UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2007

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

For the transition period from                      to                     .

CITIZENS & NORTHERN CORPORATION

(Exact name of Registrant as specified in its charter)

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

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

Large accelerated filer   o      Accelerated filer   þ     Non-accelerated filer   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes   o     No   þ

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)		8,890,134 Shares Outstanding on October 31, 2007

 

 

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

Index
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheet — September 30, 2007 and December 31, 2006		Page 3
Consolidated Statement of Income — Three Months and Nine Months Ended September 30, 2007 and 2006		Page 4
Consolidated Statement of Cash Flows — Nine Months Ended September 30, 2007 and 2006		Pages 5 through 6
Notes to Consolidated Financial Statements		Pages 7 through 13
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		Pages 14 through 30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		Pages 31 through 33
Item 4. Controls and Procedures		Page 33
Part II. Other Information		Pages 34 through 35
Signatures		Page 36
Exhibit 31.1. Rule 13a-14(a)/15d-14(a) Certification — Chief Executive Officer		Page 37
Exhibit 31.2. Rule 13a-14(a)/15d-14(a) Certification — Chief Financial Officer		Page 38
Exhibit 32. Section 1350 Certifications		Page 39
EX-31.1
EX-31.2
EX-32

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

PART I — FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Consolidated Balance Sheet
(In Thousands Except Share Data)

		September 30,				December 31,
		2007				2006
		(Unaudited)				(Note)
ASSETS
Cash and due from banks:
Noninterest-bearing		$	20,759			$	18,676
Interest-bearing			1,094				8,483
Total cash and cash equivalents			21,853				27,159
Trading securities			2,515				—
Available-for-sale securities			344,310				356,665
Held-to-maturity securities			410				414
Loans, net			737,408				679,300
Bank-owned life insurance			21,336				16,388
Accrued interest receivable			5,513				5,046
Bank premises and equipment, net			28,259				23,129
Foreclosed assets held for sale			386				264
Intangible asset — Core deposit intangible			1,534				336
Intangible asset — Goodwill			12,072				2,809
Other assets			19,435				15,858
TOTAL ASSETS		$	1,195,031			$	1,127,368
LIABILITIES
Deposits:
Noninterest-bearing		$	122,816			$	105,675
Interest-bearing			704,573				654,674
Total deposits			827,389				760,349
Dividends payable			2,134				1,969
Short-term borrowings			47,879				49,258
Long-term borrowings			169,417				179,182
Accrued interest and other liabilities			7,829				6,722
TOTAL LIABILITIES			1,054,648				997,480
STOCKHOLDERS’ EQUITY
Common stock, par value $1.00 per share; authorized 20,000,000 shares in 2007 and 2006; issued 9,193,192 in 2007 and 8,472,382 in 2006			9,193				8,472
Stock dividend distributable			—				1,806
Paid-in capital			42,495				27,077
Retained earnings			97,059				96,077
Total			148,747				133,432
Accumulated other comprehensive income			(3,291	)			613
Unamortized stock compensation			(81	)			(11	)
Treasury stock, at cost:
303,058 shares at September 30, 2007			(4,992	)
262,598 shares at December 31, 2006							(4,146	)
TOTAL STOCKHOLDERS’ EQUITY			140,383				129,888
TOTAL LIABILITIES & STOCKHOLDERS’ EQUITY		$	1,195,031			$	1,127,368

The accompanying notes are an integral part of these consolidated financial statements.
Note: The balance sheet at December 31, 2006 has been derived from the audited financial statements at that date but does not include all the information and notes required by U.S. generally accepted accounting principles for complete financial statements.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

CONSOLIDATED STATEMENT OF INCOME
(In Thousands, Except Per Share Data) (Unaudited)

		3 Months Ended								Fiscal Year To Date
		Sept. 30,				Sept. 30,				9 Months Ended Sept. 30,
		2007				2006				2007				2006
		(Current)				(Prior Year)				(Current)				(Prior Year)
INTEREST INCOME
Interest and fees on loans		$	12,929			$	11,046			$	36,889			$	31,907
Interest on loans to political subdivisions			369				23				1,072				967
Interest on balances with depository institutions			16				321				74				58
Interest on federal funds sold			50				146				200				242
Interest on trading securities			27				—				46				—
Income from available-for-sale and held-to-maturity securities:
Taxable			3,777				3,588				10,945				10,865
Tax-exempt			677				792				2,076				3,174
Dividends			213				236				691				786
Total interest and dividend income			18,058				16,152				51,993				47,999
INTEREST EXPENSE
Interest on deposits			6,437				5,688				18,780				15,995
Interest on short-term borrowings			432				562				1,397				1,611
Interest on long-term borrowings			1,682				1,583				5,053				5,071
Total interest expense			8,551				7,833				25,230				22,677
Interest margin			9,507				8,319				26,763				25,322
Provision for loan losses			—				191				229				491
Interest margin after provision for loan losses			9,507				8,128				26,534				24,831
OTHER INCOME
Trust and financial management revenue			885				726				2,506				1,784
Service charges on deposit accounts			709				560				1,824				1,523
Service charges and fees			177				130				501				304
Insurance commissions, fees and premiums			108				111				368				371
Increase in cash surrender value of life insurance			196				163				515				463
Other operating income			802				509				1,895				1,480
Total other income before net (losses) gains on available-for-sale securities			2,877				2,199				7,609				5,925
Net (losses) gains on available-for-sale securities			(68	)			1,602				(79	)			4,250
Total other income			2,809				3,801				7,530				10,175
OTHER EXPENSES
Salaries and wages			3,741				3,425				10,769				10,111
Pensions and other employee benefits			1,032				1,003				3,190				3,151
Occupancy expense, net			668				540				1,954				1,680
Furniture and equipment expense			708				643				2,104				1,961
Pennsylvania shares tax			236				244				707				732
Other operating expense			2,306				1,785				6,403				5,824
Total other expenses			8,691				7,640				25,127				23,459
Income before income tax provision			3,625				4,289				8,937				11,547
Income tax provision			777				1,016				1,695				2,255
NET INCOME		$	2,848			$	3,273			$	7,242			$	9,292
PER SHARE DATA:
Net income — basic		$	0.32			$	0.39			$	0.84			$	1.11
Net income — diluted		$	0.32			$	0.39			$	0.84			$	1.11
Dividend per share		$	0.24			$	0.24			$	0.72			$	0.72
Number of shares used in computation — basic			8,897,844				8,322,436				8,656,921				8,355,173
Number of shares used in computation — diluted			8,905,827				8,344,340				8,669,444				8,382,610

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

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

Consolidated Statement of Cash Flows
(In Thousands) (Unaudited)

		9 Months Ended
		Sept. 30,				Sept. 30,
		2007				2006
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income		$	7,242			$	9,292
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			229				491
Realized losses (gains) on available for sale securities, net			79				(4,250	)
Gain on sale of foreclosed assets, net			(76	)			(26	)
Loss (gain) on disposition of premises and equipment			145				(35	)
Depreciation expense			2,125				1,942
Loss from writedown of impaired premises and equipment			—				169
Accretion and amortization of securities, net			274				365
Other accretion and amortization, net			(158	)			—
Increase in cash surrender value of life insurance			(515	)			(463	)
Stock-based compensation			231				31
Amortization of core deposit intangibles			289				96
Net increase in trading securities			(2,515	)			—
Increase in accrued interest receivable and other assets			(1,099	)			(2,302	)
Increase in accrued interest payable and other liabilities			482				1,165
Net Cash Provided by Operating Activities			6,733				6,475
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from acquisition of Citizens Bancorp, Inc., net			29,941				—
Proceeds from maturity of held-to-maturity securities			4				4
Proceeds from sales of available-for-sale securities			91,088				93,402
Proceeds from calls and maturities of available-for-sale securities			27,235				26,200
Purchase of available-for-sale securities			(85,847	)			(62,052	)
Purchase of Federal Home Loan Bank of Pittsburgh stock			(4,655	)			(1,597	)
Redemption of Federal Home Loan Bank of Pittsburgh stock			4,977				3,289
Net decrease (increase) in loans			1,483				(24,551	)
Return of principal on limited partnership investment			238				—
Purchase of premises and equipment			(2,157	)			(3,220	)
Proceeds from sale of premises and equipment			—				222
Proceeds from sale of foreclosed assets			478				603
Net Cash Provided by Investing Activities			62,785				32,300
CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in deposits			(32,615	)			(693	)
Net (decrease) increase in short-term borrowings			(2,805	)			28,745
Proceeds from long-term borrowings			42,500				—
Repayments of long-term borrowings			(74,927	)			(63,735	)
Purchase of treasury stock			(950	)			(2,274	)
Sale of treasury stock			88				76
Tax benefit from compensation plans			—				7
Dividends paid			(6,115	)			(5,974	)
Net Cash Used in Financing Activities			(74,824	)			(43,848	)
DECREASE IN CASH AND CASH EQUIVALENTS			(5,306	)			(5,073	)
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR			27,159				26,446
CASH AND CASH EQUIVALENTS, END OF PERIOD		$	21,853			$	21,373

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

Consolidated Statement of Cash Flows
(In Thousands) (Unaudited) (Continued)

		9 Months Ended
		Sept. 30,				Sept. 30,
		2007				2006
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Assets acquired through foreclosure of real estate loans		$	417			$	650
Interest paid		$	25,278			$	22,778
Income taxes paid		$	1,977			$	1,750
ACQUISITION OF CITIZENS BANCORP, INC.:
Cash and cash equivalents received		$	44,264			$	—
Cash paid for acquisition			(14,323	)			—
Net cash received on acquisition		$	29,941			$	—
NONCASH ASSETS RECEIVED, LIABILITIES ASSUMED AND EQUITY ISSUED FROM ACQUISITION OF CITIZENS BANCORP, INC.:
Assets received:
Available for sale securities		$	26,426			$	—
Loans			60,151				—
Bank-owned life insurance			4,433				—
Premises and equipment			5,243				—
Foreclosed assets			107				—
Intangible asset — core deposit intangible			1,487				—
Intangible asset — goodwill			9,263				—
Other assets			1,567				—
Total noncash assets received		$	108,677			$	—
Liabilities assumed and equity issued:
Deposits		$	99,636			$	—
Short-term borrowings			1,426				—
Long-term borrowings			22,753				—
Other liabilities			735				—
Equity issued, net			14,068				—
Total noncash liabilities assumed and equity issued		$	138,618			$	—

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

CITIZENS & NORTHERN CORPORATION — FORM 10-Q
Notes to Consolidated Financial Statements

1. BASIS OF INTERIM PRESENTATION

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

The financial information included herein, with the exception of the consolidated balance sheet dated December 31, 2006, is unaudited; however, 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 and cash flows for the interim periods.

Results reported for the three-month and nine-month periods ended September 30, 2007 might not be indicative of the results for the year ending December 31, 2007.

This document has not been reviewed or confirmed for accuracy or relevance by the Federal Deposit Insurance Corporation or any other regulatory agency.

2. PER SHARE DATA

Net income per share is based on the weighted-average number of shares of common stock outstanding. The number of shares used in calculating net income and cash dividends per share reflect the retroactive effect of stock dividends for all periods presented. The following data show the amounts used in computing net income per share and the weighted average number of shares of dilutive stock options. 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
Nine Months Ended September 30, 2007
Earnings per share — basic		$	7,242,000				8,656,921			$	0.84
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options							109,329
Hypothetical share repurchase at $20.50							(96,806	)
Earnings per share — diluted		$	7,242,000				8,669,444			$	0.84
Nine Months Ended September 30, 2006
Earnings per share — basic		$	9,292,000				8,355,173			$	1.11
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options							139,968
Hypothetical share repurchase at $23.80							(112,531	)
Earnings per share — diluted		$	9,292,000				8,382,610			$	1.11

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

2. PER SHARE DATA, Continued

						Weighted-
						Average				Earnings
		Net				Common				Per
		Income				Shares				Share
Quarter Ended September 30, 2007
Earnings per share — basic		$	2,848,000				8,897,844			$	0.32
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options							108,115
Hypothetical share repurchase at $18.93							(100,132	)
Earnings per share — diluted		$	2,848,000				8,905,827			$	0.32
Quarter Ended September 30, 2006
Earnings per share — basic		$	3,273,000				8,322,436			$	0.39
Dilutive effect of potential common stock arising from stock options:
Exercise of outstanding stock options							120,591
Hypothetical share repurchase at $22.53							(98,687	)
Earnings per share — diluted		$	3,273,000				8,344,340			$	0.39

3. COMPREHENSIVE INCOME

U.S. generally accepted accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. Although unrealized gains and losses on available-for-sale securities are reported as a separate component of the equity section of the balance sheet, changes in unrealized gains and losses on available-for-sale securities, along with net income, are components of comprehensive income. Also, effective December 31, 2006, the Corporation applied Statement of Financial Accounting Standards (SFAS) No. 158, Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans. SFAS No. 158 requires the Corporation to recognize the underfunded or overfunded status of defined benefit postretirement plans as a liability or asset in the balance sheet. Beginning in 2007, changes in accumulated other comprehensive income attributable to the impact of SFAS No. 158 on defined benefit plans are included in other comprehensive income.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

The components of comprehensive income, and the related tax effects, are as follows:

		3 Months Ended								9 Months Ended
		Sept. 30,				Sept. 30,				Sept. 30,				Sept. 30,
(In Thousands)		2007				2006				2007				2006
Net income		$	2,848			$	3,273			$	7,242			$	9,292
Unrealized gains (losses) on available-for-sale securities:
Unrealized holding (losses) gains on available-for-sale securities			(2,333	)			3,709				(6,026	)			(898	)
Reclassification adjustment for losses (gains) realized in income			68				(1,602	)			79				(4,250	)
Other comprehensive (loss) income before income tax			(2,265	)			2,107				(5,947	)			(5,148	)
Income tax related to unrealized loss (gain) on securities			770				(718	)			2,022				1,750
Other comprehensive (loss) gain on securities			(1,495	)			1,389				(3,925	)			(3,398	)
Unfunded pension and postretirement obligations:
Amortization of net transition obligation, prior service cost and net actuarial loss included in net periodic benefit cost			11				—				33				—
Income tax related to other comprehensive gain			(3	)			—				(12	)			—
Other comprehensive gain on unfunded retirement obligations			8				—				21				—
Total comprehensive income		$	1,361			$	4,662			$	3,338			$	5,894

4. SECURITIES

The Corporation’s trading assets at September 30, 2007 were municipal bonds with an estimated fair value of $2,515,000. The consolidated income statement includes net losses from trading assets in the nine months ended September 30, 2007 of $24,000. This includes realized gains on the sale of trading securities of $52,000 and a net unrealized holding loss of $76,000. In the third quarter 2007, net gains from trading assets of $47,000 included realized gains on the sale of trading securities of $46,000, and a net unrealized holding gain of $1,000. There was no trading activity in 2006.

Amortized cost and fair value of available-for-sale and held-to-maturity securities at September 30, 2007 are summarized as follows:

		September 30, 2007
						Gross				Gross
						Unrealized				Unrealized
		Amortized				Holding				Holding				Fair
(In Thousands)		Cost				Gains				Losses				Value
AVAILABLE-FOR-SALE SECURITIES:
Obligations of other U.S. Government agencies		$	44,396			$	207			$	(144	)		$	44,459
Obligations of states and political subdivisions			62,198				217				(2,363	)			60,052
Mortgage-backed securities			77,216				222				(858	)			76,580
Collateralized mortgage obligations			49,357				8				(988	)			48,377
Other securities			92,042				800				(2,619	)			90,223
Total debt securities			325,209				1,454				(6,972	)			319,691
Marketable equity securities			22,330				3,494				(1,205	)			24,619
Total		$	347,539			$	4,948			$	(8,177	)		$	344,310

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

		September 30, 2007
						Gross				Gross
						Unrealized				Unrealized
		Amortized				Holding				Holding				Fair
(In Thousands)		Cost				Gains				Losses				Value
HELD-TO-MATURITY SECURITIES:
Obligations of the U.S. Treasury		$	308			$	9			$	—			$	317
Obligations of other U.S. Government agencies			99				5				—				104
Mortgage-backed securities			3				—				—				3
Total		$	410			$	14			$	—			$	424

The following table presents gross unrealized losses and fair value of investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at September 30, 2007.

September 30, 2007		Less Than 12 Months								12 Months or More								Total
(In Thousands)		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
AVAILABLE-FOR-SALE SECURITIES:
Obligations of other U.S. Government agencies		$	1,497			$	(3	)		$	24,859			$	(141	)		$	26,356			$	(144	)
Obligations of states and political subdivisions			30,162				(1,875	)			14,221				(488	)			44,383				(2,363	)
Mortgage-backed securities			14,218				(84	)			37,700				(774	)			51,918				(858	)
Collateralized mortgage obligations			14,039				(40	)			28,825				(948	)			42,864				(988	)
Other securities			27,520				(1,942	)			28,799				(677	)			56,319				(2,619	)
Total debt securities			87,436				(3,944	)			134,404				(3,028	)			221,840				(6,972	)
Marketable equity securities			7,971				(790	)			1,899				(415	)			9,870				(1,205	)
Total temporarily impaired available-for-sale Securities		$	95,407			$	(4,734	)		$	136,303			$	(3,443	)		$	231,710			$	(8,177	)

Management evaluates securities for other-than-temporary impairment at least on a quarterly basis, and more frequently when economic or market concerns 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) the intent and ability of the Corporation to retain its investment in the issuer for a period of time sufficient to allow for any anticipated recovery in fair value.

The unrealized losses on debt securities as of September 30, 2007 are primarily the result of volatility in interest rates. Based on the Corporation’s ability and intent to hold the securities for the foreseeable future, and management’s assessment of the credit worthiness of the issuers, management believes the Corporation’s debt securities at September 30, 2007 were not other-than-temporarily impaired.

Unrealized losses on marketable equity securities are mainly from investments in common stocks of banking corporations. Management believes that recent declines in market prices of many bank stocks have been caused by media reports regarding sub-prime mortgage losses and similar events that have mainly affected mortgage banking operations and very large financial institutions. Accordingly, as of September 30, 2007, management believes the impairment of the Corporation’s marketable equity securities to be temporary.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

5. DEFINED BENEFIT PLANS

The Corporation has a noncontributory defined benefit pension plan for employees meeting certain age and length of service requirements. Benefits are based primarily on years of service and the average annual compensation during the highest five consecutive years.

On October 18, 2007, the Corporation’s Board of Directors adopted amendments to the defined benefit pension plan to freeze and terminate the Plan, effective December 31, 2007. The Corporation expects that it would fund and settle its obligations under the Plan sometime in 2008. In connection with freezing and terminating the Plan, the Corporation has also amended the Plan to make lump sum distributions available to all active participants and vested former employees. The Corporation expects to record a gain or loss on curtailment of the Plan in the fourth quarter 2007, and a settlement gain or loss in 2008. The amount of curtailment gain or loss in 2007 and settlement gain or loss in 2008 has not yet been determined.

In addition, 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 affect the liability balance at September 30, 2007 and December 31, 2006, and will not affect the Corporation’s future expenses.

The Corporation uses a December 31 measurement date for its plans.

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

		Pension Benefits								Postretirement Benefits
		Nine Months Ended								Nine Months Ended
(In Thousands)		September 30,								September 30,
		2007				2006				2007				2006
Service cost		$	512			$	457			$	55			$	48
Interest cost			525				472				52				46
Expected return on plan assets			(689	)			(623	)			—				—
Amortization of transition (asset) obligation			(17	)			(17	)			27				27
Amortization of prior service cost			6				6				—				—
Recognized net actuarial loss			34				53				2				2
Net periodic benefit cost		$	371			$	348			$	136			$	123

(In Thousands)		Pension								Postretirement
		Three Months Ended								Three Months Ended
		September 30,								September 30,
		2007				2006				2007				2006
Service cost		$	170			$	152			$	18			$	16
Interest cost			175				157				17				15
Expected return on plan assets			(230	)			(207	)			—				—
Amortization of transition (asset) obligation			(5	)			(5	)			9				9
Amortization of prior service cost			2				2				—				—
Recognized net actuarial loss			11				18				1				1
Net periodic benefit cost		$	123			$	117			$	45			$	41

Due to freezing the defined benefit pension plan, management expects there will be no minimum required employer contribution to the defined benefit pension plan for 2007. Through the third quarter of 2007, the Corporation has funded postretirement contributions totaling $44,000, with estimated annual postretirement contributions, net of anticipated reimbursements from the Medicare (Part D) program, of $33,000 expected in 2007 for the full year.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

As a result of the acquisition of Citizens Bancorp, Inc. (see Note 8), the Corporation assumed the Citizens Trust Company Retirement Plan, a defined benefit pension plan for which benefit accruals and participation were frozen in 2002. The Corporation used a September 30 measurement date for this plan in 2007, and will change to a December 31 measurement date in 2008. The Corporation’s net periodic pension benefit recognized in the nine months ended September 30, 2007 was $1,000.

6. STOCK-BASED COMPENSATION PLANS

In January 2007, the Corporation granted options to purchase a total of 43,385 shares of common stock through its Stock Incentive and Independent Directors Stock Incentive Plans. The exercise price for these options is $22.325 per share, which was the market price as of the date of grant. The Corporation neither modified, nor issued, any new options in 2006.

SFAS No. 123R requires the Corporation to record stock option expense based on estimated fair value calculated using an option valuation model. The fair value of each option granted in 2007 was estimated to be $4.46 per share as of the grant date. In calculating the fair value, the Corporation utilized the Black-Scholes option-pricing model with the following assumptions:

	•		Volatility — 23%
	•		Expected option lives — 8 years
	•		Risk-free interest rate — 4.69%
	•		Dividend yield — 3.61%

In calculating the estimated fair value of the 2007 stock option awards, the Corporation utilized its historical volatility and dividend yield over the immediately prior 8-year period to estimate future levels of volatility and dividend yield. The risk-free interest rate was based on the published yield of zero-coupon U.S. Treasury strips with an 8-year maturity as of the grant dates. The 8-year term was based on management’s estimate of the average term for all options issued under both plans.

In calculating stock option expense for the 2007 stock option awards, management assumed a 23% 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.

Also, effective in January 2007, the Corporation awarded a total of 5,835 shares of restricted stock under the Stock Incentive and Independent Directors Stock Incentive 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.

Total stock-based compensation expense is as follows:

(In Thousands)		3 Months Ended								Fiscal Year To Date
		Sept. 30,				Sept. 30,				9 Months Ended Sept. 30,
		2007				2006				2007				2006
		(Current)				(Prior Year)				(Current)				(Prior Year)
Stock options		$	—			$	—			$	156			$	—
Restricted stock			25				9				75				29
Total		$	25			$	9			$	231			$	29

Stock option expense has been recognized over the six-month vesting period for the 2007 awards.

7. 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.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

8. MERGER

On May 1, 2007, the Corporation completed its acquisition of 100% of the outstanding voting stock of Citizens Bancorp, Inc. (“Citizens.”) Accordingly, the results of operations for the former Citizens have been included in the accompanying consolidated financial statements from that date forward. In connection with the transaction, Citizens Trust Company, the banking subsidiary of Citizens, has merged with and into Citizens & Northern Bank (“C&N Bank”), a subsidiary of the Corporation. The Corporation’s management believes the acquisition of Citizens provides two significant benefits: (1) extension of its geographic market for banking services, which should provide growth opportunities, and (2) addition of management personnel with background and skills complementary to the Corporation’s management personnel.

The aggregate acquisition price was $28,391,000, which included cash of $14,323,000 and 636,967 shares of the Corporation’s common stock valued at $14,068,000. The value of the stock issued was determined based on the average market price of the shares over the seven days before and after the date the terms of the acquisition agreement were negotiated and publicly announced, adjusted for the values of Citizens shares held prior to the merger announcement and Corporation shares that were held by Citizens.

The Corporation is in the process of obtaining final valuations on loans, intangible assets, premises and equipment, deposits and other liabilities; accordingly, allocation of the purchase price is subject to modification in the future. Information regarding the purchase price and estimated fair values of assets acquired and liabilities assumed as of the acquisition date is provided as supplemental information in the consolidated statement of cash flows. Following are pro forma income statement amounts, without adjustment for the material nonrecurring items described below, assuming the acquisition was made on January 1, 2006:

(In Thousands)		3 Months Ended								Fiscal Year To Date
		Sept. 30,				Sept. 30,				9 Months Ended Sept. 30,
		2007				2006				2007				2006
		(Current)				(Prior Year)				(Current)				(Prior Year)
Net interest income		$	9,507			$	9,337			$	28,124			$	28,280
Net income		$	2,848			$	3,632			$	6,790			$	10,238
Net income per share — basic		$	0.32			$	0.41			$	0.76			$	1.14
Net income per share — diluted		$	0.32			$	0.40			$	0.76			$	1.14

Citizens recorded material, nonrecurring expenses and losses which reduced pro forma net income (included in the table immediately above) by $698,000 for the nine months ended September 30, 2007. These nonrecurring items included merger-related professional expense and realized losses from sales of securities. Excluding the effect of these nonrecurring items, pro forma income statement amounts (assuming the acquisition was made on January 1, 2006) are as follows:

(In Thousands)		3 Months Ended								Fiscal Year To Date
		Sept. 30,				Sept. 30,				9 Months Ended Sept. 30,
		2007				2006				2007				2006
		(Current)				(Prior Year)				(Current)				(Prior Year)
Net income		$	2,848			$	3,632			$	7,488			$	10,238
Net income per share — basic		$	0.32			$	0.41			$	0.84			$	1.14
Net income per share — diluted		$	0.32			$	0.40			$	0.84			$	1.14

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

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

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 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.

REFERENCES TO 2007 AND 2006

Unless otherwise noted, all references to “2007” in the following discussion of operating results are intended to mean the nine months ended September 30, 2007, and similarly, references to “2006” relate to the nine months ended September 30, 2006.

EARNINGS OVERVIEW

Net Income was $7,242,000 in the first nine months of 2007, down 22.1% from the first nine months of 2006. Net Income Per Share was $0.84 (basic and diluted) in the first nine months of 2007, down 24.3% from Net Income Per Share of $1.11 (basic and diluted) in the first nine months of 2006. Return on average assets was 0.83% in the first nine months of 2007 and 1.09% in the first nine months of 2006. Return on average equity was 7.02% in the nine months ended September 30, 2007 and 9.45% in the nine months ended September 30, 2006. Cash dividends declared were $0.72 per share in both 2007 and 2006.

Earnings for the first nine months of 2007 were impacted by a loss (net of tax) on mortgage-backed securities of $1,352,000. These securities were classified as other-than-temporarily impaired in the second quarter 2007, and written down through earnings by $1,175,000, net of tax. The securities were sold in July 2007, with a further loss of $177,000 (net of tax) realized in the third quarter. The impact per share of the loss from these securities, excluding the positive effect of investing the sale proceeds at higher yields, was $0.16 (basic and diluted) for the first nine months of 2007.

On May 1, 2007, the acquisition of Citizens Bancorp, Inc. became effective. Citizens Bancorp, Inc. was the parent company of Citizens Trust Company, with offices in Coudersport, Port Allegany and Emporium, PA. The Citizens Trust Company operations, which are now part of Citizens & Northern Bank, contributed significantly to growth in total assets, including loans, as well as the growth in deposits and trust assets under management, and increases in revenues and expenses in 2007.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

Significant income statement changes between 2007 and 2006 were as follows:

•

Net interest margin increased $1,441,000, or 5.7%, in 2007 as compared to 2006. Most of the increase in the net interest margin between years occurred in the third quarter, since the net interest margin for the third quarter 2007 was $1,188,000 higher than for the third quarter 2006. Factors contributing to recent improvements in the net interest margin include: (1) the acquisition of Citizens Trust Company, which resulted in increased interest and fees on loans, and provided funding to help pay off borrowings, (2) a change in the shape of the yield curve, which has become slightly positive after remaining flat or inverted throughout 2006 and the first half of 2007, allowing the Corporation a few opportunities to earn a positive spread from borrowing and investing activities, and (3) the increase in yield on the investment portfolio resulting from the restructuring described above.

	•		Noninterest revenue increased $1,684,000 (28.4%) in 2007 over 2006. Trust and Financial Management revenue increased $722,000 (40.5%). Other significant increases in noninterest revenue included: service charges on deposits, which increased $301,000, increases of $197,000 for service charges and fees, including letter of credit and ATM-related fees, as well as increases of $415,000 in other operating income, which includes debit card fees, credit card (as a third party agent), a gain from sale of a restricted stock, and certain training grant revenues.
	•		Net realized losses (pre-tax) from sales of securities amounted to $79,000 in 2007, as compared to pre-tax securities gains of $4,250,000 in 2006. Excluding the $2,048,000 pre-tax loss on impaired securities described above, securities gains for 2007, totaled $1,969,000, down $2,281,000 from 2006. Most of the gains realized in both periods were from sales of bank stocks.
	•		Noninterest expense increased $1,668,000 (7.1%) in 2007 as compared to 2006. The increase in expenses reflects the addition of Citizens Trust Company. Also, professional fees of $221,000 have been incurred in 2007 related to the computer core system conversions of the First State Bank (New York) and Citizens Trust Company operations.
	•		The income tax provision decreased $560,000, to $1,695,000 in 2007 from $2,255,000 in 2006, as a result of lower pre-tax earnings.

Third Quarter 2007

Net Income in the third quarter 2007 was $2,848,000, down $425,000 (13.0%) from the third quarter 2006, and $912,000 (47.1%) higher than second quarter 2007. Net Income Per Share (basic and diluted) was $0.32 in the third quarter 2007, as compared to $0.39 (basic and diluted) in the third quarter 2006, and $0.22 (basic and diluted) in the second quarter 2007. Net realized losses (pre-tax) from sales of securities amounted to $68,000 in the third quarter 2007, as compared to pre-tax securities gains of $1,602,000 in the third quarter 2006. Third quarter 2007 earnings were positively affected by improvements in the net interest margin and increases in noninterest revenue, as referred to in the discussion of year-to-date results above. In addition to securities losses, third quarter earnings were negatively affected by one time costs totaling $427,000, including professional fees associated with computer core system conversions and a loss on the disposition of telephone equipment.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

TABLE I — QUARTERLY FINANCIAL DATA
(In Thousands)

		Sept. 30,				June 30,				Mar. 31,				Dec. 31,				Sept. 30,				June 30,				Mar. 31,
		2007				2007				2007				2006				2006				2006				2006
Interest income		$	18,058			$	17,692			$	16,243			$	16,463			$	16,152			$	15,984			$	15,863
Interest expense			8,551				8,679				8,000				8,097				7,833				7,566				7,278
Interest margin			9,507				9,013				8,243				8,366				8,319				8,418				8,585
Provision for loan losses			—				—				229				181				191				(300	)			600
Interest margin after provision for loan losses			9,507				9,013				8,014				8,185				8,128				8,718				7,985
Other income			2,877				2,644				2,088				2,045				2,199				1,937				1,789
Net (losses) gains on available-for-sale securities			(68	)			(1,172	)			1,161				796				1,602				1,333				1,315
Gain from sale of credit card loans			—				—				—				340				—				—				—
Other expenses			8,691				8,189				8,247				8,155				7,640				7,976				7,843
Income before income tax provision			3,625				2,296				3,016				3,211				4,289				4,012				3,246
Income tax provision			777				360				558				517				1,016				813				426
Net income		$	2,848			$	1,936			$	2,458			$	2,694			$	3,273			$	3,199			$	2,820
Net income per share — basic		$	0.32			$	0.22			$	0.30			$	0.32			$	0.39			$	0.38			$	0.34
Net income per share — diluted		$	0.32			$	0.22			$	0.30			$	0.32			$	0.39			$	0.38			$	0.33

The number of shares used in calculating net income per share for each quarter presented in Table I reflects the retroactive effect of stock dividends.

Prospects for the Fourth Quarter 2007

Management has begun several initiatives designed to increase revenues and reduce expenses over the remainder of 2007 and in 2008. Management expects some of the initiatives to immediately increase revenues or decrease expenses, while other changes may result in an up front cost or expense, followed by future improvements. As part of these initiatives, full-time equivalent staffing is being reduced approximately 10% during the last half of 2007. Looking beyond the end of 2007, management expects that expansion of the Corporation’s footprint — including in 2005 through 2007 the construction or acquisition of banking facilities in Lycoming County, PA, New York State (First State Bank) and most recently, the Citizens Trust Company locations — will produce opportunities to increase profitability by increasing loans, deposits and Trust and Financial Management volume.

As referred to in Note 5 to the financial statements, in October 2007 the Corporation’s Board of Directors adopted amendments to the defined benefit pension plan to freeze and terminate the Plan, effective December 31, 2007. The purpose of freezing and terminating the Plan is to control and reduce future employee benefit expenses. Management expects to present an amendment to the Corporation’s Employee Savings & Retirement Plan (a 401(k) plan), for Board approval, which would increase employer matching contributions under that plan in 2008. Based on the current number and composition of employees and 401(k) plan participation, the increase in expense in 2008 associated with the 401(k) Plan will be approximately $150,000, which is less than the ongoing expense ($495,000 for the year ending December 31, 2007) that would be expected from maintaining the defined benefit pension plan. The Corporation expects to record a gain or loss on curtailment of the Plan in the fourth quarter 2007, and a settlement gain or loss in 2008. The amount of curtailment gain or loss in 2007 and settlement gain or loss in 2008 has not yet been determined.

A major variable that affects the Corporation’s earnings is securities gains and losses, particularly from bank stocks and other equity securities. Management’s decisions regarding sales of securities are based on a variety of factors, with the overall goal of maximizing portfolio return over a long-term horizon. It is difficult to predict, with much precision, the amount of net securities gains and losses that will be realized in the fourth quarter 2007.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

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. The Corporation’s methodology for determining the allowance for loan losses is described 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. The Corporation receives estimated fair values of debt securities from an independent valuation service, or from brokers. In developing these 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. Accordingly, when selling debt securities, management typically obtains price quotes from more than one source. The large majority of the Corporation’s securities are classified as available-for-sale. Accordingly, these securities are carried at fair value on the consolidated balance sheet, with unrealized gains and losses excluded from earnings and reported separately through accumulated other comprehensive income (included in stockholders’ equity).

NET INTEREST MARGIN

The Corporation’s primary source of operating income is represented by the net interest margin. The net interest margin 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 margin for 2007 and 2006. 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 margin 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.

The fully taxable equivalent net interest margin was $28,193,000 in 2007, $995,000 (3.7%) higher than in 2006. As shown in Table IV, net increases in volume had the effect of increasing net interest income $1,152,000 in 2007 over 2006 while interest rate changes had the effect of decreasing net interest income $157,000. Increases in volume of earning assets and interest-bearing liabilities were significantly affected by the acquisition of Citizens Trust Company on May 1, 2007. The most significant components of the volume changes in 2007 were an increase of $3,475,000 attributable to loan growth and a decrease in interest expense on short-term and long-term borrowings of $991,000, partially offset by lower interest income of $2,031,000 from available-for-sale securities and an increase in interest expense of $880,000 on certificates of deposit. As presented in Table III, the “Interest Rate Spread” (excess of average rate of return on interest-bearing assets over average cost of funds on interest-bearing liabilities) was 2.89% in the first nine months of 2007, as compared to 2.90% for the year ended December 31, 2006 and 2.93% in the first nine months of 2006.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

INTEREST INCOME AND EARNING ASSETS

Interest income totaled $53,423,000 in 2007, an increase of 7.1% over 2006. Interest and fees from loans increased $5,131,000, or 15.4%, while income from available-for-sale securities decreased $1,623,000, or 10.0%. As indicated in Table III, total average available-for-sale securities in 2007 fell to $347,617,000, a decrease of $44,125,000 or 11.3% from 2006. Throughout the calendar year 2006 and the first nine months of 2007, proceeds from sales and maturities of securities were used, in part, to help fund loans and pay off borrowings. Within the available-for-sale securities portfolio, the average balance of municipal bonds shrunk by $32,566,000 in 2007 as compared to 2006. Management decided in mid-2006 to reduce the Corporation’s investment in municipal bonds in order to reduce the alternative minimum tax liability. The average rate of return on available-for-sale securities was 5.62% for 2007, in line with the 5.55% return for the year ended December 31, 2006 and 5.55% in the first nine months of 2006.

The average balance of gross loans increased 10.1% to $723,794,000 in 2007 from $657,447,000 in the first nine months of 2006. Excluding Citizens Trust Company, average loans increased 1.0% despite the payoff of $22,475,000 associated with one significant commercial relationship. The Corporation has experienced an increase in average balances of both residential mortgage and commercial loans in 2007. The average rate of return on loans was 7.10% in 2007, up from 6.81% for the year ended December 31, 2006 and 6.77% in the first nine months of 2006.

INTEREST EXPENSE AND INTEREST-BEARING LIABILITIES

Interest expense rose $2,553,000, or 11.3%, to $25,230,000 in 2007 from $22,677,000 in 2006. Table III shows that the overall cost of funds on interest-bearing liabilities rose to 3.72% in 2007, from 3.44% for the year ended December 31, 2006 and 3.38% in the first nine months of 2006.

From Table III, you can calculate that total average deposits (interest-bearing and noninterest-bearing) increased 7.5%, to $809,001,000 in 2007 from $752,575,000 in the first nine months of 2006. In July 2007, the Citizens Trust Company operations were converted to the same operational platform as Citizens & Northern Bank, and $13,343,000 of money market deposits was transferred to another financial institution. Management utilizes a third-party provider for Trust & Financial Management money market allocations primarily for interest rate risk management reasons. Excluding acquired Citizens Trust Company deposit accounts, net of the transfers above, total average deposits increased 0.7%. The average rate incurred on certificates of deposit has increased significantly in 2007 over the first half of 2006, to 4.46% from 3.87%. Also, the average rate on Individual Retirement Accounts increased significantly, to 4.54% in 2007 from 4.18% in the first nine months of 2006.

The combined average total short-term and long-term borrowed funds decreased $34,534,000 to $211,535,000 in 2007 from $246,069,000 in the first nine months of 2006. With the yield curve being flat or inverted throughout 2006 and the first half of 2007, opportunities have been limited for earning a positive spread by purchasing or holding investment securities as compared to interest costs associated with maintaining borrowed funds. Accordingly, the Corporation paid off many borrowings as they matured. The average rate on long-term borrowings was 4.11% in 2007, up from 3.53% in the first nine months of 2006.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

TABLE II — ANALYSIS OF INTEREST INCOME AND EXPENSE

		Nine Months Ended
		September 30,								Increase/
(In Thousands)		2007				2006				(Decrease)
INTEREST INCOME
Available-for-sale securities:
Taxable		$	11,618			$	11,633			$	(15	)
Tax-exempt			3,006				4,614				(1,608	)
Total available-for-sale securities			14,624				16,247				(1,623	)
Held-to-maturity securities, Taxable			18				18				—
Trading securities			66				—				66
Interest-bearing due from banks			74				58				16
Federal funds sold			200				242				(42	)
Loans:
Taxable			36,889				31,907				4,982
Tax-exempt			1,552				1,403				149
Total loans			38,441				33,310				5,131
Total Interest Income			53,423				49,875				3,548
INTEREST EXPENSE
Interest checking			1,485				1,378				107
Money market			4,535				4,340				195
Savings			256				257				(1	)
Certificates of deposit			8,085				6,187				1,898
Individual Retirement Accounts			4,413				3,827				586
Other time deposits			6				6				—
Short-term borrowings			1,397				1,611				(214	)
Long-term borrowings			5,053				5,071				(18	)
Total Interest Expense			25,230				22,677				2,553
Net Interest Income		$	28,193			$	27,198			$	995

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 34%.

CITIZENS & NORTHERN CORPORATION — FORM 10-Q

Table IIl — Analysis of Average Daily Balances and Rates
(Dollars in Thousands)

		9 Months								Year								9 Months
		Ended				Rate of				Ended				Rate of				Ended				Rate of
		9/30/2007				Return/				12/31/2006				Return/				9/30/2006				Return/
		Average				Cost of				Average				Cost of				Average				Cost of
		Balance				Funds %				Balance				Funds %				Balance				Funds %
EARNING ASSETS
Available-for-sale securities, at amortized cost:
Taxable		$	285,215				5.45	%		$	295,138				5.25	%		$	296,774				5.24	%
Tax-exempt			62,402				6.44	%			89,981				6.51	%			94,968				6.50	%
Total available-for-sale securities			347,617				5.62	%			385,119				5.55	%			391,742				5.55	%
Held-to-maturity securities, Taxable			412				5.84	%			418				5.74	%			419				5.74	%
Trading securities			1,541				5.73	%			—				0.00	%			—				0.00	%
Interest-bearing due from banks			2,058				4.81	%			2,272				4.01	%			2,066				3.75	%
Federal funds sold			5,091				5.25	%			4,580				5.48	%			5,763				5.61	%
Loans:
Taxable			691,194				7.14	%			631,969				6.84	%			627,102				6.80	%
Tax-exempt			32,600				6.37	%			30,745				6.19	%			30,345				6.18	%
Total loans			723,794				7.10	%			662,714				6.81	%			657,447				6.77	%
Total Earning Assets			1,080,513				6.61	%			1,055,103				6.34	%			1,057,437				6.31	%
Cash			19,488								19,027								19,309
Unrealized gain/loss on securities			553								3,151								3,385
Allowance for loan losses			(8,662	)							(8,495	)							(8,589	)
Bank premises and equipment			26,337								23,491								23,517
Intangible Asset — Core Deposit Intangible			1,239								389								402
Intangible Asset — Goodwill			7,810								2,912								2,919
Other assets			40,462								39,111								39,165
Total Assets		$	1,167,740							$	1,134,689							$	1,137,545
INTEREST-BEARING LIABILITIES
Interest checking		$	75,576				2.63	%		$	68,369				2.61	%		$	70,275				2.62	%
Money market			183,798				3.30	%			179,288				3.24	%			180,001				3.22	%
Savings			62,702				0.55	%			62,030				0.54	%			63,072				0.54	%
Certificates of deposit			242,189				4.46	%			215,460				3.96	%			213,792				3.87	%
Individual Retirement Accounts			130,099				4.54	%			122,459				4.28	%			122,491				4.18	%
Other time deposits			1,467				0.55	%			1,116				0.63	%			1,256				0.64	%
Short-term borrowings			47,266				3.95	%			56,606				4.09	%			54,275				3.97	%
Long-term borrowings			164,269				4.11	%			188,077				3.59	%			191,794				3.53	%
Total Interest-bearing Liabilities			907,366				3.72	%			893,405				3.44	%			896,956				3.38	%
Demand deposits			113,170								102,260								101,688
Other liabilities			9,697								7,942								7,806
Total Liabilities			1,030,233								1,003,607								1,006,450
Stockholders’ equity, excluding other comprehensive income/loss			138,299								129,004								128,856
Other comprehensive income/loss			(792	)							2,078								2,239
Total Stockholders’ Equity			137,507								131,082								131,095
Total Liabilities and Stockholders’ Equity		$	1,167,740							$	1,134,689							$	1,137,545
Interest Rate Spread							2.89	%							2.90	%							2.93	%
Net Interest Income/Earning Assets							3.49	%							3.42	%							3.44	%