Edgar Filing: CITIZENS & NORTHERN CORP

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2012

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

For the transition period from _______________ to _________________________.

Commission file number: 000-16084

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

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

90-92 MAIN STREET, WELLSBORO, PA 16901

(Address of principal executive offices) (Zip code)

570-724-3411

(Registrant's telephone number including area code)

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

Yes x No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

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

Large accelerated filer ¨ Accelerated filer x Non-accelerated filer ¨ Smaller reporting company ¨

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

Yes ¨ No x

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

Common Stock ($1.00 par value)

12,236,327 Shares Outstanding on August 2, 2012

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CITIZENS & NORTHERN CORPORATION

Index

Part I. Financial Information

Item 1. Financial Statements

Consolidated Balance Sheets (Unaudited) – June 30, 2012 and December 31, 2011		Page 3

Consolidated Statements of Operations (Unaudited) – Three Months and Six Months Ended June 30, 2012 and 2011		Page 4

Consolidated Statements of Comprehensive Income (Unaudited) – Three Months and Six Months Ended June 30, 2012 and 2011		Page 5

Consolidated Statements of Cash Flows (Unaudited) – Six Months Ended June 30, 2012 and 2011		Page 6

Consolidated Statements of Changes in Stockholders’ Equity (Unaudited) - Six Months Ended June 30, 2012 and 2011		Page 7

Notes to Unaudited Consolidated Financial Statements		Pages 8 – 35

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations		Pages 36 – 55

Item 3. Quantitative and Qualitative Disclosures About Market Risk		Pages 55 – 58

Item 4. Controls and Procedures		Page 58

Part II. Other Information		Pages 59 – 60

Signatures

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

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

Exhibit 32. Section 1350 Certifications

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited)
(In Thousands Except Share Data)	June 30,			December 31,
	2012			2011
ASSETS
Cash and due from banks:
Noninterest-bearing	$	19,815		$	17,618
Interest-bearing		49,343			42,957
Total cash and due from banks		69,158			60,575
Available-for-sale securities, at fair value		478,368			481,685
Loans held for sale		3,190			939

Loans receivable		704,434			708,315
Allowance for loan losses		(7,657	)		(7,705	)
Loans, net		696,777			700,610
Bank-owned life insurance		21,125			20,889
Accrued interest receivable		4,556			4,797
Bank premises and equipment, net		19,090			19,028
Foreclosed assets held for sale		904			1,235
Deferred tax asset, net		3,962			6,173
Intangible asset - Core deposit intangibles		175			212
Intangible asset – Goodwill		11,942			11,942
Other assets		18,280			15,650
TOTAL ASSETS	$	1,327,527		$	1,323,735

LIABILITIES
Deposits:
Noninterest-bearing	$	199,089		$	193,595
Interest-bearing		830,367			824,611
Total deposits		1,029,456			1,018,206
Short-term borrowings		4,242			4,950
Long-term borrowings		110,038			125,363
Accrued interest and other liabilities		7,729			7,831
TOTAL LIABILITIES	$	1,151,465			1,156,350

STOCKHOLDERS' EQUITY
Preferred stock, $1,000 par value; authorized 30,000 shares; $1,000 liquidation preference per share; no shares issued at June 30, 2012 and December 31, 2011		0			0
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2012 and 2011; issued 12,489,836 at June 30, 2012 and 12,460,920 at December 31, 2011		12,490			12,461
Paid-in capital		67,817			67,568
Retained earnings		88,956			82,302
Treasury stock, at cost; 254,519 shares at June 30, 2012 and 305,391 shares at December 31, 2011		(4,255	)		(5,106	)
Sub-total		165,008			157,225
Accumulated other comprehensive income:
Unrealized gains on available-for-sale securities		11,519			10,791
Defined benefit plans		(465	)		(631	)
Total accumulated other comprehensive income		11,054			10,160
TOTAL STOCKHOLDERS' EQUITY		176,062			167,385
TOTAL LIABILITIES & STOCKHOLDERS' EQUITY	$	1,327,527		$	1,323,735

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF OPERATIONS	3 Months Ended				Fiscal Year To Date
(In Thousands, Except Per Share Data) (Unaudited)	June 30,		June 30,		6 Months Ended June 30,
	2012		2011		2012			2011
INTEREST INCOME
Interest and fees on loans	$	10,265	$	10,854	$	20,640		$	21,722
Interest on balances with depository institutions		31		16		59			32
Interest on loans to political subdivisions		375		372		752			747
Income from available-for-sale and held-to-maturity securities:
Taxable		2,520		2,849		5,178			5,542
Tax-exempt		1,265		1,291		2,528			2,575
Dividends		73		61		148			123
Total interest and dividend income		14,529		15,443		29,305			30,741
INTEREST EXPENSE
Interest on deposits		1,271		2,267		2,621			4,835
Interest on short-term borrowings		1		8		4			14
Interest on long-term borrowings		1,129		1,353		2,278			2,795
Total interest expense		2,401		3,628		4,903			7,644
Net interest income		12,128		11,815		24,402			23,097
Provision (credit) for loan losses		367		31		185			(161	)
Net interest income after provision (credit) for loan losses		11,761		11,784		24,217			23,258
OTHER INCOME
Service charges on deposit accounts		1,256		1,225		2,417			2,356
Service charges and fees		235		207		455			425
Trust and financial management revenue		960		946		1,889			1,823
Interchange revenue from debit card transactions		488		485		983			937
Net gains from sale of loans		373		155		638			414
Increase in cash surrender value of life insurance		117		132		236			254
Insurance commissions, fees and premiums		73		58		107			126
Impairment loss on limited partnership investment		0		0		0			(948	)
Other operating income		593		465		1,129			841
Sub-total		4,095		3,673		7,854			6,228
Total other-than-temporary impairment losses on available-for-sale securities		0		0		(67	)		0
Portion of (gain) loss recognized in other comprehensive loss (before taxes)		0		0		0			0
Net impairment losses recognized in earnings		0		0		(67	)		0
Realized gains on available-for-sale securities, net		203		163		268			2,002
Net realized gains on available-for-sale securities		203		163		201			2,002
Total other income		4,298		3,836		8,055			8,230
OTHER EXPENSES
Salaries and wages		3,586		3,469		7,161			6,870
Pensions and other employee benefits		1,090		1,018		2,456			2,324
Occupancy expense, net		628		665		1,264			1,397
Furniture and equipment expense		461		453		943			937
FDIC Assessments		157		189		303			514
Pennsylvania shares tax		340		320		672			639
Other operating expense		2,018		1,680		3,998			3,376
Total other expenses		8,280		7,794		16,797			16,057
Income before income tax provision		7,779		7,826		15,475			15,431
Income tax provision		2,094		2,129		4,203			4,193
NET INCOME	$	5,685	$	5,697	$	11,272		$	11,238
NET INCOME PER SHARE - BASIC	$	0.46	$	0.47	$	0.92		$	0.92
NET INCOME PER SHARE - DILUTED	$	0.46	$	0.47	$	0.92		$	0.92

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						Six Months Ended
	June 30,						June 30,
	2012			2011			2012			2011
Net income	$	5,685		$	5,697		$	11,272		$	11,238

Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities		1,227			5,949			1,571			12,074
Reclassification adjustment for gains realized in income		(203	)		(163	)		(201	)		(2,002	)
Other comprehensive gain on available-for-sale securities		1,024			5,786			1,370			10,072

Unfunded pension and postretirement obligations:
Change in items from defined benefit plans included in accumulated other comprehensive income		0			(3	)		200			(122	)
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		20			14			40			27
Other comprehensive gain (loss) on unfunded retirement obligations		20			11			240			(95	)

Other comprehensive income before income tax		1,044			5,797			1,610			9,977
Income tax related to other comprehensive income		(364	)		(1,969	)		(716	)		(3,390	)

Net other comprehensive income		680			3,828			894			6,587

Total comprehensive income	$	6,365		$	9,525		$	12,166		$	17,825

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

CONSOLIDATED STATEMENTS OF CASH FLOWS	Six Months Ended June 30,
(In Thousands) (Unaudited)	2012			2011
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	11,272		$	11,238
Adjustments to reconcile net income to net cash provided by operating activities:
Provision (credit) for loan losses		185			(161	)
Realized gains on available-for-sale securities, net		(201	)		(2,002	)
Gain on disposition of premises and equipment		(270	)		0
Loss on sale of foreclosed assets, net		80			43
Depreciation expense		964			1,058
Accretion and amortization on securities, net		416			753
Accretion and amortization on loans, deposits and borrowings, net		(26	)		(18	)
Amortization of mortgage servicing rights		44			29
Impairment loss on limited partnership interest		0			948
Increase in cash surrender value of life insurance		(236	)		(254	)
Stock-based compensation		411			351
Amortization of core deposit intangibles		37			57
Deferred income taxes		1,495			2,562
Gains on sales of mortgage loans, net		(638	)		(414	)
Origination of mortgage loans for sale		(22,121	)		(8,453	)
Proceeds from sales of mortgage loans		20,379			13,807
(Increase) decrease in accrued interest receivable and other assets		(2,517	)		2,750
(Decrease) increase in accrued interest payable and other liabilities		(308	)		507
Net Cash Provided by Operating Activities		8,966			22,801
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of certificates of deposit		(960	)		0
Proceeds from sales of available-for-sale securities		11,781			16,615
Proceeds from calls and maturities of available-for-sale securities		56,423			54,054
Purchase of available-for-sale securities		(63,502	)		(79,627	)
Redemption of Federal Home Loan Bank of Pittsburgh stock		648			796
Net decrease in loans		3,159			14,424
Purchase of premises and equipment		(1,028	)		(266	)
Proceeds from disposition of premises and equipment		454			0
Purchase of investment in limited liability entity		(534	)		(200	)
Return of principal on limited liability entity investments		47			70
Proceeds from sale of foreclosed assets		858			230
Net Cash Provided by Investing Activities		7,346			6,096
CASH FLOWS FROM FINANCING ACTIVITIES:
Net increase (decrease) in deposits		11,244			(8,996	)
Net (decrease) increase in short-term borrowings		(708	)		1,930
Repayments of long-term borrowings		(15,325	)		(15,313	)
Purchase of treasury stock		0			(571	)
Sale of treasury stock		155			16
Tax benefit from compensation plans		30			31
Common dividends paid		(4,085	)		(2,903	)
Net Cash Used in Financing Activities		(8,689	)		(25,806	)
INCREASE IN CASH AND CASH EQUIVALENTS		7,623			3,091
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR		56,815			46,301
CASH AND CASH EQUIVALENTS, END OF PERIOD	$	64,438		$	49,392

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through foreclosure of real estate loans	$	521		$	1,401
Accrued purchase of available-for-sale securities	$	230		$	0
Interest paid	$	5,117		$	7,694
Income taxes paid	$	3,050		$	400

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

Six Months Ended June 30, 2012 and 2011

(In Thousands Except Share and Per Share Data)														Accum. Other
(Unaudited)	Common		Treasury			Common		Paid-in			Retained			Comprehensive			Treasury
	Shares		Shares			Stock		Capital			Earnings			Income (Loss)			Stock			Total
Six Months Ended June 30, 2012:
Balance, December 31, 2011		12,460,920		305,391		$	12,461	$	67,568		$	82,302		$	10,160		$	(5,106	)	$	167,385
Net income												11,272									11,272
Other comprehensive income, net															894						894
Cash dividends declared on common stock, $.38 per share												(4,640	)								(4,640	)
Shares issued for dividend reinvestment Plan		28,916					29		526												555
Shares issued from treasury related to exercise of stock options				(10,352	)				(19	)								174			155
Restricted stock granted				(42,552	)				(711	)								711			0
Forfeiture of restricted stock				2,032					34									(34	)		0
Stock-based compensation expense									411												411
Tax benefit of stock options									8												8
Tax benefit from employee benefit plan												22									22
Balance, June 30, 2012		12,489,836		254,519		$	12,490	$	67,817		$	88,956		$	11,054		$	(4,255	)	$	176,062

Six Months Ended June 30, 2011:
Balance, December 31, 2010		12,408,212		254,614		$	12,408	$	66,648		$	65,920		($	1,601	)	$	(4,431	)	$	138,944
Net income												11,238									11,238
Other comprehensive income, net															6,587						6,587
Cash dividends declared on common stock, $.27 per share												(3,287	)								(3,287	)
Shares issued for dividend reinvestment plan		24,556					25		359												384
Treasury stock purchased				40,302														(571	)		(571	)
Shares issued from treasury related to exercise of stock options				(1,108	)				(3	)								19			16
Restricted stock granted				(15,622	)				(272	)								272			0
Forfeiture of restricted stock				189					3									(3	)		0
Stock-based compensation expense									351												351
Tax benefit from employee benefit plan												31									31
Balance, June 30, 2011		12,432,768		278,375		$	12,433	$	67,086		$	73,902		$	4,986		$	(4,714	)	$	153,693

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Notes to Unaudited Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION

The consolidated financial information included herein, with the exception of the consolidated balance sheet dated December 31, 2011, 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 2011 information has been reclassified for consistency with the 2012 presentation.

Operating results reported for the three-month and six-month periods ended June 30, 2012 might not be indicative of the results for the year ending December 31, 2012. The Corporation evaluates subsequent events through the date of filing with the Securities and Exchange Commission.

2. PER COMMON SHARE DATA

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

			Weighted-
			Average			Earnings
	Net		Common			Per
	Income		Shares			Share
Six Months Ended June 30, 2012
Earnings per share – basic	$	11,272,000		12,216,339		$	0.92
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options				204,836
Hypothetical share repurchase at $19.35				(177,872	)
Earnings per share – diluted	$	11,272,000		12,243,303		$	0.92

Six Months Ended June 30, 2011
Earnings per share – basic	$	11,238,000		12,176,027		$	0.92
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options				93,266
Hypothetical share repurchase at $15.58				(90,140	)
Earnings per share – diluted	$	11,238,000		12,179,153		$	0.92

Quarter Ended June 30, 2012
Earnings per share – basic	$	5,685,000		12,225,808		$	0.46
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options				137,591
Hypothetical share repurchase at $18.26				(120,566	)
Earnings per share – diluted	$	5,685,000		12,242,833		$	0.46

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

			Weighted-
			Average			Earnings
	Net		Common			Per
	Income		Shares			Share
Quarter Ended June 30, 2011
Earnings per share – basic	$	5,697,000		12,177,110		$	0.47
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options				92,449
Hypothetical share repurchase at $15.58				(89,360	)
Earnings per share – diluted	$	5,697,000		12,180,199		$	0.47

Stock options that were anti-dilutive were excluded from net income per share calculations. Weighted-average common shares available from anti-dilutive instruments totaled 147,509 shares in the six-month period ended June 30, 2012, 225,245 shares in the six-month period ended June 30, 2011, 210,875 shares in the second quarter 2012 and 224,063 shares in the second quarter 2011.

3. COMPREHENSIVE INCOME

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

	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
Six Months Ended June 30, 2012
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities	$	1,571		$	(712	)	$	859
Reclassification adjustment for gains realized in income		(201	)		70			(131	)
Other comprehensive gain on available-for-sale securities		1,370			(642	)		728

Unfunded pension and postretirement obligations:
Change in items from defined benefit plans included in accumulated other comprehensive income		200			(61	)		139
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		40			(13	)		27
Other comprehensive gain on unfunded retirement obligations		240			(74	)		166

Total other comprehensive income	$	1,610		$	(716	)	$	894

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
Six Months Ended June 30, 2011
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities	$	12,074		$	(4,103	)	$	7,971
Reclassification adjustment for gains realized in income		(2,002	)		681			(1,321	)
Other comprehensive gain on available-for-sale securities		10,072			(3,422	)		6,650

Unfunded pension and postretirement obligations:
Change in items from defined benefit plans included in accumulated other comprehensive income		(122	)		41			(81	)
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		27			(9	)		18
Other comprehensive loss on unfunded retirement obligations		(95	)		32			(63	)

Total other comprehensive income	$	9,977		$	(3,390	)	$	6,587

	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
Quarter Ended June 30, 2012
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities	$	1,227		$	(428	)	$	799
Reclassification adjustment for gains realized in income		(203	)		71			(132	)
Other comprehensive gain on available-for-sale securities		1,024			(357	)		667

Unfunded pension and postretirement obligations:
Change in items from defined benefit plans included in accumulated other comprehensive income		0			0			0
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		20			(7	)		13
Other comprehensive gain on unfunded retirement obligations		20			(7	)		13

Total other comprehensive income	$	1,044		$	(364	)	$	680

	Before-Tax			Income Tax			Net-of-Tax
	Amount			Effect			Amount
Quarter Ended June 30, 2011
Unrealized gains on available-for-sale securities:
Unrealized holding gains on available-for-sale securities	$	5,949		$	(2,021	)	$	3,928
Reclassification adjustment for gains realized in income		(163	)		56			(107	)
Other comprehensive gain on available-for-sale securities		5,786			(1,965	)		3,821

Unfunded pension and postretirement obligations:
Change in items from defined benefit plans included in accumulated other comprehensive income		(3	)		1			(2	)
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost		14			(5	)		9
Other comprehensive gain on unfunded retirement obligations		11			(4	)		7

Total other comprehensive income	$	5,797		$	(1,969	)	$	3,828

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Changes in the components of accumulated other comprehensive income are as follows:

							Accumulated
	Unrealized			Unfunded			Other
	Holding Gains			Retirement			Comprehensive
	on Securities			Obligations			Income
Six Months Ended June 30, 2012
Balance, beginning of period	$	10,791		$	(631	)	$	10,160
Change during six months ended June 30, 2012		728			166			894
Balance, end of period	$	11,519		$	(465	)	$	11,054

Six Months Ended June 30, 2011
Balance, beginning of period	$	(1,351	)	$	(250	)	$	(1,601	)
Change during six months ended June 30, 2011		6,650			(63	)		6,587
Balance, end of period	$	5,299		$	(313	)	$	4,986

Quarter Ended June 30, 2012
Balance, beginning of period	$	10,852		$	(478	)	$	10,374
Change during three months ended June 30, 2012		667			13			680
Balance, end of period	$	11,519		$	(465	)	$	11,054

Quarter Ended June 30, 2011
Balance, beginning of period	$	1,478		$	(320	)	$	1,158
Change during three months ended June 30, 2011		3,821			7			3,828
Balance, end of period	$	5,299		$	(313	)	$	4,986

4. CASH AND DUE FROM BANKS

Cash and due from banks at June 30, 2012 and December 31, 2011 include the following:

(In thousands)	June 30,		Dec. 31,
	2012		2011
Cash and cash equivalents	$	64,438	$	56,815
Certificates of deposit		4,720		3,760
Total cash and due from banks	$	69,158	$	60,575

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

The Corporation is required to maintain reserves against deposit liabilities in the form of cash and balances with the Federal Reserve Bank. The reserves are based on deposit levels, account activity, and other services provided by the Federal Reserve Bank. Required reserves were $13,739,000 at June 30, 2012 and $14,035,000 at December 31, 2011.

5. FAIR VALUE MEASUREMENTS AND FAIR VALUES OF FINANCIAL INSTRUMENTS

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

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

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

At June 30, 2012 and December 31, 2011, assets measured at fair value and the valuation methods used are as follows:

			June 30, 2012
	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	$	23,916	$	0		$	23,916
Obligations of states and political subdivisions:
Tax-exempt		0		141,140		0			141,140
Taxable		0		19,924		0			19,924
Mortgage-backed securities		0		108,426		0			108,426
Collateralized mortgage obligations, Issued by U.S. Government agencies		0		165,923		0			165,923
Trust preferred securities issued by individual institutions		0		6,221		0			6,221
Collateralized debt obligations:
Pooled trust preferred securities - senior tranches		0		0		2,386			2,386
Pooled trust preferred securities - mezzanine tranches		0		0		1,146			1,146
Other collateralized debt obligations		0		660		0			660
Total debt securities		0		466,210		3,532			469,742
Marketable equity securities		8,626		0		0			8,626
Total available-for-sale securities		8,626		466,210		3,532			478,368
Servicing rights		0		0		460			460
Total recurring fair value measurements	$	8,626	$	466,210	$	3,992		$	478,828

Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$	0	$	0	$	3,434		$	3,434
Valuation allowance		0		0		(1,303	)		(1,303	)
Impaired loans, net		0		0		2,131			2,131
Foreclosed assets held for sale		0		0		904			904
Total nonrecurring fair value measurements	$	0	$	0	$	3,035		$	3,035

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

			December 31, 2011
	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	$	25,587	$	0		$	25,587
Obligations of states and political subdivisions:
Tax-exempt		0		132,962		0			132,962
Taxable		0		14,334		0			14,334
Mortgage-backed securities		0		121,769		0			121,769
Collateralized mortgage obligations,
Issued by U.S. Government agencies		0		165,131		0			165,131
Trust preferred securities issued by individual institutions		0		8,146		0			8,146
Collateralized debt obligations:
Pooled trust preferred securities - senior tranches		0		0		4,638			4,638
Pooled trust preferred securities - mezzanine tranches		0		0		730			730
Other collateralized debt obligations		0		660		0			660
Total debt securities		0		468,589		5,368			473,957
Marketable equity securities		7,728		0		0			7,728
Total available-for-sale securities		7,728		468,589		5,368			481,685
Servicing rights		0		0		375			375
Total recurring fair value measurements	$	7,728	$	468,589	$	5,743		$	482,060

Nonrecurring fair value measurements
Impaired loans with a valuation allowance	$	0	$	0	$	3,433		$	3,433
Valuation allowance		0		0		(1,126	)		(1,126	)
Impaired loans, net		0		0		2,307			2,307
Foreclosed assets held for sale		0		0		1,235			1,235
Total nonrecurring fair value measurements	$	0	$	0	$	3,542		$	3,542

Management determined there have been few trades of pooled trust-preferred securities since 2008, except for a limited number of transactions that have taken place as a result of bankruptcies, forced liquidations or similar circumstances. Also, in management’s judgment, there were no available quoted market prices in active markets for assets sufficiently similar to the Corporation’s pooled trust-preferred securities to be reliable as observable inputs. Accordingly, the Corporation follows a method of valuing pooled trust-preferred securities using a Level 3 methodology, based on discounted cash flows.

Management has calculated the fair value of the Corporation’s pooled trust-preferred securities by applying a discount rate to the estimated cash flows. Management used the cash flow estimates determined using the process described in Note 6 for evaluating pooled trust-preferred securities for other-than-temporary impairment (OTTI). Management used discount rates considered reflective of a market participant’s expectations regarding the extent of credit and liquidity risk inherent in the securities. In establishing the discount rate, management considered: (1) the implied discount rates as of the end of 2007, prior to the market for trust-preferred securities becoming inactive; (2) adjustment to the year-end 2007 discount rates for the change in the spread between indicative market rates over corresponding risk-free rates; and (3) an additional adjustment – an increase of 2% in the discount rate – for liquidity risk. Management considered the additional 2% increase in the discount rate necessary in order to give some consideration to price estimates based on trades made under distressed conditions, as reported by brokers and pricing services.

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 less estimated selling costs.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Management’s evaluation and selection of valuation techniques and the unobservable inputs used in determining the fair values of assets valued using Level 3 methodologies include sensitive assumptions. Other market participants might use substantially different assumptions, which could result in calculations of fair values that would be substantially different than the amount calculated by management. The following table shows quantitative information regarding significant techniques and inputs used at June 30, 2012 for assets measured using unobservable inputs (Level 3 methodologies) on a recurring basis:

	Fair Value at
	6/30/12		Valuation	Unobservable				Method or Value As of
Asset	(In Thousands)		Technique	Input(s)				6/30/12
Pooled trust preferred securities - senior tranches	$	2,386	Discounted cash flow	Issuer defaults		46.15	%	Actual Deferrals and Defaults as % of Outstanding Collateral
						23.31	%	Expected Additional Net Deferrals and Defaults as % of Performing Collateral
				Issuer prepayments		34.99	%	Expected Issuer Prepayments as % of Performing Collateral
				Discount rate		11.70	%	Implied 7.57% discount rate at 12/31/07 plus 4.13% spread for credit and liquidity risk
Pooled trust preferred securities - mezzanine tranches		1,146	Discounted cash flow	Issuer defaults		22.95	%	Actual Deferrals and Defaults as % of Outstanding Collateral
						33.92	%	Expected Additional Net Deferrals and Defaults as % of Performing Collateral
				Future interest rates				Three-month LIBOR forward curve
				Issuer prepayments		3.70	%	Expected Issuer Prepayments as % of Performing Collateral
				Discount rate		3.95	%	Credit and liquidity risk spread added to three-month LIBOR forward curve
Servicing rights		460	Discounted cash flow	Discount rate		12.00	%	Rate used through modeling period
				Loan prepayment speeds		292.00	%	Weighted-average PSA
				Servicing fees		0.25	%	of loan balances
						5.00	%	of payments are late
						5.00	%	late fees assessed
					$	1.94		Miscellaneous fees per account per month
				Servicing costs	$	5.50		Monthly servicing cost per account
					$	22.00		Additional monthly servicing cost per loan on loans more than 30 days delinquent
						1.00	%	of loans more than 30 days delinquent
						3.00	%	annual increase in servicing costs

Increases (decreases) in actual or expected issuer defaults tend to decrease (increase) the fair value of the Corporation’s senior and mezzanine tranches of pooled trust preferred securities. The values of the Corporation’s mezzanine tranches of pooled trust preferred securities are also affected by expected future interest rates. However, due to the structure of each security, timing of cash flows, and secondary effects on the financial performance of the underlying issuers, the effects of changes in future interest rates on the fair value of the Corporation’s holdings are not quantifiably estimable. 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.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

	Three Months Ended June 30, 2012												Six Months Ended June 30, 2012
	Pooled Trust			Pooled Trust									Pooled Trust			Pooled Trust
	Preferred			Preferred									Preferred			Preferred
	Securities -			Securities -									Securities -			Securities -
	Senior			Mezzanine			Servicing						Senior			Mezzanine			Servicing
	Tranches			Tranches			Rights			Total			Tranches			Tranches			Rights			Total
Balance, beginning of period	$	4,638		$	782		$	409		$	5,829		$	4,638		$	730		$	375		$	5,743
Issuances of servicing rights		0			0			74			74			0			0			129			129
Accretion and amortization, net		(2	)		0			0			(2	)		(5	)		0			0			(5	)
Proceeds from sales and calls		(2,515	)		(27	)		0			(2,542	)		(2,515	)		(54	)		0			(2,569	)
Realized gains, net		40			27			0			67			40			54			0			94
Unrealized losses included in earnings		0			0			(23	)		(23	)		0			0			(44	)		(44	)
Unrealized gains included in other comprehensive income		225			364			0			589			228			416			0			644
Balance, end of period	$	2,386		$	1,146		$	460		$	3,992		$	2,386		$	1,146		$	460		$	3,992

	Three Months Ended June 30, 2011												Six Months Ended June 30, 2011
	Pooled Trust			Pooled Trust									Pooled Trust			Pooled Trust
	Preferred			Preferred									Preferred			Preferred
	Securities -			Securities -									Securities -			Securities -
	Senior			Mezzanine			Servicing						Senior			Mezzanine			Servicing
	Tranches			Tranches			Rights			Total			Tranches			Tranches			Rights			Total
Balance, beginning of period	$	9,038		$	0		$	293		$	9,331		$	7,400		$	0		$	204		$	7,604
Issuances of servicing rights		0			0			38			38			0			0			140			140
Accretion and amortization, net		(14	)		0			0			(14	)		(34	)		0			0			(34	)
Proceeds from sales and calls		(2,035	)		(25	)		0			(2,060	)		(2,035	)		(50	)		0			(2,085	)
Realized gains, net		25			25			0			50			25			50			0			75
Unrealized losses included in earnings		0			0			(16	)		(16	)		0			0			(29	)		(29	)
Unrealized gains included in other comprehensive income		193			0			0			193			1,851			0			0			1,851
Balance, end of period	$	7,207		$	0		$	315		$	7,522		$	7,207		$	0		$	315		$	7,522

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 program.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 June 30, 2012 and December 31, 2011. The fair value of time deposits, such as certificates of deposit and Individual Retirement Accounts, is based on the discounted value of contractual cash flows. The discount rate is estimated using the rates currently offered for deposits of similar remaining maturities. The fair value estimates of deposits do not include the benefit that results from the low-cost funding provided by the deposit liabilities compared to the cost of borrowing funds in the market, commonly referred to as the core deposit intangible.

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

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

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

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

(In Thousands)	Valuation		June 30, 2012				December 31, 2011
	Method(s)		Carrying		Fair		Carrying		Fair
	Used		Amount		Value		Amount		Value
Financial assets:
Cash and cash equivalents		Level 1	$	64,438	$	64,438	$	56,815	$	56,815
Certificates of deposit		Level 2		4,720		4,738		3,760		3,683
Available-for-sale securities		See Above		478,368		478,368		481,685		481,685
Restricted equity securities (included in Other Assets)		Level 2		6,125		6,125		6,773		6,773
Loans held for sale		Level 1		3,190		3,190		939		939
Loans, net		Level 3		696,777		716,462		700,610		718,274
Accrued interest receivable		Level 1		4,556		4,556		4,797		4,797
Servicing rights		Level 3		460		460		375		375
Financial liabilities:
Deposits with no stated maturity		Level 1		683,183		683,183		677,461		677,461
Time deposits		Level 3		346,273		349,561		340,745		344,936
Short-term borrowings		Level 3		4,242		4,208		4,950		4,897
Long-term borrowings		Level 3		110,038		125,159		125,363		145,641
Accrued interest payable		Level 1		210		210		358		358

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

6. SECURITIES

Amortized cost and fair value of available-for-sale securities at June 30, 2012 and December 31, 2011 are summarized as follows:

			June 30, 2012
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding			Fair
(In Thousands)	Cost		Gains		Losses			Value

Obligations of U.S. Government agencies	$	23,244	$	672	$	0		$	23,916
Obligations of states and political subdivisions:
Tax-exempt		135,736		5,894		(490	)		141,140
Taxable		19,524		437		(37	)		19,924
Mortgage-backed securities		103,801		4,625		0			108,426
Collateralized mortgage obligations, Issued by U.S. Government agencies		162,780		3,153		(10	)		165,923
Trust preferred securities issued by individual institutions		6,179		42		0			6,221
Collateralized debt obligations:
Pooled trust preferred securities - senior tranches		2,516		0		(130	)		2,386
Pooled trust preferred securities - mezzanine tranches		0		1,146		0			1,146
Other collateralized debt obligations		660		0		0			660
Total debt securities		454,440		15,969		(667	)		469,742
Marketable equity securities		6,208		2,468		(50	)		8,626
Total	$	460,648	$	18,437	$	(717	)	$	478,368

			December 31, 2011
			Gross		Gross
			Unrealized		Unrealized
	Amortized		Holding		Holding			Fair
(In Thousands)	Cost		Gains		Losses			Value

Obligations of U.S. Government agencies	$	24,877	$	710	$	0		$	25,587
Obligations of states and political subdivisions:
Tax-exempt		129,401		4,891		(1,330	)		132,962
Taxable		14,004		334		(4	)		14,334
Mortgage-backed securities		116,602		5,167		0			121,769
Collateralized mortgage obligations, Issued by U.S. Government agencies		161,818		3,350		(37	)		165,131
Trust preferred securities issued by individual institutions		7,334		865		(53	)		8,146
Collateralized debt obligations:
Pooled trust preferred securities - senior tranches		4,996		0		(358	)		4,638
Pooled trust preferred securities - mezzanine tranches		0		730		0			730
Other collateralized debt obligations		660		0		0			660
Total debt securities		459,692		16,047		(1,782	)		473,957
Marketable equity securities		5,643		2,186		(101	)		7,728
Total	$	465,335	$	18,233	$	(1,883	)	$	481,685

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table presents gross unrealized losses and fair value of available-for-sale securities with unrealized loss positions that are not deemed to be other-than-temporarily impaired, aggregated by length of time that individual securities have been in a continuous unrealized loss position at June 30, 2012 and December 31, 2011:

June 30, 2012	Less Than 12 Months					12 Months or More					Total
(In Thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses

Obligations of states and political subdivisions:
Tax-exempt	$	16,333	$	(246	)	$	8,081	$	(244	)	$	24,414	$	(490	)
Taxable		3,907		(37	)		0		0			3,907		(37	)
Collateralized mortgage obligations, Issued by U.S. Government agencies		7,094		(10	)		0		0			7,094		(10	)
Collateralized debt obligations, Pooled trust preferred securities - senior tranches		0		0			2,386		(130	)		2,386		(130	)
Total debt securities		27,334		(293	)		10,467		(374	)		37,801		(667	)
Marketable equity securities		412		(49	)		89		(1	)		501		(50	)
Total temporarily impaired available-for-sale securities	$	27,746	$	(342	)	$	10,556	$	(375	)	$	38,302	$	(717	)

December 31, 2011	Less Than 12 Months					12 Months or More					Total
(In Thousands)	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses

Obligations of states and political subdivisions:
Tax-exempt	$	4,301	$	(34	)	$	20,692	$	(1,296	)	$	24,993	$	(1,330	)
Taxable		927		(2	)		244		(2	)		1,171		(4	)
Collateralized mortgage obligations, Issued by U.S. Government agencies		6,886		(36	)		5,075		(1	)		11,961		(37	)
Trust preferred securities issued by individual institutions		0		0			947		(53	)		947		(53	)
Collateralized debt obligations, Pooled trust preferred securities - senior tranches		0		0			4,638		(358	)		4,638		(358	)
Total debt securities		12,114		(72	)		31,596		(1,710	)		43,710		(1,782	)
Marketable equity securities		776		(44	)		98		(57	)		874		(101	)
Total temporarily impaired available-for-sale securities	$	12,890	$	(116	)	$	31,694	$	(1,767	)	$	44,584	$	(1,883	)

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

(In Thousands)	3 Months Ended						6 Months Ended
	June 30,			June 30,			June 30,			June 30,
	2012			2011			2012			2011
Gross realized gains	$	252		$	169		$	317		$	2,009
Gross realized losses		(49	)		(6	)		(116	)		(7	)
Net realized gains	$	203		$	163		$	201		$	2,002
Income tax provision related to net realized gains	$	71		$	56		$	70		$	681

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The amortized cost and fair value of available-for-sale debt securities by contractual maturity are shown in the following table as of June 30, 2012. Actual maturities may differ from contractual maturities because counterparties may have the right to call or prepay obligations with or without call or prepayment penalties.

	Amortized		Fair
(In Thousands)	Cost		Value

Due in one year or less	$	8,791	$	8,847
Due from one year through five years		51,216		52,756
Due from five years through ten years		35,688		36,350
Due after ten years		92,164		97,440
Subtotal		187,859		195,393
Mortgage-backed securities		103,801		108,426
Collateralized mortgage obligations,
Issued by U.S. Government agencies		162,780		165,923
Total	$	454,440	$	469,742

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

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

The Corporation recognized no impairment losses in earnings in the three-month period ended June 30, 2012. The Corporation recognized an impairment loss in earnings totaling $67,000 in the six-month period ended June 30, 2012, which was related to a bank stock. No impairment losses were recognized in the three-month or six-month periods ended June 30, 2011.

A summary of information management considered in evaluating debt and equity securities for OTTI at June 30, 2012 is provided below.

Debt Securities

At June 30, 2012, management performed an assessment for possible OTTI of the Corporation’s debt securities on an issue-by-issue basis, relying on information obtained from various sources, including publicly available financial data, ratings by external agencies, brokers and other sources. The extent of individual analysis applied to each security depended on the size of the Corporation’s investment, as well as management’s perception of the credit risk associated with each security. Based on the results of the assessment, management believes impairment of these debt securities, including municipal bonds with no external ratings, at June 30, 2012 to be temporary.

The credit rating agencies have withdrawn their ratings on numerous municipal bonds held by the Corporation. At June 30, 2012, the total amortized cost basis of municipal bonds with no external credit ratings was $22,977,000, with an aggregate unrealized gain of $65,000. At the time of purchase, each of these bonds was considered investment grade and had been rated by at least one credit rating agency. The bonds for which the ratings were removed were almost all insured by an entity that has reported significant financial problems and declines in its regulatory capital ratios, and most of the ratings were removed in the fourth quarter 2009. However, the insurance remains in effect on the bonds, and none of the affected municipal bonds has failed to make a scheduled interest payment.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following table provides information related to trust preferred securities issued by individual institutions as of June 30, 2012:

(In Thousands)												Moody's/
										Cumulative		S&P/
										Realized		Fitch
		Par Amount		Amortized		Fair		Unrealized		Credit		Credit
Name of Issuer	Issuer's Parent Company	Outstanding		Cost		Value		Gain		Losses		Ratings
Astoria Capital Trust I	Astoria Financial Corporation	$	5,000	$	5,179	$	5,195	$	16	$	0		Ba1/BB/B+
Patriot Capital Trust I	Susquehanna Bancshares, Inc.		1,000		1,000		1,026		26		0		NR
Total		$	6,000	$	6,179	$	6,221	$	42	$	0

NR = not rated.

Management assesses each of the trust preferred securities issued by individual institutions for the possibility of OTTI by reviewing financial information that is publicly available. Neither Astoria Financial Corporation nor Susquehanna Bancshares, Inc. has deferred or defaulted on payments associated with the Corporation’s securities.

The Corporation recognized OTTI charges in 2009 and 2010 related to its holding of a trust preferred security issued by Carolina First Mortgage Loan Trust, a subsidiary of The South Financial Group, Inc. In the fourth quarter 2010, The Toronto-Dominion Bank acquired The South Financial Group, Inc. After the acquisition, The Toronto-Dominion Bank made a payment for the full amount of previously deferred interest and resumed quarterly payments on the security. The Corporation recognized a material change in the expected cash flows in the fourth quarter 2010. The Corporation recorded accretion income (included in interest income) totaling $398,000 in the three-month period ended June 30, 2012 and $855,000 in the six-month period ended June 30, 2012. The Corporation recorded accretion income totaling $160,000 in the three-month period ended June 30, 2011 and $271,000 in the six-month period ended June 30, 2011. For the year ended December 31, 2011, the Corporation recorded accretion income totaling $825,000. The security had a face amount of $2,000,000 and matured in May 2012.

Pooled trust-preferred securities are very long-term (usually 30-year maturity) instruments, mainly issued by banks. The Corporation’s investments in pooled trust-preferred securities are each made up of companies with geographic and size diversification. Almost all of the Corporation’s pooled trust-preferred securities are composed of debt issued by banking companies, with a lesser amount issued by insurance companies. Trust-preferred securities typically permit deferral of quarterly interest payments for up to five years, and some of the issuers of trust-preferred securities that are included in the Corporation’s pooled investments have elected to defer payment of interest on these obligations. Some issuers have defaulted.

Management evaluated pooled trust-preferred securities for OTTI by estimating the cash flows expected to be received from each security, taking into account estimated levels of deferrals and defaults by the underlying issuers. In determining cash flows, management assumed all issuers currently deferring or in default would make no future payments, and assigned estimated future default levels for the remaining issuers in each security based on financial strength ratings assigned by a national ratings service. Management calculated the present value of each security based on the current book yield, adjusted for future changes in three-month LIBOR (which is the index rate on the Corporation’s adjustable-rate pooled trust-preferred securities) based on the applicable forward curve. Management’s estimates of cash flows used to evaluate other-than-temporary impairment of pooled trust-preferred securities were based on sensitive assumptions regarding the timing and amounts of defaults that may occur, and changes in the assumptions used could produce different conclusions for each security. Additional information regarding these assumptions is included in Note 5.

The following table provides detailed information related to pooled trust preferred securities – mezzanine tranches held as of June 30, 2012:

(In Thousands)
			Par Amount		Amortized		Fair		Unrealized		Cumulative
Security	Tranche		Outstanding		Cost		Value		Gain		OTTI
ALESCO Preferred Funding IX, Ltd.		C-1	$	3,000	$	0	$	0	$	0	($	2,988	)
U.S. Capital Funding II, Ltd.		B-1		2,000		0		458		458		(1,992	)
U.S. Capital Funding II, Ltd.		B-2		3,000		0		688		688		(2,973	)
Total			$	8,000	$	0	$	1,146	$	1,146	($	7,953	)

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

As of June 30, 2012, the Corporation’s investment in the senior tranche of MMCAPS Funding I, Ltd. had an investment grade rating. The security, with an amortized cost of $2,516,000, has been subjected to impairment analysis based on estimated cash flows (using the process described above), and management has determined that impairment was temporary as of June 30, 2012.

The table that follows provides additional information related to pooled trust preferred securities as of June 30, 2012:

Security	MMCAPS			U.S. Capital			U.S. Capital
	Funding I, Ltd.			Funding II, Ltd.			Funding II, Ltd.
Tranche	Senior			B-1			B-2
Number of Issuers Currently Performing		9			35			35
Moody’s/Fitch Credit Ratings		A3/BBB (1)			Caa3/C			Caa3/C
Actual Deferrals and Defaults as % of Outstanding Collateral		46.15	%		22.95	%		22.95	%
Expected Additional Net Deferrals and Defaults as % of Performing Collateral		23.31	%		33.92	%		33.92	%
Excess Subordination as % of Performing Collateral		57.60	%		-16.08	%		-16.08	%
Expected Issuer Prepayments as % of Performing Collateral		34.99	%		3.70	%		3.70	%

(1) Fitch has the senior tranche of MMCAPS Funding I, Ltd. on negative outlook.

In the table above, “Excess Subordination as % of Performing Collateral” (Excess Subordination Ratio) was calculated as follows: (Total face value of performing collateral – Face value of all outstanding note balances not subordinate to the Corporation’s investment)/Total face value of performing collateral.

The Excess Subordination Ratio measures the extent to which there may be tranches within the pooled trust preferred structure available to absorb credit losses before the Corporation’s security would be impacted. A positive Excess Subordination Ratio signifies there is available support from subordinate tranches to absorb losses before the Corporation’s investment would be impacted. A negative Excess Subordination Ratio signifies there is no available support from subordinate tranches to absorb losses before the Corporation’s securities would be impacted. The Excess Subordination Ratio is not definitive, in isolation, for determining OTTI or whether the Corporation will receive future payments on a pooled trust preferred security. Other factors affect the timing and amount of cash flows available for payments to the note holders (investors), including the excess interest paid by the issuers, who typically pay higher rates of interest than are paid out to the note holders.

The Corporation separates OTTI related to the trust-preferred securities into (a) the amount of the total impairment related to credit loss, which is recognized in the statement of earnings, and (b) the amount of the total impairment related to all other factors, which is recognized in other comprehensive income. The Corporation measures the credit loss component of OTTI based on the difference between: (1) the present value of estimated cash flows, at the book yield in effect prior to recognition of any OTTI, as of the most recent balance sheet date, and (2) the present value of estimated cash flows as of the previous quarter-end balance sheet date based on management’s cash flow assumptions at that time.

The Corporation recorded no OTTI losses related to pooled trust-preferred securities in the three-month and six-month periods ended June 30, 2012 and 2011.

Equity Securities

The Corporation’s marketable equity securities at June 30, 2012 and December 31, 2011 consisted exclusively of stocks of banking companies. The Corporation recognized an impairment loss in earnings related to a bank stock of $67,000 in the first quarter 2012. Management’s decision to recognize an impairment loss on this security followed an evaluation of the issuer’s published financial results in which management determined that the recovery of the Corporation’s cost basis within the foreseeable future was uncertain. As a result of this determination, the Corporation recognized an impairment loss to write the stock down to the most recent trade price at March 31, 2012. The Corporation recognized no OTTI losses related to bank stocks in the second quarter 2012. The Corporation recognized no OTTI losses related to bank stocks in the first six months of 2011. At June 30, 2012, management did not intend to sell impaired bank stocks, and based on the intent to hold the securities for the foreseeable future and other factors specific to the securities, has determined that none of the Corporation’s other bank stock holdings at June 30, 2012 were other than temporarily impaired.

The Corporation did not sell any bank stocks or realize any gains or losses from sales of bank stocks during the first six months of 2012. In the three-month period ended June 30, 2011, the Corporation realized a gain of $89,000 from the sale of a bank stock for which OTTI had been previously recognized. Realized gains from sales of bank stocks totaled $91,000 in the six-month period ended June 30, 2011 including $89,000 of realized gains from sales of stocks for which OTTI had been previously recognized.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

C&N Bank is a member of the Federal Home Loan Bank of Pittsburgh (FHLB-Pittsburgh), which is one of 12 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 $5,995,000 at June 30, 2012 and $6,643,000 at December 31, 2011. The Corporation evaluated its holding of FHLB-Pittsburgh stock for impairment and deemed the stock to not be impaired at June 30, 2012 and December 31, 2011. In making this determination, management concluded that recovery of total outstanding par value, which equals the carrying value, is expected. The decision was based on review of financial information that FHLB-Pittsburgh has made publicly available.

7. LOANS

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

Loans outstanding at June 30, 2012 and December 31, 2011 are summarized as follows:

Summary of Loans by Type

(In Thousands)	June 30,			% of			Dec. 31,			% of
	2012			Total			2011			Total
Residential mortgage:
Residential mortgage loans - first liens	$	321,163			45.59	%	$	331,015			46.73	%
Residential mortgage loans - junior liens		27,404			3.89	%		28,851			4.07	%
Home equity lines of credit		31,858			4.52	%		30,037			4.24	%
1-4 Family residential construction		10,699			1.52	%		9,959			1.41	%
Total residential mortgage		391,124			55.52	%		399,862			56.45	%
Commercial:
Commercial loans secured by real estate		164,771			23.39	%		156,388			22.08	%
Commercial and industrial		52,704			7.48	%		57,191			8.07	%
Political subdivisions		36,858			5.23	%		37,620			5.31	%
Commercial construction		26,517			3.76	%		23,518			3.32	%
Loans secured by farmland		10,079			1.43	%		10,949			1.55	%
Multi-family (5 or more) residential		6,409			0.91	%		6,583			0.93	%
Agricultural loans		3,263			0.46	%		2,987			0.42	%
Other commercial loans		563			0.08	%		552			0.08	%
Total commercial		301,164			42.75	%		295,788			41.76	%
Consumer		12,146			1.72	%		12,665			1.79	%
Total		704,434			100.00	%		708,315			100.00	%
Less: allowance for loan losses		(7,657	)					(7,705	)
Loans, net	$	696,777					$	700,610

The Corporation grants loans to individuals as well as commercial and tax-exempt entities. Commercial, residential and personal loans are made to customers geographically concentrated in the Pennsylvania and New York counties that comprise the market serviced by Citizens & Northern Bank. Although the Corporation has a diversified loan portfolio, a significant portion of its debtors’ ability to honor their contracts is dependent on the local economic conditions within the region. There is no concentration of loans to borrowers engaged in similar businesses or activities that exceed 10% of total loans at either June 30, 2012 or December 31, 2011.

The Corporation maintains an allowance for loan losses that represents management’s estimate of the losses inherent in the loan portfolio as of the balance sheet date and recorded as a reduction of the investment in loans. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. Management performs a quarterly evaluation of the adequacy of the allowance. The allowance is based on the Corporation’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. In the process of evaluating the loan portfolio, management also considers the Corporation’s exposure to losses from unfunded loan commitments. As of June 30, 2012 and December 31, 2011, management determined that no allowance for credit losses related to unfunded loan commitments was required.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Transactions within the allowance for loan losses, summarized by segment and class, for the three-month and six-month periods ended June 30, 2012 and 2011 were as follows:

Six Months Ended June 30, 2012	Dec. 31,										June 30,
(In Thousands)	2011 Balance		Charge-offs			Recoveries		Provision (Credit)			2012 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	3,026	$	(188	)	$	18	$	32		$	2,888
Residential mortgage loans - junior liens		266							(12	)		254
Home equity lines of credit		231							14			245
1-4 Family residential construction		79							1			80
Total residential mortgage		3,602		(188	)		18		35			3,467
Commercial:
Commercial loans secured by real estate		2,004							(28	)		1,976
Commercial and industrial		946		(35	)		5		(204	)		712
Political subdivisions		0							0			0
Commercial construction		267							339			606
Loans secured by farmland		126							(9	)		117
Multi-family (5 or more) residential		66							(2	)		64
Agricultural loans		27							2			29
Other commercial loans		5							0			5
Total commercial		3,441		(35	)		5		98			3,509
Consumer		228		(68	)		35		50			245
Unallocated		434							2			436

Total Allowance for Loan Losses	$	7,705	$	(291	)	$	58	$	185		$	7,657

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Six Months Ended June 30, 2011

	December 31,										June 30,
(In Thousands)	2010 Balance		Charge- offs			Recoveries		Provision (Credit)			2011 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	2,745	$	(28	)	$	0	$	333		$	3,050
Residential mortgage loans - junior liens		334		(51	)		0		10			293
Home equity lines of credit		218		0			0		2			220
1-4 Family residential construction		208		0			0		(141	)		67
Total residential mortgage		3,505		(79	)		0		204			3,630
Commercial:
Commercial loans secured by real estate		3,314		(535	)		0		(277	)		2,502
Commercial and industrial		862		(199	)		177		68			908
Political subdivisions		0		0			0		0			0
Commercial construction		590		0			0		(309	)		281
Loans secured by farmland		139		0			0		(5	)		134
Multi-family (5 or more) residential		63		0			0		12			75
Agricultural loans		32		0			0		(3	)		29
Other commercial loans		0		0			0		5			5
Total commercial		5,000		(734	)		177		(509	)		3,934
Consumer		289		(84	)		43		27			275
Unallocated		313							117			430

Total Allowance for Loan Losses	$	9,107	$	(897	)	$	220	$	(161	)	$	8,269

Three Months Ended June 30, 2012

	March 31,										June 30,
(In Thousands)	2012 Balance		Charge- offs			Recoveries		Provision (Credit)			2012 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	2,953	$	(50	)	$	18	$	(33	)	$	2,888
Residential mortgage loans - junior liens		260							(6	)		254
Home equity lines of credit		232							13			245
1-4 Family residential construction		62							18			80
Total residential mortgage		3,507		(50	)		18		(8	)		3,467
Commercial:
Commercial loans secured by real estate		1,920							56			1,976
Commercial and industrial		762		(35	)		4		(19	)		712
Political subdivisions		0							0			0
Commercial construction and land		325							281			606
Loans secured by farmland		121							(4	)		117
Multi-family (5 or more) residential		63							1			64
Agricultural loans		27							2			29
Other commercial loans		3							2			5
Total commercial		3,221		(35	)		4		319			3,509
Consumer		206		(30	)		13		56			245
Unallocated		436							0			436

Total Allowance for Loan Losses	$	7,370	$	(115	)	$	35	$	367		$	7,657

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Three Months Ended June 30, 2011

	March 31,										June 30,
(In Thousands)	2011 Balance		Charge- offs			Recoveries		Provision (Credit)			2011 Balance
Allowance for Loan Losses:
Residential mortgage:
Residential mortgage loans - first liens	$	3,150	$	(27	)	$	0	$	(73	)	$	3,050
Residential mortgage loans - junior liens		305		0			0		(12	)		293
Home equity lines of credit		212		0			0		8			220
1-4 Family residential construction		62		0			0		5			67
Total residential mortgage		3,729		(27	)		0		(72	)		3,630
Commercial:
Commercial loans secured by real estate		3,118		(535	)		0		(81	)		2,502
Commercial and industrial		842		(199	)		176		89			908
Political subdivisions		0		0			0		0			0
Commercial construction		271		0			0		10			281
Loans secured by farmland		142		0			0		(8	)		134
Multi-family (5 or more) residential		77		0			0		(2	)		75
Agricultural loans		29		0			0		0			29
Other commercial loans		8		0			0		(3	)		5
Total commercial		4,487		(734	)		176		5			3,934
Consumer		275		(39	)		16		23			275
Unallocated		355							75			430

Total Allowance for Loan Losses	$	8,846	$	(800	)	$	192	$	31		$	8,269

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

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The following tables summarize the aggregate credit quality classification of outstanding loans by risk rating as of June 30, 2012 and December 31, 2011:

June 30, 2012:
(In Thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Residential mortgage:
Residential mortgage loans - first liens	$	306,272	$	2,216	$	12,476	$	199	$	321,163
Residential mortgage loans - junior liens		25,978		536		890		0		27,404
Home equity lines of credit		31,231		361		266		0		31,858
1-4 Family residential construction		10,616		0		83		0		10,699
Total residential mortgage		374,097		3,113		13,715		199		391,124
Commercial:
Commercial loans secured by real estate		152,208		7,462		5,101		0		164,771
Commercial and industrial		44,154		4,174		4,163		213		52,704
Political subdivisions		36,742		116		0		0		36,858
Commercial construction and land		24,697		221		1,599		0		26,517
Loans secured by farmland		7,758		763		1,523		35		10,079
Multi-family (5 or more) residential		6,044		354		11		0		6,409
Agricultural loans		3,171		29		63		0		3,263
Other commercial loans		563		0		0		0		563
Total commercial		275,337		13,119		12,460		248		301,164
Consumer		11,956		17		173		0		12,146

Totals	$	661,390	$	16,249	$	26,348	$	447	$	704,434

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2011:
(In Thousands)	Pass		Special Mention		Substandard		Doubtful		Total
Residential mortgage:
Residential mortgage loans - first liens	$	314,900	$	2,955	$	12,956	$	204	$	331,015
Residential mortgage loans - junior liens		27,260		660		924		7		28,851
Home equity lines of credit		29,408		264		365		0		30,037
1-4 Family residential construction		9,959		0		0		0		9,959
Total residential mortgage		381,527		3,879		14,245		211		399,862
Commercial:
Commercial loans secured by real estate		143,247		7,385		5,046		710		156,388
Commercial and industrial		46,110		6,254		4,413		414		57,191
Political subdivisions		37,499		121		0		0		37,620
Commercial construction and land		21,668		211		1,639		0		23,518
Loans secured by farmland		8,040		1,341		1,531		37		10,949
Multi-family (5 or more) residential		6,200		369		14		0		6,583
Agricultural loans		2,765		164		58		0		2,987
Other commercial loans		552		0		0		0		552
Total commercial		266,081		15,845		12,701		1,161		295,788
Consumer		12,437		20		207		1		12,665

Totals	$	660,045	$	19,744	$	27,153	$	1,373	$	708,315

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

The qualitative factors used in the general component calculations are designed to address credit risk characteristics associated with each segment. The Corporation’s credit risk associated with all of the segments is significantly impacted by these factors, which include economic conditions within its market area, the Corporation’s lending policies, changes or trends in the portfolio, risk profile, competition, regulatory requirements and other factors. Further, the residential mortgage segment is significantly affected by the values of residential real estate that provide collateral for the loans. The majority of the Corporation’s commercial segment loans (approximately 69% at June 30, 2012) is secured by real estate, and accordingly, the Corporation’s risk for the commercial segment is significantly affected by commercial real estate values. The consumer segment includes a wide mix of loans for different purposes, primarily secured loans, including loans secured by motor vehicles, manufactured housing and other types of collateral.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The scope of loans evaluated individually for impairment include all loan relationships greater than $200,000 for which there is at least one extension of credit graded Special Mention, Substandard or Doubtful. Also, all loans classified as troubled debt restructurings (discussed in more detail below) and all loan relationships less than $200,000 in the aggregate, but with an estimated loss of $100,000 or more, are individually evaluated for impairment. Loans that are individually evaluated for impairment, but which are not determined to be impaired, are combined with all remaining loans that are not reviewed on a specific basis, and such loans are included within larger pools of loans based on similar risk and loss characteristics for purposes of determining the general component of the allowance. The loans that have been individually evaluated, but which have not been determined to be impaired, are included in the “Collectively Evaluated” column in the tables summarizing the allowance and associated loan balances as of June 30, 2012 and December 31, 2011.

The following tables present a summary of loan balances and the related allowance for loan losses summarized by portfolio segment and class for each impairment method used as of June 30, 2012 and December 31, 2011:

June 30, 2012	Loans:						Allowance for Loan Losses:
(In Thousands)	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens	$	1,716	$	319,447	$	321,163	$	396	$	2,492	$	2,888
Residential mortgage loans - junior liens		58		27,346		27,404		0		254		254
Home equity lines of credit		0		31,858		31,858		0		245		245
1-4 Family residential construction		0		10,699		10,699		0		80		80
Total residential mortgage		1,774		389,350		391,124		396		3,071		3,467
Commercial:
Commercial loans secured by real estate		1,805		162,966		164,771		150		1,826		1,976
Commercial and industrial		782		51,922		52,704		297		415		712
Political subdivisions		0		36,858		36,858		0		0		0
Commercial construction		1,476		25,041		26,517		381		225		606
Loans secured by farmland		925		9,154		10,079		35		82		117
Multi-family (5 or more) residential		11		6,398		6,409		0		64		64
Agricultural loans		40		3,223		3,263		0		29		29
Other commercial loans		0		563		563		0		5		5
Total commercial		5,039		296,125		301,164		863		2,646		3,509
Consumer		48		12,098		12,146		44		201		245
Unallocated												436

Total	$	6,861	$	697,573	$	704,434	$	1,303	$	5,918	$	7,657

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

December 31, 2011	Loans:						Allowance for Loan Losses:
(In Thousands)	Individually		Collectively				Individually		Collectively
	Evaluated		Evaluated		Totals		Evaluated		Evaluated		Totals
Residential mortgage:
Residential mortgage loans - first liens	$	2,227	$	328,788	$	331,015	$	461	$	2,565	$	3,026
Residential mortgage loans - junior liens		137		28,714		28,851		11		255		266
Home equity lines of credit		93		29,944		30,037		0		231		231
1-4 Family residential construction		0		9,959		9,959		0		79		79
Total residential mortgage		2,457		397,405		399,862		472		3,130		3,602
Commercial:
Commercial loans secured by real estate		2,169		154,219		156,388		169		1,835		2,004
Commercial and industrial		942		56,249		57,191		361		585		946
Political subdivisions		0		37,620		37,620		0		0		0
Commercial construction		1,266		22,252		23,518		65		202		267
Loans secured by farmland		927		10,022		10,949		35		91		126
Multi-family (5 or more) residential		14		6,569		6,583		0		66		66
Agricultural loans		39		2,948		2,987		0		27		27
Other commercial loans		0		552		552		0		5		5
Total commercial		5,357		290,431		295,788		630		2,811		3,441
Consumer		50		12,615		12,665		24		204		228
Unallocated												434

Total	$	7,864	$	700,451	$	708,315	$	1,126	$	6,145	$	7,705

Summary information related to impaired loans as of June 30, 2012 and December 31, 2011 is as follows:

	As of		As of
(In Thousands)	June 30,		Dec. 31,
	2012		2011
Impaired loans with a valuation allowance	$	3,434	$	3,433
Impaired loans without a valuation allowance		3,427		4,431
Total impaired loans	$	6,861	$	7,864
Valuation allowance related to impaired loans	$	1,303	$	1,126

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

(In Thousands)	3 Months Ended				6 Months Ended
	June 30,				June 30,
	2012		2011		2012		2011
Average investment in impaired loans	$	6,930	$	7,266	$	7,025	$	8,020
Interest income recognized on impaired loans		55		36		138		86
Interest income recognized on a cash basis on impaired loans		55		36		138		86

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

(In Thousands)	June 30, 2012				December 31, 2011
	Past Due				Past Due
	90+ Days and				90+ Days and
	Accruing		Nonaccrual		Accruing		Nonaccrual
Residential mortgage:
Residential mortgage loans - first liens	$	931	$	3,261	$	949	$	3,058
Residential mortgage loans - junior liens		71		65		11		67

Total residential mortgage		1,002		3,326		960		3,125
Commercial:
Commercial loans secured by real estate		105		1,342		75		1,595
Commercial and industrial		30		456		21		541
Commercial construction		0		1,328		139		978
Loans secured by farmland		0		925		53		927
Agricultural loans		0		40		0		0
Total commercial		135		4,091		288		4,041
Consumer		7		30		19		31

Totals	$	1,144	$	7,447	$	1,267	$	7,197

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

The table below presents a summary of the contractual aging of loans as of June 30, 2012 and December 31, 2011:

	As of June 30, 2012								As of December 31, 2011
	Current &								Current &
(In Thousands)	Past Due		Past Due		Past Due				Past Due		Past Due		Past Due
	Less than		30-89		90+				Less than		30-89		90+
	30 Days		Days		Days		Total		30 Days		Days		Days		Total
Residential mortgage:
Residential mortgage loans - first liens	$	314,401	$	4,831	$	1,931	$	321,163	$	321,907	$	6,723	$	2,385	$	331,015
Residential mortgage loans - junior liens		27,212		111		81		27,404		28,437		393		21		28,851
Home equity lines of credit		31,621		237		0		31,858		29,986		51		0		30,037
1-4 Family residential construction		10,699		0		0		10,699		9,959		0		0		9,959
Total residential mortgage		383,933		5,179		2,012		391,124		390,289		7,167		2,406		399,862
Commercial:
Commercial loans secured by real estate		163,391		545		835		164,771		155,025		343		1,020		156,388
Commercial and industrial		52,313		277		114		52,704		56,835		169		187		57,191
Political subdivisions		36,858		0		0		36,858		37,620		0		0		37,620
Commercial construction		25,191		387		939		26,517		22,323		1,056		139		23,518
Loans secured by farmland		9,122		67		890		10,079		9,973		33		943		10,949
Multi-family (5 or more) residential		6,406		3		0		6,409		6,583		0		0		6,583
Agricultural loans		3,223		0		40		3,263		2,945		3		39		2,987
Other commercial loans		557		6		0		563		552		0		0		552
Total commercial		297,061		1,285		2,818		301,164		291,856		1,604		2,328		295,788
Consumer		11,956		183		7		12,146		12,340		306		19		12,665

Totals	$	692,950	$	6,647	$	4,837	$	704,434	$	694,485	$	9,077	$	4,753	$	708,315

Nonaccrual loans are included in the contractual aging immediately above and on the previous page. A summary of the contractual aging of nonaccrual loans at June 30, 2012 and December 31, 2011 is as follows:

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

	Current &
(In Thousands)	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Total
June 30, 2012 Nonaccrual Totals	$	2,298	$	1,456	$	3,693	$	7,447
December 31, 2011 Nonaccrual Totals	$	2,532	$	1,179	$	3,486	$	7,197

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. In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The Update provides guidance in evaluating whether a restructuring constitutes a TDR. The Update was effective for the Corporation in 2011, with retrospective application to January 1, 2011.

The outstanding balance of loans subject to TDRs, as well as contractual aging information at June 30, 2012 and December 31, 2011 is as follows:

Troubled Debt Restructurings (TDRs)

	Current &
(In Thousands)	Past Due		Past Due		Past Due
	Less than		30-89		90+
	30 Days		Days		Days		Nonaccrual		Total
June 30, 2012 Totals	$	925	$	0	$	0	$	1,754	$	2,679
December 31, 2011 Totals	$	1,064	$	0	$	146	$	2,267	$	3,477

There were no TDRs that occurred during the second quarter 2012. TDRs that occurred during the six-month period ended June 30, 2012 are as follows:

Six Months Ended June 30, 2012

Pre-

Post-

(Balances in Thousands)

Modification

Number

Outstanding

Recorded

Contracts

Investment

Commercial, Commercial and industrial

The TDR in the six-month period ended June 30, 2012 was an extension of the final maturity and lowering of monthly payments required on a commercial loan. There was no allowance for loan losses on this loan at June 30, 2012, and no change in the allowance for loan losses resulting from this TDR.

The outstanding balance of TDRs at December 31, 2011 included a balance of $466,000 related to six commercial loans secured by real estate stemming from a forbearance agreement entered into with one commercial customer. Under the terms of the forbearance agreement, the Corporation had agreed to accept payment of less than the total principal amount of the loans, assuming payment was received by dates specified within the forbearance agreement. In the first six months of 2012, the loans were not repaid and the forbearance agreement expired. Accordingly, the Corporation’s concession terminated, and the loans were not classified as TDRs at June 30, 2012. The outstanding balance of the loans was $466,000 at June 30, 2012. The loans were in nonaccrual status at June 30, 2012 and December 31, 2011. At June 30, 2012, the risk rating of the loans was Substandard, while the risk rating of the loans was Doubtful at December 31, 2011. Based on management’s estimate of the value of the underlying collateral, net of selling costs, the Corporation had no allowance for loan losses associated with these loans at June 30, 2012 and December 31, 2011.

In the second quarter 2012, there were no defaults on loans for which modifications considered to be TDRs were entered into within the previous 12 months. In the six-month period ended June 30, 2012, such defaults are as follows:

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Six Months Ended June 30, 2012

	Number
(Balances in Thousands)	of		Recorded
	Contracts		Investment
Commercial, Commercial construction and land		1	$	950

The event of default in the table above resulted from the borrowers’ failure to make payments due at maturity, based on a loan maturity date that had been extended from the original due date. The allowance for loan losses on this loan was $274,000 at June 30, 2012, an increase of $209,000 over the allowance on the loan at December 31, 2011.

8. 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. This plan contains a cost-sharing feature, which causes participants to pay for all future increases in costs related to benefit coverage. Accordingly, actuarial assumptions related to health care cost trend rates do not significantly affect the liability balance at June 30, 2012 and December 31, 2011, 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
	Six Months Ended						Six Months Ended
	June 30,						June 30,
	2012			2011			2012		2011
Service cost	$	0		$	0		$	46	$	42
Interest cost		36			37			41		46
Expected return on plan assets		(36	)		(36	)		0		0
Amortization of transition (asset) obligation		0			0			18		18
Amortization of prior service cost		0			0			7		7
Recognized net actuarial loss		15			2			0		0
Net periodic benefit cost	$	15		$	3		$	112	$	113

Defined Benefit Plans
(In Thousands)	Pension						Postretirement
	Three Months Ended						Three Months Ended
	June 30,						June 30,
	2012			2011			2012		2011
Service cost	$	0		$	0		$	23	$	21
Interest cost		18			19			21		23
Expected return on plan assets		(18	)		(18	)		0		0
Amortization of transition (asset) obligation		0			0			9		9
Amortization of prior service cost		0			0			3		4
Recognized net actuarial loss		8			1			0		0
Net periodic benefit cost	$	8		$	2		$	56	$	57

In the first six months of 2012, the Corporation funded postretirement contributions totaling $29,000, with estimated annual postretirement contributions of $60,000 expected in 2012 for the full year. The Corporation made a contribution to the defined benefit pension plan of $21,000 in the first quarter of 2012 for the 2011 plan year. Based upon the related actuarial reports, the Corporation made a $23,000 contribution in the second quarter 2012 for the 2012 plan year. No further contributions are required in 2012, though the Corporation may make additional discretionary contributions.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

9. STOCK-BASED COMPENSATION PLANS

In January 2012, the Corporation granted options to purchase a total of 64,757 shares of common stock through its Stock Incentive and Independent Directors Stock Incentive Plans. In January 2011, the Corporation granted options to purchase a total of 93,674 shares of common stock. The exercise price for the 2012 awards is $18.54 per share, and the exercise price for the 2011 awards is $15.06 per share, based on the market price as of the date of grant. Stock option expense is recognized over the vesting period of each option. The Corporation expects total stock option expense for the year ending December 31, 2012 will be $247,000, and total stock option expense for the year ended December 31, 2011 was $279,000.

The Corporation records stock option expense based on estimated fair value calculated using an option valuation model. In calculating the 2012 and 2011 fair values, the Corporation utilized the Black-Scholes-Merton option-pricing model. The calculated fair value of each option granted, and significant assumptions used in the calculations, are as follows:

	2012			2011
Fair value of each option granted	$	5.15		$	4.26
Volatility		41	%		37	%
Expected option lives		7 Years			8 Years
Risk-free interest rate		1.53	%		3.10	%
Dividend yield		3.97	%		3.86	%

In calculating the estimated fair value of 2012 and 2011 stock option awards, management based its estimates of volatility and dividend yield on the Corporation’s experience over the immediately prior period of time consistent with the estimated lives of the options. The risk-free interest rate was based on the published yield of zero-coupon U.S. Treasury strips with an applicable maturity as of the grant dates. The expected option lives were based on management’s estimates of the average term for all options issued under both plans. In 2012 and 2011, management assumed a 33% forfeiture rate for options granted under the Stock Incentive Plan, and a 0% forfeiture rate for the Directors Stock Incentive Plan. These estimated forfeiture rates were determined based on the Corporation’s historical experience.

In January 2012, the Corporation awarded a total of 42,552 shares of restricted stock under the Stock Incentive and Independent Directors Stock Incentive Plans. In January 2011, a total of 15,622 shares of restricted stock were awarded under the Plans. Compensation cost related to restricted stock is recognized based on the market price of the stock at the grant date over the vesting period. For restricted stock awards granted under the Stock Incentive Plan, the Corporation must meet an annual targeted return on average equity (“ROAE”) performance ratio, as defined, in order for participants to vest. Management has estimated restricted stock expense in the first six months of 2012 based on an assumption that the ROAE target for 2012 will be met. In the first quarter 2010, the Corporation awarded 9,125 shares of restricted stock to the Chief Executive Officer under the Stock Incentive Plan. This award provides that vesting will occur upon the earliest of (i) the third anniversary of the date of grant, (ii) death or disability or (iii) the occurrence of a change in control of the Corporation.

Total stock-based compensation expense is as follows:

(In Thousands)	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2012		2011		2012		2011
Stock options	$	88	$	123	$	247	$	279
Restricted stock		82		36		164		72

Total	$	170	$	159	$	411	$	351

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

10. INCOME TAXES

The net deferred tax asset at June 30, 2012 and December 31, 2011 represents the following temporary difference components:

	June 30,		December 31,
(In Thousands)	2012		2011
Deferred tax assets:
Defined benefit plans - ASC 835	$	250	$	324
Net realized losses on securities		2,915		3,175
Allowance for loan losses		2,680		2,697
Credit for alternative minimum tax paid		4,070		4,569
Net operating loss carryforwards		44		44
General business credit carryforwards		0		831
Other deferred tax assets		1,786		1,671
Total deferred tax assets		11,745		13,311

Deferred tax liabilities:
Unrealized holding gains on securities		6,201		5,559
Bank premises and equipment		1,386		1,357
Core deposit intangibles		61		74
Other deferred tax liabilities		135		148
Total deferred tax liabilities		7,783		7,138
Deferred tax asset, net	$	3,962	$	6,173

The deferred tax asset from realized losses on securities resulted primarily from OTTI charges for financial statement purposes that are not deductible for income tax reporting purposes through June 30, 2012. Of the total deferred tax asset from realized losses on securities, $332,000 is from securities that, if the Corporation were to sell them, would be classified as capital losses for income tax reporting purposes.

The Corporation has available an estimated $130,000 capital loss carryforward at June 30, 2012, expiring in 2015.

The provision for income tax for the three-month and six-month periods ended June 30, 2012 and 2011 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						Fiscal Year To Date
(In thousands)	June 30,						Six Months Ended June 30,
	2012			2011			2012			2011
	(Current)			(Prior Year)			(Current)			(Prior Year)
Income before income tax provision	$	7,779		$	7,826		$	15,475		$	15,431
Income tax provision		2,094			2,129			4,203			4,193

Effective tax rate		26.92	%		27.20	%		27.16	%		27.17	%

The effective tax rate for each period presented differs from the statutory rate of 35% principally because of the effects of tax-exempt interest income.

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 2008.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

11. IMPAIRMENT OF LIMITED PARTNERSHIP INVESTMENT

In the first quarter 2011, the Corporation reported an impairment loss of $948,000 related to an investment in a real estate limited partnership. In addition to the limited partnership investment, the Corporation has a loan receivable from the limited partnership with an outstanding balance of $1,029,000 at June 30, 2012. Based on updated financial information, management prepared an estimated valuation based on cash flow analysis. That analysis showed the estimated return to the Corporation would be sufficient to repay the loan in full, but would not provide sufficient additional cash flow for return on the limited partnership investment. Accordingly, management made the decision to completely write-off the limited partnership investment in the first quarter 2011.

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

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

In April 2011, the FASB issued ASU 2011-02, Receivables (Topic 310) - A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. The Update amends ASC Topic 310 to provide guidance in evaluating whether a restructuring constitutes a Troubled Debt Restructuring. The main provisions conclude that a creditor must separately conclude that both of the following exist – (1) the restructuring constitutes a concession, and (2) the debtor is experiencing financial difficulties. The amendments then provide guidance on a creditor’s evaluation of each of the requirements for a Troubled Debt Restructuring. For public entities, the Update was effective for the first interim or annual period beginning on or after June 15, 2011, including retrospective application to the beginning of the annual period of adoption. Note 7 provides disclosures required by this standard.

In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement (Topic 820) – Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs. The amendments in this Update will result in common fair value measurement and disclosure requirements in U.S. GAAP and IFRSs. The Update includes various amendments, including amendments that: (1) clarify FASB’s intent about the application of existing fair value measurement and disclosure requirements, and (2) change some particular principles or requirements for measuring fair value or disclosing information about fair value measurements. There were no changes in the Corporation’s procedures for determining fair value measurements as a result of this Update, however additional quantitative disclosures about unobservable inputs used in fair value measurements categorized within Level 3 of the fair value hierarchy are provided. The amendments in this ASU are applied prospectively, and Note 5 includes disclosures required by this ASU.

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. The intent of this standard is to increase the prominence of comprehensive income in the financial statements. This standard requires the components of comprehensive income be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The single format includes the traditional income statement and the components of other comprehensive income, total other comprehensive income and total comprehensive income. In the two statement approach, the first statement is the traditional income statement, which would be immediately followed by a separate statement which would include the components of other comprehensive income, total other comprehensive income and total comprehensive income. The amendments in this ASU are applied retrospectively, and the Corporation has adopted the two statement approach as reflected in the accompanying financial statements.

In September 2011, the FASB issued ASU No. 2011-08, Intangibles – Goodwill and Other (Topic 350) – Testing Goodwill for Impairment. The amendments in this ASU permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in Topic 350. The amendments in this ASU are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted, and management adopted this ASU in assessing goodwill for impairment as of December 31, 2011.

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

Net income for the second quarter 2012 was $5,685,000, or $0.46 per basic and diluted share, comparable to net income of $0.46 per share for the first quarter 2012 and down slightly from $0.47 per share for the second quarter 2011. For the first six months of 2012, net income was $11,272,000, or $0.92 per basic and diluted share, comparable to $0.92 per share in the first six months of 2011. Annualized return on average assets was 1.72% for the six months ended June 30, 2012, and annualized return on average equity for the same period was 13.12%.

Some of the more significant fluctuations in the components of earnings are as follows:

Net interest income in the second quarter 2012 was $146,000 (1.2%) lower than in the first quarter 2012, and $313,000 (2.6%) higher than in the second quarter 2011. For the first six months of 2012, net interest income was $1,305,000 (5.7%) higher than for the first six months of 2011. The interest margin fell slightly to 4.33% in the second quarter 2012 from 4.41% in the first quarter 2012, as yields on earning assets (mainly loans and securities) dropped due in part to falling market interest rates. The higher level of net interest income in the second quarter 2012 and year-to-date June 30, 2012 as compared to the corresponding periods of 2011 reflected significant improvement in the margin, primarily because of a lower cost of funds. Net interest income included the benefit of accretion from the offset of a previous write-down on a security, with a benefit of $855,000 in the first six months of 2012, including $398,000 in the second quarter and $457,000 in the first quarter, as compared to a benefit of $271,000 in the first six months of 2011, with $160,000 in the second quarter 2011 and $111,000 in the first quarter 2011. The security matured in the second quarter 2012, with the Corporation receiving full repayment of principal.

The provision for loan losses was $367,000 in the second quarter 2012, as compared to a credit (reduction in expense) of $182,000 in the first quarter 2012 and a provision of $31,000 in the second quarter 2011. For the first six months of 2012, the Corporation’s provision for loan losses was $185,000 as compared to a credit of $161,000 in the first six months of 2011. In the second quarter 2012, the provision included a net increase in specific allowances for loan losses on larger commercial loans of $177,000, including an increase of $263,000 related to one relationship. In the first quarter 2012, the credit included a reduction in a component of the allowance for loan losses that is determined based on the 3 previous years’ net charge-off experience. The credits for loan losses in the first quarter 2012 and the first six months of 2011 resulted, in part, from a reduction in loans outstanding, as the general component of the allowance for loan losses was reduced in those periods. The credit for the first six months of 2011 also reflected the benefit of lower charge-off amounts than had been anticipated (and for which larger allowances had been established) related to three commercial loan relationships.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Total noninterest revenue was $4,095,000 in the second quarter 2012, up from $3,759,000 in the first quarter 2012 and $3,673,000 in the second quarter 2011. For the first six months of 2012, total noninterest revenue was $7,854,000 or 26.1% higher than in the first six months of 2011. The increases in noninterest revenue for both the most recent quarter and year-to-date 2012 included significant increases in gains from sales of residential mortgage loans and from brokerage revenues. In April 2012, the Corporation re-opened the Athens, PA branch, which had been closed due to a flood that occurred in September 2011. In the second quarter 2012, noninterest revenue included a gain related to re-opening the Athens branch of approximately $270,000, as the amount of insurance proceeds received exceeded the historical book value of the assets replaced or reconstructed. Also included in noninterest revenue in the second quarter 2012 were losses totaling $184,000 related to real estate properties acquired in foreclosures. In 2011, noninterest revenue was negatively impacted by an impairment loss in the first quarter of $948,000 related to an investment in a real estate limited partnership. Excluding the 2011 impairment loss, as well as the Athens and foreclosed property transactions, noninterest revenue for the first six months of 2012 was $445,000 (6.2%) higher than in the first six months of 2011.

Net gains from available-for-sale securities totaled $203,000 in the second quarter 2012, as compared to net losses of $2,000 in the first quarter 2012 and net gains of $163,000 in the second quarter 2011. For the first six months of 2012, net securities gains of $201,000 were considerably lower than gains of $2,002,000 in the first six months of 2011. In the first quarter 2011, the Corporation realized gains of $1,510,000 from two pooled trust-preferred securities that had been written off in prior periods.

Total noninterest expense was $8,280,000 in the second quarter 2012, down $237,000 from the first quarter 2012 and up $486,000 (6.2%) over the second quarter 2011. For the first six months of 2012, total noninterest expense was $740,000 (4.6%) higher than for the first six months of 2011. The reduction in expenses in the second quarter 2012 as compared to the first quarter includes the effect of lower payroll taxes and other employee benefit expenses that are typically higher in the first quarter than in the remainder of the year. The increase in noninterest expenses in the second quarter 2012 as compared to the second quarter 2011 included a charge of $143,000 related to pre-payment of a $5 million borrowing, which the Corporation funded by selling securities for a net gain of $166,000 and which management expects will result in a slightly favorable impact to the net interest margin in future periods. The increase in noninterest expense in the second quarter 2012 as compared to the second quarter 2011 also reflects increases in salaries and wages of $117,000 (3.4%) as well as increases in software subscriptions and updates, charitable donations and other expenses. The increase in noninterest expense for the six months ended June 30, 2012 as compared to the first six months of 2011 includes an increase in other operating expense of $622,000. Within other operating expenses, the largest increases in the first six months of 2012 included the $143,000 charge for pre-payment of a borrowing described above as well as increases in software subscriptions and updates, legal and professional fees, ATM and debit card processing costs, expenses related to other real estate properties and charitable donations. FDIC assessments were $211,000 lower in the first six months of 2012 than in the first six months of 2011, reflecting the benefit of a change in the FDIC’s method for determining assessments that became effective in the second quarter 2011.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE I - QUARTERLY FINANCIAL DATA
(In Thousands)
	June 30,		Mar. 31,			Dec 31,			Sept. 30,			June 30,		Mar. 31,
	2012		2012			2011			2011			2011		2011
Interest income	$	14,529	$	14,776		$	15,198		$	15,317		$	15,443	$	15,298
Interest expense		2,401		2,502			2,804			3,108			3,628		4,016
Net interest income		12,128		12,274			12,394			12,209			11,815		11,282
Provision (credit) for loan losses		367		(182	)		(87	)		(37	)		31		(192	)
Net Interest income after provision (credit) for loan losses		11,761		12,456			12,481			12,246			11,784		11,474
Other income		4,095		3,759			3,711			3,999			3,673		2,555
Net gains (losses) on available-for-sale securities		203		(2	)		188			26			163		1,839
Other expenses		8,280		8,517			7,948			8,052			7,794		8,263
Income before income tax provision		7,779		7,696			8,432			8,219			7,826		7,605
Income tax provision		2,094		2,109			2,291			2,230			2,129		2,064
Net income available to common shareholders	$	5,685	$	5,587		$	6,141		$	5,989		$	5,697	$	5,541
Net income per common share – basic	$	0.46	$	0.46		$	0.51		$	0.49		$	0.47	$	0.46
Net income per common share – diluted	$	0.46	$	0.46		$	0.51		$	0.49		$	0.47	$	0.45

CRITICAL ACCOUNTING POLICIES

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

A material estimate that is particularly susceptible to significant change is the determination of the allowance for loan losses. Management believes that 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 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 5 to the consolidated financial statements, management calculates the fair values of pooled trust-preferred securities by applying discount rates to estimated cash flows for each security. Management estimated the cash flows expected to be received from each security, taking into account estimated levels of deferrals and defaults by the underlying issuers, and used discount rates considered reflective of a market participant’s expectations regarding the extent of credit and liquidity risk inherent in the securities. Management’s estimates of cash flows and discount rates used to calculate fair values of pooled trust-preferred securities were based on sensitive assumptions, and use of different assumptions could result in calculations of fair values that would be substantially different than the amounts calculated by management.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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 six-month periods ended June 30, 2012 and June 30, 2011. 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.

Six-Month Periods Ended June 30, 2012 and 2011

For the six-month periods, fully taxable equivalent net interest income was $26,102,000 in 2012, $1,390,000 (5.6%) higher than in 2011. As shown in Table IV, net changes in volume had the effect of increasing net interest income $397,000 in 2012 compared to 2011, and interest rate changes had the effect of increasing net interest income $993,000. The most significant components of the volume change in net interest income in 2012 were a decrease in interest expense of $519,000 attributable to a reduction in the balance of borrowed funds, a decrease in interest expense of $285,000 attributable to a reduction in the balance of interest-bearing deposits (primarily certificates of deposit and Individual Retirement Accounts), and a decrease in interest income of $488,000 attributable to a decline in the balance of loans receivable. The most significant components of the rate change in net interest income in 2012 were a decrease in interest expense of $1,929,000 due to lower rates paid on interest-bearing deposits (primarily Individual Retirement Accounts), a decrease in interest income of $567,000 attributable to lower rates earned on loans receivable, and a decrease in interest income of $392,000 attributable to lower rates earned on available-for-sale securities. As presented in Table III, the “Interest Rate Spread” (excess of average rate of return on earning assets over average cost of funds on interest-bearing liabilities) was 4.14% in 2012, as compared to 3.84% in 2011.

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $31,005,000 in 2012, a decrease of 4.2% from 2011. Interest and fees on loans receivable decreased $1,055,000, or 4.6%. As indicated in Table III, average available-for-sale securities (at amortized cost) totaled $461,051,000 in 2012, an increase of $2,318,000 (0.5%) from 2011. Net growth in the Corporation’s available-for-sale securities portfolio was primarily made up of U.S. Government agency collateralized mortgage obligations and mortgage-backed securities and also included a significant increase in the balance of municipal securities. This growth was partially offset by a reduction in the balances of U.S. Government agency bonds and pooled trust preferred securities. The Corporation’s yield on taxable securities fell in 2011 and 2012 primarily because of low market interest rates, including the effects of management’s decision to limit purchases of taxable securities to investments that mature or are expected to repay a substantial portion of principal within approximately four years or less. The average rate of return on available-for-sale securities was 4.00% for 2012 and 4.17% in 2011.

The average balance of gross loans receivable decreased 2.4% to $702,625,000 in 2012 from $720,244,000 in 2011. The Corporation experienced contraction in the balance of loans receivable due to borrowers prepaying or refinancing existing loans combined with modest demand for new loans. The decline in the balance of the residential mortgage portfolio was also affected by management’s decision to sell a portion of newly originated residential mortgages on the secondary market. The Corporation’s average rate of return on loans receivable declined to 6.23% in 2012 from 6.39% in 2011 as rates on new loans as well as existing, variable-rate loans have decreased.

The average balance of interest-bearing due from banks increased to $35,817,000 in 2012 from $30,561,000 in 2011. This has consisted primarily of balances held by the Federal Reserve. Although the rates of return on balances with the Federal Reserve are low, the Corporation has maintained relatively high levels of liquid assets in 2011 and 2012 (as opposed to increasing long-term, available-for-sale securities at higher yields) in order to maximize flexibility for dealing with possible fluctuations in cash requirements, and due to management’s concern about the possibility of substantial increases in interest rates within the next few years. During the fourth quarter 2011, the Corporation began investing in FDIC-insured certificates of deposit issued by other financial institutions and maturing within five years; these investments averaged $4,189,000 for 2012 and totaled $4,720,000 at June 30, 2012. The Corporation held no such investments in the six-month period ended June 30, 2011 or in prior periods.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense fell $2,741,000, or 35.9%, to $4,903,000 in 2012 from $7,644,000 in 2011. Table III shows that the overall cost of funds on interest-bearing liabilities fell to 1.05% in 2012 from 1.55% in 2011.

Total average deposits (interest-bearing and noninterest-bearing) increased 0.3%, to $1,005,768,000 in 2012 from $1,002,444,000 in 2011. Increases in the average balances of demand deposits and savings accounts were partially offset by decreases in interest checking accounts, certificates of deposit and Individual Retirement Accounts. Consistent with continuing low short-term market interest rates, the average rates incurred on deposit accounts have decreased significantly in 2012 as compared to 2011.

Variable-rate accounts made up $133,726,000 of the average balance in Individual Retirement Accounts in 2012 and $148,128,000 in 2011. Prior to May 2011, substantially all of these accounts were paid interest at a rate that could change quarterly at management’s discretion with a contractual floor of 3.00%. Effective in May 2011, the rate floor was removed; following this change, the rate paid on these accounts was lowered several times and was 0.65% at June 30, 2012. As shown in Table III, the average rate on Individual Retirement Accounts decreased to 0.94% in 2012 from 2.73% in 2011.

Total average borrowed funds decreased $37,697,000 to $120,990,000 in 2012 from $158,687,000 in 2011. During 2011 and 2012, the Corporation has paid off long-term borrowings as they matured using the cash flow received from loans and investment securities. The average balance of “RepoSweep” arrangements, which are used by the Corporation to borrow funds from commercial banking customers on an overnight basis and included within short-term borrowings, declined to $4,255,000 in 2012 from $18,143,000 in 2011 primarily as a result of changes to service charges assessed on related business checking accounts. In 2012, the Corporation took three short-term advances from the Federal Home Loan Bank of Pittsburgh (FHLB) to offset seasonal declines in deposit balances. Short-term advances averaged $2,281,000 in 2012 with no such advances outstanding during 2011. The short-term advances matured, and none were outstanding at June 30, 2012. The average rate on borrowed funds was 3.79% in 2012, compared to 3.57% in 2011.

Three-Month Periods Ended June 30, 2012 and 2011

Except as noted below, significant changes in the three-month results are consistent with the discussion of the six-month results provided in the previous section.

For the three-month periods, fully taxable equivalent net interest income was $12,979,000 in 2012, $352,000 (2.8%) higher than in 2011. As shown in Table IV, net changes in volume had the effect of increasing net interest income $126,000 in 2012 compared to 2011, and interest rate changes had the effect of increasing net interest income $226,000. As presented in Table III, the “Interest Rate Spread” was 4.10% in 2012, as compared to 3.92% in 2011.

Interest income totaled $15,380,000 in 2012, a decrease of 5.4% from 2011. Income from available-for-sale securities decreased $317,000 (6.6%), while interest and fees from loans receivable decreased $590,000, or 5.2%. As indicated in Table III, total average available-for-sale securities (at amortized cost) in 2012 increased slightly to $463,366,000 from $463,338,000 in 2011. The average rate of return on available-for-sale securities was 3.92% for 2012 and 4.18% in 2011. For the three-month period, the average balance of gross loans receivable decreased 1.9% to $703,096,000 in 2012 from $716,481,000 in 2011. The average rate of return on loans was 6.18% in 2012 and 6.39% in 2011.

The average balance of interest-bearing due from banks increased to $37,300,000 in 2012 from $29,385,000 in 2011. This category includes balances held by the Federal Reserve, and it also includes the Corporation’s investment in FDIC-insured certificates of deposit issued by other financial institutions, which averaged $4,287,000 for 2012. The Corporation held no such investments in the three-month period ended June 30, 2011 or in prior periods.

For the three-month period, interest expense fell $1,227,000, or 33.8%, to $2,401,000 in 2012 from $3,628,000 in 2011. Total average deposits (interest-bearing and noninterest-bearing) increased 0.8%, to $1,011,232,000 in 2012 from $1,002,866,000 in 2011. Total average borrowed funds decreased $35,800,000 to $118,951,000 in 2012 from $154,751,000 in 2011.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE II - ANALYSIS OF INTEREST INCOME AND EXPENSE

	Three Months Ended							Six Months Ended
	June 30,				Increase/			June 30,				Increase/
(In Thousands)	2012		2011		(Decrease)			2012		2011		(Decrease)

INTEREST INCOME
Available-for-sale securities:
Taxable	$	2,593	$	2,910	$	(317	)	$	5,326	$	5,665	$	(339	)
Tax-exempt		1,921		1,921		0			3,837		3,826		11
Total available-for-sale securities		4,514		4,831		(317	)		9,163		9,491		(328	)
Interest-bearing due from banks		31		16		15			59		32		27
Loans held for sale		23		6		17			32		27		5
Loans receivable:
Taxable		10,242		10,848		(606	)		20,608		21,695		(1,087	)
Tax-exempt		570		554		16			1,143		1,111		32
Total loans receivable		10,812		11,402		(590	)		21,751		22,806		(1,055	)
Total Interest Income		15,380		16,255		(875	)		31,005		32,356		(1,351	)

INTEREST EXPENSE
Interest-bearing deposits:
Interest checking		50		117		(67	)		101		247		(146	)
Money market		97		140		(43	)		194		291		(97	)
Savings		27		48		(21	)		53		104		(51	)
Certificates of deposit		770		1,001		(231	)		1,596		2,042		(446	)
Individual Retirement Accounts		326		960		(634	)		676		2,149		(1,473	)
Other time deposits		1		1		0			1		2		(1	)
Total interest-bearing deposits		1,271		2,267		(996	)		2,621		4,835		(2,214	)
Borrowed funds:
Short-term		1		8		(7	)		4		14		(10	)
Long-term		1,129		1,353		(224	)		2,278		2,795		(517	)
Total borrowed funds		1,130		1,361		(231	)		2,282		2,809		(527	)
Total Interest Expense		2,401		3,628		(1,227	)		4,903		7,644		(2,741	)

Net Interest Income	$	12,979	$	12,627	$	352		$	26,102	$	24,712	$	1,390

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 35% in 2012 and 34% in 2011.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE III - ANALYSIS OF AVERAGE DAILY BALANCES AND RATES

(Dollars in Thousands)

	3 Months						3 Months						6 Months						6 Months
	Ended			Rate of			Ended			Rate of			Ended			Rate of			Ended			Rate of
	6/30/2012			Return/			6/30/2011			Return/			6/30/2012			Return/			6/30/2011			Return/
	Average			Cost of			Average			Cost of			Average			Cost of			Average			Cost of
	Balance			Funds %			Balance			Funds %			Balance			Funds %			Balance			Funds %
EARNING ASSETS
Available-for-sale securities, at amortized cost:
Taxable	$	333,255			3.13	%	$	335,289			3.48	%	$	332,131			3.22	%	$	331,219			3.45	%
Tax-exempt		130,111			5.94	%		128,049			6.02	%		128,920			5.99	%		127,514			6.05	%
Total available-for-sale securities		463,366			3.92	%		463,338			4.18	%		461,051			4.00	%		458,733			4.17	%
Interest-bearing due from banks		37,300			0.33	%		29,385			0.22	%		35,817			0.33	%		30,561			0.21	%
Loans held for sale		1,865			4.96	%		342			7.04	%		1,461			4.40	%		1,028			5.30	%
Loans receivable:
Taxable		666,752			6.18	%		681,333			6.39	%		666,344			6.22	%		684,277			6.39	%
Tax-exempt		36,344			6.31	%		34,806			6.38	%		36,281			6.34	%		34,939			6.41	%
Total loans receivable		703,096			6.18	%		716,481			6.39	%		702,625			6.23	%		720,244			6.39	%
Total Earning Assets		1,205,627			5.13	%		1,209,204			5.39	%		1,200,954			5.19	%		1,209,538			5.39	%
Cash		17,791						17,631						17,341						17,310
Unrealized gain/loss on securities		17,545						5,805						17,734						2,626
Allowance for loan losses		(7,435	)					(8,938	)					(7,587	)					(9,069	)
Bank premises and equipment		18,908						22,114						18,903						22,293
Intangible Asset - Core Deposit Intangible		186						287						195						301
Intangible Asset - Goodwill		11,942						11,942						11,942						11,942
Other assets		47,046						56,349						47,664						58,541
Total Assets	$	1,311,610					$	1,314,394					$	1,307,146					$	1,313,482

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking	$	156,994			0.13	%	$	166,795			0.28	%	$	159,259			0.13	%	$	165,146			0.30	%
Money market		210,646			0.19	%		207,266			0.27	%		208,256			0.19	%		205,363			0.29	%
Savings		107,514			0.10	%		95,821			0.20	%		106,023			0.10	%		94,232			0.22	%
Certificates of deposit		199,320			1.55	%		205,346			1.96	%		195,622			1.64	%		208,721			1.97	%
Individual Retirement Accounts		144,095			0.91	%		156,611			2.46	%		145,168			0.94	%		158,880			2.73	%
Other time deposits		1,314			0.31	%		1,350			0.30	%		1,128			0.18	%		1,154			0.35	%
Total interest-bearing deposits		819,883			0.62	%		833,189			1.09	%		815,456			0.65	%		833,496			1.17	%
Borrowed funds:
Short-term		5,650			0.07	%		19,407			0.17	%		6,536			0.12	%		18,143			0.16	%
Long-term		113,301			4.01	%		135,344			4.01	%		114,454			4.00	%		140,544			4.01	%
Total borrowed funds		118,951			3.82	%		154,751			3.53	%		120,990			3.79	%		158,687			3.57	%
Total Interest-bearing Liabilities		938,834			1.03	%		987,940			1.47	%		936,446			1.05	%		992,183			1.55	%
Demand deposits		191,349						169,677						190,312						168,948
Other liabilities		7,774						6,998						8,613						6,731
Total Liabilities		1,137,957						1,164,615						1,135,371						1,167,862
Stockholders' equity, excluding other comprehensive income/loss		162,721						146,267						160,761						144,172
Other comprehensive income/loss		10,932						3,512						11,014						1,448
Total Stockholders' Equity		173,653						149,779						171,775						145,620
Total Liabilities and Stockholders' Equity	$	1,311,610					$	1,314,394					$	1,307,146					$	1,313,482
Interest Rate Spread					4.10	%					3.92	%					4.14	%					3.84	%
Net Interest Income/Earning Assets					4.33	%					4.19	%					4.37	%					4.12	%

Total Deposits (Interest-bearing and Demand)	$	1,011,232					$	1,002,866					$	1,005,768					$	1,002,444

(1) Rates of return on tax-exempt securities and loans are presented on a fully taxable-equivalent basis, using the Corporation’s marginal federal income tax rate of 35% in 2012 and 34% in 2011.

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE IV - ANALYSIS OF VOLUME AND RATE CHANGES

(In Thousands)	3 Months Ended 6/30/12 vs. 6/30/11									6 Months Ended 6/30/12 vs. 6/30/11
	Change in			Change in			Total			Change in			Change in			Total
	Volume			Rate			Change			Volume			Rate			Change
EARNING ASSETS
Available-for-sale securities:
Taxable	$	(23	)	$	(294	)	$	(317	)	$	17		$	(356	)	$	(339	)
Tax-exempt		29			(29	)		0			47			(36	)		11
Total available-for-sale securities		6			(323	)		(317	)		64			(392	)		(328	)
Interest-bearing due from banks		6			9			15			7			20			27
Loans held for sale		16			1			17			10			(5	)		5
Loans receivable:
Taxable		(251	)		(355	)		(606	)		(533	)		(554	)		(1,087	)
Tax-exempt		23			(7	)		16			45			(13	)		32
Total loans receivable		(228	)		(362	)		(590	)		(488	)		(567	)		(1,055	)
Total Interest Income		(200	)		(675	)		(875	)		(407	)		(944	)		(1,351	)

INTEREST-BEARING LIABILITIES
Interest-bearing deposits:
Interest checking		(7	)		(60	)		(67	)		(9	)		(137	)		(146	)
Money market		2			(45	)		(43	)		4			(101	)		(97	)
Savings		6			(27	)		(21	)		12			(63	)		(51	)
Certificates of deposit		(30	)		(201	)		(231	)		(121	)		(325	)		(446	)
Individual Retirement Accounts		(70	)		(564	)		(634	)		(171	)		(1,302	)		(1,473	)
Other time deposits		0			0			0			0			(1	)		(1	)
Total interest-bearing deposits		(99	)		(897	)		(996	)		(285	)		(1,929	)		(2,214	)
Borrowed funds:
Short-term		(3	)		(4	)		(7	)		(7	)		(3	)		(10	)
Long-term		(224	)		0			(224	)		(512	)		(5	)		(517	)
Total borrowed funds		(227	)		(4	)		(231	)		(519	)		(8	)		(527	)
Total Interest Expense		(326	)		(901	)		(1,227	)		(804	)		(1,937	)		(2,741	)

Net Interest Income	$	126		$	226		$	352		$	397		$	993		$	1,390

(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 35% in 2012 and 34% in 2011.

(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

RECOVERY ON IMPAIRED INVESTMENT SECURITY

In 2009, the Corporation recorded OTTI of $3,209,000 on its holding of a trust preferred security issued by Carolina First Mortgage Loan Trust, a subsidiary of The South Financial Group, Inc., and the Corporation also ceased accruing interest income on the security. In January 2010, The South Financial Group, Inc. began deferring its interest payments on the security. In April 2010, the Corporation sold half of its investment in the security, and in the first quarter 2010 recorded OTTI of $320,000 to further write down amortized cost based on the selling price of the April transaction.

In the fourth quarter 2010, The Toronto-Dominion Bank acquired The South Financial Group, Inc., made a payment for the full amount of previously deferred interest, and resumed quarterly payments on the security. The Corporation recognized a material change in the expected cash flows and began recording accretion income (included in interest income) to offset the previous OTTI charges as an adjustment to the security’s yield over its remaining life. The yield to maturity was 147.03%. The security had a face amount of $2,000,000 and matured in May 2012.

The amounts of accretion income from this security are as follows:

	Accretion of
	Prior OTTI
4th Quarter 2010	$	83
1st Quarter 2011		111
2nd Quarter 2011		160
3rd Quarter 2011		229
4th Quarter 2011		325
1st Quarter 2012		457
2nd Quarter 2012		398
Total	$	1,763

Excluding interest income (including accretion) and the average balance of this security from the calculations used to determine Tables II, III and IV, the interest rate spread and interest margin (fully taxable equivalent net interest income divided by average total earning assets) would be as follows:

	3 Months Ended						6 Months Ended
	June 30,			June 30,			June 30,			June 30,
	2012			2011			2012			2011
Interest rate spread:
Actual from Table III		4.10	%		3.92	%		4.14	%		3.84	%
Excluding Carolina First security		3.97	%		3.86	%		4.00	%		3.79	%

Interest margin:
Actual from Table III		4.33	%		4.19	%		4.37	%		4.12	%
Excluding Carolina First security		4.20	%		4.13	%		4.23	%		4.07	%

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE V - COMPARISON OF NONINTEREST INCOME	6 Months Ended
(In Thousands)	June 30,						$			%
	2012			2011			Change			Change
Service charges on deposit accounts	$	2,417		$	2,356		$	61			2.6
Service charges and fees		455			425			30			7.1
Trust and financial management revenue		1,889			1,823			66			3.6
Brokerage revenue		456			352			104			29.5
Insurance commissions, fees and premiums		107			126			(19	)		(15.1	)
Interchange revenue from debit card transactions		983			937			46			4.9
Net gains from sales of loans		638			414			224			54.1
Increase in cash surrender value of life insurance		236			254			(18	)		(7.1	)
Net (loss) from other real estate		(80	)		(43	)		(37	)		86.0
Net gain from premises and equipment		270			0			270
Impairment loss on limited partnership investment		0			(948	)		948			(100.0	)
Other operating income		483			532			(49	)		(9.2	)
Total other operating income before realized gains on available-for-sale securities, net	$	7,854		$	6,228		$	1,626			26.1

NONINTEREST INCOME - SIX MONTHS ENDED JUNE 30, 2012 AND 2011

Table V excludes realized gains on available-for-sale securities, which are discussed in the “Earnings Overview” section of Management’s Discussion and Analysis. Total noninterest income shown in Table V increased $1,626,000 or 26.1%, in the first six months of 2012 as compared to the first six months of 2011. The most significant variances are as follows:

In the first quarter 2011, the Corporation reported an impairment loss of $948,000 related to an investment in a real estate limited partnership. In addition to the limited partnership investment, the Corporation has a loan receivable from the limited partnership of $1,029,000 at June 30, 2012. Based on updated financial information, management prepared an estimated valuation based on cash flow analysis. That analysis showed the estimated return to the Corporation would be sufficient to repay the loan in full, but would not provide sufficient additional cash flow for return on the limited partnership investment. Accordingly, management made the decision to completely write-off the limited partnership investment in 2011.

Brokerage revenue increased $104,000, or 29.5%, reflecting increased sales of annuities used by customers as investment vehicles in retirement.

Net gains from sales of loans increased $224,000. Starting in late 2009, the Corporation began to sell a significant amount of residential mortgage loans into the secondary market through the MPF Xtra program administered by the Federal Home Loan Banks of Pittsburgh and Chicago. The increase in revenue from sales in 2012 reflects the impact of significant refinancing activity, as market interest rates have continued to fall throughout most of the time frame since the Corporation began to offer the program.

The net gain from premises and equipment of $270,000 in 2012 included a gain of $272,000 from the excess of insurance proceeds received over the historical book value of assets replaced or reconstructed at the Athens, PA branch, which was damaged by a flood in September 2011 and remained closed until it was re-opened in April 2012. Total insurance proceeds associated with the reconstruction project amounted to $608,000, including $154,000 for reimbursement of clean-up and other expenses, with the gain determined based on the excess of insurance proceeds for reconstruction and replacement of equipment totaling $454,000 over the net book value of items replaced totaling $182,000.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE VI - COMPARISON OF NONINTEREST INCOME	3 Months Ended
(In Thousands)	June 30,						$			%
	2012			2011			Change			Change
Service charges on deposit accounts	$	1,256		$	1,225		$	31			2.5
Service charges and fees		235			207			28			13.5
Trust and financial management revenue		960			946			14			1.5
Brokerage revenue		288			229			59			25.8
Insurance commissions, fees and premiums		73			58			15			25.9
Interchange revenue from debit card transactions		488			485			3			0.6
Net gains from sales of loans		373			155			218			140.6
Increase in cash surrender value of life insurance		117			132			(15	)		(11.4	)
Net loss from other real estate		(184	)		(24	)		(160	)		666.7
Net gain from premises and equipment		270			0			270
Other operating income		219			260			(41	)		(15.8	)
Total other operating income before realized gains on available-for-sale securities, net	$	4,095		$	3,673		$	422			11.5

NONINTEREST INCOME - THREE MONTHS ENDED JUNE 30, 2012 AND 2011

As presented in Table VI, total noninterest income (excluding realized gains on available-for-sale securities) increased $422,000 or 11.5%, in the second quarter 2012 as compared to the second quarter 2011. The most significant variances are as follows:

As described in the discussion of noninterest income for the six month periods ended June 30, 2012 and 2011, brokerage revenue increased $59,000, or 25.8%, mainly from an increase in sales of annuities.

Also as described above, gains from sales of loans increased $218,000, with all of the gains resulting from sales of residential mortgage loans under the MPF Xtra program.

The net loss from other real estate in the second quarter 2012 of $184,000 included write-downs of the carrying values of two properties totaling $97,000 based on updated valuations from new appraisals, and losses totaling $87,000 from adjustments to amounts payable to the U.S. Small Business Administration related to sales of two commercial properties that took place in 2011.

As described in the discussion of noninterest income for the six month periods ended June 30, 2012 and 2011, the $270,000 net gain from premises and equipment in the second quarter 2012 included a gain of $272,000 from the excess of insurance proceeds received over the historical book value of assets replaced or reconstructed at the Athens, PA branch, which was damaged by a flood in September 2011 and remained closed until it was re-opened in April 2012.

TABLE VII - COMPARISON OF NONINTEREST EXPENSE

(In Thousands)	6 Months Ended
	June 30,				$			%
	2012		2011		Change			Change
Salaries and wages	$	7,161	$	6,870	$	291			4.2
Pensions and other employee benefits		2,456		2,324		132			5.7
Occupancy expense, net		1,264		1,397		(133	)		(9.5	)
Furniture and equipment expense		943		937		6			0.6
FDIC Assessments		303		514		(211	)		(41.1	)
Pennsylvania shares tax		672		639		33			5.2
Other operating expense		3,998		3,376		622			18.4

Total Other Expense	$	16,797	$	16,057	$	740			4.6

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

NONINTEREST EXPENSE - SIX MONTHS ENDED JUNE 30, 2012 AND 2011

As shown in Table VI, total noninterest expense increased $740,000 or 4.6% in the first six months of 2012 as compared to the first six months of 2011. Significant variances include the following:

Salaries and wages increased $291,000, or 4.2%, mainly as a result of merit-based salary increases. The number of full-time equivalent employees was 290 at June 30, 2012, up slightly from 289 at June 30, 2011.

Pensions and other employee benefits increased $132,000, or 5.7%, including an increase of $151,000 (23.8%) in group health insurance expense. The Corporation participates in a health care consortium, and is effectively self-insured for health care costs except for stop loss insurance coverage for catastrophic expenses in excess of defined levels. The increase in health insurance expense in 2012 over 2011 reflects a higher amount of claims incurred. Unemployment compensation and employee tuition expenses were lower in the first six months of 2012 than in the first six months of 2011.

Occupancy expense decreased $133,000, or 9.5%. Within this category, snow removal and related expenses were $48,000 lower in 2012, reflecting the milder winter weather throughout the Corporation’s market area. Depreciation expense was $86,000 lower in 2012, mainly due to the impact of the sale of the Court Street, Williamsport property in the third quarter 2011. In connection with the sale, the Corporation entered into a lease arrangement to continue to use a portion of the building. The lease is accounted for as an operating lease. Management estimates that total building-related expenses (including the effects of lower depreciation referred to above) for this location were $75,000 lower in the first six months of 2012 than in the first six months of 2011.

FDIC Assessments decreased $211,000, or 41.1%. Effective April 1, 2011, the FDIC’s method of determining assessments to banks changed, with the new methodology resulting in higher assessments to larger, more complex or higher-risk institutions, and smaller assessments to many community and small regional banks. The Corporation’s estimated first quarter 2012 FDIC assessment was substantially lower than the first quarter 2011 amount, reflecting the new methodology. The favorable decline also reflects rate changes attributed to improvements in the Corporation’s risk profile based on financial ratios.

Other operating expense increased $622,000, or 18.4%. This category includes many different types of expenses, with the most significant differences in amounts between the first six months of 2012 and 2011 as follows:

The Corporation incurred a charge of $143,000 in the second quarter 2012 related to pre-payment of a $5 million borrowing, with the pre-payment funded by proceeds from selling available-for-sale securities for a net gain of $166,000. Management expects the net impact of the sales of securities and pre-payment of the borrowing to be slightly favorable to the net interest margin over the next several quarters.

Software-related subscriptions and updates, mainly related to lending-related activities, up $131,000, or 41.7%

Fees paid related to interchange and ATM processing, up $70,000, or 14.2%

Expenses associated with other real estate properties, up $64,000

Professional fees, up $62,000, or 34.6%, including costs associated with training and implementation of lending-related software changes and customer service training

Charitable donations, up $53,000, and

Attorney fees, up $53,000, mainly related to lending-related and other matters not related to litigation.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE VIII - COMPARISON OF NONINTEREST EXPENSE

(In Thousands)
	3 Months Ended
	June 30,				$			%
	2012		2011		Change			Change
Salaries and wages	$	3,586	$	3,469	$	117			3.4
Pensions and other employee benefits		1,090		1,018		72			7.1
Occupancy expense, net		628		665		(37	)		(5.6	)
Furniture and equipment expense		461		453		8			1.8
FDIC Assessments		157		189		(32	)		(16.9	)
Pennsylvania shares tax		340		320		20			6.3
Other operating expense		2,018		1,680		338			20.1

Total Other Expense	$	8,280	$	7,794	$	486			6.2

NONINTEREST EXPENSE - THREE MONTHS ENDED JUNE 30, 2012 AND 2011

Total noninterest expense was $486,000, or 6.2%, higher in the second quarter 2012 as compared to the second quarter 2011. Significant changes include the following:

Salaries and wages increased $117,000, or 3.4%, mainly as a result of merit-based salary increases.

Pensions and other employee benefits increased $72,000, or 7.1%, including an increase of $83,000 (24.8%) in group health insurance expense, mainly as a result of higher total claims incurred in 2012.

Other operating expense increased $338,000, or 20.1%, in the second quarter 2012 as compared to the second quarter 2011. The most significant differences in individual types of expenses within this category between the second quarters of 2012 and 2011 are as follows:

As described in the comparison of expenses for the six month periods ended June 30, 2012 and 2011, the Corporation incurred a charge of $143,000 in the second quarter 2012 related to pre-payment of a $5 million borrowing, with the pre-payment funded by proceeds from selling available-for-sale securities for a net gain of $166,000.

Software-related subscriptions and updates, mainly related to lending-related activities, up $57,000, or 33.7%

Charitable donations, up $44,000

Fees paid related to interchange and ATM processing, up $38,000, or 15.1%

Professional fees, up $37,000, or 40.2%, including costs associated with training and implementation of lending-related software changes and customer service training, and

Attorney fees, up $34,000, mainly related to lending-related and other matters not related to litigation.

FINANCIAL CONDITION

Significant changes in the average balances of the Corporation’s earning assets and interest-bearing liabilities are described in the “Net Interest Income” section of Management’s Discussion and Analysis. 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.

Management does not expect capital expenditures to have a material, detrimental effect on the Corporation’s financial condition in 2012.

PROVISION AND ALLOWANCE FOR LOAN LOSSES

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

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

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

The allowance for loan losses was $7,657,000 at June 30, 2012, down slightly from $7,705,000 at December 31, 2011. As shown in Table X, the specific allowance on impaired loans totaled $1,303,000 at June 30, 2012, which was $177,000 higher than the total specific allowance at December 31, 2011. In the second quarter 2012, the estimated allowance required for loans to one commercial borrower increased $237,000 based on management’s updated assessment of the borrower’s prospects for repayment and the estimated net selling price of real estate collateral. Table X also shows the collectively determined component of the allowance for commercial loans fell by $165,000 as of June 30, 2012 compared to December 31, 2011. The collectively determined allowance for the commercial segment was lower because the net charge-off percentage used to determine a portion of the collectively determined allowance was lower in the first six months of 2012 as compared to the percentage used throughout 2011. (The Corporation uses net charge-offs as a percentage of average outstanding loans for the previous three calendar years to estimate a portion of the collectively determined allowance.) The collectively determined portion of the allowance on residential mortgage loans was $59,000 lower at June 30, 2012 than at December 31, 2011, mainly because outstanding loans were lower. The net charge-off percentages did not change significantly for the residential mortgage and consumer segments, and the qualitative factors used in determining the collectively evaluated components of the allowance did not change significantly for any of the segments, at June 30, 2012 as compared to December 31, 2011.

As shown in Table IX, the Corporation recorded a provision for loan losses of $185,000 in the first six months of 2012 as compared to a credit for loan losses of $161,000 in the first six months of 2011. The provision for loan losses in the first six months of 2012 included a provision of $367,000 in the second quarter, due mainly to the $237,000 increase in allowance required on one commercial loan relationship, as described above, as well as an increase in the collectively determined allowance required on commercial loans due to an increase in loans outstanding. The credit for loan losses in the first six months of 2011 included the impact of a reduction in the allowance on impaired loans, as a loan was paid off in full for which the Corporation had established a specific allowance of $150,000 at December 31, 2010 and lower charge-offs than previously established allowances related to two other commercial loan relationships. Also, collectively determined allowances were lower at June 30, 2011 than at December 31, 2010 as a result of lower outstanding loan balances. The total amount of the provision or credit for loan losses for each period is determined based on the amount required to maintain an appropriate allowance in light of all of the factors described above. Note 7 to the consolidated financial statements includes a summary of the provision or credit for loan losses and activity in the allowance for loan losses, by segment and class, for the three-month and six-month periods ended June 30, 2012 and 2011.

Table XI presents information related to past due and impaired loans, and loans that have been modified under terms that are considered troubled debt restructurings (TDRs). Table XI shows total impaired loans of $6,861,000 at June 30, 2012 was $1,003,000 lower than the amount at December 31, 2011, primarily because of pay-downs received. Table XI also reflects significant improvement in total loans past due 30-89 days and still accruing interest, mainly due to a lower amount of past due residential mortgage loans. Total nonperforming loans of $8,591,000, or 1.22% of total loans outstanding, at June 30, 2012 was slightly higher than total nonperforming loans of 1.19% of loans at December 31, 2011, and within the range of 1.11% to 1.58% year-end levels from 2007 through of 2011. Total nonperforming assets of $9,495,000, or 0.72% of total assets, at June 30, 2012 was slightly lower than the level at December 31, 2011, and within the range of 0.66% to 0.92% based on year-end levels from 2007 through 2011. The allowance for loan losses was 1.09% of total loans outstanding at June 30, 2012, which was the same percentage at December 31, 2011, and the allowance as a percentage of nonperforming loans was 89.13% at June 30, 2012, down slightly from 91.03% at December 31, 2011. Each period presented in Table XI 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.

As shown in Table XI, loans classified as TDRs were higher at June 30, 2012 and December 31, 2011 as compared to the previous year-end balances presented. The increase in TDRs reflects the impact of the (ASU 2011-02) accounting guidance which became effective in 2011, as modifications such as extensions of terms and maturities that would have not been considered TDRs in the past (because the contractual interest rate had not been changed) are now considered TDRs because the current (un-modified) contractual rate would be considered less than a market rate for the applicable borrower.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

The outstanding balance of TDRs at December 31, 2011 included a balance of $466,000 related to six commercial loans secured by real estate stemming from a forbearance agreement entered into with one commercial customer. Under the terms of the forbearance agreement, the Corporation had agreed to accept payment of less than the total principal amount of the loans, assuming payment was received by dates specified within the forbearance agreement. In the first quarter 2012, the loans were not repaid and the forbearance agreement expired. Accordingly, the Corporation’s concession terminated, and the loans were not classified as TDRs at June 30, 2012. The outstanding balance of the loans was $466,000 at June 30, 2012. The loans were in nonaccrual status at June 30, 2012 and December 31, 2011. At June 30, 2012, the risk rating of the loans was Substandard, while the risk rating of the loans was Doubtful at December 31, 2011. Based on management’s estimate of the value of the underlying collateral, net of selling costs, the Corporation had no allowance for loan losses associated with these loans at June 30, 2012 and December 31, 2011.

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 June 30, 2012. Management continues to closely monitor its commercial loan relationships for possible credit losses, and will adjust its estimates of loss and decisions concerning nonaccrual status, if appropriate.

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

TABLE IX - ANALYSIS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)
	6 Months Ended
	June 30,			June 30,			Years Ended December 31,
	2012			2011			2011			2010			2009			2008			2007
Balance, beginning of year	$	7,705		$	9,107		$	9,107		$	8,265		$	7,857		$	8,859		$	8,201
Charge-offs:
Residential mortgage		(188	)		(79	)		(100	)		(340	)		(146	)		(173	)		(149	)
Commercial		(35	)		(734	)		(1,189	)		(91	)		(39	)		(1,607	)		(174	)
Consumer		(68	)		(84	)		(157	)		(188	)		(293	)		(259	)		(221	)
Total charge-offs		(291	)		(897	)		(1,446	)		(619	)		(478	)		(2,039	)		(544	)
Recoveries:
Residential mortgage		18			0			3			55			8			19			5
Commercial		5			177			255			113			77			22			31
Consumer		35			43			71			102			121			87			50
Total recoveries		58			220			329			270			206			128			86
Net charge-offs		(233	)		(677	)		(1,117	)		(349	)		(272	)		(1,911	)		(458	)
Allowance for loan losses recorded in acquisition		0			0			0			0			0			0			587
Provision (credit) for loan losses		185			(161	)		(285	)		1,191			680			909			529
Balance, end of period	$	7,657		$	8,269		$	7,705		$	9,107		$	8,265		$	7,857		$	8,859

Net charge-offs as a % of average loans		0.03	%		0.09	%		0.16	%		0.05	%		0.04	%		0.26	%		0.06	%

TABLE X - COMPONENTS OF THE ALLOWANCE FOR LOAN LOSSES

(In Thousands)	As of
	June 30,		As of December 31,
	2012		2011		2010		2009		2008		2007
ASC 310 - Impaired loans	$	1,303	$	1,126	$	2,288	$	1,126	$	456	$	2,255
ASC 450 - Collective segments:
Commercial		2,646		2,811		3,047		2,677		2,654		1,870
Residential mortgage		3,071		3,130		3,227		3,859		3,920		4,201
Consumer		201		204		232		281		399		533
Unallocated		436		434		313		322		428		0

Total Allowance	$	7,657	$	7,705	$	9,107	$	8,265	$	7,857	$	8,859

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE XI – PAST DUE AND IMPAIRED LOANS, NONPERFORMING ASSETS

AND TROUBLED DEBT RESTRUCTURINGS (TDRs)

(In Thousands)

	As of
	June 30,			As of December 31,
	2012			2011			2010			2009			2008			2007
Impaired loans with a valuation allowance	$	3,434		$	3,433		$	5,457		$	2,690		$	2,230		$	5,361
Impaired loans without a valuation allowance		3,427			4,431			3,191			3,257			3,435			857
Total impaired loans	$	6,861		$	7,864		$	8,648		$	5,947		$	5,665		$	6,218

Total loans past due 30-89 days and still accruing	$	5,191		$	7,898		$	7,125		$	9,445		$	9,875		$	10,822

Nonperforming assets:
Total nonaccrual loans	$	7,447		$	7,197		$	10,809		$	9,092		$	7,200		$	6,955
Total loans past due 90 days or more and still accruing		1,144			1,267			727			31			1,305			1,200
Total nonperforming loans		8,591			8,464			11,536			9,123			8,505			8,155
Foreclosed assets held for sale (real estate)		904			1,235			537			873			298			258
Total nonperforming assets	$	9,495		$	9,699		$	12,073		$	9,996		$	8,803		$	8,413

Loans subject to troubled debt restructurings (TDRs):
Performing	$	925		$	1,064		$	645		$	326		$	0		$	0
Nonperforming		1,754			2,413			0			0			0			0
Total TDRs	$	2,679		$	3,477		$	645		$	326		$	0		$	0

Total nonperforming loans as a % of loans		1.22	%		1.19	%		1.58	%		1.27	%		1.14	%		1.11	%
Total nonperforming assets as a % of assets		0.72	%		0.73	%		0.92	%		0.76	%		0.69	%		0.66	%
Allowance for loan losses as a % of total loans		1.09	%		1.09	%		1.25	%		1.15	%		1.06	%		1.20	%
Allowance for loan losses as a % of nonperforming loans		89.13	%		91.03	%		78.94	%		90.60	%		92.38	%		108.63	%

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE XII - SUMMARY OF LOANS BY TYPE

Summary of Loans by Type
(In Thousands)	June 30,			As of December 31,
	2012			2011			2010			2009			2008			2007
Residential mortgage:
Residential mortgage loans - first liens	$	321,163		$	331,015		$	333,012		$	340,268		$	353,909		$	363,467
Residential mortgage loans - junior liens		27,404			28,851			31,590			35,734			40,657			40,392
Home equity lines of credit		31,858			30,037			26,853			23,577			21,304			20,542
1-4 Family residential construction		10,699			9,959			14,379			11,452			11,262			4,742
Total residential mortgage		391,124			399,862			405,834			411,031			427,132			429,143

Commercial:
Commercial loans secured by real estate		164,771			156,388			167,094			163,483			165,979			144,742
Commercial and industrial		52,704			57,191			59,005			49,753			48,295			52,241
Political subdivisions		36,858			37,620			36,480			37,598			38,790			33,013
Commercial construction		26,517			23,518			24,004			15,264			13,730			17,755
Loans secured by farmland		10,079			10,949			11,353			11,856			9,140			8,287
Multi-family (5 or more) residential		6,409			6,583			7,781			8,338			8,367			9,004
Agricultural loans		3,263			2,987			3,472			3,848			4,495			3,553
Other commercial loans		563			552			392			638			884			1,010
Total commercial		301,164			295,788			309,581			290,778			289,680			269,605

Consumer		12,146			12,665			14,996			19,202			26,732			37,193

Total		704,434			708,315			730,411			721,011			743,544			735,941

Less: allowance for loan losses		(7,657	)		(7,705	)		(9,107	)		(8,265	)		(7,857	)		(8,859	)

Loans, net	$	696,777		$	700,610		$	721,304		$	712,746		$	735,687		$	727,082

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 June 30, 2012, the Corporation maintained overnight interest-bearing deposits with the Federal Reserve Bank of Philadelphia and other correspondent banks totaling $44,523,000.

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 $29,281,000 at June 30, 2012.

The Corporation’s outstanding, available, and total credit facilities at June 30, 2012 and December 31, 2011 are as follows:

	Outstanding				Available				Total Credit
(In Thousands)	June 30,		Dec. 31,		June 30,		Dec. 31,		June 30,		Dec. 31,
	2012		2011		2012		2011		2012		2011
Federal Home Loan Bank of Pittsburgh	$	30,038	$	40,363	$	295,860	$	292,304	$	325,898	$	332,667
Federal Reserve Bank Discount Window		0		0		28,158		27,438		28,158		27,438
Other correspondent banks		0		0		45,000		25,000		45,000		25,000
Total credit facilities	$	30,038	$	40,363	$	369,018	$	344,742	$	399,056	$	385,105

At June 30, 2012 and December 31, 2011, the Corporation’s outstanding credit facilities with the Federal Home Loan Bank of Pittsburgh consisted of long-term borrowings. No letters of credit were outstanding at either date.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Additionally, the Corporation uses repurchase agreements placed with brokers to borrow funds secured by investment assets, and uses “RepoSweep” arrangements to borrow funds from commercial banking customers on an overnight basis. If required to raise cash in an emergency situation, the Corporation could sell available-for-sale securities to meet its obligations. At June 30, 2012, the carrying value of available-for-sale securities in excess of amounts required to meet pledging or repurchase agreement obligations was $216,200,000.

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

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

The Corporation and C&N Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Details concerning capital ratios at June 30, 2012 and December 31, 2011 are presented below. Management believes, as of June 30, 2012 and December 31, 2011, that the Corporation and C&N Bank meet all capital adequacy requirements to which they are subject.

											Minimum To Be Well
(Dollars in Thousands)						Minimum					Capitalized Under
						Capital					Prompt Corrective
	Actual					Requirement					Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2012:
Total capital to risk-weighted assets:
Consolidated	$	160,036		22.53	%	$	56,836		³8	%		n/a		n/a
C&N Bank		147,313		20.97	%		56,203		³8	%	$	70,253		³10	%
Tier 1 capital to risk-weighted assets:
Consolidated		151,291		21.29	%		28,418		³4	%		n/a		n/a
C&N Bank		139,590		19.87	%		28,101		³4	%		42,152		³6	%
Tier 1 capital to average assets:
Consolidated		151,291		11.79	%		51,312		³4	%		n/a		n/a
C&N Bank		139,590		10.92	%		51,136		³4	%		63,920		³5	%

December 31, 2011:
Total capital to risk-weighted assets:
Consolidated	$	149,898		21.17	%	$	56,636		³8	%		n/a		n/a
C&N Bank		137,717		19.66	%		56,046		³8	%	$	70,058		³10	%
Tier 1 capital to risk-weighted assets:
Consolidated		141,255		19.95	%		28,318		³4	%		n/a		n/a
C&N Bank		129,978		18.55	%		28,023		³4	%		42,035		³6	%
Tier 1 capital to average assets:
Consolidated		141,255		10.93	%		51,712		³4	%		n/a		n/a
C&N Bank		129,978		10.14	%		51,285		³4	%		64,107		³5	%

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

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

The Corporation’s total stockholders’ equity is affected by fluctuations in the fair values of available-for-sale securities. The difference between amortized cost and fair value of available-for-sale securities, net of deferred income tax, is included in “Accumulated Other Comprehensive Income (Loss)” within stockholders’ equity. The balance in Accumulated Other Comprehensive Income (Loss) related to unrealized gains on available-for-sale securities, net of deferred income tax, amounted to $11,519,000 at June 30, 2012 and $10,791,000 at December 31, 2011. Changes in accumulated other comprehensive income 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 consolidated financial statements provides additional information concerning management’s evaluation of available-for-sale securities for other-than-temporary impairment at June 30, 2012.

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 (Loss) related to underfunded defined benefit plans, net of deferred income tax, was ($465,000) at June 30, 2012 and ($631,000) at December 31, 2011.

COMPREHENSIVE INCOME

In June 2011, the FASB issued ASU No. 2011-05, Comprehensive Income (Topic 220) – Presentation of Comprehensive Income. The intent of this standard is to increase the prominence of comprehensive income in the financial statements. Accordingly, the Corporation has included Statements of Comprehensive Income in the unaudited consolidated financial statements for the three-month and six-month periods ended June 30, 2012 and 2011.

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 defined benefit plans. Comprehensive Income totaled $12,166,000 for the six months ended June 30, 2012 as compared to $17,825,000 in the first six months of 2011. Although net income was slightly higher for the first six months of 2012 than in the first six months of 2011, Comprehensive Income was lower in the first six months of 2012 because the amount of unrealized gains on available-for-sale securities, net of deferred income tax, was $728,000 as compared to $6,650,000 in the first six months of 2011. Similarly, while net income for the second quarter 2012 was only $12,000 lower than second quarter 2011 net income, Comprehensive Income of $6,365,000 for the second quarter 2012 was $3,160,000 lower than for the second quarter 2011, mainly because the amount of unrealized gains on available-for-sale securities, net of tax, was lower in the second quarter 2012 than in the second quarter 2011.

INCOME TAXES

The effective income tax rate was approximately 27% of pre-tax income for each of the three-month and six-month periods ended June 30, 2012. The provision for income tax for the interim periods is based on the Corporation’s estimate of the effective tax rate expected to be applicable for the full year. 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 June 30, 2012, the net deferred tax asset was $3,962,000, down from the balance at December 31, 2011 of $6,173,000. The main reasons for the decrease in net deferred tax asset included: (1) reduction in deferred tax asset related to general business credit carryforwards, which fell to $0 at June 30, 2012 from $831,000 at December 31, 2011; (2) reduction in deferred tax asset related to the credit for alternative minimum tax (AMT) paid in prior periods, which decreased to $4,070,000 at June 30, 2012 from $4,569,000 at December 31, 2011; and (3) increase in deferred tax liability associated with unrealized gains on available-for-sale securities to $6,201,000 at June 30, 2012 from $5,559,000 at December 31, 2011. The reduction in deferred tax assets for general business credit carryforwards and the credit for AMT resulted from the estimated excess of the Corporation’s regular tax liability over the AMT liability for the first six months of 2012, as results for the first six months of 2012 indicate the credits would be fully utilized and a portion of the credit for prior years’ AMT paid would be realized.

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 June 30, 2012 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 10 to the unaudited, consolidated financial statements.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

INFLATION

The Corporation is significantly affected by the Federal Reserve Board’s efforts to control inflation through changes in short-term interest rates. Beginning in September 2007, in response to concerns about weakness in the U.S. economy, the Federal Reserve lowered the fed funds target rate numerous times; in December 2008, it established a target range of 0% to 0.25%, which it has maintained through mid-2012. Also, the Federal Reserve has injected massive amounts of liquidity into the nation’s monetary system through a variety of programs. The Federal Reserve has purchased large amounts of securities in an effort to keep interest rates low and stimulate economic growth.

Despite the current low short-term rate environment, liquidity injections, and commodity price increases, inflation statistics indicate that the overall rate of inflation is unlikely to significantly affect the Corporation’s operations within the near future. Although management cannot predict future changes in the rates of inflation, management monitors the impact of economic trends, including any indicators of inflationary pressures, in managing interest rate and other financial risks.

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 cannot control changes in market prices of securities based on fluctuations in the risk premiums demanded by investors, nor can management control the volume of deferrals or defaults by other entities on trust-preferred securities. However, management attempts to limit the risk that economic conditions would force the Corporation to sell securities for realized losses by maintaining a strong capital position (discussed in the “Stockholders’ Equity and Capital Adequacy” section of Management’s Discussion and Analysis) and ample sources of liquidity (discussed in the “Liquidity” section of Management’s Discussion and Analysis).

The Corporation’s two major categories of market risk are interest rate risk and equity securities risk, which are discussed in the following sections.

INTEREST RATE RISK

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

The Corporation uses a simulation model to calculate the potential effects of interest rate fluctuations on net interest income and the market value of portfolio equity. For purposes of these calculations, the market value of portfolio equity includes the fair values of financial instruments, such as securities, loans, deposits and borrowed funds, and the book values of nonfinancial assets and liabilities, such as premises and equipment and accrued expenses. The model measures and projects potential changes in net interest income, and calculates the discounted present value of anticipated cash flows of financial instruments, assuming an immediate increase or decrease in interest rates. Management ordinarily runs a variety of scenarios within a range of plus or minus 50-400 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 May 31, 2012 and October 31, 2011. The table shows that as of May 31, 2012 and October 31, 2011, the changes in net interest income and changes in market value were within the policy limits in all scenarios.

In December 2007, the Corporation entered into repurchase agreements (borrowings) totaling $80 million to fund the purchase of investment securities. The borrowings include embedded caps providing that, if three-month LIBOR were to exceed 5.15%, the interest rate payable on the repurchase agreements would fall, down to a minimum of 0%, based on parameters included in the repurchase agreements. Three-month LIBOR was 0.47% at May 31, 2012 and 0.43% at October 31, 2011, and has not exceeded 5.15% since the embedded caps were acquired. The embedded cap on one of the $40 million borrowings expired in December 2010, and the embedded cap on the other $40 million borrowing expires in December 2012.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

TABLE XIII - THE EFFECT OF HYPOTHETICAL CHANGES IN INTEREST RATES

May 31, 2012 Data
(In Thousands)			Period Ending May 31, 2013

Basis Point	Interest		Interest			Net Interest			NII			NII
Change in Rates	Income		Expense			Income (NII)			% Change			Risk Limit
+400	$	62,980	$	27,471		$	35,509			-18.2	%		25.0	%
+300		60,395		22,265			38,130			-12.2	%		20.0	%
+200		57,736		17,606			40,130			-7.6	%		15.0	%
+100		54,982		13,065			41,917			-3.5	%		10.0	%
0		51,950		8,524			43,426			0.0	%		0.0	%
-100		48,699		7,416			41,283			-4.9	%		10.0	%
-200		47,737		7,412			40,325			-7.1	%		15.0	%
-300		47,422		7,412			40,010			-7.9	%		20.0	%
-400		47,295		7,412			39,883			-8.2	%		25.0	%

		Market Value of Portfolio Equity at May 31, 2012

	Present		Present			Present
Basis Point	Value		Value			Value
Change in Rates	Equity		% Change			Risk Limit
+400	$	160,386		-22.5	%		50.0	%
+300		174,800		-15.5	%		45.0	%
+200		187,641		-9.3	%		35.0	%
+100		198,721		-4.0	%		25.0	%
0		206,901		0.0	%		0.0	%
-100		202,348		-2.2	%		25.0	%
-200		221,286		7.0	%		35.0	%
-300		257,785		24.6	%		45.0	%
-400		297,821		43.9	%		50.0	%

October 31, 2011 Data
(In Thousands)				Period Ending October 31, 2012

Basis Point	Interest		Interest			Net Interest			NII			NII
Change in Rates	Income		Expense			Income (NII)			% Change			Risk Limit
+400	$	66,369	$	29,617		$	36,752			-18.0	%		25.0	%
+300		63,690		24,535			39,155			-12.6	%		20.0	%
+200		60,927		19,806			41,121			-8.2	%		15.0	%
+100		58,095		15,076			43,019			-4.0	%		10.0	%
0		55,164		10,346			44,818			0.0	%		0.0	%
-100		51,929		8,720			43,209			-3.6	%		10.0	%
-200		50,441		8,680			41,761			-6.8	%		15.0	%
-300		49,961		8,680			41,281			-7.9	%		20.0	%
-400		49,828		8,680			41,148			-8.2	%		25.0	%

		Market Value of Portfolio Equity at October 31, 2011

	Present		Present			Present
Basis Point	Value		Value			Value
Change in Rates	Equity		% Change			Risk Limit
+400	$	153,307		-23.2	%		50.0	%
+300		165,701		-17.0	%		45.0	%
+200		178,261		-10.7	%		35.0	%
+100		189,315		-5.2	%		25.0	%
0		199,726		0.0	%		0.0	%
-100		197,329		-1.2	%		25.0	%
-200		211,794		6.0	%		35.0	%
-300		238,309		19.3	%		45.0	%
-400		278,876		39.6	%		50.0	%

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

EQUITY SECURITIES RISK

The Corporation’s equity securities portfolio consists of investments in stocks of banks and bank holding companies. Investments in bank stocks are subject to risk factors that affect the banking industry in general, including credit risk, competition from non-bank entities, interest rate risk and other factors, which could result in a decline in market prices. Also, losses could occur in individual stocks held by the Corporation because of specific circumstances related to each bank. As discussed further in Note 6 of the consolidated financial statements, the Corporation recognized an impairment loss in earnings related to a bank stock of $67,000 in the first quarter 2012. The Corporation recognized no OTTI losses related to bank stocks in the second quarter 2012. The Corporation recognized no OTTI losses related to bank stocks in the first six months of 2011.

Equity securities held as of June 30, 2012 and December 31, 2011 are presented in Table XII. Table XII presents quantitative data concerning the effects of a decline in fair value of the Corporation’s equity securities of 10% or 20%. The data in Table XIV does not reflect the effects of any appreciation in value that may occur, nor does it present the Corporation’s maximum exposure to loss on equity securities, which would be 100% of their fair value as of June 30, 2012.

TABLE XIV - EQUITY SECURITIES RISK

(In Thousands)

	June 30,			Dec. 31,
	2012			2011
Cost	$	6,208		$	5,643
Fair Value		8,626			7,728
Hypothetical 10% Decline In Market Value		(863	)		(773	)
Hypothetical 20% Decline In Market Value		(1,725	)		(1,546	)

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.

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 24, 2012.

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities

On May 19, 2011, the Corporation announced the Corporation’s Board of Directors authorized repurchases of outstanding common stock, up to a total of $1 million, in open market or privately negotiated transactions. At its September 22, 2011 meeting, the Corporation’s Board of Directors authorized repurchases of outstanding common stock in open market or privately negotiated transactions, up to a total of $1 million, as an addition to the stock repurchase program previously announced on May 19, 2011. The Board of Directors’ authorizations provide that: (1) the treasury stock repurchase programs became 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 programs 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. As of June 30, 2012, the maximum additional value available for purchases under this program was $980,694.

In the second quarter 2012, the Corporation made no purchases of its equity securities.

Item 3.

Defaults Upon Senior Securities

None

Item 4.

Mine Safety Disclosures

Not applicable

Item 5.

Other Information

None

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Item 6. Exhibits

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

	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 3.2 of the Corporation's Form 8-K filed September 21, 2009

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

	11. Statement re: computation of per share earnings		Information concerning the computation of earnings per share is provided in Note 2 to the 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

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

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

	35. Service compliance statement		Not applicable

	95. Mine safety disclosure exhibit		Not applicable

	99. Additional exhibits		Not applicable

	100. XBRL-related documents		Not applicable

	101. Interactive data file		Furnished herewith*

* These interactive data files shall not be deemed filed for purposes of Section 11 or 12 of the Securities Act of 1933, as amended, or section 18 of the Securities Exchange Act of 1934, as amended, or otherwise subject to liability under those sections.

CITIZENS & NORTHERN CORPORATION – FORM 10-Q

Signatures

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

August 7, 2012	By:	/s/ Charles H. Updegraff, Jr.
Date		President and Chief Executive Officer

August 7, 2012	By:	/s/ Mark A. Hughes
Date		Treasurer and Chief Financial Officer