumulated Other			Affected Line Item in the Consolidated	Accumulated Other			Affected Line Item in the Consolidated
Comprehensive Income Components	Comprehensive Income			Statements of Income
Comprehensive Loss Components					Comprehensive Loss			Statements of Income
Unrealized gains and losses on available-for-sale securities	$	(5	)	Realized gains on available-for-sale securities, net	$	2		Realized losses on available-for-sale debt securities, net
		1		Income tax provision		(0	)	Income tax provision
		(4	)	Net of tax		2		Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost		(8	)	Pensions and other employee benefits		(7	)	Other noninterest expense
Actuarial loss		2		Pensions and other employee benefits		4		Other noninterest expense
		(6	)	Total before tax		(3	)	Total before tax
		2		Income tax provision		(0	)	Income tax provision
		(4	)	Net of tax		(3	)	Net of tax
Total reclassifications for the period	$	(8	)		$	(1	)

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

For the Three Months Ended September 30, 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	$	(5	)	Realized gains on available-for-sale debt securities, net
		1		Income tax provision
		(4	)	Net of tax
Amortization of defined benefit pension and postretirement items:
Prior service cost		(8	)	Other noninterest expense
Actuarial loss		2		Other noninterest expense
		(6	)	Total before tax
		2		Income tax provision
		(4	)	Net of tax
Total reclassifications for the period	$	(8	)

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

4. CASH AND DUE FROM BANKS

Cash and due from banks at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 include the following:

(In thousands)	Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,
	2017		2016		2018		2017
Cash and cash equivalents	$	29,610	$	28,621	$	36,031	$	37,004
Certificates of deposit		3,240		3,488		2,310		3,240
Total cash and due from banks	$	32,850	$	32,109	$	38,341	$	40,244

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

The Corporation is required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank of Philadelphia. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were ~~$17,213,000~~$14,783,000 at September 30, ~~2017~~2018 and ~~$16,654,000~~$17,178,000 at December 31, ~~2016.~~2017.

5. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, assets measured at fair value and the valuation methods used are as follows:

September 30, 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 $ 7,946 $ 0 $ 7,946
Obligations of states and political subdivisions:
Tax-exempt 0 110,557 0 110,557
Taxable 0 27,816 0 27,816
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities 0 54,917 0 54,917
Residential collateralized mortgage obligations 0 129,243 0 129,243
Commercial mortgage-backed securities 0 33,629 0 33,629
Total debt securities 0 364,108 0 364,108
Marketable equity securities 978 0 0 978
Total available-for-sale securities 978 364,108 0 365,086
Servicing rights 0 0 1,277 1,277
Total recurring fair value measurements $ 978 $ 364,108 $ 1,277 $ 366,363

Nonrecurring fair value measurements
Impaired loans with a valuation allowance $ 0 $ 0 $ 3,258 $ 3,258
Valuation allowance 0 0 (1,077 ) (1,077 )
Impaired loans, net 0 0 2,181 2,181
Foreclosed assets held for sale 0 0 1,650 1,650
Total nonrecurring fair value measurements $ 0 $ 0 $ 3,831 $ 3,831

			September 30, 2018
	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 DEBT SECURITIES:
Obligations of U.S. Government agencies	$	0	$	4,768	$	0		$	4,768
Obligations of states and political subdivisions:
Tax-exempt		0		91,712		0			91,712
Taxable		0		27,642		0			27,642
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		0		55,131		0			55,131
Residential collateralized mortgage obligations		0		142,631		0			142,631
Commercial mortgage-backed securities		0		36,822		0			36,822
Total available-for-sale debt securities		0		358,706		0			358,706
Marketable equity security		941		0		0			941
Servicing rights		0		0		1,381			1,381
Total recurring fair value measurements	$	941	$	358,706	$	1,381		$	361,028

Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$	0	$	0	$	3,623		$	3,623
Valuation allowance		0		0		(1,059	)		(1,059	)
Impaired loans, net		0		0		2,564			2,564
Foreclosed assets held for sale		0		0		2,678			2,678
Total nonrecurring fair value measurements	$	0	$	0	$	5,242		$	5,242

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

			December 31, 2016										December 31, 2017
	Quoted Prices		Other								Quoted Prices		Other
	in Active		Observable		Unobservable			Total			in Active		Observable		Unobservable			Total
	Markets		Inputs		Inputs			Fair			Markets		Inputs		Inputs			Fair
(In Thousands)	(Level 1)		(Level 2)		(Level 3)			Value			(Level 1)		(Level 2)		(Level 3)			Value

Recurring fair value measurements
AVAILABLE-FOR-SALE SECURITIES:
AVAILABLE-FOR-SALE DEBT SECURITIES:
Obligations of U.S. Government agencies	$	0	$	9,541	$	0		$	9,541		$	0	$	7,873	$	0		$	7,873
Obligations of states and political subdivisions:
Tax-exempt		0		119,037		0			119,037			0		105,111		0			105,111
Taxable		0		30,297		0			30,297			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		58,404		0			58,404			0		52,347		0			52,347
Residential collateralized mortgage obligations		0		146,608		0			146,608			0		131,814		0			131,814
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
Commercial mortgage-backed securities												0		33,219		0			33,219
Total available-for-sale debt securities												0		355,937		0			355,937
Marketable equity security												971		0		0			971
Servicing rights		0		0		1,262			1,262			0		0		1,299			1,299
Total recurring fair value measurements	$	971	$	394,106	$	1,262		$	396,339		$	971	$	355,937	$	1,299		$	358,207

Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$	0	$	0	$	3,372		$	3,372		$	0	$	0	$	3,776		$	3,776
Valuation allowance		0		0		(674	)		(674	)		0		0		(1,183	)		(1,183	)
Impaired loans, net		0		0		2,698			2,698			0		0		2,593			2,593
Foreclosed assets held for sale		0		0		2,180			2,180			0		0		1,598			1,598
Total nonrecurring fair value measurements	$	0	$	0	$	4,878		$	4,878		$	0	$	0	$	4,191		$	4,191

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

At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, quantitative information regarding significant techniques and inputs used for assets measured on a recurring basis using unobservable inputs (Level 3 methodologies) are as follows:

Fair Value at
9/30/17 Valuation Unobservable Method or Value As of
Asset (In Thousands) Technique Input(s) 9/30/17
Servicing rights $ 1,277 Discounted cash flow Discount rate 13.00 % Rate used through modeling period
Loan prepayment speeds 147.00 % 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
	9/30/18		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				9/30/18
Servicing rights	$	1,381	Discounted cash flow	Discount rate		12.50	%	Rate used through modeling period
				Loan prepayment speeds		121.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late
						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

	Fair Value at								Fair Value at
	12/31/16		Valuation	Unobservable				Method or Value As of	12/31/17		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				12/31/16	(In Thousands)		Technique	Input(s)				12/31/17
Servicing rights	$	1,262	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period	$	1,299	Discounted cash flow	Discount rate		13.00	%	Rate used through modeling period
				Loan prepayment speeds		138.00	%	Weighted-average PSA				Loan prepayment speeds		140.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances				Servicing fees		0.25	%	of loan balances
						4.00	%	of payments are late						4.00	%	of payments are late
						5.00	%	late fees assessed						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	6.00		Monthly servicing cost per account				Servicing costs	$	6.00		Monthly servicing cost per account
					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent					$	24.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.50	%	of loans more than 30 days delinquent						1.50	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs						3.00	%	annual increase in servicing costs

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. Unrealized gains (losses) in fair value of servicing rights are included in Loan servicing fees, net, in the unaudited consolidated statements of income.

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

(In Thousands) Three Months Ended Nine Months Ended
Sept. 30,
2017 Sept. 30,
2016 Sept. 30,
2017 Sept. 30,
2016
Servicing rights balance, beginning of period $ 1,279 $ 1,224 $ 1,262 $ 1,296
Issuances of servicing rights 65 52 160 159
Unrealized losses included in earnings (67 ) (68 ) (145 ) (247 )
Servicing rights balance, end of period $ 1,277 $ 1,208 $ 1,277 $ 1,208

(In Thousands)	Three Months Ended September 30, 2018									Nine Months Ended September 30, 2018
	Restricted Equity Security			Servicing Rights			Total			Restricted Equity Security		Servicing Rights			Total
Balance, beginning of period	$	866		$	1,370		$	2,236		$	0	$	1,299		$	1,299
Issuances of servicing rights		0			43			43			0		140			140
Unrealized gains (losses) included in earnings		(866	)		(32	)		(898	)		0		(58	)		(58	)
Balance, end of period	$	0		$	1,381		$	1,381		$	0	$	1,381		$	1,381

(In Thousands)	Three Months Ended September 30, 2017								Nine Months Ended September 30, 2017
	Restricted Equity Security		Servicing Rights			Total			Restricted Equity Security		Servicing Rights			Total
Balance, beginning of period	$	0	$	1,279		$	1,279		$	0	$	1,262		$	1,262
Issuances of servicing rights		0		65			65			0		160			160
Unrealized gains (losses) included in earnings		0		(67	)		(67	)		0		(145	)		(145	)
Balance, end of period	$	0	$	1,277		$	1,277		$	0	$	1,277		$	1,277

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, quantitative information regarding significant techniques and inputs used for nonrecurring fair value measurements using unobservable inputs (Level 3 methodologies) are as follows:

(In Thousands, Except									Weighted-											Weighted-
Percentages)			Valuation						Average					Valuation						Average)
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at			Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at
Asset	9/30/17		9/30/17		9/30/17		Technique	Inputs	9/30/17			9/30/18		9/30/18		9/30/18		Technique	Inputs	9/30/18

Impaired loans:
Residential mortgage loans -first liens												$	509	$	118	$	391	Sales comparison	Discount to appraised value		26	%
Commercial:
Commercial loans secured by real estate	$	2,686	$	952	$	1,734	Sales comparison	Discount to appraised value		16	%		2,550		816		1,734	Sales comparison	Discount to appraised value		16	%
Commercial and industrial		75		75		0	Sales comparison	Discount to appraised value		100	%		75		75		0	Sales comparison	Discount to appraised value		100	%
Loans secured by farmland		497		50		447	Sales comparison	Discount to appraised value		53	%		489		50		439	Sales comparison	Discount to appraised value		56	%
Total impaired loans	$	3,258	$	1,077	$	2,181						$	3,623	$	1,059	$	2,564
Foreclosed assets held for sale - real estate:
Foreclosed assets held for sale -real estate:
Residential (1-4 family)	$	640	$	0	$	640	Sales comparison	Discount to appraised value		35	%	$	328	$	0	$	328	Sales comparison	Discount to appraised value		46	%
Land		646		0		646	Sales comparison	Discount to appraised value		34	%		110		0		110	Sales comparison	Discount to appraised value		61	%
Commercial real estate		364		0		364	Sales comparison	Discount to appraised value		63	%		2,240		0		2,240	Sales comparison	Discount to appraised value		32	%
Total foreclosed assets held for sale	$	1,650	$	0	$	1,650						$	2,678	$	0	$	2,678

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

(In Thousands, Except									Weighted-											Weighted-
Percentages)			Valuation						Average					Valuation						Average
	Balance at		Allowance at		Fair Value at		Valuation	Unobservable	Discount at			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			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	$	2,773	$	528	$	2,245	Sales comparison	Discount to appraised value		7	%		2,641		919		1,722	Sales comparison	Discount to appraised value		16	%
Commercial and industrial		95		95		0	Sales comparison	Discount to appraised value		100	%		126		92		34	Sales comparison	Discount to appraised value		72	%
Loans secured by farmland		504		51		453	Sales comparison	Discount to appraised value		55	%		494		50		444	Sales comparison	Discount to appraised value		53	%
Total impaired loans	$	3,372	$	674	$	2,698						$	3,776	$	1,183	$	2,593
Foreclosed assets held for sale -real estate:
Residential (1-4 family)	$	1,102	$	0	$	1,102	Sales comparison	Discount to appraised value		35	%	$	721	$	0	$	721	Sales comparison	Discount to appraised value		37	%
Land		650		0		650	Sales comparison	Discount to appraised value		33	%		632		0		632	Sales comparison	Discount to appraised value		35	%
Commercial real estate		428		0		428	Sales comparison	Discount to appraised value		50	%		245		0		245	Sales comparison	Discount to appraised value		71	%
Total foreclosed assets held for sale	$	2,180	$	0	$	2,180						$	1,598	$	0	$	1,598

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

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

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

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

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

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

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

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

~~DEPOSITS -~~ The fair value of deposits with no stated maturity, such as noninterest-bearing demand deposits, savings, money market and interest checking accounts, is (by definition) equal to the amount payable on demand at September 30, 2017 and December 31, 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.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~BORROWED FUNDS -~~The estimated 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~~values, and related carrying amounts, of ~~accrued interest receivable and payable approximate~~the Corporation’s financial instruments that are not recorded at fair ~~values.~~value are as follows:

(In Thousands)	Fair Value		September 30, 2018				December 31, 2017
	Hierarchy		Carrying		Fair		Carrying		Fair
	Level		Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents		Level 1	$	36,031	$	36,031	$	37,004	$	37,004
Certificates of deposit		Level 2		2,310		2,298		3,240		3,234
Restricted equity securities (included in Other Assets)		Level 2		5,147		5,147		6,556		6,556
Loans, net		Level 3		813,717		811,384		806,857		789,891
Accrued interest receivable		Level 2		4,279		4,279		4,048		4,048

Financial liabilities:
Deposits with no stated maturity		Level 2		815,607		815,607		794,778		794,778
Time deposits		Level 2		228,340		228,484		213,671		213,734
Short-term borrowings		Level 2		8,421		8,185		61,766		61,643
Long-term borrowings		Level 2		32,985		32,987		9,189		9,256
Accrued interest payable		Level 2		114		114		46		46

~~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 September 30, 2017 December 31, 2016
Method(s) Carrying Fair Carrying Fair
Used Amount Value Amount Value
Financial assets:
Cash and cash equivalents Level 1 $ 29,610 $ 29,610 $ 28,621 $ 28,621
Certificates of deposit Level 2 3,240 3,239 3,488 3,481
Available-for-sale securities See Above 365,086 365,086 395,077 395,077
Restricted equity securities (included in Other Assets) Level 2 3,664 3,664 4,426 4,426
Loans held for sale Level 1 437 437 142 142
Loans, net Level 3 792,112 777,413 743,362 725,787
Accrued interest receivable Level 2 4,027 4,027 3,963 3,963
Servicing rights Level 3 1,277 1,277 1,262 1,262

Financial liabilities:
Deposits with no stated maturity Level 2 801,942 801,942 771,625 771,625
Time deposits Level 2 219,683 220,017 212,218 212,274
Short-term borrowings Level 2 7,739 7,626 26,175 26,024
Long-term borrowings Level 2 31,256 31,460 38,454 39,062
Accrued interest payable Level 2 39 39 65 65

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

6. SECURITIES

Amortized cost and fair value of available-for-sale debt securities at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 are summarized as follows:

September 30, 2017
Gross Gross
Unrealized Unrealized
Amortized Holding Holding Fair
(In Thousands) Cost Gains Losses Value

Obligations of U.S. Government agencies $ 8,028 $ 0 $ (82 ) $ 7,946
Obligations of states and political subdivisions:
Tax-exempt 108,521 2,678 (642 ) 110,557
Taxable 27,538 316 (38 ) 27,816
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities 55,247 113 (443 ) 54,917
Residential collateralized mortgage obligations 130,375 323 (1,455 ) 129,243
Commercial mortgage-backed securities 34,028 31 (430 ) 33,629
Total debt securities 363,737 3,461 (3,090 ) 364,108
Marketable equity securities 1,000 0 (22 ) 978
Total $ 364,737 $ 3,461 $ (3,112 ) $ 365,086

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

			September 30, 2018
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding			Fair
(In Thousands)	Cost		Gains		Losses			Value

Obligations of U.S. Government agencies	$	4,815	$	0	$	(47	)	$	4,768
Obligations of states and political subdivisions:
Tax-exempt		92,837		1,104		(2,229	)		91,712
Taxable		27,975		21		(354	)		27,642
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		57,279		46		(2,194	)		55,131
Residential collateralized mortgage obligations		148,074		8		(5,451	)		142,631
Commercial mortgage-backed securities		38,488		0		(1,666	)		36,822
Total available-for-sale-debt securities	$	369,468	$	1,179	$	(11,941	)	$	358,706

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

Obligations of U.S. Government agencies	$	8,026	$	0	$	(153	)	$	7,873
Obligations of states and political subdivisions:
Tax-exempt		103,673		2,291		(853	)		105,111
Taxable		25,431		226		(84	)		25,573
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 available-for-sale debt securities	$	358,317	$	2,710	$	(5,090	)	$	355,937

The following table presents gross unrealized losses and fair value of available-for-sale debt 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 September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

September 30, 2017	Less Than 12 Months					12 Months or More					Total
September 30, 2018																Less Than 12 Months					12 Months or More					Total
(In Thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses

Obligations of U.S. Government agencies	$	7,946	$	(82	)	$	0	$	0		$	7,946	$	(82	)	$	4,768	$	(47	)	$	0	$	0		$	4,768	$	(47	)
Obligations of states and political subdivisions:
Tax-exempt		21,028		(238	)		14,890		(404	)		35,918		(642	)		25,713		(465	)		28,785		(1,764	)		54,498		(2,229	)
Taxable		7,073		(38	)		0		0			7,073		(38	)		16,635		(200	)		5,362		(154	)		21,997		(354	)
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		47,572		(443	)		0		0			47,572		(443	)		13,528		(178	)		40,904		(2,016	)		54,432		(2,194	)
Residential collateralized mortgage obligations		64,948		(747	)		25,718		(708	)		90,666		(1,455	)		53,399		(884	)		87,703		(4,567	)		141,102		(5,451	)
Commercial mortgage-backed securities		24,890		(275	)		4,760		(155	)		29,650		(430	)		8,798		(147	)		28,024		(1,519	)		36,822		(1,666	)
Total debt securities		173,457		(1,823	)		45,368		(1,267	)		218,825		(3,090	)
Marketable equity securities		1,000		(22	)		0		0			1,000		(22	)
Total temporarily impaired available-for-sale securities	$	174,457	$	(1,845	)	$	45,368	$	(1,267	)	$	219,825	$	(3,112	)
Total temporarily impaired available-for-sale debt securities																$	122,841	$	(1,921	)	$	190,778	$	(10,020	)	$	313,619	$	(11,941	)

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 )

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 temporarily impaired available-for-sale debt securities	$	119,109	$	(1,184	)	$	140,056	$	(3,906	)	$	259,165	$	(5,090	)

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(In Thousands) 3 Months Ended 9 Months Ended
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
2017 2016 2017 2016
Gross realized gains from sales $ 47 $ 584 $ 315 $ 1,090
Gross realized losses from sales (42 ) 0 (58 ) (1 )
Net realized gains $ 5 $ 584 $ 257 $ 1,089

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

(In Thousands)	3 Months Ended						9 Months Ended
	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
	2018			2017			2018			2017
Gross realized gains from sales and calls	$	45		$	47		$	45		$	315
Gross realized losses from sales		(47	)		(42	)		(329	)		(58	)
Net realized (losses) gains	$	(2	)	$	5		$	(284	)	$	257

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of September 30, ~~2017.~~2018. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.

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

Due in one year or less	$	12,478	$	12,491	$	23,128	$	23,337
Due from one year through five years		71,673		73,134		39,807		39,533
Due from five years through ten years		36,361		36,517		38,688		37,515
Due after ten years		23,575		24,177		24,004		23,737
Sub-total		144,087		146,319		125,627		124,122
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities		55,247		54,917		57,279		55,131
Residential collateralized mortgage obligations		130,375		129,243		148,074		142,631
Commercial mortgage-backed securities		34,028		33,629		38,488		36,822
Total	$	363,737	$	364,108	$	369,468	$	358,706

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

Investment securities carried at ~~$224,612,000~~$236,671,000 at September 30, ~~2017~~2018 and ~~$230,803,000~~$217,925,000 at December 31, ~~2016~~2017 were pledged as collateral for public deposits, trusts and certain other deposits as provided by law. See Note 8 for information concerning securities pledged to secure borrowing arrangements.

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

A summary of information management considered in evaluating debt and equity securities for other-than-temporary impairment (“OTTI”) at September 30, ~~2017~~2018 is provided below.

Debt Securities

At September 30, ~~2017,~~2018, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of debt securities at September 30, 2018 and December 31, 2017 to be temporary.

~~Equity Securities~~22

The Corporation’s marketable equity securities at September 30, 2017 and December 31, 2016 consisted exclusively of one mutual fund. At September 30, 2017, there was an unrealized loss on the mutual fund of $22,000, and at December 31, 2016 there was an unrealized loss of $29,000. Management determined an OTTI charge was not required on this security at September 30, 2017 and December 31, 2016.

The Corporation had no realized gains or losses from the sale of equity securities in the first nine months of 2017. The Corporation realized gains from sales of bank stocks totaling $560,000 in the three-month period ended September 30, 2016 and $837,000 during the first nine months of 2016.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Equity Securities

The Corporation’s marketable equity security, with a carrying value of $941,000 at September 30, 2018 and $971,000 at December 31, 2017, consisted exclusively of one mutual fund. There was an unrealized loss on the mutual fund of $59,000 at September 30 2018 and $29,000 at December 31, 2017. The increase in the unrealized loss of $7,000 in the third quarter of 2018 and $30,000 in the nine months ended September 30, 2018 is included in other noninterest income in the consolidated statements of income.

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 11 regional Federal Home Loan Banks. As a member, C&N Bank is required to purchase and maintain stock in FHLB-Pittsburgh. There is no active market for FHLB-Pittsburgh stock, and it must ordinarily be redeemed by FHLB-Pittsburgh in order to be liquidated. C&N Bank’s investment in FHLB-Pittsburgh stock, included in Other Assets in the consolidated balance sheet, was ~~$3,534,000~~$5,017,000 at September 30, ~~2017~~2018 and ~~$4,296,000~~$6,426,000 at December 31, ~~2016.~~2017. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at September 30, ~~2017~~2018 and December 31, ~~2016.~~2017. 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.

In the second quarter 2018, the Corporation recorded a pre-tax gain on a restricted equity security (Visa Class B stock) of $1,750,000. The Corporation had received 19,789 shares of Visa Class B stock pursuant to Visa’s 2007 initial public offering. Until the second quarter 2018, the carrying value of the shares was $0, which represented the Corporation’s cost basis. Class B shares are subject to restrictions on transfer, essentially limiting their transferability to other owners of Class B shares. In June 2018, the Corporation sold 10,000 of the shares for a price of $88.43 per share in a transaction that settled in July 2018. As required by ”U.S. GAAP”, companies must consider the pricing of observable transactions in determining the carrying value of equity securities that do not have readily determinable fair values. Accordingly, the Corporation’s second quarter 2018 gain was based on the price per share of the sale initiated in June 2018, applied to the total of 19,789 shares. In the third quarter 2018, the Corporation sold the remaining 9,789 shares for $1,437,000, or approximately $146.80 per share, recognizing an additional gain of $571,000. At September 30, 2018, the balance of other assets in the unaudited, consolidated balance sheet included a receivable of $1,437,000 from the third quarter 2018 sale of the Visa Class B shares.

A summary of the realized and unrealized gains and losses recognized on equity securities is as follows:

(In Thousands)	3 Months Ended					9 Months Ended
	Sept. 30,			Sept. 30,		Sept. 30,			Sept. 30,
	2018			2017		2018			2017
Net gains and losses recognized during the period on equity securities	$	564		$	0	$	2,291		$	0
Less: net gains and losses recognized during the period on equity securities sold during the period		(571	)		0		(2,321	)		0

Unrealized gains and losses recognized during the period on equity securities still held at the reporting date	$	(7	)	$	0	$	(30	)	$	0

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

7. LOANS

The loans receivable portfolio is segmented into residential mortgage, commercial and consumer loans. Loans outstanding at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 are summarized by segment, and by classes within each segment, as follows:

Summary of Loans by Type
(In Thousands)	Sept. 30,			Dec. 31,			Sept. 30,			Dec. 31,
	2017			2016			2018			2017
Residential mortgage:
Residential mortgage loans - first liens	$	355,285		$	334,102		$	366,516		$	359,987
Residential mortgage loans - junior liens		24,694			23,706			25,748			25,325
Home equity lines of credit		36,534			38,057			34,283			35,758
1-4 Family residential construction		25,286			24,908			27,661			26,216
Total residential mortgage		441,799			420,773			454,208			447,286
Commercial:
Commercial loans secured by real estate		158,520			150,468			159,212			159,266
Commercial and industrial		83,243			83,854			91,472			88,276
Political subdivisions		54,730			38,068			53,294			59,287
Commercial construction and land		13,937			14,287			12,278			14,527
Loans secured by farmland		7,744			7,294			7,208			7,255
Multi-family (5 or more) residential		7,566			7,896			7,670			7,713
Agricultural loans		6,137			3,998			5,670			6,178
Other commercial loans		12,383			11,475			14,140			10,986
Total commercial		344,260			317,340			350,944			353,488
Consumer		14,953			13,722			17,380			14,939
Total		801,012			751,835			822,532			815,713
Less: allowance for loan losses		(8,900	)		(8,473	)		(8,815	)		(8,856	)
Loans, net	$	792,112		$	743,362		$	813,717		$	806,857

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in the Pennsylvania and New York counties that comprise the market serviced by Citizens & Northern Bank. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at either September 30, ~~2017~~2018 or December 31, ~~2016.~~2017.

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, management determined that no allowance for credit losses related to unfunded loan commitments was required.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and nine-month periods ended September 30, ~~2017~~2018 and ~~2016~~2017 were as follows:

Three Months Ended September 30, 2017	June 30,										Sept. 30,
Three Months Ended September 30, 2018													June 30,										Sept. 30,
(In Thousands)	2017 Balance		Charge-offs			Recoveries		Provision (Credit)			2017 Balance		2018 Balance		Charge-offs			Recoveries		Provision (Credit)			2018 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	3,052	$	0		$	1	$	112		$	3,165	$	3,055	$	(21	)	$	1	$	98		$	3,133
Residential mortgage loans - junior liens		261		0			1		3			265		353		0			1		(25	)		329
Home equity lines of credit		332		0			0		(6	)		326		292		(13	)		0		15			294
1-4 Family residential construction		251		0			0		(8	)		243		247		0			0		(21	)		226
Total residential mortgage		3,896		0			2		101			3,999		3,947		(34	)		2		67			3,982
Commercial:
Commercial loans secured by real estate		2,610		0			0		27			2,637		2,613		0			0		(67	)		2,546
Commercial and industrial		910		0			1		93			1,004		973		(11	)		2		34			998
Commercial construction and land		162		0			0		(13	)		149		135		0			0		(21	)		114
Loans secured by farmland		107		0			0		3			110		106		0			0		(2	)		104
Multi-family (5 or more) residential		169		0			0		2			171		174		0			0		(7	)		167
Agricultural loans		42		0			0		16			58		46		0			0		0			46
Other commercial loans		105		0			0		12			117		134		0			0		(3	)		131
Total commercial		4,105		0			1		140			4,246		4,181		(11	)		2		(66	)		4,106
Consumer		134		(67	)		7		81			155		204		(47	)		12		59			228
Unallocated		500		0			0		0			500		499		0			0		0			499
Total Allowance for Loan Losses	$	8,635	$	(67	)	$	10	$	322		$	8,900	$	8,831	$	(92	)	$	16	$	60		$	8,815

Three Months Ended September 30, 2016	June 30,											Sept. 30,
Three Months Ended September 30, 2017														June 30,										Sept. 30,
(In Thousands)	2016 Balance		Charge-offs			Recoveries		Provision (Credit)				2016 Balance		2017 Balance		Charge-offs			Recoveries		Provision (Credit)			2017 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	2,830	$	(31	)	$	2	$	155			$	2,956	$	3,052	$	0		$	1	$	112		$	3,165
Residential mortgage loans - junior liens		239		0			0		9				248		261		0			1		3			265
Home equity lines of credit		359		0			0		0				359		332		0			0		(6	)		326
1-4 Family residential construction		222		0			0		14				236		251		0			0		(8	)		243
Total residential mortgage		3,650		(31	)		2		178				3,799		3,896		0			2		101			3,999
Commercial:
Commercial loans secured by real estate		2,083		0			0		304				2,387		2,610		0			0		27			2,637
Commercial and industrial		1,038		(2	)		1		1				1,038		910		0			1		93			1,004
Commercial construction and land		105		0			0		41				146		162		0			0		(13	)		149
Loans secured by farmland		103		0			0		3				106		107		0			0		3			110
Multi-family (5 or more) residential		248		0			0		(5	)			243		169		0			0		2			171
Agricultural loans		47		0			0		(4	)			43		42		0			0		16			58
Other commercial loans		119		0			0		(3	)	��		116		105		0			0		12			117
Total commercial		3,743		(2	)		1		337				4,079		4,105		0			1		140			4,246
Consumer		138		(28	)		12		23				145		134		(67	)		7		81			155
Unallocated		398		0			0		0				398		500		0			0		0			500
Total Allowance for Loan Losses	$	7,929	$	(61	)	$	15	$	538			$	8,421	$	8,635	$	(67	)	$	10	$	322		$	8,900

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Nine Months Ended September 30, 2017 Dec. 31, Sept. 30,
(In Thousands) 2016
Balance Charge-offs Recoveries Provision
(Credit) 2017
Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens $ 3,033 $ (162 ) $ 15 $ 279 $ 3,165
Residential mortgage loans - junior liens 258 (16 ) 3 20 265
Home equity lines of credit 350 0 0 (24 ) 326
1-4 Family residential construction 249 0 0 (6 ) 243
Total residential mortgage 3,890 (178 ) 18 269 3,999
Commercial:
Commercial loans secured by real estate 2,380 (96 ) 0 353 2,637
Commercial and industrial 999 (1 ) 3 3 1,004
Commercial construction and land 162 0 0 (13 ) 149
Loans secured by farmland 110 0 0 0 110
Multi-family (5 or more) residential 241 0 0 (70 ) 171
Agricultural loans 40 0 0 18 58
Other commercial loans 115 0 0 2 117
Total commercial 4,047 (97 ) 3 293 4,246
Consumer 138 (127 ) 30 114 155
Unallocated 398 0 0 102 500
Total Allowance for Loan Losses $ 8,473 $ (402 ) $ 51 $ 778 $ 8,900

Nine Months Ended September 30, 2018	Dec. 31,										Sept. 30,
(In Thousands)	2017 Balance		Charge-offs			Recoveries		Provision (Credit)			2018 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	3,200	$	(108	)	$	3	$	38		$	3,133
Residential mortgage loans - junior liens		224		0			4		101			329
Home equity lines of credit		296		(25	)		0		23			294
1-4 Family residential construction		243		0			0		(17	)		226
Total residential mortgage		3,963		(133	)		7		145			3,982
Commercial:
Commercial loans secured by real estate		2,584		(21	)		0		(17	)		2,546
Commercial and industrial		1,065		(144	)		5		72			998
Commercial construction and land		150		0			0		(36	)		114
Loans secured by farmland		105		0			0		(1	)		104
Multi-family (5 or more) residential		172		0			0		(5	)		167
Agricultural loans		57		0			0		(11	)		46
Other commercial loans		102		0			0		29			131
Total commercial		4,235		(165	)		5		31			4,106
Consumer		159		(120	)		33		156			228
Unallocated		499		0			0		0			499
Total Allowance for Loan Losses	$	8,856	$	(418	)	$	45	$	332		$	8,815

Nine Months Ended September 30, 2016	Dec. 31,										Sept. 30,
Nine Months Ended September 30, 2017													Dec. 31,										Sept. 30,
(In Thousands)	2015 Balance		Charge-offs			Recoveries		Provision (Credit)			2016 Balance		2016 Balance		Charge-offs			Recoveries		Provision (Credit)			2017 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	2,645	$	(73	)	$	2	$	382		$	2,956	$	3,033	$	(162	)	$	15	$	279		$	3,165
Residential mortgage loans - junior liens		219		0			0		29			248		258		(16	)		3		20			265
Home equity lines of credit		347		0			0		12			359		350		0			0		(24	)		326
1-4 Family residential construction		207		0			0		29			236		249		0			0		(6	)		243
Total residential mortgage		3,418		(73	)		2		452			3,799		3,890		(178	)		18		269			3,999
Commercial:
Commercial loans secured by real estate		1,939		0			2		446			2,387		2,380		(96	)		0		353			2,637
Commercial and industrial		981		(2	)		2		57			1,038		999		(1	)		3		3			1,004
Commercial construction and land		58		0			0		88			146		162		0			0		(13	)		149
Loans secured by farmland		106		0			0		0			106		110		0			0		0			110
Multi-family (5 or more) residential		675		(595	)		0		163			243		241		0			0		(70	)		171
Agricultural loans		45		0			0		(2	)		43		40		0			0		18			58
Other commercial loans		118		0			0		(2	)		116		115		0			0		2			117
Total commercial		3,922		(597	)		4		750			4,079		4,047		(97	)		3		293			4,246
Consumer		122		(67	)		39		51			145		138		(127	)		30		114			155
Unallocated		427		0			0		(29	)		398		398		0			0		102			500
Total Allowance for Loan Losses	$	7,889	$	(737	)	$	45	$	1,224		$	8,421	$	8,473	$	(402	)	$	51	$	778		$	8,900

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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.~~that follows.

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

September 30, 2017
September 30, 2018
(In Thousands)			Special										Special
	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Residential Mortgage:
Residential mortgage loans - first liens	$	346,545	$	314	$	8,372	$	54	$	355,285	$	357,841	$	281	$	8,342	$	52	$	366,516
Residential mortgage loans - junior liens		24,463		107		124		0		24,694		25,214		95		439		0		25,748
Home equity lines of credit		35,933		62		539		0		36,534		33,611		59		613		0		34,283
1-4 Family residential construction		25,286		0		0		0		25,286		27,661		0		0		0		27,661
Total residential mortgage		432,227		483		9,035		54		441,799		444,327		435		9,394		52		454,208
Commercial:
Commercial loans secured by real estate		149,607		1,394		7,519		0		158,520		152,701		765		5,746		0		159,212
Commercial and Industrial		77,045		3,658		2,529		11		83,243		85,405		4,922		1,145		0		91,472
Political subdivisions		54,730		0		0		0		54,730		53,294		0		0		0		53,294
Commercial construction and land		13,848		10		79		0		13,937		12,202		0		76		0		12,278
Loans secured by farmland		5,759		587		1,385		13		7,744		5,218		611		1,367		12		7,208
Multi-family (5 or more) residential		6,974		0		592		0		7,566		7,278		0		392		0		7,670
Agricultural loans		5,133		278		726		0		6,137		4,912		84		674		0		5,670
Other commercial loans		12,310		0		73		0		12,383		14,069		0		71		0		14,140
Total commercial		325,406		5,927		12,903		24		344,260		335,079		6,382		9,471		12		350,944
Consumer		14,840		0		113		0		14,953		17,336		0		44		0		17,380
Totals	$	772,473	$	6,410	$	22,051	$	78	$	801,012	$	796,742	$	6,817	$	18,909	$	64	$	822,532

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2016
December 31, 2017
(In Thousands)			Special										Special
	Pass		Mention		Substandard		Doubtful		Total		Pass		Mention		Substandard		Doubtful		Total
Residential Mortgage:
Residential mortgage loans - first liens	$	324,377	$	408	$	9,258	$	59	$	334,102	$	350,609	$	307	$	9,019	$	52	$	359,987
Residential mortgage loans - junior liens		23,274		132		300		0		23,706		24,795		104		426		0		25,325
Home equity lines of credit		37,360		123		574		0		38,057		35,233		61		464		0		35,758
1-4 Family residential construction		24,820		0		88		0		24,908		26,216		0		0		0		26,216
Total residential mortgage		409,831		663		10,220		59		420,773		436,853		472		9,909		52		447,286
Commercial:
Commercial loans secured by real estate		139,358		3,092		8,018		0		150,468		150,806		936		7,524		0		159,266
Commercial and Industrial		79,202		4,180		461		11		83,854		82,724		3,896		1,645		11		88,276
Political subdivisions		38,068		0		0		0		38,068		59,287		0		0		0		59,287
Commercial construction and land		14,136		70		81		0		14,287		14,449		0		78		0		14,527
Loans secured by farmland		5,745		129		1,404		16		7,294		5,283		581		1,379		12		7,255
Multi-family (5 or more) residential		7,277		0		619		0		7,896		7,130		0		583		0		7,713
Agricultural loans		3,208		0		790		0		3,998		5,203		270		705		0		6,178
Other commercial loans		11,401		0		74		0		11,475		10,913		0		73		0		10,986
Total commercial		298,395		7,471		11,447		27		317,340		335,795		5,683		11,987		23		353,488
Consumer		13,546		0		176		0		13,722		14,853		0		86		0		14,939
Totals	$	721,772	$	8,134	$	21,843	$	86	$	751,835	$	787,501	$	6,155	$	21,982	$	75	$	815,713

The general component of the allowance for loan losses covers pools of loans including commercial loans not considered individually impaired, as well as smaller balance homogeneous classes of loans, such as residential real estate, home equity lines of credit and other consumer loans. Accordingly, the Corporation generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such ~~loans are~~a loan: (1) is subject to a restructuring ~~agreement.~~agreement, or (2) has an outstanding balance of $400,000 or more and a credit grade of Special Mention, Substandard or Doubtful. The pools of loans are evaluated for loss exposure based upon average historical net charge-off rates for each loan class, adjusted for qualitative factors (described in the following paragraphs). 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. ~~Throughout 2016~~At September 30, 2018 and ~~at March~~December 31, ~~2017, a three-year average net charge-off rate was used for all loan classes. At June 30, 2017 and September 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.

Qualitative risk factors are evaluated for the impact on each of the three segments (residential mortgage, commercial and consumer) within the loan portfolio. Each qualitative factor is assigned a value to reflect improving, stable or declining conditions based on management’s judgment using relevant information available at the time of the evaluation. The adjustment for qualitative factors is applied as an increase or decrease to the average net charge-off rate for each loan class within each segment.

The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors. Further, the residential mortgage segment is significantly affected by the values of residential real estate that provide collateral for the loans. The majority of the Corporation’s commercial segment loans (approximately ~~55%~~54% at September 30, ~~2017)~~2018) is secured by real estate, and accordingly, the Corporation’s risk for the commercial segment is significantly affected by commercial real estate values. The consumer segment includes a wide mix of loans for different purposes, primarily secured loans, including loans secured by motor vehicles, manufactured housing and other types of collateral.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

The scope of loans reviewed individually each quarter to determine if they are impaired include all commercial loan relationships greater than $200,000 and any residential mortgage or consumer loans of $400,000 or more for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Loans that are individually reviewed, but which are 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 reviewed, but which have 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 September 30, ~~2017~~2018 and December 31, ~~2016.~~2017. 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 September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

September 30, 2017	Loans:						Allowance for Loan Losses:
September 30, 2018													Loans:						Allowance for Loan Losses:
(In Thousands)
	Individually		Collectively				Individually		Collectively				Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens	$	723	$	354,562	$	355,285	$	0	$	3,165	$	3,165	$	994	$	365,522	$	366,516	$	0	$	3,133	$	3,133
Residential mortgage loans - junior liens		62		24,632		24,694		0		265		265		293		25,455		25,748		118		211		329
Home equity lines of credit		0		36,534		36,534		0		326		326		0		34,283		34,283		0		294		294
1-4 Family residential construction		0		25,286		25,286		0		243		243		0		27,661		27,661		0		226		226
Total residential mortgage		785		441,014		441,799		0		3,999		3,999		1,287		452,921		454,208		118		3,864		3,982
Commercial:
Commercial loans secured by real estate		5,917		152,603		158,520		952		1,685		2,637		4,155		155,057		159,212		816		1,730		2,546
Commercial and industrial		476		82,767		83,243		165		839		1,004		201		91,271		91,472		75		923		998
Political subdivisions		0		54,730		54,730		0		0		0		0		53,294		53,294		0		0		0
Commercial construction and land		0		13,937		13,937		0		149		149		0		12,278		12,278		0		114		114
Loans secured by farmland		1,371		6,373		7,744		50		60		110		1,352		5,856		7,208		50		54		104
Multi-family (5 or more) residential		392		7,174		7,566		0		171		171		392		7,278		7,670		0		167		167
Agricultural loans		8		6,129		6,137		0		58		58		674		4,996		5,670		0		46		46
Other commercial loans		0		12,383		12,383		0		117		117		0		14,140		14,140		0		131		131
Total commercial		8,164		336,096		344,260		1,167		3,079		4,246		6,774		344,170		350,944		941		3,165		4,106
Consumer		20		14,933		14,953		0		155		155		17		17,363		17,380		0		228		228
Unallocated												500												499

Total	$	8,969	$	792,043	$	801,012	$	1,167	$	7,233	$	8,900	$	8,078	$	814,454	$	822,532	$	1,059	$	7,257	$	8,815

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2016	Loans:						Allowance for Loan Losses:
December 31, 2017													Loans:						Allowance for Loan Losses:
(In Thousands)
	Individually		Collectively				Individually		Collectively				Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens	$	753	$	333,349	$	334,102	$	0	$	3,033	$	3,033	$	984	$	359,003	$	359,987	$	0	$	3,200	$	3,200
Residential mortgage loans - junior liens		68		23,638		23,706		0		258		258		302		25,023		25,325		122		102		224
Home equity lines of credit		0		38,057		38,057		0		350		350		0		35,758		35,758		0		296		296
1-4 Family residential construction		0		24,908		24,908		0		249		249		0		26,216		26,216		0		243		243
Total residential mortgage		821		419,952		420,773		0		3,890		3,890		1,286		446,000		447,286		122		3,841		3,963
Commercial:
Commercial loans secured by real estate		8,005		142,463		150,468		528		1,852		2,380		5,873		153,393		159,266		919		1,665		2,584
Commercial and industrial		212		83,642		83,854		95		904		999		568		87,708		88,276		188		877		1,065
Political subdivisions		0		38,068		38,068		0		0		0		0		59,287		59,287		0		0		0
Commercial construction and land		0		14,287		14,287		0		162		162		0		14,527		14,527		0		150		150
Loans secured by farmland		1,394		5,900		7,294		51		59		110		1,365		5,890		7,255		50		55		105
Multi-family (5 or more) residential		392		7,504		7,896		0		241		241		392		7,321		7,713		0		172		172
Agricultural loans		13		3,985		3,998		0		40		40		7		6,171		6,178		0		57		57
Other commercial loans		0		11,475		11,475		0		115		115		0		10,986		10,986		0		102		102
Total commercial		10,016		307,324		317,340		674		3,373		4,047		8,205		345,283		353,488		1,157		3,078		4,235
Consumer		23		13,699		13,722		0		138		138		20		14,919		14,939		0		159		159
Unallocated												398												499

Total	$	10,860	$	740,975	$	751,835	$	674	$	7,401	$	8,473	$	9,511	$	806,202	$	815,713	$	1,279	$	7,078	$	8,856

Summary information related to impaired loans at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 is as follows:

(In Thousands)	September 30, 2017						December 31, 2016						September 30, 2018						December 31, 2017
	Unpaid						Unpaid						Unpaid						Unpaid
	Principal		Recorded		Related		Principal		Recorded		Related		Principal		Recorded		Related		Principal		Recorded		Related
	Balance		Investment		Allowance		Balance		Investment		Allowance		Balance		Investment		Allowance		Balance		Investment		Allowance
With no related allowance recorded:
Residential mortgage loans - first liens	$	752	$	723	$	0	$	783	$	753	$	0	$	753	$	724	$	0	$	740	$	711	$	0
Residential mortgage loans - junior liens		62		62		0		68		68		0		54		54		0		60		60		0
Commercial loans secured by real estate		3,231		3,231		0		6,975		5,232		0		1,605		1,605		0		3,230		3,230		0
Commercial and industrial		78		78		0		117		117		0		126		126		0		119		119		0
Loans secured by farmland		874		874		0		890		890		0		863		863		0		871		871		0
Multi-family (5 or more) residential		987		392		0		987		392		0		987		392		0		987		392		0
Agricultural loans		8		8		0		13		13		0		674		674		0		8		8		0
Consumer		20		20		0		23		23		0		17		17		0		20		20		0
Total with no related allowance recorded		6,012		5,388		0		9,856		7,488		0		5,079		4,455		0		6,035		5,411		0

With a related allowance recorded:
Residential mortgage loans - first liens														270		270		0		273		273		122
Residential mortgage loans - junior liens														239		239		118		242		242		0
Commercial loans secured by real estate		2,686		2,686		952		2,773		2,773		528		2,550		2,550		816		2,641		2,641		919
Commercial and industrial		398		398		165		95		95		95		75		75		75		449		449		188
Loans secured by farmland		497		497		50		504		504		51		489		489		50		495		495		50
Total with a related allowance recorded		3,581		3,581		1,167		3,372		3,372		674		3,623		3,623		1,059		4,100		4,100		1,279
Total	$	9,593	$	8,969	$	1,167	$	13,228	$	10,860	$	674	$	8,702	$	8,078	$	1,059	$	10,135	$	9,511	$	1,279

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.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

									Interest Income Recognized on																Interest Income Recognized on
	Average Investment in Impaired Loans								Impaired Loans on a Cash Basis								Average Investment in Impaired Loans								Impaired Loans on a Cash Basis
(In Thousands)	3 Months Ended				9 Months Ended				3 Months Ended				9 Months Ended				3 Months Ended				9 Months Ended				3 Months Ended				9 Months Ended
	Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,
	2017		2016		2017		2016		2017		2016		2017		2016		2018		2017		2018		2017		2018		2017		2018		2017
Residential mortgage:
Residential mortgage loans - first lien	$	733	$	789	$	738	$	818	$	8	$	11	$	25	$	33	$	1,067	$	733	$	1,102	$	738	$	17	$	8	$	47	$	25
Residential mortgage loans - junior lien		64		72		65		72		1		0		3		2		295		64		298		65		3		1		10		3
Total residential mortgage		797		861		803		890		9		11		28		35		1,362		797		1,400		803		20		9		57		28
Commercial:
Commercial loans secured by real estate		6,200		7,022		6,377		6,524		36		83		127		274		4,050		6,200		4,921		6,377		25		36		95		127
Commercial and industrial		393		577		317		619		13		7		20		17		184		393		346		317		4		13		11		20
Loans secured by farmland		1,378		1,408		1,382		1,413		10		13		32		51		1,355		1,378		1,359		1,382		11		10		27		32
Multi-family (5 or more) residential		392		492		392		541		0		0		0		0		392		392		392		392		0		0		0		0
Agricultural loans		10		13		11		14		0		0		1		1		677		10		512		11		16		0		34		1
Total commercial		8,373		9,512		8,479		9,111		59		103		180		343		6,658		8,373		7,530		8,479		56		59		167		180
Consumer		25		17		27		16		0		0		0		0		17		25		18		27		1		0		1		0
Total	$	9,195	$	10,390	$	9,309	$	10,017	$	68	$	114	$	208	$	378	$	8,037	$	9,195	$	8,948	$	9,309	$	77	$	68	$	225	$	208

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

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

(In Thousands)	September 30, 2017				December 31, 2016				September 30, 2018				December 31, 2017
	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	$	1,739	$	4,352	$	3,022	$	3,770	$	1,615	$	4,248	$	2,340	$	5,131
Residential mortgage loans - junior liens		4		0		114		0		137		239		105		242
Home equity lines of credit		208		59		320		11		102		27		203		44
Total residential mortgage		1,951		4,411		3,456		3,781		1,854		4,514		2,648		5,417
Commercial:
Commercial loans secured by real estate		126		5,732		2,774		3,080		292		3,810		175		5,645
Commercial and industrial		632		476		286		119		708		155		603		517
Commercial construction and land		53		0		0		0		0		52		26		52
Loans secured by farmland		215		1,313		219		1,331		261		1,300		271		1,308
Multi-family (5 or more) residential		0		392		0		392		0		392		0		392
Agricultural loans		0		8		0		13		0		674		0		7
Total commercial		1,026		7,921		3,279		4,935		1,261		6,383		1,075		7,921
Consumer		2		68		103		20		9		14		1		66

Totals	$	2,979	$	12,400	$	6,838	$	8,736	$	3,124	$	10,911	$	3,724	$	13,404

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

The table below presents a summary of the contractual aging of loans as of September 30, ~~2017~~2018 and December 31, ~~2016:~~2017:

	As of September 30, 2017								As of December 31, 2016								As of September 30, 2018								As of December 31, 2017
	Current &								Current &								Current &								Current &
(In Thousands)	Past Due		Past Due		Past Due				Past Due		Past Due		Past Due				Past Due		Past Due		Past Due				Past Due		Past Due		Past Due
	Less than		30-89		90+				Less than		30-89		90+				Less than		30-89		90+				Less than		30-89		90+
	30 Days		Days		Days		Total		30 Days		Days		Days		Total		30 Days		Days		Days		Total		30 Days		Days		Days		Total
Residential mortgage:
Residential mortgage loans - first liens	$	347,083	$	4,410	$	3,792	$	355,285	$	321,670	$	6,695	$	5,737	$	334,102	$	359,582	$	3,320	$	3,614	$	366,516	$	347,032	$	7,967	$	4,988	$	359,987
Residential mortgage loans - junior liens		24,409		281		4		24,694		23,268		324		114		23,706		25,499		112		137		25,748		25,133		87		105		25,325
Home equity lines of credit		35,908		369		257		36,534		37,603		134		320		38,057		33,734		438		111		34,283		34,789		732		237		35,758
1-4 Family residential construction		24,597		689		0		25,286		24,567		341		0		24,908		27,340		321		0		27,661		25,667		549		0		26,216
Total residential mortgage		431,997		5,749		4,053		441,799		407,108		7,494		6,171		420,773		446,155		4,191		3,862		454,208		432,621		9,335		5,330		447,286

Commercial:
Commercial loans secured by real estate		155,276		215		3,029		158,520		147,464		82		2,922		150,468		157,281		505		1,426		159,212		155,917		311		3,038		159,266
Commercial and industrial		82,407		151		685		83,243		83,364		185		305		83,854		90,661		36		775		91,472		87,306		303		667		88,276
Political subdivisions		54,730		0		0		54,730		38,068		0		0		38,068		53,294		0		0		53,294		59,287		0		0		59,287
Commercial construction and land		13,858		26		53		13,937		14,199		88		0		14,287		12,226		0		52		12,278		14,400		49		78		14,527
Loans secured by farmland		6,726		57		961		7,744		6,181		83		1,030		7,294		5,448		743		1,017		7,208		6,226		12		1,017		7,255
Multi-family (5 or more) residential		7,135		39		392		7,566		7,439		65		392		7,896		7,260		18		392		7,670		7,321		0		392		7,713
Agricultural loans		6,052		77		8		6,137		3,981		4		13		3,998		5,664		0		6		5,670		6,114		57		7		6,178
Other commercial loans		12,383		0		0		12,383		11,475		0		0		11,475		14,140		0		0		14,140		10,986		0		0		10,986
Total commercial		338,567		565		5,128		344,260		312,171		507		4,662		317,340		345,974		1,302		3,668		350,944		347,557		732		5,199		353,488
Consumer		14,720		163		70		14,953		13,446		153		123		13,722		17,309		48		23		17,380		14,760		123		56		14,939

Totals	$	785,284	$	6,477	$	9,251	$	801,012	$	732,725	$	8,154	$	10,956	$	751,835	$	809,438	$	5,541	$	7,553	$	822,532	$	794,938	$	10,190	$	10,585	$	815,713

Nonaccrual loans are included in the contractual aging in the immediately preceding table. A summary of the contractual aging of nonaccrual loans at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 is as follows:

Current &
(In Thousands) Past Due Past Due Past Due
Less than 30-89 90+
30 Days Days Days Total
September 30, 2017 Nonaccrual Totals $ 5,629 $ 499 $ 6,272 $ 12,400
December 31, 2016 Nonaccrual Totals $ 4,199 $ 419 $ 4,118 $ 8,736

	Current &
(In Thousands)	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Total
September 30, 2018 Nonaccrual Totals	$	5,396	$	1,086	$	4,429	$	10,911
December 31, 2017 Nonaccrual Totals	$	5,802	$	741	$	6,861	$	13,404

Loans whose terms are modified are classified as Troubled Debt Restructurings (TDRs) if the Corporation grants such borrowers concessions, and it is deemed that those borrowers are experiencing financial difficulty. Loans classified as TDRs are designated as impaired. The outstanding balance of loans subject to TDRs, as well as contractual aging information at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 is as follows:

Current &
(In Thousands) Past Due Past Due Past Due
Less than 30-89 90+
30 Days Days Days Nonaccrual Total
September 30, 2017 Totals $ 658 $ 0 $ 0 $ 3,075 $ 3,733
December 31, 2016 Totals $ 5,453 $ 350 $ 0 $ 2,874 $ 8,677

	Current &
(In Thousands)	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Nonaccrual		Total
September 30, 2018 Totals	$	597	$	101	$	0	$	2,925	$	3,623
December 31, 2017 Totals	$	636	$	0	$	0	$	3,027	$	3,663

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

At September 30, ~~2017~~2018 and December 31, ~~2016,~~2017, there were no commitments to loan additional funds to borrowers whose loans have been classified as TDRs.

There were no TDRs that occurred during the three-month periods ended September 30, 2018 and 2017. TDRs that occurred during the nine-month periods ended September 30, ~~2017~~2018 and ~~2016~~2017 are as follows:

(Balances in Thousands) Three Months Ended Three Months Ended
September 30, 2017 September 30, 2016
Post- Post-
Number Modification Number Modification
of Recorded of Recorded
Loans Investment Loans Investment
Consumer,
Accepted short fall from sale of residential real estate on a mortgage loan and made unsecured loan to same borrower 0 $ 0 1 $ 25

Nine Months Ended Nine Months Ended
September 30, 2017 September 30, 2016
Post- Post-
Number Modification Number Modification
of Recorded of Recorded
Loans Investment Loans Investment
Residential mortgage,
Extended maturity with interest rate reduction 0 $ 0 1 $ 102
Commercial and industrial,
Extended maturity with interest rate increase 0 0 1 5
Consumer,
Accepted short fall from sale of residential real
estate on a mortgage loan and made unsecured
loan to same borrower 0 0 1 25
Total 0 $ 0 3 $ 132

(Balances in Thousands)	Nine Months Ended				Nine Months Ended
	September 30, 2018				September 30, 2017
			Post-				Post-
	Number		Modification		Number		Modification
	of		Recorded		of		Recorded
	Loans		Investment		Loans		Investment
Residential mortgage - first liens,
Reduced monthly payments for a six-month period		1	$	80		0	$	0
Commercial loans secured by real estate,
Extended interest only payments for a six-month period		2		36		0		0
Commercial and industrial,
Extended interest only payments for a six-month period		1		46		0		0
Total		4	$	162		0	$	0

~~There~~In the nine-month periods ended September 30, 2018 and 2017, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months in the three-month periods ended September 30, 2017 and 2016. In the nine-month periods ended September 30 2017 and 2016, defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months are summarized as follows:

(Balances in Thousands) Nine Months Ended Nine Months Ended
September 30, 2017 September 30, 2016
Number Number
of Recorded of Recorded
Loans Investment Loans Investment
Residential mortgage - first liens 0 $ 0 1 $ 242
Residential mortgage - junior liens 0 0 1 30
Commercial and industrial 0 0 1 5
Consumer 0 0 1 28
Total 0 $ 0 4 $ 305

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

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

(In Thousands)	Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,
	2017		2016		2018		2017
Foreclosed residential real estate	$	640	$	1,102	$	328	$	721

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

(In Thousands)	Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,
	2017		2016		2018		2017
Residential real estate in process of foreclosure	$	1,871	$	2,738	$	704	$	1,789

8. BORROWED FUNDS

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

(In Thousands)	Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,
	2017		2016		2018		2017
FHLB-Pittsburgh borrowings	$	3,000	$	21,000	$	3,000	$	58,000
Customer repurchase agreements		4,739		5,175		5,421		3,766
Total short-term borrowings	$	7,739	$	26,175	$	8,421	$	61,766

The FHLB-Pittsburgh loan facilities are collateralized by qualifying loans secured by real estate with a book value totaling ~~$495,047,000~~$489,621,000 at September 30, ~~2017~~2018 and ~~$471,454,000~~$488,889,000 at December 31, ~~2016.~~2017. Also, the FHLB-Pittsburgh loan facilities require the Corporation to invest in established amounts of FHLB-Pittsburgh stock. The carrying values of the Corporation’s holdings of FHLB-Pittsburgh stock (included in Other Assets) were ~~$3,534,000~~$5,017,000 at September 30, ~~2017~~2018 and ~~$4,296,000~~$6,426,000 at December 31, ~~2016.~~2017.

At September 30, ~~2017,~~2018, the short-term borrowing from FHLB-Pittsburgh consisted of an advance of $3,000,000 ~~was a term borrowing~~which matured in October 2018, with an interest rate of ~~1.23%, maturing in June 2018.~~1.83%. At December 31, ~~2016,~~2017, the short-term ~~borrowing~~borrowings from FHLB-Pittsburgh of ~~$21,000,000 was~~$58,000,000 included an overnight borrowing of $29,000,000 with an interest rate of ~~0.74%~~1.54% and other short-term advances totaling $29,000,000 with a weighted average rate of 1.69%.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The Corporation engages in repurchase agreements with certain commercial customers. These agreements provide that the Corporation sells specified investment securities to the customers on an overnight basis and repurchases them on the following business day. The weighted average interest rate paid by the Corporation on customer repurchase agreements was 0.10% at September 30, ~~2017~~2018 and December 31, ~~2016.~~2017. The carrying value of the underlying securities was $10,099,000 at September 30, 2018 and $12,158,000 at December 31, 2017.

~~Long-term borrowings are as follows:~~

(In Thousands) Sept. 30, Dec. 31,
2017 2016
FHLB-Pittsburgh borrowings $ 4,256 $ 11,454
Repurchase agreement 27,000 27,000
Total long-term borrowings $ 31,256 $ 38,454

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

(In Thousands) Sept. 30, Dec. 31,
2017 2016
Loan matured in June 2017 with a rate of 6.83% $ 0 $ 4
Loan matured in September 2017 with a rate of 3.81% 0 10,000
Loan maturing in December 2018 with a rate of 1.35% 3,000 0
Loan maturing in April 2020 with a rate of 4.79% 510 646
Loan maturing in June 2025 with a rate of 4.91% 746 804
Total long-term FHLB-Pittsburgh borrowings $ 4,256 $ 11,454

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

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

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

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

~~The carrying value of the underlying securities was $30,055,000 at September 30, 2017 and $31,494,000 at December 31, 2016, detailed in the following table:~~

(In Thousands) Sept. 30, Dec. 31,
2017 2016
Mortgage-backed securities issued or guaranteed by U.S. Government agencies or sponsored agencies:
Residential pass-through securities $ 14,120 $ 18,181
Residential collateralized mortgage obligations 16,935 13,313
Total $ 30,055 $ 31,494

(In Thousands)	Sept. 30,		Dec. 31,
	2018		2017
Loan maturing in November 2018 with a rate of 1.63%	$	3,000	$	3,000
Loan maturing in December 2018 with a rate of 1.35%		3,000		3,000
Loan maturing in January 2019 with a rate of 1.83%		2,000		2,000
Loan maturing in February 2019 with a rate of 1.95%		3,000		0
Loan maturing in March 2019 with a rate of 2.15%		3,000		0
Loan maturing in April 2019 with a rate of 2.24%		3,000		0
Loan maturing in May 2019 with a rate of 2.30%		3,000		0
Loan maturing in June 2019 with a rate of 2.42%		3,000		0
Loan maturing in July 2019 with a rate of 2.41%		3,000		0
Loan maturing in August 2019 with a rate of 2.48%		3,000		0
Loan maturing in September 2019 with a rate of 2.53%		3,000		0
Loan maturing in April 2020 with a rate of 4.79%		320		463
Loan maturing in June 2025 with a rate of 4.91%		665		726
Total long-term FHLB-Pittsburgh borrowings	$	32,985	$	9,189

9. DEFINED BENEFIT PLANS

The Corporation sponsors a defined benefit health care plan that provides postretirement medical benefits and life insurance to employees who meet certain age and length of service requirements. Full-time employees no longer accrue service time toward the Corporation-subsidized portion of the medical benefits. The 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 September 30, ~~2017~~2018 and December 31, ~~2016,~~2017 and are not expected to significantly affect the Corporation's future expenses. The Corporation uses a December 31 measurement date for the postretirement plan.

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

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

Defined Benefit Plans
(In Thousands) Pension Postretirement
Nine Months Ended Nine Months Ended
Sept. 30, Sept. 30,
2017 2016 2017 2016
Service cost $ 0 $ 0 $ 27 $ 27
Interest cost 18 20 43 47
Expected return on plan assets (23 ) (20 ) 0 0
Amortization of prior service cost 0 0 (23 ) (23 )
Recognized net actuarial loss 5 8 0 0
Net periodic benefit cost $ 0 $ 8 $ 47 $ 51

Defined Benefit Plans
(In Thousands)	Pension						Postretirement
	Nine Months Ended						Nine Months Ended
	Sept. 30,						Sept. 30,
	2018			2017			2018			2017
Service cost	$	0		$	0		$	30		$	27
Interest cost		19			18			38			43
Expected return on plan assets		(15	)		(23	)		0			0
Amortization of prior service cost		0			0			(23	)		(23	)
Recognized net actuarial loss		10			5			0			0
Net periodic benefit cost	$	14		$	0		$	45		$	47

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Defined Benefit Plans
(In Thousands)	Pension						Postretirement						Pension						Postretirement
	Three Months Ended						Three Months Ended						Three Months Ended						Three Months Ended
	Sept. 30,						Sept. 30,						Sept. 30,						Sept. 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Service cost	$	0		$	0		$	9		$	9		$	0		$	0		$	10		$	9
Interest cost		6			7			15			16			6			6			12			15
Expected return on plan assets		(8	)		(7	)		0			0			(5	)		(8	)		0			0
Amortization of prior service cost		0			0			(8	)		(8	)		0			0			(7	)		(8	)
Recognized net actuarial loss		2			3			0			0			4			2			0			0
Net periodic benefit cost	$	0		$	3		$	16		$	17		$	5		$	0		$	15		$	16

Service cost, interest cost and expected return on plan assets are included in pensions and other employee benefits expense in the consolidated statements of income in the first nine months of 2018 and 2017. Amortization of prior service cost and the recognized net actuarial loss are included in other noninterest expense in the consolidated statements of income in the first nine months of 2018 and 2017.

In the first nine months of ~~2017,~~2018, the Corporation funded postretirement contributions totaling ~~$36,000,~~$35,000, with estimated annual postretirement contributions of ~~$62,000~~$60,000 expected in ~~2017~~2018 for the full year. No defined benefit pension contributions are required in ~~2017,~~2018, though the Corporation may make discretionary contributions.

10. STOCK-BASED COMPENSATION PLANS

The Corporation has a Stock Incentive Plan for a selected group of officers and an Independent Directors Stock Incentive Plan. In the first quarter ~~2017,~~2018, the Corporation awarded ~~22,312~~25,466 shares of restricted stock under the Stock Incentive Plan and ~~8,470~~9,086 shares of restricted stock under the Independent Directors Stock Incentive Plan. The ~~2017~~2018 restricted stock awards under the Stock Incentive Plan vest ratably over three years, and vesting for one-half of the ~~14,897~~16,578 restricted shares awarded to Executive Officers depends on the Corporation meeting a return on average equity (“ROAE”) target each year. The ~~2017~~2018 restricted stock issued under the Independent Directors Stock Incentive Plan vests over one year.

Compensation cost related to restricted stock is recognized based on the ~~market price~~fair value of the stock at the grant date over the vesting ~~period.~~period, adjusted for estimated and actual forfeitures. Management has estimated restricted stock expense in the first nine months of ~~2017~~2018 based on an assumption that the ROAE target for awards to Executive Officers in 2016, 2017 and ~~2017~~2018 will not be met, resulting in forfeiture of the restricted stock.

~~Annual~~Total annual stock-based compensation for the year ending December 31, ~~2017~~2018 is estimated to total ~~$632,000.~~$664,000. If the ROAE targets for awards to Executive Officers in 2016, 2017 and ~~2017~~2018 are met or exceeded, total annual stock-based compensation would increase by approximately ~~$123,000.~~$190,000. Total stock-based compensation expense attributable to restricted stock awards amounted to $162,000 in the third quarter 2018 and $500,000 in the nine-month period ended September 30, 2018. Total stock-based compensation expense attributable to restricted stock awards amounted to $153,000 in the third quarter 2017 and $475,000 in the nine-month period ended September 30, 2017. ~~Total stock-based compensation expense attributable to restricted stock awards amounted to $155,000 in the third quarter 2016 and $480,000 in the nine-month period ended September 30, 2016.~~

11. INCOME TAXES

The net deferred tax asset at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 represents the following temporary difference components:

	September 30,		December 31,		September 30,		December 31,
(In Thousands)	2017		2016		2018		2017
Deferred tax assets:
Unrealized holding losses on securities	$	0	$	512
Unrealized holding losses on available-for-sale securities:
Included in accumulated other comprehensive loss					$	2,260	$	843
Included in retained earnings						0		(337	)
Allowance for loan losses		3,150		2,998		1,885		1,894
Other deferred tax assets		2,582		2,658		1,901		1,726
Total deferred tax assets		5,732		6,168		6,046		4,126

Deferred tax liabilities:
Unrealized holding gains on securities		122		0
Defined benefit plans - ASC 835		79		27
Defined benefit plans - ASC 835:
Included in accumulated other comprehensive loss						36		31
Included in retained earnings						0		(12	)
Bank premises and equipment		1,101		913		825		751
Core deposit intangibles		5		6		2		3
Other deferred tax liabilities		106		105		61		64
Total deferred tax liabilities		1,413		1,051		924		837
Deferred tax asset, net	$	4,319	$	5,117	$	5,122	$	3,289

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~In December 2017, the Corporation recognized an adjustment in the carrying value of the net deferred tax asset as a result of a reduction in the federal corporate income tax rate to 21%, effective January 1, 2018, from the 35% marginal rate that had previously been in effect. At December 31, 2017, the portion of the adjustment attributable to items of accumulated other comprehensive income (loss) were stranded in retained earnings, including components related to unrealized losses on securities and defined benefit plans. As described in Note 1, the Corporation elected early adoption of ASU 2018-02, resulting in a reclassification between two categories of stockholders’ equity at January 1, 2018, with an increase of $325,000 in retained earnings and a decrease in accumulated other comprehensive loss for the same amount. Management believes the Corporation’s accounting for the effects of the reduction in the federal income tax rate is materially complete at September 30, 2018.

The provision for income tax for the three-month and ~~nine month~~nine-month periods ended September 30, ~~2017~~2018 and ~~2016~~2017 is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The effective tax rates for the Corporation are as follows:

	Three Months Ended						Nine Months Ended						Three Months Ended						Nine Months Ended
(Dollars In thousands)	September 30,						September 30,						September 30,						September 30,
	2017			2016			2017			2016			2018			2017			2018			2017
Income before income tax provision	$	5,198		$	5,538		$	15,111		$	15,378		$	6,697		$	5,198		$	19,561		$	15,111
Income tax provision		1,262			1,451			3,620			3,847			1,111			1,262			3,229			3,620
Effective tax rate		24.28	%		26.20	%		23.96	%		25.02	%		16.59	%		24.28	%		16.51	%		23.96	%

The effective tax rate for each period presented differs from the statutory rate of 21% for the period ended September 30, 2018 and 35% for the period ended September 30, 2017 principally because of the effects of tax-exempt interest income.

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 ~~2016~~2017 and expects to continue to receive tax credits annually through 2022. The carrying amount of the Corporation’s investment is ~~$634,000~~$526,000 at September 30, ~~2017~~2018 and ~~$713,000~~$608,000 at December 31, ~~2016~~2017 (included in Other Assets in the consolidated balance sheets). For the year ending December 31, ~~2017,~~2018, the estimated amount of tax credits and other tax benefits to be received is ~~$157,000~~$150,000 and the estimated amount to be recognized as a reduction of the provision for income taxes is ~~$73,000.~~$54,000. The total reduction in the provision for income taxes resulting from this investment is $14,000 in the third quarter 2018 and $41,000 for the nine months ended September 30, 2018, and $18,000 in the third quarter 2017 and $55,000 for the nine months ended September 30, ~~2017, and $19,000 in the third quarter 2016 and $57,000 for the nine months ended September 30, 2016.~~2017.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 2014.

12. CONTINGENCIES

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

13. ~~RECENT ACCOUNTING PRONOUNCEMENTS~~REVENUE RECOGNITION

~~The FASB issues Accounting Standards Updates (ASUs) to~~As disclosed in Note 1, as of January 1, 2018, the FASB ASC. This section provides a summary description of recent ASUs that have significant implications (elected or required) within the consolidated financial statements, or that management expects may have a significant impact on financial statements issued in the near future.

~~In May 2014, the FASB issued~~Corporation adopted ASU 2014-09, Revenue from Contracts with Customers ~~which provides a principles-based framework for revenue recognition under U.S. GAAP.~~(Topic 606), as well as subsequent ASUs that modified ASC 606. The ~~core principle~~Company has elected to apply the ASU and all related ASUs using the modified retrospective implementation method. The implementation of the ~~five-step~~guidance had no material impact on the measurement or recognition of revenue ~~recognition framework~~of prior periods. The Corporation generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed; charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that ~~an entity should recognize~~significantly affects the determination of the amount and timing of 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. Several additional ASUs have been issued subsequent to ASU 2014-09 to provide clarifying guidancefrom contracts with customers.

Additional disclosures related to ~~various revenue recognition areas and to defer~~ the effective date of the standard by a year, making it applicable for the Corporation in the first quarter 2018 and for the annual period ending December 31, 2018. The amendments should be applied either retrospectively to each prior reporting period presented or retrospectively with the cumulative effect of initially applying the amendments recognized at the date of initial application. Additionally, the ASU requires expanded disclosures to help users of financial statements better understand the nature, amount, timing, and uncertainty of revenue that is recognized. 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 Corporation’s largest sources of noninterest ~~revenue which~~income within the consolidated statements of income that are subject to ASC 606 are as follows:

Trust and financial management revenue– C&N Bank’s trust division provides a wide range of financial services, including wealth management services for individuals, businesses and retirement funds, administration of 401(k) and other retirement plans, retirement planning, estate planning and estate settlement services. Trust clients are located primarily within the ~~guidance include~~Corporation’s geographic markets. Assets held in a fiduciary capacity by C&N Bank are not the Corporation’s assets and are therefore not included in the consolidated balance sheets. The fair value of trust assets under management was approximately $952,824,000 at September 30, 2018 and $916,580,000 at December 31, 2017. Trust and financial management revenue ~~service~~is included within noninterest income in the consolidated statements of income.

Trust revenue is recorded on a cash basis, which is not materially different from the accrual basis. The majority (approximately 81%, based on annual 2017 results) of trust revenue is earned and collected monthly, with the amount determined based on a percentage of the fair value of the trust assets under management. Wealth management fees are contractually agreed with each customer, and fee levels vary based mainly on the size of assets under management. The services provided under such a contract represent a single performance obligation under the ASU because it embodies a series of distinct goods or services that are substantially the same and have the same pattern of transfer to the customer. None of the contracts with trust customers provide for incentive-based fees. In addition to wealth management fees, trust revenue includes fees for provision of services, including employee benefit plan administration, tax return preparation and estate planning and settlement. Fees for such services are billed based on contractual arrangements or established fee schedules and are typically billed upon completion of providing such services. The costs of acquiring trust customers are incremental and recognized within noninterest expense in the consolidated statements of income.

Service charges on deposit accounts - Deposits are included as liabilities in the consolidated balance sheets. Service charges on deposit accounts include: overdraft fees, which are charged when customers overdraw their accounts beyond available funds; automated teller machine (ATM) fees charged for withdrawals by deposit customers from other financial institutions’ ATMs; and ~~interchange revenue from debit card transactions. Management has reviewed the Corporation’s larger noninterest revenue streams~~a variety of other monthly or transactional fees for services provided to retail and ~~does not expect the adoption of ASU 2014-09~~business customers, mainly associated with checking accounts. All deposit liabilities are considered to have ~~a material effect on~~one-day terms and therefore related fees are recognized in income at the ~~Corporation’s financial condition or results~~time when the services are provided to the customers. Incremental costs of ~~operations. Management is~~obtaining deposit contracts are not significant and are recognized as expense when incurred within noninterest expense in the ~~process~~consolidated statements of ~~reviewing the expanded disclosure requirements that will be effective in the first quarter 2018.~~income.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~In January 2016,~~Interchange revenue from debit card transactions– The Corporation issues debit cards to consumer and business customers with checking, savings or money market deposit accounts. Debit card and ATM transactions are processed via electronic systems that involve several parties. The Corporation’s debit card and ATM transaction processing is executed via contractual arrangements with payment processing networks, a processor and a settlement bank. As described above, all deposit liabilities are considered to have one-day terms and therefore interchange revenue from customers’ use of their debit cards to initiate transactions are recognized in income at the ~~FASB issued ASU 2016-01, Recognition~~time when the services are provided and ~~Measurement~~related fees received in the Corporation’s deposit account with the settlement bank. Incremental costs associated with ATM and interchange processing are recognized as expense when incurred within noninterest expense in the consolidated statements of Financial Assets and Liabilities. This makes significant changes in U.S. GAAP related to certain aspects of recognition, measurement, presentation and disclosure of financial instruments. The changes provided for in this Update that are applicable toincome.

14. PENDING MERGER

On September 28, 2018, the Corporation, ~~are as follows: (1) require equity investments (except those accounted for under~~along with Monument Bancorp, Inc. (“Monument”), announced the ~~equity method~~signing of ~~accounting or those that result~~an Agreement and Plan of Merger. Monument is the parent company of Monument Bank, a commercial bank which operates two community bank offices and one loan production office in ~~consolidation~~Bucks County, Pennsylvania. As of September 30, 2018, Monument reported total assets of $361 million. Under the terms of the ~~investee)~~Agreement and Plan of Merger, Monument will merge into the Corporation, and Monument Bank will merge into C&N Bank. In the transaction, Monument shareholders will elect to ~~be measured at fair value with changes~~receive either 1.0144 shares of Corporation common stock or $28.10 in ~~fair value recognized in net income; however, an entity may choose~~cash for each share of Monument common stock owned, subject to ~~measure equity investments~~proration to ensure that, do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investmentoverall, 20% of the ~~same issuer; (2) for equity investments without readily determinable fair values, require a qualitative assessment to identify impairment,~~Monument shares will be converted into cash and if a qualitative assessment indicates that impairment exists, requiring an entity to measure the investment at fair value; (3) eliminate the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet; (4) require public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes; (5) require an entity to present separately in other comprehensive income the portion80% of the Monument shares will be converted into Corporation stock. The estimated total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments (at September 30, 2017 and December 31, 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 balance sheet or the accompanying notes to the financial statements; and (7) clarify that an entity should evaluate the need for a valuation allowance on a deferred tax asset related to available-for-sale securities in combination with the entity’s other deferred tax assets. The amendments in this Update will become effective for the Corporation for annual and interim periods beginning in the first quarter 2018. With limited exceptions, early adoption of the amendments in this Update is not permitted. Amendments are to be applied by means of a cumulative-effect adjustment to the balance sheet as of the beginning of the fiscal year of adoption. The amendments related to equity securities without readily determinable fair values should be applied prospectively. 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 is not expected to have a significant impact 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 lesseepurchase consideration 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 leasesvalued 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 dateapproximately $42.7 million based on the ~~present value~~closing price of the ~~remaining minimum rental payments that were tracked and disclosed under previous GAAP. Topic 842 will become effective for~~Corporation’s common stock on September 27, 2018. The transaction, which has been approved by the ~~Corporation for annual and interim periods beginning in~~Board of Directors of both companies, is expected to be completed during the ~~first~~second quarter 2019. ~~The Corporation~~Consummation of the Merger is ~~in the early stages~~subject to approval by Monument’s shareholders, regulatory approvals and other customary conditions of ~~evaluating the potential impact of adopting this amendment.~~closing.

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.38

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

In March 2016, the FASB issued ASU No. 2016-09, Compensation – Stock Compensation. This ASU changes several aspects of accounting for share-based payment transactions, and includes some changes that apply only to nonpublic companies. This Update includes amendments that currently apply, or may apply in the future, to the Corporation related to the following: (1) accounting for the difference between the deduction for tax purposes and the amount of compensation cost recognized for financial reporting purposes; (2) classification of excess tax benefits on the statement of cash flows; (3) accounting for forfeitures; (4) accounting for awards partially settled in cash in excess of the employer’s minimum statutory tax withholding requirements; and (5) classification of employee taxes paid on the statement of cash flows when an employer withholds shares for tax-withholding purposes. The amendments in this Update 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 entity will record the effect of implementing this ASU through a cumulative-effect adjustment through retained earnings as of the beginning of the reporting period in which Topic 326 is effective.

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

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

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.

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

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. Discounts will continue to be amortized to maturity. The amendments in this Update are effective for the Corporation for annual and interim periods beginning in the first quarter 2019. An entity should apply the amendments in this Update through a cumulative-effect adjustment directly to retained earnings as of the beginning of the year of adoption. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. The Corporation does not expect adoption of the amendments to have a significant impact on its financial position.

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

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

AND RESULTS OF OPERATIONS

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

changes in monetary and fiscal policies of the Federal Reserve Board and the U. S. Government, particularly related to changes in interest rates

changes in general economic conditions

legislative or regulatory changes

downturn in demand for loan, deposit and other financial services in the Corporation’s market area

increased competition from other banks and non-bank providers of financial services

technological changes and increased technology-related costs

changes in accounting principles, or the application of generally accepted accounting principles.

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

EARNINGS OVERVIEW

~~Basic and~~Third quarter 2018 net income was $0.45 per diluted ~~earnings per common~~ share, ~~were $0.32 for the third quarter 2017,~~ as compared to ~~$0.34~~$0.52 in the second quarter ~~2017~~2018 and ~~$0.34~~$0.32 in the third quarter ~~2016.~~2017. Third quarter 2018 earnings included a net benefit of $0.03 per diluted share from a gain on a restricted equity security (Visa Inc. Class B stock) and a loss on available-for-sale debt securities, while second quarter 2018 earnings included a net benefit of $0.10 per diluted share from a gain on Visa Class B stock, partially offset by a loss on available-for-sale debt securities. For the nine months ended September 30, ~~2017, basic~~2018, net income was $1.33 per diluted share, including a net benefit of $0.13 per diluted share from the gain on Visa Class B stock and ~~diluted earnings per common share were $0.94 as compared to $0.95~~the loss on available-for-

sale debt securities. In comparison, for the ~~first~~ nine months ended September 30, 2017, net income was $0.94 per diluted share including a benefit of ~~2016.~~ $0.01 per diluted share from a gain on available-for-sale debt securities.

In 2018, C&N has recorded pre-tax gains on Visa Class B stock totaling $2,321,000, including gains of $1,750,000 in the second quarter and $571,000 in the third quarter. Prior to the sales, C&N held 19,789 shares of Visa Class B stock pursuant to Visa’s 2007 initial public offering. Until the second quarter 2018, the carrying value of the shares was $0, which represented C&N’s cost basis. In the second quarter 2018, C&N sold 10,000 of the shares, for a realized gain of $884,000, and recorded an unrealized gain (on the 9,789 shares still held at June 30, 2018) of $866,000. In the third quarter 2018, C&N sold 9,789 shares for total proceeds of $1,437,000, and holds no more shares as of September 30, 2018.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The ~~return~~table below provides a reconciliation of C&N’s third quarter and September 30, 2018 year-to-date unaudited earnings results to the comparative 2017 results excluding the gain on ~~average assets for the first nine months of 2017 was 1.23%,~~Visa Class B stock and ~~the return~~gains and losses on ~~average equity was 8.13%. Highlights~~available-for-sale debt securities.

(Dollars In Thousands, Except Per Share Data)
(Unaudited)	3rd Quarter 2018											3rd Quarter 2017
	Income									Diluted		Income									Diluted
	Before			Income						Earnings		Before			Income						Earnings
	Income			Tax						per		Income			Tax						per
	Tax			Provision			Net			Common		Tax			Provision			Net			Common
	Provision			(1)			Income			Share		Provision			(1)			Income			Share
Results as Presented Under U.S. GAAP	$	6,697		$	1,111		$	5,586		$	0.45	$	5,198		$	1,262		$	3,936		$	0.32
Less: Gain on Restricted Equity Security		(571	)		(119	)		(452	)				0			0			0
Net Losses (Gains) on Available-for-sale Debt Securities		2			0			2					(5	)		(2	)		(3	)
Earnings Information, Excluding Effect of Gain on Restricted Equity Security and Net Gains and Losses on Available-for-sale Debt Securities	$	6,128		$	992		$	5,136		$	0.42	$	5,193		$	1,260		$	3,933		$	0.32

	9 Months Ended Sept. 30, 2018											9 Months Ended Sept. 30, 2017
	Income									Diluted		Income									Diluted
	Before			Income						Earnings		Before			Income						Earnings
	Income			Tax						per		Income			Tax						per
	Tax			Provision			Net			Common		Tax			Provision			Net			Common
	Provision			(1)			Income			Share		Provision			(1)			Income			Share
Results as Presented Under U.S. GAAP	$	19,561		$	3,229		$	16,332		$	1.33	$	15,111		$	3,620		$	11,491		$	0.94
Less: Gain on Restricted Equity Security		(2,321	)		(487	)		(1,834	)				0			0			0
Net Losses (Gains) on Available-for-sale Debt Securities		284			59			225					(257	)		(90	)		(167	)
Earnings Information, Excluding Effect of Gain on Restricted Equity Security and Net Gains and Losses on Available-for-sale Debt Securities	$	17,524		$	2,801		$	14,723		$	1.20	$	14,854		$	3,530		$	11,324		$	0.93

(1)

Income tax has been allocated to the gain on restricted equity security and net losses (gains) on available-for-sale debt securities based on marginal income tax rates of 21% for 2018 and 35% for 2017.

Additional highlights related to the Corporation’s earnings results for the comparative periods are presented below.

Third Quarter 2018 as Compared to Third Quarter 2017

Net income of $5,586,000 in the third quarter 2018 was $1,650,000 higher than the third quarter 2017 amount. Excluding the after-tax impact of the gain on Visa Class B stock and net (losses) gains on available-for-sale debt securities as described above, adjusted third quarter 2018 net income of $5,136,000 exceeded adjusted third quarter 2017 net income of $3,933,000 by $1,203,000 (30.6%). The marginal federal income tax rate in effect in 2018 is 21%, down from the 2017 marginal rate of 35%. Accordingly, the effective tax rate of 16.6% for the third quarter ~~2017 of $3,936,000~~2018 was significantly lower ~~by $151,000 (3.7%)~~ than the third quarter ~~2016 amount. Some~~2017 effective tax rate of 24.3%. Pre-tax income, excluding the ~~more~~gain on Visa Class B stock and net (losses) gains on available-for-sale debt securities, totaled $6,128,000 in the third quarter 2018, an increase of $935,000 (18.0%) over adjusted pre-tax income of $5,193,000 in the third quarter 2017. Other significant ~~fluctuations in revenues and expenses between the three-month period ended September 30, 2017 and the corresponding period in 2016~~earnings-related variances were as follows:

Net interest income increased ~~$454,000 (4.5%~~$918,000 (8.6%) in the third quarter 2018 over the third quarter 2017 amount. Total interest and dividend income increased $1,174,000, while interest expense increased $256,000. The net interest margin of 3.87% for the third quarter 2018 was 0.04% higher than the third quarter 2017 level. The average fully taxable equivalent yield on earning assets increased to 4.27% in the third quarter 2018 from 4.16% in the third quarter 2017, as ~~compared~~the average yield on loans increased to ~~the third quarter 2016. The net interest margin of 3.83% for the third quarter 2017 was higher than the third quarter 2016 level of 3.74%~~5.06% from 4.88%. The improvement in average yield reflects the ~~margin included the impact~~effects of ~~a favorable change~~recent increases in ~~the mix of earning assets, including growth in loans and a reduction in securities.~~interest rates. Average total loans outstanding were higher by ~~$55.3~~$32.1 million ~~(7.5%~~(4.1%) in the third quarter ~~2017~~2018 as compared to the third quarter ~~2016, while average total available-for-sale securities were lower by $41.0 million.~~2017. Average total deposits were ~~$26.8~~$37.4 million ~~(2.7%~~(3.7%) higher in the third quarter ~~2017~~2018 as compared to the third quarter ~~2016.~~2017. In the third quarter 2018, average brokered deposits totaled $3,207,000, while there were no brokered deposits in the third quarter 2017. The average rate paid on interest-bearing liabilities was 0.59% in the third quarter 2018, up 0.11% from the third quarter 2017. The average rate paid on deposits was up 0.19% in the third quarter 2018 as compared to the third quarter 2017, while the average cost of borrowed funds dropped to 1.90% from 3.14% because of the pay-off of higher-cost borrowings that matured in the latter portion of 2017.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The ~~third quarter 2017~~ provision for loan losses was ~~$216,000 lower than~~$60,000 in the third quarter ~~2016 amount.~~2018, down from $322,000 in the third quarter 2017. The third quarter 2018 provision included a charge of $40,000 related to specific loans (net charge-offs of $76,000, less a reduction in specific allowances on loans of $36,000) and a net $20,000 charge attributable mainly to loan growth. In comparison, the third quarter 2017 provision included $141,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period and ~~an increase of~~a $181,000 charge attributable mainly to increases in ~~the collectively determined allowance for loan losses. In comparison, the third quarter 2016 provision included a $478,000 increase~~qualitative factors used in ~~total specific allowances on impaired loans, as adjusted for net charge-offs during the period, and a $60,000 increase in~~estimating the collectively determined portion of the ~~allowance. The increase in total specific allowances on impaired loans in the third quarter 2016 included the initial recognition of an~~ allowance ~~of $528,000 on a real estate secured commercial loan for which the specific allowance had increased to $952,000 at September 30, 2017. The outstanding balance of this loan was $2,686,000~~ at September 30, 2017.

Noninterest ~~revenue~~income increased ~~$182,000 (4.7%~~$396,000 (9.7%) in the third quarter ~~2017~~2018 over the third quarter ~~2016~~2017 amount. Service charges on deposit accounts increased $145,000 (12.2%) in the third quarter 2018 over the third quarter 2017 total, mainly due to increased fees from the overdraft privilege program and reflecting the impact of changes to the program that were instituted early in 2018. Trust and financial management revenue increased ~~$120,000 (10.2%~~$135,000 (10.4%), reflecting growth in assets under management resulting from market appreciation and new ~~business, as well as a recent increase in fee levels.~~business. Interchange revenue from debit card transactions increased ~~$80,000 (16.6%~~$99,000 (17.6%), reflecting ~~benefits~~an increase in transaction volume. Other noninterest income increased $73,000, including increases in dividends received on Federal Home Loan Bank of Pittsburgh stock and interchange revenue from ~~a consulting project in 2016 that identified opportunities for improvements in card-related volumes and processing.~~credit card transactions. Net gains from sales of loans decreased $133,000 (44.8%), reflecting a reduction in volume of residential mortgage loans originated and sold.

Total noninterest expense increased ~~$61,000 (25.8%~~$641,000 (7.0%) in the third quarter 2018 over the third quarter 2017 amount. Third quarter 2018 results included expenses related to the pending merger with Monument Bancorp, Inc. totaling $200,000 ($100,000 included in professional fees and $100,000 included in other noninterest expense). Salaries and wages expense increased $278,000 (7.0%), including the effects of annual performance-based salary adjustments for employees along with an increase of $108,000 in estimated cash and stock-based compensation expense and an increase in the average number of full-time equivalent employees (FTEs) to 298 in the third quarter 2018 from 293 in the third quarter 2017. Occupancy expense increased $68,000 (11.7%), including the effects of accelerated depreciation on the Ralston, Pennsylvania branch scheduled to close in November 2018 and an increase in repairs and maintenance expense at several locations. Over the last half of 2017 and early 2018, the Corporation installed a new telephone system throughout most locations and implemented a new loan origination system. Costs associated with these projects contributed to increases in professional fees, data processing and other noninterest expense in the third quarter 2018 as compared to the third quarter ~~2016, reflecting increases in sales volume and average profit margin. Service charges on deposit accounts decreased $53,000 (4.3%), as revenue from consumer overdrafts declined due to lower volume.~~2017.

Nine Months Ended September 30, 2018 as Compared to Nine Months Ended September 30, 2017

For the nine months ended September 30, 2018, net income of $16,332,000 was $4,841,000 higher than the corresponding amount for the first nine months of 2017. Excluding the after-tax impact of the gain on Visa Class B stock and net (losses) gains on available-for-sale debt securities as described above, adjusted year-to-date 2018 net income of $14,723,000 exceeded adjusted net income for the first nine months of 2017 of $11,324,000 by $3,399,000 (30.0%). As a result of the lower marginal federal income tax rate in effect in 2018, the effective tax rate was 16.5% for the first nine months of 2018, down from 24.0% for the first nine months of 2017. Pre-tax income, excluding the gain on Visa Class B stock and net (losses) gains on available-for-sale debt securities, totaled $17,524,000 for the first nine months of 2018, an increase of $2,670,000 (18.0%) over adjusted pre-tax income of $14,854,000 for the first nine months of 2017. Other significant earnings-related variances were as follows:

Net interest income was higher by $2,549,000 (8.2%) for the first nine months of 2018 as compared to the amount for the first nine months of 2017. The net interest margin was 3.86% for the first nine months of 2018, up from 3.81% for the first nine months of 2017. The average yield on earning assets was 4.23% in the first nine months of 2018, up from 4.15% in the first nine months of 2017, reflecting an increase in average yield on loans of 0.12%. Average total loans outstanding were higher by $47.8 million (6.2%) for the first nine months of 2018 as compared to the first nine months of 2017, while average total available-for-sale debt securities were lower by $17.9 million. Average total deposits were $38.8 million (3.9%) higher for the first nine months of 2018 as compared to 2017. In the first nine months of 2018, average brokered deposits totaled $1,685,000, while there were no brokered deposits in the first nine months of 2017. The average rate paid on interest-bearing liabilities was 0.53% in the first nine months of 2018, up 0.05% as compared to 2017. The average rate paid on deposits was up 0.14% in the first nine months of 2018 as compared to 2017, while the average cost of borrowed funds dropped to 1.75% from 2.59% because of the pay-off of higher-cost borrowings that matured in the latter portion of 2017.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Realized gains on available-for-sale securities totaled $5,000 in the third quarter 2017, down from $584,000 in the third quarter 2016. Within this category, gains from sales of bank stocks totaled $560,000 in the third quarter 2016. The ~~Corporation sold its investments in bank stocks over the course of 2014 through 2016, and has held no such investments throughout 2017.~~

Total noninterest expenses increased $613,000 (7.1%) in the third quarter 2017 over the third quarter 2016 amount. Other operating expense increased $226,000. The increase in other operating expense included an increase of $97,000 in attorney fees, mainly related to a commercialprovision for loan workout situation, and an increase in accounting and auditing expense of $46,000 resulting from an increase in outsourced internal audit activity. Pensions and other employee benefits expense increased $156,000, mainly due to higher health care expenses on the Corporation’s partially self-insured plan. Salaries and wages expense increased $84,000, or 2.2%. Software subscriptions increased $62,000, including costs associated with new applications as well as annual licensing increases. Automated teller machine and interchange expense increased $55,000, including increased costs related to fraud protection services and higher volume of debit card transactions. Pennsylvania shares tax increased $49,000, reflecting a tax rate increase and an increase in C&N Bank capital. FDIC assessments expense decreased $58,000, reflecting a lower assessment level.

~~The income tax provision of $1,262,000 in the third quarter 2017 (24.3% of pre-tax income)~~losses was $189,000 lower than the third quarter 2016 tax provision of $1,451,000 (26.2% of pre-tax income). The lower amount of tax provision and effective tax rate in the third quarter 2017 resulted primarily from lower pre-tax income. Also, in the third quarter 2016, the tax provision included a $39,000 catch up adjustment for an increase in the New York State tax provision related to a change in tax methodology that first became effective in 2015.

Net income was $11,491,000 for the first nine months of 2017, a decrease of $40,000 (0.4%) from net income for the first nine months of 2016. Some of the more significant fluctuations in revenues and expenses between the nine-month period ended September 30, 2017 and the corresponding period in 2016 were as follows:

~~Net interest income was $943,000 (3.1%) higher~~$332,000 for the first nine months of ~~2017 as compared~~2018, down from $778,000 in 2017. The 2018 provision included a charge of $153,000 related to ~~the first nine months~~specific loans (net charge-offs of ~~2016. The~~$373,000, less a reduction in specific allowances on loans of $220,000) and a net interest margin was 3.81% for the first nine months of 2017, up from 3.77% for the first nine months of 2016. Average total loans outstanding were up $57.6 million (8.0%) in the first nine months of 2017 as compared$179,000 charge attributable mainly to the first nine months of 2016, while average total available-for-sale securities were lower by $33.0 million. Average total deposits were $20.4 million (2.1%) higher in the first nine months of 2017 as compared to the first nine months of 2016.

~~The provision for~~ loan ~~losses of $778,000 for the first nine months of 2017 was $446,000 lower than the amount for the first nine months of 2016.~~growth. In ~~2017,~~comparison, the provision in 2017 included $844,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period and a $102,000 increase in the unallocated portion of the allowance, with a reduction in the provision of $168,000 related to ~~the~~a reduction in the collectively determined allowance for loan losses. The reduction in the collectively determined allowance included the effects of an improvement in aggregate net charge-off experience and a reduction in the qualitative factors used to estimate the allowance as of September 30, 2017. The net increase in specific allowances in the first nine months of 2017 included an increase in the allowance related to one real estate secured commercial loan of $424,000 to $952,000 at September 30, 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 for the first nine months of 2016 included $557,000 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 $696,000 related to an increase in the collectively determined allowance for loan losses. The increase in the collectively determined portion of the allowance at September 30, 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.

Noninterest ~~revenue~~income increased ~~$556,000 (4.8%~~$1,521,000 (12.6%) infor the first nine months of ~~2017 as compared to~~2018 over the amount for the first nine months of ~~2016.~~2017. Service charges on deposit accounts increased $438,000 (12.9%), mainly due to increased fees from the overdraft privilege program. Trust and financial management revenue increased ~~$402,000 (11.3%~~$406,000 (10.2%), reflecting growth in assets under management resulting from market appreciation and new ~~business, as well as a recent~~business. Other noninterest income increased $327,000, including an increase in ~~fee levels~~tax credits of $122,000 resulting from a state tax credit related to donation of real estate in Towanda, Pennsylvania, along with increases in dividends received on Federal Home Loan Bank of Pittsburgh stock, credit card interchange fees and ~~an estimated $215,000 of additional~~ revenue from ~~changing the frequency of billings to monthly for certain~~merchant services. Interchange revenue from debit card transactions increased ~~$218,000 (15.2%),~~$231,000 and brokerage revenue increased $167,000, reflecting ~~improvements~~increases in card-related volumes and processing. Loan servicing fees, net, increased $123,000, as the fair value of mortgage servicing rights decreased by $145,000 in the first nine months of 2017 as compared to a reduction of $247,000 in the first nine months of 2016. Service charges on deposit accounts decreased $177,000 (5.0%), as revenue from consumer overdrafts declined due to lower volume.

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

~~Realized gains on available-for-sale securities totaled $257,000 in the first nine months of 2017, down from $1,089,000 in the first nine months of 2016. Within this category,~~ Net gains from sales of ~~bank stocks totaled $837,000~~loans decreased $137,000 (21.0%), reflecting a reduction in ~~the first nine months~~volume of ~~2016. As noted above, the Corporation sold all of its investments in bank stocks prior to 2017.~~residential mortgage loans originated and sold.

Total noninterest ~~expenses~~expense increased ~~$1,380,000 (5.3%~~$1,846,000 (6.7%) for the first nine months of ~~2017 as compared to~~2018 over the amount for the first nine months of ~~2016. Other operating~~2017. Significant fluctuations include the following:

Salaries and wages expense increased ~~$682,000. Within other operating~~$755,000 (6.4%), including the effects of annual performance-based salary adjustments for employees along with an increase of $268,000 in estimated cash and stock-based compensation expense and an increase in the ~~largest variances included increases~~average number of ~~$182,000~~full-time equivalent employees (FTEs) to 296 in ~~loan collection expenses, $129,000~~2018 from 291 in ~~attorney fees (mainly related to a commercial loan workout situation) and $94,000 in accounting and auditing expense stemming from increased internal audit outsourcing.~~ 2017.

Pensions and other employee benefits expense increased ~~$391,000, primarily~~$177,000 (4.6%), consistent with the increase in salaries and wages and including an increase of $124,000 (9.0%) in health insurance expense from C&N’s partially self-insured plan.

Professional fees increased $261,000 (43.6%), including $100,000 of merger-related expense as noted above, along with consulting costs related to Board governance and committee structures, implementation of new accounting standards, certification of a ~~result~~compliance-related software system and other corporate projects.

Other noninterest expense increased $171,000, including an increase in donations expense of ~~higher health care~~$228,000 due mainly to the Towanda real estate donation described above, $100,000 of merger-related expenses, an increase in consulting services related to the overdraft privilege program and an increase in credit card processing and rewards expenses, partially offset by a $216,000 decrease in loan collection expense and a decrease in other taxes of $118,000 from sales tax refunds received.

Occupancy expense increased $140,000 (8.0%), including the effects of accelerated depreciation on the ~~Corporation’s partially self-insured plan. Software subscriptions increased $141,000, including~~Ralston, Pennsylvania branch scheduled to close in November 2018 and an increase in repairs and maintenance expense at several locations.

In addition to items previously described, costs associated with new ~~applications as well as annual licensing increases. Automated teller machine~~telephone and ~~interchange~~loan origination systems contributed to increases in professional fees, data processing, telecommunications and other noninterest expense increased $138,000, including increased costs related to fraud protection services and higher volume of debit card transactions. FDIC assessments expense decreased $165,000, reflecting a lower assessment level. Professional fees expense decreased $66,000, reflecting a reduction in ~~information technology and sales and service-related consulting expense.~~

The income tax provision was $3,620,000 for the first nine months of 2017 (24.0% of pre-tax income), down from $3,847,000 (25.0% of pre-tax income) for the first nine months of 2016. The lower amount of tax provision and effective tax rate in 2017 resulted from lower pre-tax income, along with the effects of a change in accounting for stock-based compensation that requires recognition of the tax benefits as a reduction in the tax provision and a $30,000 catch up adjustment in 2016 for an increase in the New York State tax provision related to a change in tax methodology that first became effective in 2015.2018.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE I - QUARTERLY FINANCIAL DATA
(Dollars In Thousands, Except Per Share Data)
(Unaudited) For the Three Months Ended:
Sept. 30, June 30, Mar. 31, Dec. 31, Sept. 30, June 30, Mar. 31,
2017 2017 2017 2016 2016 2016 2016
Interest income $ 11,626 $ 11,340 $ 11,112 $ 11,106 $ 11,131 $ 10,924 $ 10,937
Interest expense 985 978 953 920 944 925 904
Net interest income 10,641 10,362 10,159 10,186 10,187 9,999 10,033
Provision (credit) for loan losses 322 4 452 (3 ) 538 318 368
Net interest income after provision (credit) for loan losses 10,319 10,358 9,707 10,189 9,649 9,681 9,665
Other income 4,066 4,106 3,864 4,031 3,884 3,906 3,690
Net gains on available-for-sale securities 5 107 145 69 584 122 383
Other expenses 9,192 9,076 9,298 8,558 8,579 8,535 9,072
Income before income tax provision 5,198 5,495 4,418 5,731 5,538 5,174 4,666
Income tax provision 1,262 1,374 984 1,500 1,451 1,303 1,093
Net income $ 3,936 $ 4,121 $ 3,434 $ 4,231 $ 4,087 $ 3,871 $ 3,573
Net income attributable to common shares $ 3,916 $ 4,100 $ 3,416 $ 4,209 $ 4,065 $ 3,850 $ 3,553
Basic earnings per common share $ 0.32 $ 0.34 $ 0.28 $ 0.35 $ 0.34 $ 0.32 $ 0.29
Diluted earnings per common share $ 0.32 $ 0.34 $ 0.28 $ 0.35 $ 0.34 $ 0.32 $ 0.29

Table I – QUARTERLY FINANCIAL DATA

(Dollars In Thousands, Except Per Share Data)	For the Three Months Ended:
(Unaudited)	Sept. 30,		June 30,			March 31,		Dec. 31,		Sept. 30,		June 30,		March 31,
	2018		2018			2018		2017		2017		2017		2017
Interest income	$	12,800	$	12,334		$	11,890	$	11,785	$	11,626	$	11,340	$	11,112
Interest expense		1,241		1,079			993		999		985		978		953
Net interest income		11,559		11,255			10,897		10,786		10,641		10,362		10,159
Provision (credit) for loan losses		60		(20	)		292		23		322		4		452
Net interest income after provision (credit) for loan losses		11,499		11,275			10,605		10,763		10,319		10,358		9,707
Noninterest income		4,462		4,689			4,406		4,117		4,066		4,106		3,864
Net gains on securities		569		1,468			0		0		5		107		145
Noninterest expense		9,833		9,684			9,895		9,401		9,192		9,076		9,298
Income before income tax provision		6,697		7,748			5,116		5,479		5,198		5,495		4,418
Income tax provision		1,111		1,377			741		3,536		1,262		1,374		984
Net income	$	5,586	$	6,371		$	4,375	$	1,943	$	3,936	$	4,121	$	3,434
Net income attributable to common shares	$	5,558	$	6,339		$	4,352	$	1,933	$	3,916	$	4,100	$	3,416
Basic earnings per common share	$	0.45	$	0.52		$	0.36	$	0.16	$	0.32	$	0.34	$	0.28
Diluted earnings per common share	$	0.45	$	0.52		$	0.36	$	0.16	$	0.32	$	0.34	$	0.28

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.

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

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

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

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

NET INTEREST INCOME

The Corporation’s primary source of operating income is net interest income, which is equal to the difference between the amounts of interest income and interest expense. Tables II, III and IV include information regarding the Corporation’s net interest income for the three-month and nine-month periods ended September 30, ~~2017~~2018 and ~~September 30, 2016.~~2017. In each of these tables, the amounts of interest income earned on tax-exempt securities and loans have been adjusted to a fully taxable-equivalent basis. Accordingly, the net interest income amounts reflected in these tables exceed the amounts presented in the consolidated financial statements. The discussion that follows is based on amounts in the related Tables.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Nine-Month Periods Ended September 30, ~~2017~~2018 and ~~2016~~2017

For the nine-month periods, fully taxable equivalent net interest income was ~~$33,240,000~~$34,692,000 in ~~2017, $943,000 (2.9%~~2018, $1,452,000 (4.4%) higher than in ~~2016.~~2017. Interest income was ~~$1,084,000~~$1,851,000 higher in ~~2017~~2018 as compared to ~~2016;~~2017, while interest expense was ~~also~~ higher by ~~$141,000~~$399,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was ~~3.81%~~3.86% in ~~2017~~2018 as compared to ~~3.77%~~3.81% 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) increased to 3.67% in the nine-month period ended September 30, 2017, ~~from 3.64% in the nine-month period ended September 30, 2016.~~

~~INTEREST INCOME AND EARNING ASSETS~~

Interest income totaled $36,154,000 in 2017, an increase of 3.1% from 2016. The overall yield on earning assets increased to 4.15% in 2017 from 4.09% in 2016, reflecting the impact of loan growth and a reduction in lower-yielding securities as a percentage of total earning assets.

Interest and fees on loans receivable increased $1,656,000, or 6.3%. The average balance of gross loans receivable increased $57,563,000, or 8.0%, to $773,138,000 in 2017 from $715,575,000 in 2016. The Corporation experienced growth in both mortgage and commercial loans. The Corporation’s average yield on loans receivable declined to 4.87% in 2017 from 4.94% 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 III, average available-for-sale securities (at amortized cost) totaled $374,298,000 in 2017, a decrease of $33,049,000 (8.1%) from 2016. The Corporation’s yield on securities was 2.81% in 2017 as compared to 2.78% in 2016.

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

~~INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES~~

Interest expense increased $141,000, or 5.1%, to $2,914,000 in 2017 from $2,773,000 in 2016. Table III shows that the overall cost of funds on interest-bearing liabilities increased to 0.48% in 2017 from 0.45% in 2016. The increase in interest expense is mainly a result of increases in rates paid on interest checking accounts and certificates of deposit.

Total average deposits (interest-bearing and noninterest-bearing) increased 2.1%, to $985,961,000 in 2017 from $965,584,000 in 2016. Increases in the average balances of demand deposits, savings and interest checking accounts were contributors to the increase in total average deposits, while the average balances of money market accounts and Individual Retirement Accounts (IRAs) declined.

Total average borrowed funds decreased $3,618,000 to $60,858,000 in 2017 from $64,476,000 in 2016. The average rate on borrowed funds was 2.59% in 2017 compared to 2.53% in 2016 primarily due to an increase in short term borrowing rates in 2017.

~~Three-Month Periods Ended September 30, 2017 and 2016~~

For the three-month periods, fully taxable equivalent net interest income was $11,337,000 in 2017, which was $468,000 (4.3%) higher than in 2016. Interest income was $507,000 higher in 2017 as compared to 2016, while interest expense was higher by $39,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.83% in 2017 as compared to 3.74% 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 ~~3.68%~~3.70% in 2018, up from 3.67% in 2017.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $38,005,000 in 2018, an increase of 5.1% from 2017. Interest and fees on loans receivable increased $2,507,000, or 8.9%, to $30,642,000 in 2018 from $28,135,000 in 2017. Table IV shows the increase in interest on loans includes $1,735,000 attributable to an increase in volume and $772,000 related to an increase in average rate. The average balance of loans receivable increased $47,820,000 (6.2%) to $820,958,000 in 2018 from $773,138,000 in 2017. The increase in average balance reflects growth in the average balance of both commercial and residential mortgage loans. The average rate on taxable loans in 2018 was 5.12% compared to 4.90% in 2017 as ~~compared to 3.61%~~current rates on variable rate loans and rates on recent new loan originations have increased, consistent with increases in ~~2016.~~market interest rates. The yield on ~~earning~~tax-exempt loans receivable decreased to 3.69% in 2018 compared to 4.51% in 2017. This decrease reflects the reduced tax benefit on tax-exempt assets ~~increased~~as compared to ~~4.16%~~taxable assets resulting from the marginal tax rate being reduced to 21% in 2018 from 35% in 2017.

Interest income on available-for-sale debt securities totaled $7,019,000 in 2018, a reduction of $825,000 from the total for 2017. As indicated in Table III, average available-for-sale debt securities (at amortized cost) totaled $355,420,000 in 2018, a decrease of $17,878,000 (4.8%) from 2017. The average yield on available-for-sale debt securities decreased to 2.64% in 2018 from 2.81% in 2017. The reduction in yield on available-for-sale debt securities includes the impact of a reduced tax benefit on tax-exempt municipal bonds as a result of the reduction in the ~~third quarter~~federal income tax rate.

Interest income from interest-bearing deposits in banks totaled $319,000 in 2018, an increase of $179,000 over the total for 2017. The most significant categories of assets within this category include interest-bearing balances held with the Federal Reserve and investments in certificates of deposit issued by other banks. The increase in interest income from interest-bearing deposits with banks includes the effects of an increase in yield to 1.80% in 2018 from 1.10% in 2017, consistent with market increases in short-term interest rates, and an increase in average balance to $23,727,000 in 2018 from ~~4.07%~~$17,042,000 in ~~the third quarter 2016, while~~2017.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense increased $399,000, or 13.7%, to $3,313,000 in 2018 from $2,914,000 in 2017. Table III shows that the overall cost of funds on interest-bearing liabilities increased to 0.53% in 2018 from 0.48% in 2017.

Total average deposit balances (interest-bearing and noninterest-bearing) increased 3.9%, to $1,024,735,000 in 2018 from $985,961,000 in 2017. Increases in the average balances of demand deposits, certificates of deposit, interest checking and savings were partially offset by reductions in money market and Individual Retirement Accounts.

Interest expense on deposits increased $907,000 in 2018 over 2017. The average rate on interest-bearing deposits increased to 0.45% in 2018 from 0.31% in 2017. Interest expense on certificates of deposit increased $418,000 in 2018 of which $301,000 is from an increase in average rate and $117,000 due to an increase in volume. Interest expense on interest checking accounts increased $348,000 and on money market accounts increased $106,000, in 2018 as compared to 2017, primarily due to increases in the average rates paid.

Interest expense on borrowed funds decreased $508,000 in 2018 as compared to 2017, including a reduction in interest expense on long-term borrowings partially offset by an increase in interest expense on short-term borrowings. Total average borrowed funds decreased $9,412,000 to $51,446,000 in 2018 from $60,858,000 in 2017. The average rate on total borrowed funds was 1.75% in 2018 compared to 2.59% in 2017.

Interest expense on short-term borrowings in 2018 exceeded interest expense in the same period of 2017 by $190,000 as result of a series of advances from FHLB-Pittsburgh that mature in monthly amounts of $3,000,000 through October 2018, as well as an increase in short-term interest rates. These short-term advances were originated in the third ~~quarter~~and fourth quarters of 2017 to pay off a portion of a total of $37,000,000 in long-term borrowings that matured during that time period. Average short-term borrowings totaled $29,515,000 for the first nine months of 2018, an increase of $6,397,000 over 2017. The weighted-average rate on short-term borrowings was 1.45% in 2018 as compared to 0.75% in 2017.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Interest expense on long-term debt decreased $698,000 in 2018 as compared to 2017, mainly from ~~0.46%~~repayment of the $37 million in higher-cost borrowings (weighted-average rate of 3.65%) in the third ~~quarter 2016.~~and fourth quarters of 2017 as referred to above. Borrowings are classified as long-term within the Tables based on their term at origination. The average balance of long-term borrowings in 2018 of $21,931,000 consisted mainly of FHLB advances maturing in 2019 and had a weighted-average rate of 2.15%. In comparison, average long-term borrowings in the same period of 2017 totaled $37,740,000, with an average rate of 3.72%.

Three-Month Periods Ended September 30, 2018 and 2017

For the three-month periods, fully taxable equivalent net interest income was $11,880,000 in 2018, which was $543,000 (4.8%) higher than in 2017. Interest income was $801,000 higher in 2018 as compared to 2017, while interest expense was higher by $258,000 in comparing the same periods. As presented in Table III, the Net Interest Margin was 3.87% in 2018 as compared to 3.83% in 2017, and the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) remained unchanged at 3.68% in 2018 as compared to 2017.

Interest income totaled ~~$12,320,000~~$13,121,000 in ~~2017,~~2018, an increase of ~~$507,000 (4.3%~~$801,000 (6.5%) from ~~2016.~~2017. Interest and fees from loans receivable increased ~~$656,000,~~$760,000, or ~~7.3%~~7.8%, in ~~2017~~2018 as compared to ~~2016,~~2017, and interest income from interest-bearing deposits in banks increased $106,000, while income from available-for-sale securities decreased ~~$190,000 (7.0%~~$57,000 (2.2%). As indicated in Table III, for the three-month periods, the average balance of gross loans receivable increased ~~7.5%~~4.1% to $820,432,000 in 2018 from $788,346,000 in ~~2017 from $733,016,000 in 2016.~~2017. The average rate of return on loans was 5.06% in 2018, up from 4.88% in 2017.

The increase in interest income from interest-bearing deposits with banks includes the effects of an increase in yield to 1.99% in the third quarter 2018 from 1.25% in 2017, ~~down slightly~~consistent with market increases in short-term interest rates, and an increase in average balance to $34,540,000 in 2018 from ~~4.91%~~$21,260,000 in ~~2016.~~ 2017.

Total average available-for-sale securities (at amortized cost) in ~~2017 decreased~~2018 increased slightly to ~~$363,495,000~~$362,529,000 from ~~$404,526,000~~$362,495,000 in ~~2016.~~2017. The average rate of return on available-for-sale securities was 2.71% for 2018, down from 2.78% ~~for 2017, up~~in 2017. The reduction in average rate of return on available-for-sale securities is a result of a reduced tax benefit on tax exempt municipal bonds due to the marginal tax rate decreasing to 21% in 2018 from ~~2.69%~~35% in ~~2016.~~2017.

For the three-month periods, interest expense increased ~~$39,000,~~$258,000, or ~~4.1%~~26.2%, to $1,241,000 in 2018 from $983,000 in ~~2017 from $944,000 in 2016. This included an increase of $89,000 in interest~~2017. Interest expense on deposits increased $395,000, as the average rate paid on deposits increased ~~0.05%,~~to 0.52% in 2018 from 0.33% in 2017, including increases of ~~0.10%~~0.39% on certificates of deposit, 0.24% on interest checking and ~~0.08%~~0.14% on ~~certificates of deposit.~~money market accounts. Total average deposits (interest-bearing and noninterest-bearing) amounted to ~~$1,010,201,000~~$1,047,599,000 in the third quarter ~~2017,~~of 2018, an increase of ~~$26,848,000 (2.7%~~$37,398,000 (3.7%) ~~from~~over the third quarter ~~2016~~2017 total. The increase in total average deposits ~~consisted~~included an increase in certificates of ~~increases~~deposits of $22,130,000 and an increase in noninterest-bearing demand deposits of $16,959,000 and an overall increase in interest bearing deposits of $9,889,000, including increases of $18,844,000 in interest checking and $11,756,000 in savings accounts partially offset by decreases in money market accounts, IRAs and certificates of deposit.$19,254,000.

Interest expense on total borrowed funds decreased ~~$50,000~~$137,000 in ~~2017~~2018 as compared to ~~2016.~~2017. Interest expense on short-term borrowings ~~decreased $22,000 and~~increased $31,000 while interest expense on long-term borrowings decreased by ~~$28,000~~$168,000 in ~~2017~~2018 as compared to ~~2016.~~2017. The average balance of total borrowed funds decreased slightly to $43,437,000 in the third quarter 2018 from $43,608,000 in the third quarter 2017, ~~from $57,226,000 in the third quarter 2016,~~ while the average rate on borrowed funds ~~increased~~decreased to 1.90% in the third quarter 2018 from 3.14% in the third quarter ~~2017 from 2.75% in the third quarter 2016.~~2017.

Interest expense on short-term borrowings increased $31,000 to $39,000 in 2018 from $8,000 in 2017. The increase in interest expense on short-term borrowings reflects the impact of higher short-term interest rates in 2018 as compared to 2017 as the average rate on short-term borrowings increased to 1.18% in 2018 from 0.44% in 2017. The average balance of short-term borrowings ~~decreased~~increased to $13,062,000 in the third quarter 2018 from $7,139,000 in the third quarter ~~2017 from $18,655,000 in 2016, and the average rate on short-term borrowings decreased to 0.44% in 2017 from 0.64% in 2016.~~2017.

The average balance of long-term borrowings was ~~$36,469,000~~$30,375,000 in the third quarter ~~2017,~~2018, at an average rate of ~~3.67%~~2.21%, down from an average balance of ~~$38,571,000~~$36,469,000 at an average rate of ~~3.76%~~3.67% in the third quarter ~~2016. Borrowings are classified as~~2017. As described above, the reduction in average balance and rate on long-term ~~within~~borrowings reflects the ~~Tables based on their term at origination; however, within this category, a borrowing~~repayment of higher cost borrowings totaling $37,000,000 in the third and fourth quarters of 2017, with ~~a balance~~long-term borrowings in 2018 consisting mainly of ~~$10,000,000 at a rate of 3.81% matured~~FHLB advances maturing in ~~September 2017 and a borrowing with a balance of $27,000,000 at a rate of 3.595% matures in December 2017.~~2019.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE

	Three Months Ended							Nine Months Ended							Three Months Ended							Nine Months Ended
	September 30,				Increase/			September 30,				Increase/			September 30,				Increase/			September 30,				Increase/
(In Thousands)	2017		2016		(Decrease)			2017		2016		(Decrease)			2018		2017		(Decrease)			2018		2017		(Decrease)

INTEREST INCOME
Available-for-sale securities:
Available-for-sale debt securities:
Taxable	$	1,341	$	1,456	$	(115	)	$	4,106	$	4,540	$	(434	)	$	1,624	$	1,335	$	289		$	4,368	$	4,090	$	278
Tax-exempt		1,202		1,277		(75	)		3,753		3,941		(188	)		856		1,202		(346	)		2,651		3,754		(1,103	)
Total available-for-sale securities		2,543		2,733		(190	)		7,859		8,481		(622	)
Total available-for-sale debt securities																2,480		2,537		(57	)		7,019		7,844		(825	)
Dividends on marketable equity security																5		6		(1	)		16		15		1
Interest-bearing due from banks		67		29		38			140		89		51			173		67		106			319		140		179
Loans held for sale		10		7		3			20		21		(1	)		3		10		(7	)		9		20		(11	)
Loans receivable:
Taxable		8,889		8,347		542			25,872		24,407		1,465			9,754		8,889		865			28,530		25,872		2,658
Tax-exempt		811		697		114			2,263		2,072		191			706		811		(105	)		2,112		2,263		(151	)
Total loans receivable		9,700		9,044		656			28,135		26,479		1,656			10,460		9,700		760			30,642		28,135		2,507
Total Interest Income		12,320		11,813		507			36,154		35,070		1,084			13,121		12,320		801			38,005		36,154		1,851

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		141		78		63			324		210		114			278		141		137			672		324		348
Money market		94		89		5			264		254		10			155		94		61			370		264		106
Savings		36		34		2			106		99		7			38		36		2			113		106		7
Certificates of deposit		255		238		17			717		660		57			441		255		186			1,135		717		418
Individual Retirement Accounts		111		109		2			322		326		(4	)		120		111		9			350		322		28
Other time deposits		1		1		0			1		1		0
Total interest-bearing deposits		638		549		89			1,734		1,550		184			1,033		638		395			2,641		1,734		907
Borrowed funds:
Short-term		8		30		(22	)		130		133		(3	)		39		8		31			320		130		190
Long-term		337		365		(28	)		1,050		1,090		(40	)		169		337		(168	)		352		1,050		(698	)
Total borrowed funds		345		395		(50	)		1,180		1,223		(43	)		208		345		(137	)		672		1,180		(508	)
Total Interest Expense		983		944		39			2,914		2,773		141			1,241		983		258			3,313		2,914		399

Net Interest Income	$	11,337	$	10,869	$	468		$	33,240	$	32,297	$	943		$	11,880	$	11,337	$	543		$	34,692	$	33,240	$	1,452

Note: Interest income from tax-exempt securities and loans has been adjusted to a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21% for 2018 and 35%. for 2017.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE III - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES

(Dollars in Thousands)

	3 Months						3 Months						9 Months						9 Months						3 Months						3 Months						9 Months						9 Months
	Ended			Rate of			Ended			Rate of			Ended			Rate of			Ended			Rate of			Ended			Rate of			Ended			Rate of			Ended			Rate of			Ended			Rate of
	9/30/2017			Return/			9/30/2016			Return/			9/30/2017			Return/			9/30/2016			Return/			9/30/2018			Return/			9/30/2017			Return/			9/30/2018			Return/			9/30/2017			Return/
	Average			Cost of			Average			Cost of			Average			Cost of			Average			Cost of			Average			Cost of			Average			Cost of			Average			Cost of			Average			Cost of
	Balance			Funds %			Balance			Funds %			Balance			Funds %			Balance			Funds %			Balance			Funds %			Balance			Funds %			Balance			Funds %			Balance			Funds %
EARNING ASSETS
Available-for-sale securities, at amortized cost:
Available-for-sale debt securities, at amortized cost:
Taxable	$	251,774			2.11	%	$	291,847			1.98	%	$	259,539			2.12	%	$	298,421			2.03	%	$	269,054			2.39	%	$	250,774			2.11	%	$	255,638			2.28	%	$	258,539			2.12	%
Tax-exempt		111,721			4.27	%		112,679			4.51	%		114,759			4.37	%		108,926			4.83	%		93,475			3.63	%		111,721			4.27	%		99,782			3.55	%		114,759			4.37	%
Total available-for-sale securities		363,495			2.78	%		404,526			2.69	%		374,298			2.81	%		407,347			2.78	%
Total available-for-sale debt securities																										362,529			2.71	%		362,495			2.78	%		355,420			2.64	%		373,298			2.81	%
Marketable equity security																										945			2.10	%		1,000			2.38	%		953			2.24	%		1,000			2.14	%
Interest-bearing due from banks		21,260			1.25	%		17,138			0.67	%		17,042			1.10	%		20,566			0.58	%		34,540			1.99	%		21,260			1.25	%		23,727			1.80	%		17,042			1.10	%
Loans held for sale		781			5.08	%		556			5.01	%		496			5.39	%		516			5.44	%		179			6.65	%		781			5.08	%		205			5.87	%		496			5.39	%
Loans receivable:
Taxable		717,012			4.92	%		671,408			4.95	%		706,065			4.90	%		654,256			4.98	%		744,793			5.20	%		717,012			4.92	%		744,461			5.12	%		706,065			4.90	%
Tax-exempt		71,334			4.51	%		61,608			4.50	%		67,073			4.51	%		61,319			4.51	%		75,639			3.70	%		71,334			4.51	%		76,497			3.69	%		67,073			4.51	%
Total loans receivable		788,346			4.88	%		733,016			4.91	%		773,138			4.87	%		715,575			4.94	%		820,432			5.06	%		788,346			4.88	%		820,958			4.99	%		773,138			4.87	%
Total Earning Assets		1,173,882			4.16	%		1,155,236			4.07	%		1,164,974			4.15	%		1,144,004			4.09	%		1,218,625			4.27	%		1,173,882			4.16	%		1,201,263			4.23	%		1,164,974			4.15	%
Cash		18,325						17,523						17,213						16,548						18,697						18,325						17,867						17,213
Unrealized gain/loss on securities		1,449						9,654						402						8,154						(8,641	)					1,449						(7,482	)					402
Allowance for loan losses		(8,769	)					(8,050	)					(8,755	)					(7,913	)					(8,984	)					(8,769	)					(9,049	)					(8,755	)
Bank premises and equipment		15,431						15,379						15,618						15,409						15,023						15,431						15,298						15,618
Intangible Assets		11,958						11,966						11,958						11,968						11,953						11,958						11,953						11,958
Other assets		40,944						38,225						42,038						38,563						44,675						40,944						43,017						42,038
Total Assets	$	1,253,220					$	1,239,933					$	1,243,448					$	1,226,733					$	1,291,348					$	1,253,220					$	1,272,867					$	1,243,448

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	$	219,633			0.25	%	$	200,789			0.15	%	$	208,071			0.21	%	$	197,628			0.14	%	$	223,105			0.49	%	$	219,633			0.25	%	$	217,935			0.41	%	$	208,071			0.21	%
Money market		194,947			0.19	%		205,158			0.17	%		192,265			0.18	%		199,211			0.17	%		185,267			0.33	%		194,947			0.19	%		181,972			0.27	%		192,265			0.18	%
Savings		145,025			0.10	%		133,269			0.10	%		142,292			0.10	%		131,880			0.10	%		153,514			0.10	%		145,025			0.10	%		151,946			0.10	%		142,292			0.10	%
Certificates of deposit		119,351			0.85	%		123,475			0.77	%		116,500			0.82	%		118,256			0.75	%		141,481			1.24	%		119,351			0.85	%		133,692			1.14	%		116,500			0.82	%
Individual Retirement Accounts		96,934			0.45	%		103,259			0.42	%		97,981			0.44	%		104,280			0.42	%		90,693			0.52	%		96,934			0.45	%		92,621			0.51	%		97,981			0.44	%
Other time deposits		1,472			0.27	%		1,523			0.26	%		1,126			0.12	%		1,157			0.12	%		1,446			0.27	%		1,472			0.27	%		1,106			0.12	%		1,126			0.12	%
Total interest-bearing deposits		777,362			0.33	%		767,473			0.28	%		758,235			0.31	%		752,412			0.28	%		795,506			0.52	%		777,362			0.33	%		779,272			0.45	%		758,235			0.31	%
Borrowed funds:
Short-term		7,139			0.44	%		18,655			0.64	%		23,118			0.75	%		25,828			0.69	%		13,062			1.18	%		7,139			0.44	%		29,515			1.45	%		23,118			0.75	%
Long-term		36,469			3.67	%		38,571			3.76	%		37,740			3.72	%		38,648			3.77	%		30,375			2.21	%		36,469			3.67	%		21,931			2.15	%		37,740			3.72	%
Total borrowed funds		43,608			3.14	%		57,226			2.75	%		60,858			2.59	%		64,476			2.53	%		43,437			1.90	%		43,608			3.14	%		51,446			1.75	%		60,858			2.59	%
Total Interest-bearing Liabilities		820,970			0.48	%		824,699			0.46	%		819,093			0.48	%		816,888			0.45	%		838,943			0.59	%		820,970			0.48	%		830,718			0.53	%		819,093			0.48	%
Demand deposits		232,839						215,880						227,726						213,172						252,093						232,839						245,463						227,726
Other liabilities		8,801						9,057						8,181						8,249						11,147						8,801						9,630						8,181
Total Liabilities		1,062,610						1,049,636						1,055,000						1,038,309						1,102,183						1,062,610						1,085,811						1,055,000
Stockholders' equity, excluding other comprehensive income/loss		189,520						183,966						188,041						183,078						195,854						189,520						192,807						188,041
Accumulated other comprehensive income/loss		1,090						6,331						407						5,346						(6,689	)					1,090						(5,751	)					407
Total Stockholders' Equity		190,610						190,297						188,448						188,424						189,165						190,610						187,056						188,448
Total Liabilities and Stockholders' Equity	$	1,253,220					$	1,239,933					$	1,243,448					$	1,226,733					$	1,291,348					$	1,253,220					$	1,272,867					$	1,243,448
Interest Rate Spread					3.68	%					3.61	%					3.67	%					3.64	%					3.68	%					3.68	%					3.70	%					3.67	%
Net Interest Income/Earning Assets					3.83	%					3.74	%					3.81	%					3.77	%					3.87	%					3.83	%					3.86	%					3.81	%

Total Deposits (Interest-bearing and Demand)	$	1,010,201					$	983,353					$	985,961					$	965,584					$	1,047,599					$	1,010,201					$	1,024,735					$	985,961

(1) Annualized rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 21% in 2018 and 35% in 2017.

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

(3) Rates of return on earning assets and costs of funds are presented on an annualized basis.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES

(In Thousands)	3 Months Ended 9/30/17 vs. 9/30/16									9 Months Ended 9/30/17 vs. 9/30/16									3 Months Ended 9/30/18 vs. 9/30/17									9 Months Ended 9/30/18 vs. 9/30/17
	Change in			Change in			Total			Change in			Change in			Total			Change in			Change in			Total			Change in			Change in			Total
	Volume			Rate			Change			Volume			Rate			Change			Volume			Rate			Change			Volume			Rate			Change
EARNING ASSETS
Available-for-sale securities:
Available-for-sale debt securities:
Taxable	$	(206	)	$	91		$	(115	)	$	(612	)	$	178		$	(434	)	$	101		$	188		$	289		$	(46	)	$	324		$	278
Tax-exempt		(13	)		(62	)		(75	)		202			(390	)		(188	)		(181	)		(165	)		(346	)		(453	)		(650	)		(1,103	)
Total available-for-sale securities		(219	)		29			(190	)		(410	)		(212	)		(622	)
Total available-for-sale debt securities																				(80	)		23			(57	)		(499	)		(326	)		(825	)
Marketable equity security																				(2	)		1			(1	)		(1	)		2			1
Interest-bearing due from banks		8			30			38			(17	)		68			51			49			57			106			68			111			179
Loans held for sale		3			0			3			(1	)		0			(1	)		(9	)		2			(7	)		(13	)		2			(11	)
Loans receivable:
Taxable		583			(41	)		542			1,886			(421	)		1,465			354			511			865			1,442			1,216			2,658
Tax-exempt		112			2			114			192			(1	)		191			49			(154	)		(105	)		293			(444	)		(151	)
Total loans receivable		695			(39	)		656			2,078			(422	)		1,656			403			357			760			1,735			772			2,507
Total Interest Income		487			20			507			1,650			(566	)		1,084			361			440			801			1,290			561			1,851

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		8			55			63			12			102			114			3			134			137			16			332			348
Money market		(5	)		10			5			(9	)		19			10			(5	)		66			61			(15	)		121			106
Savings		3			(1	)		2			8			(1	)		7			2			0			2			7			0			7
Certificates of deposit		(8	)		25			17			(10	)		67			57			52			134			186			117			301			418
Individual Retirement Accounts		(7	)		9			2			(21	)		17			(4	)		(8	)		17			9			(19	)		47			28
Other time deposits		0			0			0			0			0			0
Total interest-bearing deposits		(9	)		98			89			(20	)		204			184			44			351			395			106			801			907
Borrowed funds:
Short-term		(21	)		(1	)		(22	)		(15	)		12			(3	)		14			17			31			44			146			190
Long-term		(19	)		(9	)		(28	)		(26	)		(14	)		(40	)		(55	)		(113	)		(168	)		(347	)		(351	)		(698	)
Total borrowed funds		(40	)		(10	)		(50	)		(41	)		(2	)		(43	)		(41	)		(96	)		(137	)		(303	)		(205	)		(508	)
Total Interest Expense		(49	)		88			39			(61	)		202			141			3			255			258			(197	)		596			399

Net Interest Income	$	536		$	(68	)	$	468		$	1,711		$	(768	)	$	943		$	358		$	185		$	543		$	1,487		$	(35	)	$	1,452

(1) Changes in income on tax-exempt securities and loans are presented on a fully tax-equivalent basis, using the Corporation’s marginal federal income tax rate of 21% for 2018 and 35%. for 2017.

(2) The change in interest due to both volume and rates has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amount of the change in each.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST INCOME

TABLE V - COMPARISON OF NONINTEREST INCOME

(~~Dollars~~ In Thousands)

	9 Months Ended										9 Months Ended
	September 30,				$			%			September 30,				$			%
	2017		2016		Change			Change			2018		2017		Change			Change
Service charges on deposit accounts	$	3,346	$	3,523	$	(177	)		(5.0	)
Service charges and fees		316		335		(19	)		(5.7	)
Trust and financial management revenue		3,969		3,567		402			11.3		$	4,375	$	3,969	$	406			10.2
Brokerage revenue		551		569		(18	)		(3.2	)		718		551		167			30.3
Insurance commissions, fees and premiums		98		74		24			32.4			72		98		(26	)		(26.5	)
Service charges on deposit accounts												3,837		3,399		438			12.9
Service charges and fees												263		263		0			0.0
Interchange revenue from debit card transactions		1,649		1,431		218			15.2			1,880		1,649		231			14.0
Net gains from sales of loans		651		699		(48	)		(6.9	)		514		651		(137	)		(21.0	)
Loan servicing fees, net		162		39		123			315.4			263		162		101			62.3
Increase in cash surrender value of life insurance		281		286		(5	)		(1.7	)		295		281		14			5.0
Other operating income		1,013		957		56			5.9
Total noninterest income before realized gains on available-for-sale securities, net	$	12,036	$	11,480	$	556			4.8
Other noninterest income												1,340		1,013		327			32.3
Total noninterest income before realized gains on securities, net											$	13,557	$	12,036	$	1,521			12.6

Table V excludes ~~realized~~the gain on a restricted equity security (Visa Class B stock) and net (losses) gains on available-for-sale debt securities, which are discussed in the “Earnings Overview” section of Management’s Discussion and Analysis. Total noninterest income shown in Table V increased ~~$556,000 (4.8%~~$1,521,000 (12.6%) in the first nine months of ~~2017~~2018 over the first nine months of ~~2016~~2017 amount. The most significant variances include the following:

Service charges on deposit accounts increased $438,000 (12.9%), mainly due to increased fees from the overdraft privilege program and reflecting the benefit of operational improvements to the program that were instituted early in 2018.

Trust and financial management revenue increased ~~$402,000 (11.3%~~$406,000 (10.2%). The increase in revenue included the impact of a change in the frequency of billings for many accounts from a quarterly billing cycle to monthly, resulting in additional fees of $215,000 more than would otherwise have been recognized in the first nine months of 2017. (Trust revenue is recognized on a cash basis, which would not ordinarily vary significantly from an amount determined on an accrual basis.) The increase also included the effects of a ~~recent~~mid-year 2017 increase in fee levels and an increase in the value of assets under management to ~~$924,907,000~~$952,824,000 at September 30, ~~2017,~~2018, up ~~6.6%~~3.0% from one year earlier. The increase in value of Trust assets under management resulted from appreciation in equity values and new business.

Interchange revenue from debit card transactions increased ~~$218,000 (15.2%~~$231,000 (14.0%), reflecting ~~improvements~~an increase in ~~card-related volumes and processing.~~volume of transactions.

As a result of increased volume, broker-dealer revenue increased $167,000 (30.3%).

Loan servicing fees, net, increased ~~$123,000.~~$101,000. This category includes fees received from servicing residential mortgage loans that have been originated and sold, adjusted for changes in the fair value of servicing rights. The fair value of mortgage servicing rights decreased by ~~$145,000~~$58,000 in the first nine months of ~~2017~~2018 as compared to a reduction of ~~$247,000~~$145,000 in the same period of ~~2016.~~2017.

Other ~~operating~~noninterest income increased ~~$56,000~~$327,000, including an increase of $122,000 in ~~the first nine months of 2017 as compared to the same period in 2016. Within this category there were increases in revenue~~state tax benefits from ~~merchant services, check sales, dividends from Federal Home Loan Bank of Pittsburgh stock, realization of~~ tax credits, ~~and fees~~primarily as a result of the donation of the Towanda building. Also, dividends on FHLB-Pittsburgh stock increased $105,000 to $240,000 in 2018 from ~~sales of loans on an agency basis under government programs (primarily FHA). These increases were partially offset by a net $116,000 decrease~~$135,000 in 2017, interchange revenue from credit card transactions ~~as interchange fees~~increased $78,000 to $85,000 in 2018 from ~~the Corporation’s recently implemented credit card offering have been less than the amount received~~$7,000 in ~~2016 under an agency arrangement.~~

~~Service charges on deposit accounts decreased $177,000 (5.0%), as~~2017 and revenue from ~~consumer overdrafts declined due~~merchant services increased $41,000 to ~~lower volume.~~$277,000 in 2018 from $236,000 in 2017.

Net gains from sales of loans ~~were $48,000 lower for the first nine months of 2017 as compared to 2016, due to~~decreased $137,000 (21.0%), reflecting a ~~lower average profit margin. The~~ reduction in ~~average profit margin resulted from competitive pricing pressures.~~volume of residential mortgage loans originated and sold.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE VI - COMPARISON OF NONINTEREST INCOME

(~~Dollars~~ In Thousands)

	3 Months Ended										3 Months Ended
	September 30,				$			%			September 30,				$			%
	2017		2016		Change			Change			2018		2017		Change			Change
Service charges on deposit accounts	$	1,168	$	1,221	$	(53	)		(4.3	)
Service charges and fees		115		118		(3	)		(2.5	)
Trust and financial management revenue		1,292		1,172		120			10.2		$	1,427	$	1,292	$	135			10.4
Brokerage revenue		187		216		(29	)		(13.4	)		235		187		48			25.7
Insurance commissions, fees and premiums		26		26		0			0.0			15		26		(11	)		(42.3	)
Service charges on deposit accounts												1,331		1,186		145			12.2
Service charges and fees												95		97		(2	)		(2.1	)
Interchange revenue from debit card transactions		561		481		80			16.6			660		561		99			17.6
Net gains from sales of loans		297		236		61			25.8			164		297		(133	)		(44.8	)
Loan servicing fees, net		35		28		7			25.0			74		35		39			111.4
Increase in cash surrender value of life insurance		97		97		0			0.0			100		97		3			3.1
Other operating income		288		289		(1	)		(0.3	)
Total noninterest income before realized gains on available-for-sale securities, net	$	4,066	$	3,884	$	182			4.7
Other noninterest income												361		288		73			25.3
Total noninterest income before realized gains on securities, net											$	4,462	$	4,066	$	396			9.7

Table VI excludes ~~realized~~the gain on a restricted equity security (Visa Class B stock) and net (losses) gains on available-for-sale debt securities, which are discussed in the “Earnings Overview” section of Management’s Discussion and Analysis. Total noninterest income shown in Table VI increased ~~$182,000 (4.7%~~$396,000 (9.7%) in the third quarter ~~of 2017 as compared to~~2018 over the third quarter ~~of 2016.~~2017 amount. The most significant variances include the following:

Service charges on deposit accounts increased $145,000 (12.2%) in the third quarter 2018 over the third quarter 2017 total, mainly due to increased fees from the overdraft privilege program and reflecting the benefit of operational improvements to the program that were instituted early in 2018.

Trust and financial management revenue increased ~~$120,000 (10.2%~~$135,000 (10.4%), reflecting growth in assets under management. The increase in value of Trust assets under management ~~resulting~~resulted from ~~market~~ appreciation in equity values and new ~~business, as well as a recent increase in fee levels.~~business.

Interchange revenue from debit card transactions increased ~~$80,000 (16.6%~~$99,000 (17.6%), reflecting ~~benefits from a consulting project~~an increase in ~~2016 that identified opportunities for improvements in card-related volumes and processing.~~volume of transactions.

As a result of increased volume, broker-dealer revenue increased $48,000 (25.7%).

Loan servicing fees, net, increased $39,000 (111.4%). The fair value of mortgage servicing rights decreased by $32,000 in the third quarter of 2018 as compared to a reduction of $67,000 in the same period of 2017.

Other noninterest income increased $73,000, including a $35,000 increase in dividends received on Federal Home Loan Bank of Pittsburgh stock and a $30,000 increase in interchange revenue from credit card transactions.

Net gains from sales of loans ~~increased $61,000 (25.8%~~decreased $133,000 (44.8%), reflecting a reduction in ~~the third quarter 2017 as compared to the third quarter 2016, reflecting increases in sales~~ volume of residential mortgage loans originated and ~~average profit margin.~~sold.

~~Service charges on deposit accounts decreased $53,000 (4.3%), as revenue from consumer overdrafts declined due to lower volume.~~

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST EXPENSE

TABLE VII - COMPARISON OF NONINTEREST EXPENSE

(Dollars In Thousands)

9 Months Ended
September 30, $ %
2017 2016 Change Change
Salaries and wages $ 11,825 $ 11,701 $ 124 1.1
Pensions and other employee benefits 3,890 3,499 391 11.2
Occupancy expense, net 1,758 1,770 (12 ) (0.7 )
Furniture and equipment expense 1,372 1,301 71 5.5
FDIC Assessments 283 448 (165 ) (36.8 )
Pennsylvania shares tax 1,008 932 76 8.2
Professional fees 750 816 (66 ) (8.1 )
Automated teller machine and interchange expense 945 807 138 17.1
Software subscriptions 870 729 141 19.3
Other operating expense 4,865 4,183 682 16.3
Total noninterest expense $ 27,566 $ 26,186 $ 1,380 5.3

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

	Nine Months Ended
	September 30,				$			%
	2018		2017		Change			Change
Salaries and wages	$	12,580	$	11,825	$	755			6.4
Pensions and other employee benefits		4,047		3,870		177			4.6
Occupancy expense, net		1,898		1,758		140			8.0
Furniture and equipment expense		901		968		(67	)		(6.9	)
Data processing expenses		2,002		1,785		217			12.2
Automated teller machine and interchange expense		988		945		43			4.6
Pennsylvania shares tax		998		1,008		(10	)		(1.0	)
Professional fees		860		599		261			43.6
Telecommunications		567		409		158			38.6
Directors' fees		549		548		1			0.2
Other noninterest expense		4,022		3,851		171			4.4
Total noninterest expense	$	29,412	$	27,566	$	1,846			6.7

As shown in Table VII, total noninterest expense increased ~~$1,380,000 (5.3%~~$1,846,000 (6.7%) in the first nine months of ~~2017~~2018 as compared to the first nine months of ~~2016.~~2017. The most significant variances include the following:

~~Other operating~~Salaries and wages expense increased ~~$682,000. Within other operating~~$755,000 (6.4%), including the effects of annual performance-based salary adjustments for a majority of employees along with an increase of $268,000 in estimated cash and stock-based compensation expense and an increase in the ~~largest variances~~average number of FTEs to 296 in the first nine months of 2018 from 291 in the first nine months of 2017.

Professional fees were $261,000 higher in 2018 than in 2017. The increase in professional fees included ~~increases~~$100,000 of ~~$182,000 in loan collection expenses, $129,000 in attorney fees (mainly~~merger-related expense as previously noted, along with consulting costs related to Board governance and committee structures, implementation of new accounting standards, certification of a ~~commercial~~compliance-related software system and other corporate projects.

Data processing expenses increased $217,000, including costs associated with the new mortgage loan ~~workout situation)~~origination system and ~~$94,000 in accounting and auditing expense stemming from increased internal audit outsourcing.~~document imaging.

Pensions and other employee benefits expense increased ~~$391,000, primarily as a result~~$177,000, including an increase of ~~higher~~$124,000 (9.0%) in health care expenses due to an increase in FTEs and higher claims on the ~~Corporation’s~~ partially self-insured plan.

~~Software subscriptions~~Other noninterest expense increased ~~$141,000,~~$171,000. Within this category, the most significant fluctuations between 2018 and comparative 2017 were as follows:

Donations expense increased $228,000. In June 2018, the Corporation donated the real estate for its existing Towanda banking facility to a nonprofit organization and entered into a 12-month lease with the nonprofit organization, with a 6-month renewal option, allowing banking operations to continue until a new location in the Towanda market can be obtained and prepared for use. The amount recorded for the Towanda real estate donation, based on the net book value of the property at that time, was $250,000.

Legal fees and expenses increased $69,000, including $100,000 of fees incurred through September 30, 2018 related to the pending merger with Monument Bancorp, Inc.

Consulting fees related to the overdraft privilege program totaled $66,000 in 2018 with no corresponding expense in 2017.

Credit card processing and rewards expenses increased $63,000 to $94,000 in 2018 from $31,000 in 2017. The Corporation implemented an in-house credit card program in the latter portion of 2016 and has seen a gradual increase in activity since then.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Loan collection expense, net of recoveries, is $216,000 lower in 2018 than in 2017, with net recoveries of $13,000 in 2018 as compared to net expenses of $203,000 in 2017. Most of the Corporation’s loan collection expenses include property taxes and other costs related to commercial and residential loans secured by real estate. The net reduction in collection expense in 2018 as compared to 2017 includes a reduction in expenses incurred of $110,000 and an increase in recoveries of expenses incurred in prior years of $106,000.

Recoveries of sales and use tax totaled $50,000 in the first nine months of 2018, resulting in a reduction in expense. In comparison, expense associated with ~~new applications as well as annual licensing increases.~~sales and use tax assessments totaling $68,000 were incurred in the first nine months of 2017.

~~Automated teller machine and interchange~~Telecommunications expense increased ~~$138,000, including increased~~$158,000 because of additional costs related to ~~fraud protection services and higher volume of debit card transactions.~~a new telephone system, along with costs from the prior legacy system during the transition period.

~~FDIC assessments~~Occupancy expense ~~decreased $165,000, reflecting a lower assessment level.~~

~~Professional fees~~increased $140,000 (8.0%), including the effects of accelerated depreciation on the Ralston, Pennsylvania branch scheduled to close in November 2018 and an increase in repairs and maintenance expense ~~decreased $66,000, reflecting a reduction in information technology and sales and service-related consulting expense.~~at several locations.

TABLE VIII - COMPARISON OF NONINTEREST EXPENSE

(Dollars In Thousands)

	3 Months Ended										Three Months Ended
	September 30,				$			%			September 30,				$			%
	2017		2016		Change			Change			2018		2017		Change			Change
Salaries and wages	$	3,985	$	3,901	$	84			2.2		$	4,263	$	3,985	$	278			7.0
Pensions and other employee benefits		1,216		1,060		156			14.7			1,237		1,209		28			2.3
Occupancy expense, net		580		601		(21	)		(3.5	)		648		580		68			11.7
Furniture and equipment expense		471		435		36			8.3			317		340		(23	)		(6.8	)
FDIC Assessments		93		151		(58	)		(38.4	)
Data processing expenses												667		595		72			12.1
Automated teller machine and interchange expense												347		346		1			0.3
Pennsylvania shares tax		336		287		49			17.1			326		336		(10	)		(3.0	)
Professional fees		269		245		24			9.8			305		224		81			36.2
Automated teller machine and interchange expense		346		291		55			18.9
Software subscriptions		299		237		62			26.2
Other operating expense		1,597		1,371		226			16.5
Total noninterestexpense	$	9,192	$	8,579	$	613			7.1
Telecommunications												177		143		34			23.8
Directors' fees												197		177		20			11.3
Other noninterest expense												1,349		1,257		92			7.3
Total noninterest expense											$	9,833	$	9,192	$	641			7.0

As shown in Table VIII, total noninterest expense increased ~~$613,000 (7.1%~~$641,000 (7.0%) in the third quarter ~~2017~~2018 as compared to the third quarter ~~2016.~~2017. The most significant variances include the following:

~~Other operating~~Salaries and wages expense increased ~~$226,000. The increase in other operating expense included~~$278,000 (7.0%), including the effects of annual performance-based salary adjustments for employees along with an increase of ~~$97,000~~$108,000 in ~~attorney fees, mainly related to a commercial loan workout situation,~~estimated cash and stock-based compensation expense and an increase in ~~accounting and auditing expense~~the average number of ~~$46,000 resulting~~FTEs to 298 in the third quarter 2018 from ~~an increase~~293 in ~~outsourced internal audit activity.~~the third quarter 2017.

~~Pensions~~Professional fees increased $81,000 and other ~~employee benefits~~noninterest expense increased ~~$156,000, mainly due~~$92,000, including $200,000 of expenses related to ~~higher health care expenses on~~ the ~~Corporation’s partially self-insured plan.~~pending merger with Monument Bancorp, Inc., with $100,000 included in professional fees and $100,000 included in other noninterest expense.

~~Salaries and wages expense~~Data processing expenses increased ~~$84,000, or 2.2%.~~$72,000, including costs associated with the new mortgage loan origination system.

~~Software subscriptions increased $62,000, including costs associated with new applications as well as annual licensing increases.~~

~~Automated teller machine and interchange~~Occupancy expense increased ~~$55,000,~~$68,000 (11.7%), including ~~increased costs related~~the effects of accelerated depreciation on the Ralston, Pennsylvania branch scheduled to ~~fraud protection services~~close in November 2018 and ~~higher volume of debit card transactions.~~an increase in repairs and maintenance expense at several locations.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~Pennsylvania shares tax increased $49,000, reflecting a tax rate increase and an increase in C&N Bank capital.~~

INCOME TAXES

~~FDIC assessments expense decreased $58,000, reflecting a lower assessment level.~~

The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision for the first nine months of 2018 was $3,229,000, or 16.5% of pre-tax earnings, which was $391,000 lower than the provision for the first nine months of 2017 of $3,620,000, or 24.0% of pre-tax income. The Corporation benefited from the reduction in the federal corporate income tax rate to 21%, effective January 1, 2018, from the 35% marginal tax rate in effect throughout 2017. The Corporation’s effective tax rates differ from the statutory rate of 21% in the first nine months of 2018 and 35% for the first nine months of 2017 principally because of the effects of tax-exempt interest income.

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At September 30, 2018 the net deferred tax asset was $5,122,000, up from $3,289,000 at December 31, 2017. The most significant change in temporary difference components was a net increase of $1,754,000 related to unrealized losses on available-for-sale securities. At September 30, 2018, the net deferred tax asset associated with the unrealized loss was $2,260,000, while at December 31, 2017, the deferred tax asset associated with the unrealized loss was $506,000, including $843,000 recorded as an offset to the pre-tax unrealized loss within accumulated other comprehensive loss, partially offset by $337,000 charged against retained earnings.

The Corporation regularly reviews deferred tax assets for recoverability based on history of earnings, expectations for future earnings and expected timing of reversals of temporary differences. Realization of deferred tax assets ultimately depends on the existence of sufficient taxable income, including taxable income in prior carryback years, as well as future taxable income.

Management believes the recorded net deferred tax asset at September 30, 2018 is fully realizable; however, if management determines the Corporation will be unable to realize all or part of the net deferred tax asset, the Corporation would adjust the deferred tax asset, which would negatively impact earnings.

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

FINANCIAL CONDITION

This section includes information regarding the Corporation’s lending activities or other significant changes or exposures that are not otherwise addressed in Management’s Discussion and Analysis. Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the “Net Interest Income” section of Management’s Discussion and Analysis. Other significant balance sheet items, including the allowance for loan losses and stockholders’ equity, are discussed in separate sections of Management’s Discussion and Analysis. There are no significant concerns that have arisen related to the Corporation’s off-balance sheet loan commitments or outstanding standby letters of credit at September 30, ~~2017,~~2018, and management does not expect capital expenditures to have a material, detrimental effect on the Corporation’s financial condition in ~~2017.~~2018.

Gross loans outstanding (excluding mortgage loans held for sale) were $822,532,000 at September 30, 2018, up 0.8% from $815,713,000 at December 31, 2017 and 2.7% from $801,012,000 at September 30, ~~2017, up 6.5% from $751,835,000 at December 31, 2016 and up 7.9 % from $742,338,000 at September 30, 2016.~~2017. Total outstanding mortgages and other consumer real estate loans were ~~$21,026,000 (5.0%~~$6,922,000 (1.5%) higher at September 30, ~~2017~~2018 as compared to December 31, ~~2016~~2017 and increased ~~$31,539,000 (7.7%) compared to September 30, 2016. Total outstanding commercial loans were higher by $26,920,000 (8.5%) at September 30, 2017 as compared to December 31, 2016 and $24,988,000 (7.8%~~$12,409,000 (2.8%) as compared to September 30, ~~2016.~~2017. Total outstanding commercial loans were lower by $2,544,000 (0.7%) at September 30, 2018 as compared to December 31, 2017 and higher by $6,684,000 (1.9%) compared to September 30, 2017. Average loans outstanding in the first nine months of ~~2017~~2018 of ~~$773,138,000~~$820,958,000 were ~~$57,563,000 (8.0%~~$47,820,000 (6.2%) higher than the corresponding total in the first nine months of 2016. The increase in loans outstanding over the last quarter of 2016 and first three quarters of 2017 have included significant increases in mortgages and other consumer real estate loans as well as commercial loans.2017.

While the Corporation’s lending activities are primarily concentrated in its market area, a portion of the Corporation’s commercial loan segment consists of 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 “Commercial and industrial,” “Commercial loans secured by real estate”, “Political subdivisions” and ~~“Political subdivisions”~~“Other commercial” classes in the loan tables presented in this Form 10-Q. Total participation loans outstanding amounted to $65,741,000 at September 30, 2018, up from $61,245,000 at December 31, 2017 and $53,559,000 at September 30, ~~2017, up from $47,508,000 at December 31, 2016 and $48,670,000 at September 30, 2016.~~2017. At September 30, ~~2017,~~2018, the balance of participation loans outstanding includes a total of ~~$45,369,000~~$54,464,000 to businesses located outside of the Corporation’s market area, including ~~$11,806,000~~$9,612,000 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. Total leveraged participation loans, including loans originated through the network and two loans originated through another lead institution, totaled ~~$13,490,000~~$14,813,000 at September 30, ~~2017, $15,207,000~~2018 and $15,328,000 at December 31, ~~2016 and $14,688,000 at September 30, 2016.~~2017.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 September 30, ~~2017,~~2018, the total outstanding balance of loans the Corporation has repurchased

as a result of identified instances of noncompliance amounted to ~~$1,817,000,~~$1,769,000, and the corresponding total outstanding balance repurchased at December 31, ~~2016~~2017 was ~~$1,852,000.~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~$1,805,000.

At September 30, 2018, outstanding balances of loans sold and serviced through the two programs totaled $171,516,000, including loans sold through the MPF Xtra program of $99,636,000 and loans sold through the Original program of $71,880,000. At December 31, 2017, outstanding balances of loans sold and serviced through the two programs totaled ~~$169,581,000,~~$169,725,000, including loans sold through the MPF Xtra program of ~~$109,692,000~~$107,117,000 and loans sold through the Original program of $59,889,000. 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.$62,608,000. Based on the fairly limited volume of required repurchases to date, no allowance has been established for representation and warranty exposures as of September 30, ~~2017~~2018 and December 31, ~~2016.~~2017.

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 September 30, ~~2017,~~2018, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was $3,907,000, and the Corporation has recorded ana related allowance ~~in the amount of $244,000~~ for credit losses ~~on loans sold under the MPF Original Program~~of $310,000 which is included in “Accrued interest and other liabilities” in the accompanying consolidated balance ~~sheet. The corresponding recorded allowance at~~sheets. At December 31, ~~2016~~2017, the Corporation’s maximum credit enhancement obligation under the MPF Original Program was ~~$196,000.~~$5,742,000, and the related allowance for credit losses was $260,000. The Corporation does not provide a credit enhancement for loans sold through the Xtra program.

PROVISION AND ALLOWANCE FOR LOAN LOSSES

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

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

The allowance for loan losses was ~~$8,900,000~~$8,815,000 at September 30, ~~2017, up~~2018, down slightly from ~~$8,473,000~~$8,856,000 at December 31, ~~2016.~~2017. Table X shows total specific allowances on impaired loans ~~increased $493,000~~decreased $220,000 to ~~$1,167,000~~$1,059,000 at September 30, ~~2017~~2018 from ~~$674,000~~$1,279,000 at December 31, ~~2016.~~2017. The ~~net increase in~~largest individual loan balance for which a specific ~~allowances in the first nine months of 2017 included an increase of $424,000 in the~~ allowance ~~related to one~~has been recorded is a real estate secured commercial ~~loan. The increase in the specific allowance for this~~ loan ~~was based on~~with an ~~updated appraisal. At September 30, 2017, the~~ outstanding balance of ~~this loan was $2,686,000,~~$2,550,000 and ~~the related~~a specific allowance ~~was $952,000.~~

~~Table X also shows that the collectively determined portion~~ of ~~the allowance related to commercial loans decreased $294,000, to $3,079,000~~$816,000 at September 30, ~~2017~~2018, down from ~~$3,373,000~~an outstanding balance of $2,641,000 and a specific allowance of $919,000 at December 31, 2016. The decrease in the collectively determined allowance on commercial loans resulted from an aggregate improvement (reduction) in the net charge-off experience and qualitative factors used to 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 allowance calculation on commercial loans was 0.09% lower at September 30, 2017 as compared to December 31, 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 0.06% lower at September 30, 2017 as compared to December 31, 2016, reflecting a pattern of overall improvement in loan delinquency levels and a reduction in the unemployment rate throughout most of the 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 loan classes. At June 30, 2017 and September 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.

2017.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The provision (credit) for loan losses by segment in the three-month and nine-month periods ended September 30, ~~2017~~2018 and ~~2016~~2017 is as follows:

(In Thousands)	3 Months Ended				9 Months Ended					3 Months Ended					9 Months Ended
	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,			Sept. 30,			Sept. 30,		Sept. 30,		Sept. 30,
	2017		2016		2017		2016			2018			2017		2018		2017
Residential mortgage	$	101	$	178	$	269	$	452		$	67		$	101	$	145	$	269
Commercial		140		337		293		750			(66	)		140		31		293
Consumer		81		23		114		51			59			81		156		114
Unallocated		0		0		102		(29	)		0			0		0		102

Total	$	322	$	538	$	778	$	1,224		$	60		$	322	$	332	$	778

The ~~overall decreases in the~~ provision (credit) for loan losses for the third quarter and first nine months of 2017 as compared to the corresponding periods of 2016 reflect decreases in the collectively determined allowance for loan losses including a reduction in the qualitative factors used to determine the allowance as well as a reduction in the historical average net charge-offs as a percentage of outstanding loans as described above. More detail related to the largest segments, residential mortgage and commercial, is further detailed as follows:

The provision for the residential mortgage segment in the third quarter 2017 included $103,000 related to an increase in the collectively determined portion of the allowance. The third quarter 2017 increase in the collectively determined portion of the allowance on residential mortgage loans resulted from the increase in outstanding mortgage loans partially offset by a 0.03% reduction in qualitative factors, reflecting improvements in delinquency trends and a reduction in the unemployment rate in the Corporation’s market area over the previous 12-18 months. In comparison, the provision for the residential mortgage segment in the third quarter 2016 included $29,000 related to net charge-offs during the period and an increase of $149,000 in the collectively determined portion of the allowance. The increase in the collectively determined portion of the allowance in the third quarter 2016 resulted mainly from growth in outstanding loans.

	3 Months			3 Months			9 Months			9 Months
Residential mortgage segment	Ended			Ended			Ended			Ended
(In thousands)	Sept. 30,			Sept. 30,			Sept. 30,			Sept. 30,
	2018			2017			2018			2017
Increase (decrease) in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	30		$	(2	)	$	122		$	160

Increase (decrease) in collectively determined portion of the allowance attributable to:
Loan growth		38			15			61			63
Changes in historical loss experience factors		(1	)		3			(38	)		42
Changes in qualitative factors		0			85			0			4
Total provision for loan losses - Residential mortgage segment	$	67		$	101		$	145		$	269

For the first nine months of 2017, the provision for the residential mortgage segment included net charge-offs totaling $160,000 and a net increase in the collectively determined allowance of $109,000. The net increase in the collectively determined portion of the allowance for residential mortgage loans included the effects of an increase in loans outstanding, partially offset by a 0.03% reduction in qualitative factors used to calculate the allowance at September 30, 2017 as compared to December 31, 2016. For the first nine months of 2016, the provision for the residential mortgage segment included net charge-offs totaling $71,000 and a net increase in the collectively determined allowance of $381,000.

The provision for the commercial segment in the third quarter 2017 included $83,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period in addition to an increase of $57,000 in the collectively determined allowance for loan losses. The increase in the collectively determined allowance on commercial loans was primarily due to an increase in commercial loan balances. In the third quarter 2016, the provision for the commercial segment included a net increase of $433,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period and a decrease of $96,000 in the collectively determined allowance for loan losses.

The provision for the commercial segment for the first nine months of 2017 included $587,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period offset by a decrease of $294,000 in the collectively determined allowance for loan losses. The increase in specific allowances on commercial loans in the first nine months of 2017 included an increase of $424,000 related to a commercial loan that previously had an allowance, as mentioned above. As noted above, the reduction in the collectively determined allowance on commercial loans included the effects of reductions in net charge-off experience and qualitative factors used in calculating the allowance. For the first nine months of 2016, the provision for the commercial segment included $458,000 related to the change in total specific allowances on impaired loans, as adjusted for net charge-offs during the period and an increase of $292,000 in the collectively determined allowance for loan losses.

	3 Months			3 Months		9 Months			9 Months
Commercial segment	Ended			Ended		Ended			Ended
(In thousands)	Sept. 30,			Sept. 30,		Sept. 30,			Sept. 30,
	2018			2017		2018			2017
(Decrease) increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	(25	)	$	83	$	(56	)	$	587

Increase (decrease) in collectively determined portion of the allowance attributable to:
Loan growth		9			19		44			64
Changes in historical loss experience factors		(50	)		3		43			(259	)
Changes in qualitative factors		0			35		0			(99	)
Total (credit) provision for loan losses - Commercial segment	$	(66	)	$	140	$	31		$	293

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

	3 Months		3 Months		9 Months		9 Months
Consumer segment	Ended		Ended		Ended		Ended
(In thousands)	Sept. 30,		Sept. 30,		Sept. 30,		Sept. 30,
	2018		2017		2018		2017
Increase in total specific allowance onimpaired loans, adjusted for the effect of netcharge-offs	$	35	$	60	$	87	$	97

Increase (decrease) in collectively determinedportion of the allowance attributable to:
Loan growth		16		0		25		7
Changes in historical loss experience factors		8		21		34		12
Changes in qualitative factors		0		0		10		(2	)
Total provision for loan losses -
Consumer segment	$	59	$	81	$	156	$	114

	3 Months			3 Months		9 Months		9 Months
Total - All segments	Ended			Ended		Ended		Ended
(In thousands)	Sept. 30,			Sept. 30,		Sept. 30,		Sept. 30,
	2018			2017		2018		2017
Increase in total specific allowance on impaired loans, adjusted for the effect of net charge-offs	$	40		$	141	$	153	$	844

Increase (decrease) in collectively determined portion of the allowance attributable to:
Loan growth		63			34		130		134
Changes in historical loss experience factors		(43	)		27		39		(205	)
Changes in qualitative factors		0			120		10		(97	)
Subtotal		60			322		332		676
Unallocated		0			0		0		102
Total provision for loan losses - All segments	$	60		$	322	$	332	$	778

For the periods shown in the tables immediately above, the provision related to increases or decreases in specific allowances on impaired loans was affected by changes in 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 tables immediately above, the portion of the net change in the collectively determined allowance attributable to loan growth was determined by applying the historical loss experience and qualitative factors used in the allowance calculation at the end of the preceding period to the net increase in loans outstanding (excluding loans specifically evaluated for impairment) for the period.

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

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 ~~1.92%~~1.71% at September 30, ~~2017,~~2018, down from ~~2.07%~~2.10% at December 31, ~~2016,~~2017, and nonperforming assets as a percentage of total assets was ~~1.35%~~1.30% at September 30, ~~2017,~~2018, down from ~~1.43%~~1.47% at December 31, ~~2016.~~2017. Table XI presents data at September 30, ~~2017~~2018 and at the end of each of the years ended December 31, ~~2012~~2013 through ~~2016.~~2017. For the range of dates presented in Table XI, total nonperforming loans as a percentage of loans has ranged from a low of ~~1.41%~~1.71% at ~~December 31, 2012~~September 30, 2018 to a high of 2.80% at December 31, 2013, and total nonperforming assets as a percentage of assets have ranged from a low of ~~0.82%~~1.30% at ~~December 31, 2012~~September 30, 2018 to a high of 1.53% at December 31, 2013.

The balance of loans subject to troubled debt restructurings (TDRs) was $3,733,000 at September 30, 2017, which was $4,944,000 lower than the corresponding total at December 31, 2016, mainly due to removal of one commercial relationship from TDR status. At September 30, 2017, the outstanding contractual balances of loans to this borrower totaled $6,454,000, and the recorded investments totaled $4,649,000. In 2014, the Corporation entered into a forbearance agreement with this commercial borrower which was extended for two additional twelve-month periods, most recently in July 2016. The Corporation recorded a charge-off of $1,486,000 in the second quarter 2014, as the payment amounts based on the forbearance agreement were not sufficient to fully amortize the contractual amount of principal outstanding on the loans. In December 2016, the Corporation and the borrower entered into a modification agreement, terminating the forbearance agreement and establishing loan terms with essentially 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 the modification. The borrower has made all required payments on the loans in accordance with the terms of the forbearance agreement, as extended, and the modification agreement. Accordingly, the loans were restored to full accrual status at December 31, 2016 and are no longer included in the amounts reported as TDRs at September 30, 2017.CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Total impaired loans of ~~$8,969,000~~$8,078,000 at September 30, ~~2017~~2018 are down ~~$1,891,000~~$1,433,000 from the corresponding amount at December 31, ~~2016~~2017 of ~~$10,860,000, including~~$9,511,000, while foreclosed assets held for sale increased $1,080,000 to a ~~decrease~~balance of $2,678,000 at September 30, 2018. In the second quarter 2018, the Corporation acquired two properties that had secured a commercial loan, recording the acquisition at an estimated fair value of $2,293,000 with no gain or loss recognized. In the third quarter 2018, the Corporation recorded a loss of $53,000 based on an updated estimate of costs to sell the properties, resulting in ~~impaired loans without a valuation allowance of $2,100,000. This net decrease~~an adjustment in ~~impaired loans is the result of: (1) removal from impairment status~~their carrying value to $2,240,000 at September 30, 2018. In October 2018, one of the ~~loans~~two commercial properties referred to above was sold for $711,000, with no gain or loss recognized. Table XI shows that the ~~modification agreement noted in the previous paragraph, partially offset by (2) the addition of one commercial loan secured by real estate with an~~total outstanding balance of ~~approximately $2.8 million~~impaired loans of $8,078,000 at September 30, ~~2017. This commercial loan was reviewed in~~2018 is lower than the ~~third quarter~~year-end balances from 2013 – 2017, ~~to determine if a specific allowance~~while the balance of foreclosed assets held for ~~loan losses would be required, and it was determined that no allowance was required~~sale at September ~~30, 2017 based on~~30. 2018 is higher than the ~~estimated net realizable value of~~year-end amounts for the ~~related collateral.~~previous five years.

Total nonperforming assets of ~~$17,029,000~~$16,713,000 at September 30, ~~2017~~2018 are ~~$725,000~~$2,013,000 lower than the corresponding amount at December 31, ~~2016,~~2017, summarized as follows:

Total nonaccrual loans at September 30, ~~2017~~2018 of ~~$12,400,000~~$10,911,000 was ~~$3,664,000 higher~~$2,493,000 lower than the corresponding December 31, ~~2016~~2017 total of $13,404,000, including the effect of ~~classifying~~reducing nonaccrual loans due to the acquisition of the commercial properties as ~~nonaccrual the real estate secured commercial loan with a balance of approximately $2.8 million noted~~described above.

Total loans past due 90 days or more and still accruing interest amounted to ~~$2,979,000~~$3,124,000 at September 30, ~~2017,~~2018, a decrease of ~~$3,859,000~~$600,000 from the total 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 effects of moving the previously noted commercial loan with a balance of $2.8 million to nonaccrual status at September 30, 2017. The reduction in loans past due 90 days or more ~~also~~ included a reduction in residential mortgage loans of $794,000 and an increase in ~~that aging category.~~commercial loans of $222,000. 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 ~~$1,650,000~~$2,678,000 at September 30, ~~2017, a decrease~~2018, an increase of ~~$530,000~~$1,080,000 from ~~$2,180,000~~$1,598,000 at December 31, ~~2016.~~2017. At September 30, ~~2017,~~2018, the Corporation held 1311 such properties for sale, with total carrying values of ~~$640,000~~$328,000 related to residential real estate, ~~$646,000~~$110,000 of land and ~~$364,000~~$2,240,000 related to commercial real estate. At December 31, ~~2016,~~2017, the Corporation held 1916 such properties for sale, with total carrying values of ~~$1,102,000~~$721,000 related to residential real estate, ~~$650,000~~$632,000 of land and ~~$428,000~~$245,000 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.

Over the period ~~2012-2016~~2013-2017 and the first nine months of ~~2017,~~2018, 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.

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

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 September 30, ~~2017.~~2018. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(Dollars In Thousands)

9 Months Ended
Sept. 30, Sept. 30, Years Ended December 31,
2017 2016 2016 2015 2014 2013 2012
Balance, beginning of year $ 8,473 $ 7,889 $ 7,889 $ 7,336 $ 8,663 $ 6,857 $ 7,705
Charge-offs:
Residential mortgage (178 ) (73 ) (73 ) (217 ) (327 ) (95 ) (552 )
Commercial (97 ) (597 ) (597 ) (251 ) (1,715 ) (459 ) (498 )
Consumer (127 ) (67 ) (87 ) (94 ) (97 ) (117 ) (171 )
Total charge-offs (402 ) (737 ) (757 ) (562 ) (2,139 ) (671 ) (1,221 )
Recoveries:
Residential mortgage 18 2 3 1 25 24 18
Commercial 3 4 35 214 264 348 8
Consumer 30 39 82 55 47 58 59
Total recoveries 51 45 120 270 336 430 85
Net charge-offs (351 ) (692 ) (637 ) (292 ) (1,803 ) (241 ) (1,136 )
Provision for loan losses 778 1,224 1,221 845 476 2,047 288
Balance, end of period $ 8,900 $ 8,421 $ 8,473 $ 7,889 $ 7,336 $ 8,663 $ 6,857
Net charge-offs as a % of average loans 0.05 % 0.10 % 0.09 % 0.04 % 0.29 % 0.04 % 0.16 %

	Nine Months Ended
	Sept. 30,			Sept. 30,			Years Ended December 31,
	2018			2017			2017			2016			2015			2014			2013
Balance, beginning of year	$	8,856		$	8,473		$	8,473		$	7,889		$	7,336		$	8,663		$	6,857
Charge-offs:
Residential mortgage		(133	)		(178	)		(197	)		(73	)		(217	)		(327	)		(95	)
Commercial		(165	)		(97	)		(132	)		(597	)		(251	)		(1,715	)		(459	)
Consumer		(120	)		(127	)		(150	)		(87	)		(94	)		(97	)		(117	)
Total charge-offs		(418	)		(402	)		(479	)		(757	)		(562	)		(2,139	)		(671	)
Recoveries:
Residential mortgage		7			18			19			3			1			25			24
Commercial		5			3			4			35			214			264			348
Consumer		33			30			38			82			55			47			58
Total recoveries		45			51			61			120			270			336			430
Net charge-offs		(373	)		(351	)		(418	)		(637	)		(292	)		(1,803	)		(241	)
Provision for loan losses		332			778			801			1,221			845			476			2,047
Balance, end of period	$	8,815		$	8,900		$	8,856		$	8,473		$	7,889		$	7,336		$	8,663
Net charge-offs as a % of average loans		0.05	%		0.05	%		0.05	%		0.09	%		0.04	%		0.29	%		0.04	%

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)

Sept. 30, As of December 31,
2017 2016 2015 2014 2013 2012
ASC 310 - Impaired loans $ 1,167 $ 674 $ 820 $ 769 $ 2,333 $ 623
ASC 450 - Collective segments:
Commercial 3,079 3,373 3,103 2,732 2,583 2,594
Residential mortgage 3,999 3,890 3,417 3,295 3,156 3,011
Consumer 155 138 122 145 193 188
Unallocated 500 398 427 395 398 441
Total Allowance $ 8,900 $ 8,473 $ 7,889 $ 7,336 $ 8,663 $ 6,857

	Sept. 30,		As of December 31,
	2018		2017		2016		2015		2014		2013
ASC 310 - Impaired loans	$	1,059	$	1,279	$	674	$	820	$	769	$	2,333
ASC 450 - Collective segments:
Commercial		3,165		3,078		3,373		3,103		2,732		2,583
Residential mortgage		3,864		3,841		3,890		3,417		3,295		3,156
Consumer		228		159		138		122		145		193
Unallocated		499		499		398		427		395		398
Total Allowance	$	8,815	$	8,856	$	8,473	$	7,889	$	7,336	$	8,663

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS
AND TROUBLED DEBT RESTRUCTURINGS (TDRs)
(Dollars In Thousands) As of
Sept. 30, As of December 31,
2017 2016 2015 2014 2013 2012
Impaired loans with a valuation allowance $ 3,581 $ 3,372 $ 1,933 $ 3,241 $ 9,889 $ 2,710
Impaired loans without a valuation allowance 5,388 7,488 8,041 9,075 6,432 4,719
Total impaired loans $ 8,969 $ 10,860 $ 9,974 $ 12,316 $ 16,321 $ 7,429
Total loans past due 30-89 days and still accruing $ 5,978 $ 7,735 $ 7,057 $ 7,121 $ 8,305 $ 7,756

Nonperforming assets:
Total nonaccrual loans $ 12,400 $ 8,736 $ 11,517 $ 12,610 $ 14,934 $ 7,353
Total loans past due 90 days or more and still accruing 2,979 6,838 3,229 2,843 3,131 2,311
Total nonperforming loans 15,379 15,574 14,746 15,453 18,065 9,664
Foreclosed assets held for sale (real estate) 1,650 2,180 1,260 1,189 892 879
Total nonperforming assets $ 17,029 $ 17,754 $ 16,006 $ 16,642 $ 18,957 $ 10,543

Loans subject to troubled debt restructurings (TDRs):
Performing $ 658 $ 5,803 $ 1,186 $ 1,807 $ 3,267 $ 906
Nonperforming 3,075 2,874 5,178 5,388 908 1,155
Total TDRs $ 3,733 $ 8,677 $ 6,364 $ 7,195 $ 4,175 $ 2,061

Total nonperforming loans as a % of loans 1.92 % 2.07 % 2.09 % 2.45 % 2.80 % 1.41 %
Total nonperforming assets as a % of assets 1.35 % 1.43 % 1.31 % 1.34 % 1.53 % 0.82 %
Allowance for loan losses as a % of total loans 1.11 % 1.13 % 1.12 % 1.16 % 1.34 % 1.00 %
Allowance for loan losses as a % of nonperforming loans 57.87 % 54.40 % 53.50 % 47.47 % 47.95 % 70.95 %

TABLE XII - SUMMARY OF LOANS BY TYPE
Summary of Loans by Type
(In Thousands) Sept. 30, As of December 31,
2017 2016 2015 2014 2013 2012
Residential mortgage:
Residential mortgage loans - first liens $ 355,285 $ 334,102 $ 304,783 $ 291,882 $ 299,831 $ 311,627
Residential mortgage loans - junior liens 24,694 23,706 21,146 21,166 23,040 26,748
Home equity lines of credit 36,534 38,057 39,040 36,629 34,530 33,017
1-4 Family residential construction 25,286 24,908 21,121 16,739 13,909 12,842
Total residential mortgage 441,799 420,773 386,090 366,416 371,310 384,234
Commercial:
Commercial loans secured by real estate 158,520 150,468 154,779 145,878 147,215 158,413
Commercial and industrial 83,243 83,854 75,196 50,157 42,387 48,442
Political subdivisions 54,730 38,068 40,007 17,534 16,291 31,789
Commercial construction and land 13,937 14,287 5,122 6,938 17,003 28,200
Loans secured by farmland 7,744 7,294 7,019 7,916 10,468 11,403
Multi-family (5 or more) residential 7,566 7,896 9,188 8,917 10,985 6,745
Agricultural loans 6,137 3,998 4,671 3,221 3,251 3,053
Other commercial loans 12,383 11,475 12,152 13,334 14,631 362
Total commercial 344,260 317,340 308,134 253,895 262,231 288,407
Consumer 14,953 13,722 10,656 10,234 10,762 11,269
Total 801,012 751,835 704,880 630,545 644,303 683,910
Less: allowance for loan losses (8,900 ) (8,473 ) (7,889 ) (7,336 ) (8,663 ) (6,857 )
Loans, net $ 792,112 $ 743,362 $ 696,991 $ 623,209 $ 635,640 $ 677,053

TABLE XI - PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)

(Dollars In Thousands)

	Sept. 30,			As of December 31,
	2018			2017			2016			2015			2014			2013
Impaired loans with a valuation allowance	$	3,623		$	4,100		$	3,372		$	1,933		$	3,241		$	9,889
Impaired loans without a valuation allowance		4,455			5,411			7,488			8,041			9,075			6,432
Total impaired loans	$	8,078		$	9,511		$	10,860		$	9,974		$	12,316		$	16,321

Total loans past due 30-89 days and still accruing	$	4,455		$	9,449		$	7,735		$	7,057		$	7,121		$	8,305

Nonperforming assets:
Total nonaccrual loans	$	10,911		$	13,404		$	8,736		$	11,517		$	12,610		$	14,934
Total loans past due 90 days or more and still accruing		3,124			3,724			6,838			3,229			2,843			3,131
Total nonperforming loans		14,035			17,128			15,574			14,746			15,453			18,065
Foreclosed assets held for sale (real estate)		2,678			1,598			2,180			1,260			1,189			892
Total nonperforming assets	$	16,713		$	18,726		$	17,754		$	16,006		$	16,642		$	18,957

Loans subject to troubled debt restructurings (TDRs):
Performing	$	698		$	636		$	5,803		$	1,186		$	1,807		$	3,267
Nonperforming		2,925			3,027			2,874			5,178			5,388			908
Total TDRs	$	3,623		$	3,663		$	8,677		$	6,364		$	7,195		$	4,175

Total nonperforming loans as a % of loans		1.71	%		2.10	%		2.07	%		2.09	%		2.45	%		2.80	%
Total nonperforming assets as a % of assets		1.30	%		1.47	%		1.43	%		1.31	%		1.34	%		1.53	%
Allowance for loan losses as a % of total loans		1.07	%		1.09	%		1.13	%		1.12	%		1.16	%		1.34	%
Allowance for loan losses as a % of nonperforming loans		62.81	%		51.70	%		54.40	%		53.50	%		47.47	%		47.95	%

TABLE XII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type

(In Thousands)	Sept. 30,			As of December 31,
	2018			2017			2016			2015			2014			2013
Residential mortgage:
Residential mortgage loans - first liens	$	366,516		$	359,987		$	334,102		$	304,783		$	291,882		$	299,831
Residential mortgage loans - junior liens		25,748			25,325			23,706			21,146			21,166			23,040
Home equity lines of credit		34,283			35,758			38,057			39,040			36,629			34,530
1-4 Family residential construction		27,661			26,216			24,908			21,121			16,739			13,909
Total residential mortgage		454,208			447,286			420,773			386,090			366,416			371,310

Commercial:
Commercial loans secured by real estate		159,212			159,266			150,468			154,779			145,878			147,215
Commercial and industrial		91,472			88,276			83,854			75,196			50,157			42,387
Political subdivisions		53,294			59,287			38,068			40,007			17,534			16,291
Commercial construction and land		12,278			14,527			14,287			5,122			6,938			17,003
Loans secured by farmland		7,208			7,255			7,294			7,019			7,916			10,468
Multi-family (5 or more) residential		7,670			7,713			7,896			9,188			8,917			10,985
Agricultural loans		5,670			6,178			3,998			4,671			3,221			3,251
Other commercial loans		14,140			10,986			11,475			12,152			13,334			14,631
Total commercial		350,944			353,488			317,340			308,134			253,895			262,231
Consumer		17,380			14,939			13,722			10,656			10,234			10,762
Total		822,532			815,713			751,835			704,880			630,545			644,303
Less: allowance for loan losses		(8,815	)		(8,856	)		(8,473	)		(7,889	)		(7,336	)		(8,663	)
Loans, net	$	813,717		$	806,857		$	743,362		$	696,991		$	623,209		$	635,640

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 September 30, ~~2017,~~2018, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling ~~$9,709,000.~~$15,053,000.

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 ~~$18,470,000~~$15,355,000 at September 30, ~~2017.~~2018.

The Corporation’s outstanding, available, and total credit facilities at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 are as follows:

	Outstanding				Available				Total Credit				Outstanding				Available				Total Credit
(In Thousands)	Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,		Sept. 30,		Dec. 31,
	2017		2016		2017		2016		2017		2016		2018		2017		2018		2017		2018		2017
Federal Home Loan Bank of Pittsburgh	$	7,256	$	32,454	$	351,683	$	306,767	$	358,939	$	339,221	$	35,985	$	67,189	$	326,354	$	295,441	$	362,339	$	362,630
Federal Reserve Bank Discount Window		0		0		18,009		15,636		18,009		15,636		0		0		14,856		15,877		14,856		15,877
Other correspondent banks		0		0		45,000		45,000		45,000		45,000		0		0		45,000		45,000		45,000		45,000
Total credit facilities	$	7,256	$	32,454	$	414,692	$	367,403	$	421,948	$	399,857	$	35,985	$	67,189	$	386,210	$	356,318	$	422,195	$	423,507

At September 30, ~~2017,~~2018, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of a short-term ~~borrowing~~borrowings of $3,000,000 and long-term borrowings ~~with a total amount~~ of ~~$4,256,000.~~$32,985,000. At December 31, ~~2016,~~2017, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of overnight borrowings of ~~$21,000,000~~$29,000,000, short-term borrowings of $29,000,000 and long-term borrowings ~~with a total amount~~ of ~~$11,454,000.~~$9,189,000. Additional information regarding borrowed funds is included in Note 8 ofto the unaudited 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.~~obligations or use repurchase agreements placed with brokers to borrow funds secured by investment assets. At September 30, ~~2017,~~2018, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was ~~$146,551,000.~~$164,204,000.

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

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

As required by the Economic Growth, Regulatory Relief, and Consumer Protection Act (discussed further in the Recent Legislative Developments section of Management’s Discussion and Analysis), in August 2018, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement. The interim final rule raised the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company that: (1) is not engaged in significant nonbanking activities; (2) does not conduct significant off-balance sheet activities; and (3) does not have a material amount of debt or equity securities, other than trust-preferred securities, outstanding. The interim final rule provides that, if warranted for supervisory purposes, the Federal Reserve may exclude a company from the threshold increase. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at September 30, 2018; however, C&N Bank ~~are~~remains subject to ~~various~~ regulatory capital requirements administered by the federal banking agencies.

Details concerning capital ratios at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 are presented below. Management believes, as of September 30, ~~2017 and December 31, 2016,~~2018, that ~~the Corporation and~~ C&N Bank ~~meet~~meets all capital adequacy requirements to which ~~they are~~it is subject and ~~maintain~~maintains a capital conservation ~~buffers~~buffer (described in more detail below) that ~~allow~~allows the ~~Corporation and C&N~~ Bank to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers. Further, as reflected in the table below, the Corporation’s and C&N Bank’s capital ratios at September 30, ~~2017~~2018 and December 31, ~~2016~~2017 exceed the Corporation’s Board policy threshold levels.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

(Dollars in Thousands) Minimum To Be Well
Minimum Minimum To Maintain Capitalized Under Minimum To Meet
Capital Capital Conservation Prompt Corrective the Corporation's
Actual Requirement Buffer at Reporting Date Action Provisions Policy Thresholds
Amount Ratio Amount Ratio Amount Ratio Amount Ratio Amount Ratio
September 30, 2017:
Total capital to risk-weighted assets:
Consolidated $ 187,820 23.56 % $ 63,768 ³8% $ 73,732 ³9.25% $ 79,710 ³10% $ 83,696 ³10.5%
C&N Bank 166,093 20.95 % 63,415 ³8% 73,324 ³9.25% 79,269 ³10% 83,232 ³10.5%
Tier 1 capital to risk-weighted assets:
Consolidated 178,676 22.42 % 47,826 ³6% 57,790 ³7.25% 63,768 ³8% 67,754 ³8.5%
C&N Bank 156,949 19.80 % 47,561 ³6% 57,470 ³7.25% 63,415 ³8% 67,379 ³8.5%
Common equity tier 1 capital to risk-weighted assets:
Consolidated 178,676 22.42 % 35,870 ³4.5% 45,833 ³5.75% 51,812 ³6.5% 55,797 ³7%
C&N Bank 156,949 19.80 % 35,671 ³4.5% 45,580 ³5.75% 51,525 ³6.5% 55,488 ³7%
Tier 1 capital to average assets:
Consolidated 178,676 14.40 % 49,632 ³4% N/A N/A 62,041 ³5% 62,041 ³5%
C&N Bank 156,949 12.80 % 49,053 ³4% N/A N/A 61,316 ³5% 61,316 ³5%

December 31, 2016:
Total capital to risk-weighted assets:
Consolidated $ 183,597 23.60 % $ 62,245 ³8% $ 67,108 ³8.625% $ 77,806 ³10% $ 81,697 ³10.5%
C&N Bank 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 174,928 22.48 % 46,684 ³6% 51,547 ³6.625% 62,245 ³8% 66,135 ³8.5%
C&N Bank 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 174,928 14.27 % 49,026 ³4% N/A N/A 61,282 ³5% 61,282 ³5%
C&N Bank 154,036 12.73 % 48,404 ³4% N/A N/A 60,506 ³5% 60,506 ³5%

(Dollars in Thousands)														Minimum To Be Well
						Minimum				Minimum To Maintain				Capitalized Under				Minimum To Meet
						Capital				Capital Conservation				Prompt Corrective				the Corporation's
	Actual					Requirement				Buffer at Reporting Date				Action Provisions				Policy Thresholds
	Amount		Ratio			Amount		Ratio		Amount		Ratio		Amount		Ratio		Amount		Ratio
September 30, 2018:
Total capital to risk-weighted assets:
Consolidated	$	195,531		23.88	%		N/A		N/A		N/A		N/A		N/A		N/A	$	85,988		³10.5%
C&N Bank		173,160		21.26	%		65,171		³8%		80,446		³9.875%		81,464		³10%		85,537		³10.5%
Tier 1 capital to risk-weighted assets:
Consolidated		186,406		22.76	%		N/A		N/A		N/A		N/A		N/A		N/A		69,610		³8.5%
C&N Bank		164,035		20.14	%		48,878		³6%		64,153		³7.875%		65,171		³8%		69,244		³8.5%
Common equity tier 1 capital to risk-weighted assets:
Consolidated		186,406		22.76	%		N/A		N/A		N/A		N/A		N/A		N/A		57,326		³7%
C&N Bank		164,035		20.14	%		36,659		³4.5%		51,933		³6.375%		52,952		³6.5%		57,025		³7%
Tier 1 capital to average assets:
Consolidated		186,406		14.50	%		N/A		N/A		N/A		N/A		N/A		N/A		102,874		³8%
C&N Bank		164,035		12.90	%		50,854		³4%		N/A		N/A		63,568		³5%		101,708		³8%

December 31, 2017:
Total capital to risk-weighted assets:
Consolidated	$	187,097		23.07	%	$	64,872		³8%	$	75,008		³9.25%	$	81,090		³10%	$	85,144		³10.5%
C&N Bank		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		177,981		21.95	%		48,654		³6%		58,790		³7.25%		64,872		³8%		68,926		³8.5%
C&N Bank		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		177,981		14.23	%		50,023		³4%		N/A		N/A		62,529		³5%		62,529		³5%
C&N Bank		156,026		12.63	%		49,418		³4%		N/A		N/A		61,772		³5%		61,772		³5%

Management expects ~~the Corporation and~~ C&N Bank to maintain capital levels that exceed the regulatory standards for well-capitalized institutions and the applicable capital conservation ~~buffers~~buffer, including the impact of the pending merger discussed in Note 14 to the unaudited, consolidated financial statements, for the next 12 months and for the foreseeable future.

Future dividend payments will depend upon maintenance of a strong financial condition, future earnings and capital and regulatory requirements. As described in more detail below, ~~the Corporation and~~ C&N Bank ~~are~~is subject to restrictions on the amount of dividends that may be paid without approval of banking regulatory authorities. Further, although the Corporation is no longer subject to the specific consolidated capital requirements described herein, the Corporation’s ability to pay dividends, repurchase stock or engage in other activities may be limited by the Federal Reserve if the Corporation fails to hold capital commensurate with its overall risk profile.

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.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 subject to the rule 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 current and remaining transition schedule for ~~new~~capital ratios, including 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 %

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

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

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

At September 30, ~~2017, the Corporation’s~~2018, C&N Bank’s Capital Conservation Buffer, determined based on the minimum total capital ratio, was ~~15.56%. C&N Bank’s Capital Conservation Buffer (also determined based on the minimum total capital ratio) was 12.95%~~13.26%.

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale debt securities. The difference between amortized cost and fair value of available-for-sale debt 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 ~~$227,000~~($8,502,000) at September 30, ~~2017~~2018 and ($~~949,000)~~1,566,000) at December 31, ~~2016.~~2017. 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 6 to the unaudited consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale securities for other-than-temporary impairment at September 30, ~~2017.~~

2018.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 ~~$147,000~~$134,000 at September 30, ~~2017~~2018 and ~~$51,000~~$59,000 at December 31, ~~2016.~~2017.

COMPREHENSIVE INCOME

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

Comprehensive Income totaled ~~$3,790,000~~$3,557,000 for the three months ended September 30, ~~2017~~2018 as compared to ~~$2,623,000~~$3,790,000 in the third quarter ~~2016.~~2017. For the three months ended September 30, ~~2017,~~2018, Comprehensive Income included: (1) Net Income of ~~$3,936,000,~~$5,586,000, which was ~~$151,000 lower~~$1,650,000 higher than in the third quarter ~~2016;~~2017; (2) Other Comprehensive Loss from ~~a decrease in net unrealized gains on~~ available-for-sale securities of ($~~142,000)~~2,026,000) as compared to Other Comprehensive Loss of ($~~1,461,000) from a decrease in net unrealized gains on available-for-sale securities~~142,000) in the third quarter ~~2016;~~2017; and (3) Other Comprehensive Loss from defined benefit plans of ($3,000) for the third quarter 2018 as compared to ($4,000) for the third quarter ~~2017 as compared to ($3,000) for the third quarter 2016.~~2017.

~~Comprehensive Income totaled $12,763,000 for~~For the nine months ended September 30, ~~2017~~2018, Comprehensive Income totaled $9,748,000 as compared to ~~$14,433,000~~$12,763,000 for the first nine months of 2017. For the nine months ended September 30, ~~2016. In the nine months ended September 30, 2017,~~2018, Comprehensive Income included: (1) Net Income of ~~$11,491,000, which was $40,000 lower than in~~$16,332,000, up $4,841,000 from net income for the first nine months of ~~2016;~~2017; (2) Other Comprehensive ~~Income~~Loss from ~~an increase in net unrealized gains on~~ available-for-sale securities ~~net~~ of ~~deferred income tax, of $1,176,000~~($6,647,000) as compared to Other Comprehensive Income of ~~$2,895,000~~$1,176,000 in the first nine months of ~~2016;~~2017; and (3) Other Comprehensive Income from defined benefit plans of ~~$96,000~~$63,000 for the nine months ended September 30, 2018 as compared to Other Comprehensive Income of ~~$7,000 in the first nine months of 2016.~~

~~INCOME TAXES~~

~~The income tax provision in interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. The income tax provision~~$96,000 for the first nine months of 2017 was $3,620,000, or 24% of pre-tax earnings, $227,000 lower than the provision for the first nine months of 2016 of $3,847,000, or 25% of pre-tax income. The Corporation’s effective tax rates differ from the statutory rate of 35% principally because of the effects of tax-exempt interest income.

The Corporation recognizes deferred tax assets and liabilities based on differences between the financial statement carrying amounts and the tax basis of assets and liabilities. At September 30, 2017 the net deferred tax asset was $4,319,000, down from $5,117,000 at December 31, 2016. The most significant change in temporary difference components was a net reduction of $634,000 related to unrealized gains and losses on available-for-sale securities. At September 30, 2017, the net deferred tax liability associated with the unrealized gain was $122,000, while at December 31, 2016, the deferred tax asset associated with the unrealized loss was $512,000.

The Corporation uses currently enacted tax rates to value deferred tax assets and liabilities. The U.S. Congress is in the process of evaluating draft legislation which includes a reduction in U.S. corporate income tax rates. If corporate tax rates were reduced, management expects the Corporation would record an initial charge against earnings to lower the carrying amount of the net deferred tax asset, and then would record a lower tax provision going forward on an ongoing basis.

Management believes the recorded net deferred tax asset at September 30, 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 11 to the unaudited, consolidated financial statements.~~

~~CITIZENS & NORTHERN CORPORATION – FORM 10-Q~~2017.

INFLATION

The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. Since September 2007, the Federal Reserve has maintained the fed funds target rate at extremely low levels by historical standards. Further, throughout the period of low interest rates, the Federal Reserve has injected massive amounts of liquidity into the nation’s monetary system through a variety of programs. Since late 2015, the Federal Reserve has begun to move its fed funds target rate higher, in an effort to re-establish a more normalized level by historical standards, with eight separate 0.25% increases infrom December 2015 ~~and 2016, March 2017 and June 2017,~~through September 2018, resulting in the current range of 1%2.00% to ~~1.25%~~2.25%. Inflation has remained subdued, measured ~~for most of 2016~~through 2017 and the first nine months of ~~2017~~2018 at levels at or just below the Federal Open Market Committee’s 2% longer run ~~objective, though there have been some reports of wage pressure~~objective. The FOMC noted in its latest statement that the labor market has continued to strengthen, and that economic activity continues to rise at a solid rate with household spending and business fixed investment growing strongly. The Committee continues to suggest that as market conditions continue to improve, further gradual increases in the ~~U.S. employment picture has gradually improved over the past several years.~~federal funds rate will be warranted.

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 LEGISLATIVE DEVELOPMENTS

On May 24, 2018, President Trump signed into law the Economic Growth, Regulatory Relief, and Consumer Protection Act (the “Act”), which was designed to ease certain restrictions imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. Most of the changes made by the new Act can be grouped into five general areas: mortgage lending; certain regulatory relief for “community” banks; enhanced consumer protections in specific areas, including subjecting credit reporting agencies to additional requirements; certain regulatory relief for large financial institutions, including increasing the threshold at which institutions are classified as systemically important financial institutions (from $50 billion to $250 billion) and therefore subject to stricter oversight, and revising the rules for larger institution stress testing; and certain changes to federal securities regulations designed to promote capital formation.

As noted in the Stockholders’ Equity and Capital Adequacy section of Management’s Discussion and Analysis, as required by the Act, the Federal Reserve Board issued an interim final rule that expanded applicability of the Board’s small bank holding company policy statement, raising the policy statement’s asset threshold from $1 billion to $3 billion in total consolidated assets for a bank holding company or savings and loan holding company, subject to other conditions. Management believes the Corporation meets the conditions of the Federal Reserve’s small bank holding company policy statement and is therefore excluded from consolidated capital requirements at September 30, 2018. Further, qualification as a small bank holding company allows the Corporation to file more abbreviated, and less frequent, consolidated and holding company reports with the Federal Reserve.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Some of the other key provisions of the Act as it relates to community banks and bank holding companies include, but are not limited to: (i) designating mortgages held in portfolio as “qualified mortgages” for banks with less than $10 billion in assets, subject to certain documentation and product limitations; (ii) exempting banks with less than $10 billion in assets from Volcker Rule requirements relating to proprietary trading; (iii) simplifying capital calculations for banks with less than $10 billion in assets by requiring federal banking agencies to establish a community bank leverage ratio of tangible equity to average consolidated assets of not less than 8% or more than 10%, and provide that banks that maintain tangible equity in excess of such ratio will be deemed to be in compliance with risk-based capital and leverage requirements; (iv) assisting smaller banks with obtaining stable funding by providing an exception for reciprocal deposits from FDIC restrictions on acceptance of brokered deposits; (v) raising the eligibility for use of short-form Call Reports from $1 billion to $5 billion in assets; and (vi) clarifying definitions pertaining to high volatility commercial real estate loans (HVCRE), which require higher capital allocations, so that only loans with increased risk are subject to higher risk weightings.

The Corporation continues to analyze the changes implemented by the Act, but does not believe that such changes will materially impact the Corporation’s business, operations, or financial results.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

MARKET RISK

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

The Corporation’s major category of market risk, interest rate risk, is discussed in the following section.

INTEREST RATE RISK

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

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

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Table XIII, which follows this discussion, is based on the results of calculations performed using the simulation model as of ~~July 31, 2017~~September 30, 2018 and December 31, ~~2016. Table XIII reflects two significant changes to the analysis using July 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 XIII. 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 XIII~~2017. The table shows that as of the respective dates, the changes in net interest income and changes in market value were within the policy limits in all scenarios.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE XIII - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES

July 31, 2017 Data
September 30, 2018 Data
(Dollars In Thousands)	Period Ending July 31, 2018												Period Ending September 30, 2019

Basis Point	Interest		Interest		Net Interest		NII			NII			Interest		Interest		Net Interest		NII			NII
Change in Rates	Income		Expense		Income (NII)		% Change			Risk Limit			Income		Expense		Income (NII)		% Change			Risk Limit
+400	$	55,775	$	18,524	$	37,251		-8.5	%		25.0	%	$	62,241	$	19,731	$	42,510		-7.8	%		25.0	%
+300		52,948		14,786		38,162		-6.2	%		20.0	%		59,575		16,088		43,487		-5.7	%		20.0	%
+200		50,134		11,047		39,087		-4.0	%		15.0	%		56,921		12,445		44,476		-3.6	%		15.0	%
+100		47,293		7,309		39,984		-1.8	%		10.0	%		54,158		8,802		45,356		-1.7	%		10.0	%
0		44,329		3,630		40,699		0.0	%		0.0	%		51,296		5,170		46,126		0.0	%		0.0	%
-100		41,209		2,690		38,519		-5.4	%		10.0	%		47,952		3,370		44,582		-3.3	%		10.0	%
-200		39,217		2,450		36,767		-9.7	%		15.0	%		44,731		2,678		42,053		-8.8	%		15.0	%
-300		38,711		2,302		36,409		-10.5	%		20.0	%		42,647		2,436		40,211		-12.8	%		20.0	%
-400		38,483		2,302		36,181		-11.1	%		25.0	%		42,314		2,436		39,878		-13.5	%		25.0	%

	Market Value of Portfolio Equity at July 31, 2017								Market Value of Portfolio Equity at September 30, 2018

	Present		Present			Present			Present		Present			Present
Basis Point	Value		Value			Value			Value		Value			Value
Change in Rates	Equity		% Change			Risk Limit			Equity		% Change			Risk Limit
+400	$	194,644		-15.0	%		40.0	%	$	200,924		-16.5	%		40.0	%
+300		201,803		-11.9	%		30.0	%		209,456		-13.0	%		30.0	%
+200		210,522		-8.1	%		25.0	%		220,194		-8.5	%		25.0	%
+100		219,626		-4.1	%		15.0	%		230,238		-4.4	%		15.0	%
0		228,967		0.0	%		0.0	%		240,719		0.0	%		0.0	%
-100		229,156		0.1	%		15.0	%		242,264		0.6	%		15.0	%
-200		228,292		-0.3	%		25.0	%		241,271		0.2	%		25.0	%
-300		254,212		11.0	%		30.0	%		240,940		0.1	%		30.0	%
-400		292,504		27.7	%		40.0	%		273,246		13.5	%		40.0	%

December 31, 2016 Data
December 31, 2017 Data													December 31, 2017 Data
(Dollars in Thousands)			Period Ending December 31, 2017													Period Ending December 31, 2018

Basis Point	Interest		Interest		Net Interest		NII			NII				Interest		Interest		Net Interest		NII			NII
Change in Rates	Income		Expense		Income (NII)		% Change			Risk Limit				Income		Expense		Income (NII)		% Change			Risk Limit
+400	$	53,712	$	22,315	$	31,397		-20.5	%		25.0	%		$	57,619	$	19,730	$	37,889		-10.8	%		25.0	%
+300		51,128		17,545		33,583		-15.0	%		20.0	%			54,978		15,852		39,126		-7.9	%		20.0	%
+200		48,500		12,809		35,691		-9.6	%		15.0	%			52,334		11,974		40,360		-5.0	%		15.0	%
+100		45,845		8,102		37,743		-4.4	%		10.0	%			49,620		8,095		41,525		-2.2	%		10.0	%
0		43,132		3,643		39,489		0.0	%		0.0	%			46,717		4,243		42,474		0.0	%		0.0	%
-100		40,581		2,978		37,603		-4.8	%		10.0	%			43,581		2,781		40,800		-3.9	%		10.0	%
-200		38,881		2,949		35,932		-9.0	%		15.0	%			41,290		2,216		39,074		-8.0	%		15.0	%
-300		38,269		2,936		35,333		-10.5	%		20.0	%			40,463		2,191		38,272		-9.9	%		20.0	%
-400		38,104		2,936		35,168		-10.9	%		25.0	%			40,194		2,191		38,003		-10.5	%		25.0	%

	Market Value of Portfolio Equity at December 31, 2016								Market Value of Portfolio Equity at December 31, 2017

	Present		Present			Present			Present		Present			Present
Basis Point	Value		Value			Value			Value		Value			Value
Change in Rates	Equity		% Change			Risk Limit			Equity		% Change			Risk Limit
+400	$	168,600		-24.6	%		50.0	%	$	195,385		-16.8	%		40.0	%
+300		180,500		-19.3	%		45.0	%		203,648		-13.3	%		30.0	%
+200		194,471		-13.1	%		35.0	%		213,689		-9.0	%		25.0	%
+100		208,830		-6.7	%		25.0	%		224,389		-4.4	%		15.0	%
0		223,744		0.0	%		0.0	%		234,759		0.0	%		0.0	%
-100		227,806		1.8	%		25.0	%		236,030		0.5	%		15.0	%
-200		229,602		2.6	%		35.0	%		234,863		0.0	%		25.0	%
-300		252,118		12.7	%		45.0	%		252,464		7.5	%		30.0	%
-400		290,792		30.0	%		50.0	%		292,124		24.4	%		40.0	%

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

ITEM 4. CONTROLS AND PROCEDURES

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PART II – OTHER INFORMATION

Item 1.

Legal Proceedings

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


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

Item 1A.	Risk Factors

There have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed February 15, 2018.


	~~There have been no material changes from the risk factors previously disclosed in Item 1A of the Corporation’s Form 10-K filed February 16, 2017.~~

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

	~~Issuer Purchases of Equity Securities~~

	~~The following table sets forth a summary of the purchases by the Corporation, on the open market, of its equity securities during the third quarter 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
July 1 - 31, 2017 0 $ 0 0 600,000
August 1 - 31, 2017 0 $ 0 0 600,000
September 1 - 30, 2017 0 $ 0 0 600,000

Issuer Purchases of Equity Securities

The following table sets forth a summary of the purchases by the Corporation, on the open market, of its equity securities during the third quarter 2018:

Period	Total Number of Shares Purchased		Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs		Maximum Number of Shares that May Yet be Purchased Under the Plans or Programs
July 1 - 31, 2018		0	$	0		0		600,000
August 1 - 31, 2018		0	$	0		0		600,000
September 1 - 30, 2018		0	$	0		0		600,000

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

Item 3.

Defaults Upon Senior Securities

None


	~~None~~

Item 4.	Mine Safety Disclosures

Not applicable


	~~Not applicable~~

Item 5.	Other Information

	~~None~~

None

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

~~Item 6. Exhibits~~

Item 6.

Exhibits

2. Plan of acquisition, reorganization, arrangement, liquidation or succession		~~Not applicable~~Incorporated by reference to Exhibit 2.1 of the Corporation’s Form 8-K filed September 28, 2018

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

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

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

10.	Material ~~contracts~~contracts:		~~Not applicable~~
10.1 Form of Indemnification Agreement dated September 20, 2018 between the Corporation and J. Bradley Scovill		Filed herewith

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

15.	Letter re: unaudited interim information		Not applicable

18.	Letter re: change in accounting principles		Not applicable

19.	Report furnished to security holders		Not applicable

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

23.	Consents of experts and counsel		Not applicable

24.	Power of attorney		Not applicable

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

32.	Section 1350 certifications		Filed herewith

99.	Additional exhibits		Not applicable

100.	XBRL-related documents		Not applicable

101.	Interactive data file		Filed herewith

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

SIGNATURES

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

	CITIZENS & NORTHERN CORPORATION

November ~~2, 2017~~1, 2018	By:	~~/s/~~ /s/ J. Bradley Scovill
Date	President and Chief Executive Officer

November ~~2, 2017~~1, 2018	By:	~~/s/~~ /s/ Mark A. Hughes
Date	Treasurer and Chief Financial Officer

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

TABLE I - QUARTERLY FINANCIAL DATA
(Dollars In Thousands, Except Per Share Data) (Unaudited)	For the Three Months Ended:
	Sept. 30,		June 30,		Mar. 31,		Dec. 31,			Sept. 30,		June 30,		Mar. 31,
	2017		2017		2017		2016			2016		2016		2016
Interest income	$	11,626	$	11,340	$	11,112	$	11,106		$	11,131	$	10,924	$	10,937
Interest expense		985		978		953		920			944		925		904
Net interest income		10,641		10,362		10,159		10,186			10,187		9,999		10,033
Provision (credit) for loan losses		322		4		452		(3	)		538		318		368
Net interest income after provision (credit) for loan losses		10,319		10,358		9,707		10,189			9,649		9,681		9,665
Other income		4,066		4,106		3,864		4,031			3,884		3,906		3,690
Net gains on available-for-sale securities		5		107		145		69			584		122		383
Other expenses		9,192		9,076		9,298		8,558			8,579		8,535		9,072
Income before income tax provision		5,198		5,495		4,418		5,731			5,538		5,174		4,666
Income tax provision		1,262		1,374		984		1,500			1,451		1,303		1,093
Net income	$	3,936	$	4,121	$	3,434	$	4,231		$	4,087	$	3,871	$	3,573
Net income attributable to common shares	$	3,916	$	4,100	$	3,416	$	4,209		$	4,065	$	3,850	$	3,553
Basic earnings per common share	$	0.32	$	0.34	$	0.28	$	0.35		$	0.34	$	0.32	$	0.29
Diluted earnings per common share	$	0.32	$	0.34	$	0.28	$	0.35		$	0.34	$	0.32	$	0.29