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 1934

For the quarterly period ended September 30, 2017

OR

¨ 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 ____________000-13232_____________________________________

 

Juniata Valley Financial Corp.

(Exact name of registrant as specified in its charter)

 

Pennsylvania	23-2235254
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification No.)

 

Bridge and Main Streets, Mifflintown, Pennsylvania	17059
(Address of principal executive offices)	(Zip Code)

 

(717) 436-8211

(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.

x Yes ¨ 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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

x Yes ¨ 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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  ¨	Accelerated filer  x
Non-accelerated filer ¨  (Do not check if a smaller reporting company)	Smaller reporting company  ¨
Emerging growth company  ¨

 

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

 

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

¨ Yes x No

 

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

 

Class		Outstanding as of November 9, 2017
Common Stock ($1.00 par value)		4,767,656 shares

 

 

 

TABLE OF CONTENTS

 

	PART I - FINANCIAL INFORMATION
Item 1.	Financial Statements
	Consolidated Statements of Financial Condition as of September 30, 2017 (Unaudited) and December 31, 2016	3
	Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)	4
	Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2017 and 2016 (Unaudited)	5
	Consolidated Statements of Stockholders’ Equity for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)	6
	Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2017 and 2016 (Unaudited)	7
	Notes to Consolidated Financial Statements (Unaudited)	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	37
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	47
Item 4.	Controls and Procedures	48
	PART II - OTHER INFORMATION
Item 1.	Legal Proceedings	49
Item 1A.	Risk Factors	49
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49
Item 3.	Defaults upon Senior Securities	50
Item 4.	Mine Safety Disclosures	50
Item 5.	Other Information	50
Item 6.	Exhibits	50
	Signatures	51

 

 

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Financial Condition

 

		(Unaudited)
(Dollars in thousands, except share data)		September 30,				December 31,
		2017				2016
ASSETS
Cash and due from banks		$	13,219			$	9,464
Interest bearing deposits with banks			133				95
Cash and cash equivalents			13,352				9,559
Interest bearing time deposits with banks			350				350
Securities available for sale			159,180				150,488
Restricted investment in Federal Home Loan Bank (FHLB) stock			3,616				3,610
Investment in unconsolidated subsidiary			4,820				4,703
Residential mortgage loans held for sale			117				-
Total loans			382,616				378,297
Less: Allowance for loan losses			(2,907	)			(2,723	)
Total loans, net of allowance for loan losses			379,709				375,574
Premises and equipment, net			6,695				6,857
Other real estate owned			576				638
Bank owned life insurance and annuities			14,898				14,631
Investment in low income housing partnership			5,319				3,812
Core deposit and other intangible			210				262
Goodwill			5,448				5,448
Mortgage servicing rights			223				205
Accrued interest receivable and other assets			5,409				4,217
Total assets		$	599,922			$	580,354
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Deposits:
Non-interest bearing		$	109,880			$	104,006
Interest bearing			363,703				351,816
Total deposits			473,583				455,822
Securities sold under agreements to repurchase			5,207				4,496
Short-term borrowings			27,500				27,700
Long-term debt			25,000				25,000
Other interest bearing liabilities			1,566				1,545
Accrued interest payable and other liabilities			6,618				6,701
Total liabilities			539,474				521,264
Stockholders' Equity:
Preferred stock, no par value: Authorized - 500,000 shares, none issued			-				-
Common stock, par value $1.00 per share: Authorized 20,000,000 shares
Issued -
4,811,611 shares at September 30, 2017;
4,805,000 shares at December 31, 2016
Outstanding -
4,767,656 shares at September 30, 2017;
4,755,630 shares at December 31, 2016			4,811				4,805
Surplus			18,548				18,476
Retained earnings			40,759				39,945
Accumulated other comprehensive loss			(2,839	)			(3,209	)
Cost of common stock in Treasury:
43,955 shares at September 30, 2017;
49,370 shares at December 31, 2016			(831	)			(927	)
Total stockholders' equity			60,448				59,090
Total liabilities and stockholders' equity		$	599,922			$	580,354

 

See Notes to Consolidated Financial Statements

 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Income (Unaudited)

 

		Three Months Ended								Nine Months Ended
(Dollars in thousands, except share data)		September 30,								September 30,
		2017				2016				2017				2016
Interest income:
Loans, including fees		$	4,607			$	4,356			$	13,491			$	13,155
Taxable securities			729				590				2,128				1,831
Tax-exempt securities			112				100				340				314
Other interest income			9				3				20				13
Total interest income			5,457				5,049				15,979				15,313
Interest expense:
Deposits			561				461				1,555				1,350
Securities sold under agreements to repurchase			8				1				17				3
Short-term borrowings			80				5				212				49
Long-term debt			95				87				274				241
Other interest bearing liabilities			8				7				23				22
Total interest expense			752				561				2,081				1,665
Net interest income			4,705				4,488				13,898				13,648
Provision for loan losses			149				132				389				366
Net interest income after provision for loan losses			4,556				4,356				13,509				13,282
Non-interest income:
Customer service fees			428				471				1,302				1,279
Debit card fee income			274				264				824				769
Earnings on bank-owned life insurance and annuities			93				107				269				284
Trust fees			97				84				324				315
Commissions from sales of non-deposit products			43				43				140				181
Income from unconsolidated subsidiary			49				61				154				163
Fees derived from loan activity			77				58				181				175
Mortgage banking income			83				41				170				106
Gain on sales and calls of securities			2				6				510				134
Gain on sales of loans			-				-				-				113
Gain on life insurance proceeds			-				364				-				364
Other non-interest income			73				72				217				212
Total non-interest income			1,219				1,571				4,091				4,095
Non-interest expense:
Employee compensation expense			1,829				1,848				5,326				5,266
Employee benefits			567				564				1,802				1,699
Occupancy			291				278				878				847
Equipment			175				160				504				492
Data processing expense			440				493				1,318				1,358
Director compensation			60				59				183				176
Professional fees			148				130				431				405
Taxes, other than income			111				107				353				319
FDIC Insurance premiums			83				96				250				295
Loss (gain) on sales of other real estate owned			19				50				(26	)			56
Amortization of intangibles			17				26				52				86
Amortization of investment in low-income housing partnership			173				120				412				359
Merger and acquisition expense			-				-				-				372
Other non-interest expense			529				399				1,457				1,226
Total non-interest expense			4,442				4,330				12,940				12,956
Income before income taxes			1,333				1,597				4,660				4,421
Income tax provision			127				150				701				567
Net income		$	1,206			$	1,447			$	3,959			$	3,854
Earnings per share
Basic		$	0.25			$	0.30			$	0.83			$	0.80
Diluted		$	0.25			$	0.30			$	0.83			$	0.80
Cash dividends declared per share		$	0.22			$	0.22			$	0.66			$	0.66
Weighted average basic shares outstanding			4,767,656				4,804,000				4,764,325				4,800,804
Weighted average diluted shares outstanding			4,778,950				4,805,177				4,772,935				4,801,521

 

See Notes to Consolidated Financial Statements

 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

 

		Three Months Ended September 30,
		2017												2016
		Before								Net of				Before								Net of
(Dollars in thousands)		Tax				Tax				Tax				Tax				Tax				Tax
		Amount				Effect				Amount				Amount				Effect				Amount
Net income		$	1,333			$	(127	)		$	1,206			$	1,597			$	(150	)		$	1,447
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains (losses) arising during the period			(20	)			7				(13	)			(267	)			91				(176	)
Unrealized holding gains (losses) from unconsolidated subsidiary			(3	)			-				(3	)			(4	)			-				(4	)
Less reclassification adjustment for gains included in net income (1) (3)			(2	)			1				(1	)			(6	)			2				(4	)
Amortization of pension net actuarial cost (2) (3)			57				(20	)			37				62				(21	)			41
Other comprehensive income (loss)			32				(12	)			20				(215	)			72				(143	)
Total comprehensive income		$	1,365			$	(139	)		$	1,226			$	1,382			$	(78	)		$	1,304

 

		Nine Months Ended September 30,
		2017												2016
		Before								Net of				Before								Net of
		Tax				Tax				Tax				Tax				Tax				Tax
		Amount				Effect				Amount				Amount				Effect				Amount
Net income		$	4,660			$	(701	)		$	3,959			$	4,421			$	(567	)		$	3,854
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains arising during the period			882				(300	)			582				2,083				(708	)			1,375
Unrealized holding gains (losses) from unconsolidated subsidiary			12				-				12				(5	)			-				(5	)
Less reclassification adjustment for gains included in net income (1) (3)			(510	)			174				(336	)			(134	)			46				(88	)
Amortization of pension net actuarial cost (2) (3)			170				(58	)			112				186				(63	)			123
Other comprehensive income			554				(184	)			370				2,130				(725	)			1,405
Total comprehensive income		$	5,214			$	(885	)		$	4,329			$	6,551			$	(1,292	)		$	5,259

 

See Notes to Consolidated Financial Statements

 

(1)

Amounts are included in gain on sales and calls of securities on the Consolidated Statements of Income as a separate element within total non-interest income.

(2)

Amounts are included in the computation of net periodic benefit cost and are included in employee benefits expense on the Consolidated Statements of Income as a separate element within total non-interest expense.

(3)

Income tax amounts are included in the provision for income taxes on the Consolidated Statements of Income.

 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Stockholders' Equity (Unaudited)

For the Nine Months Ended September 30, 2017

 

		Number																Accumulated
		of																Other								Total
(Dollars in thousands, except share data)		Shares				Common								Retained				Comprehensive				Treasury				Stockholders'
		Outstanding				Stock				Surplus				Earnings				Loss				Stock				Equity
Balance, January 1, 2017			4,755,630			$	4,805			$	18,476			$	39,945			$	(3,209	)		$	(927	)		$	59,090
Net income															3,959												3,959
Other comprehensive income																			370								370
Cash dividends at $0.66 per share															(3,145	)											(3,145	)
Stock-based compensation											54																54
Purchase of treasury stock			(4,289	)																			(86	)			(86	)
Treasury stock issued for stock plans			9,704								(10	)											182				172
Common stock issued for stock plans			6,611				6				28																34
Balance, September 30, 2017			4,767,656			$	4,811			$	18,548			$	40,759			$	(2,839	)		$	(831	)		$	60,448

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Stockholders' Equity (Unaudited)

For the Nine Months Ended September 30, 2016

 

		Number																Accumulated
		of																Other								Total
(Dollars in thousands, except share data)		Shares				Common								Retained				Comprehensive				Treasury				Stockholders'
		Outstanding				Stock				Surplus				Earnings				Loss				Stock				Equity
Balance, January 1, 2016			4,798,086			$	4,798			$	18,352			$	39,015			$	(2,203	)		$	-			$	59,962
Net income															3,854												3,854
Other comprehensive income																			1,405								1,405
Cash dividends at $0.66 per share															(3,170	)											(3,170	)
Stock-based compensation											50																50
Purchase of treasury stock			(1,000	)																			(18	)			(18	)
Common stock issued for stock plans			6,914				7				57												-				64
Balance, September 30, 2016			4,804,000			$	4,805			$	18,459			$	39,699			$	(798	)		$	(18	)		$	62,147

 

See Notes to Consolidated Financial Statements

 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in thousands)		Nine Months Ended September 30,
		2017				2016
Operating activities:
Net income		$	3,959			$	3,854
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			389				366
Depreciation			487				447
Net amortization of securities premiums			490				556
Net amortization of loan origination fees			48				31
Deferred net loan origination costs			(297	)			(94	)
Amortization of core deposit intangible			52				86
Amortization of investment in low income housing partnership			412				359
Net accretion (amortization) of purchase fair value adjustments			4				(7	)
Net realized gain on sales and calls of securities			(510	)			(134	)
Net (gain) loss on sales and valuation of other real estate owned			(26	)			56
Earnings on bank owned life insurance and annuities			(269	)			(284	)
Deferred income tax (credit) expense			(34	)			31
Equity in earnings of unconsolidated subsidiary, net of dividends of $49 and $42			(105	)			(121	)
Stock-based compensation expense			54				50
Gain from sale of student loans			-				(113	)
Mortgage loans originated for sale			(3,527	)			(1,582	)
Proceeds from mortgage loans sold to others			3,563				1,822
Mortgage banking income			(170	)			(106	)
Gain from life insurance proceeds			-				(364	)
(Increase) decrease in accrued interest receivable and other assets			(1,360	)			90
Increase (decrease) in accrued interest payable and other liabilities			146				(813	)
Net cash provided by operating activities			3,306				4,130
Investing activities:
Purchases of:
Securities available for sale			(42,510	)			(36,505	)
Premises and equipment			(324	)			(482	)
Bank owned life insurance and annuities			(36	)			(50	)
Proceeds from:
Sales of securities available for sale			21,800				4,273
Maturities of and principal repayments on securities available for sale			12,407				36,190
(Purchase) redemption of FHLB stock			(6	)			636
Sale of student loans			-				1,706
Life insurance claim			-				1,016
Sale of other real estate owned			617				132
Sale of other assets			25				-
Investment in low income housing partnership			(1,919	)			(314	)
Net increase in loans			(4,809	)			(550	)
Net cash (used in) provided by investing activities			(14,755	)			6,052
Financing activities:
Net increase in deposits			17,756				6,199
Net increase (decrease) in short-term borrowings and securities sold under agreements to repurchase			511				(16,754	)
Issuance of long-term debt			-				10,000
Repayment of long-term debt			-				(7,500	)
Cash dividends			(3,145	)			(3,170	)
Purchase of treasury stock			(86	)			(18	)
Common stock issued for employee stock plans			206				64
Net cash provided by (used in) financing activities			15,242				(11,179	)
Net increase (decrease) in cash and cash equivalents			3,793				(997	)
Cash and cash equivalents at beginning of year			9,559				10,458
Cash and cash equivalents at end of period		$	13,352			$	9,461
Supplemental information:
Interest paid		$	2,051			$	1,673
Income taxes paid			385				200
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate owned		$	529			$	289
Transfer of loans to repossessed vehicles			5				20

 

See Notes to Consolidated Financial Statements

 

 

JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1. Basis of Presentation and Accounting Policies

 

The consolidated financial statements include the accounts of Juniata Valley Financial Corp. (the “Company”) and its wholly owned subsidiary, The Juniata Valley Bank (the “Bank” or “JVB”). All significant intercompany accounts and transactions have been eliminated.

 

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (“U.S. GAAP”) for complete consolidated financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three and nine months period ended September 30, 2017 are not necessarily indicative of the results for the year ending December 31, 2017. For further information, refer to the consolidated financial statements and notes thereto included in Juniata Valley Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

The Company has evaluated events and transactions occurring subsequent to the consolidated statement of financial condition date of September 30, 2017 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

2. Recent Accounting Standards Updates (ASU)

 

Accounting Standards Update 2017-12, Targeted Improvements to Accounting for Hedging Activities

 

Issued: August 2017

 

Summary: ASU 2017-12 improves Topic 815 by simplifying and expanding the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies its application through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the new standard provides partial relief on the timing of certain aspects of hedge documentation and eliminates the requirement to recognize hedge ineffectiveness separately in earnings in the current period.

 

Effective Date: The amendments are effective for public business entities, for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted in any interim period after issuance of the amendments for existing hedging relationships on the date of adoption. This Update will have no impact on the Company’s consolidated financial position and results of operations.

 

Accounting Standards Update 2017-09, Scope of Modification Accounting

 

Issued: May 2017

 

Summary: ASU 2017-09 clarifies Topic 718 such that an entity must apply modification accounting to changes in the terms or conditions of a share-based payment award unless all of the following criteria are met:

 

1.

The fair value of the modified award is the same as the fair value of the original award immediately before the modification. The standard indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification.

2.

The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification.

 

 

3.

The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification.

 

Effective Date: The amendments are effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. This Update will have no impact on the Company’s consolidated financial position and results of operations.

 

Accounting Standards Update 2017-08, Premium Amortization on Purchased Callable Debt Securities

 

Issued: March 2017

 

Summary: ASU 2017-08 shortens the amortization period for premiums on purchased callable debt securities to the earliest call date, rather than amortizing over the full contractual term. The ASU does not change the accounting for securities held at a discount.

 

Effective Date: The amendments are effective for public business entities for fiscal years beginning after December 15, 2019. This Update will have no impact on the Company’s consolidated financial position and results of operations.

 

Accounting Standards Update 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost

 

Issued: March 2017

 

Summary: ASU 2017-07 requires that an employer disaggregate the service cost component from the other components of net benefit cost.

 

Effective Date: The amendments are effective for public business entities for fiscal years beginning after December 15, 2017. This Update will have no impact on the Company’s consolidated financial position and results of operations.

 

Accounting Standards Update 2017-04, Simplifying the Test for Goodwill Impairment

 

Issued: January 2017

 

Summary: ASU 2017-04 eliminates Step 2 of the goodwill impairment test.

 

Effective Date: The amendments are effective for public business entities for fiscal years beginning after December 15, 2019. This Update will have no impact on the Company’s consolidated financial position and results of operations.

 

Accounting Standards Update 2016-15, Classification of Certain Cash Receipts and Cash Payments

 

Issued: August 2016

 

Summary: ASU 2016-15 clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are intended to reduce diversity in practice.

 

Effective Date: The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This Update will have no impact on the Company’s consolidated financial position and results of operations.

 

Accounting Standards Update 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

 

Issued: June 2016

 

Summary: ASU 2016-13 requires credit losses on most financial assets to be measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.

 

 

The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.

 

Further, the ASU made certain targeted amendments to the existing impairment model for available-for-sale (AFS) debt securities. For an AFS debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.

 

Effective Date: The new standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. While the Company’s senior management is currently in the process of evaluating the impact of the amended guidance on its consolidated financial statements, it currently expects the ALLL to increase upon adoption given that the allowance will be required to cover the full remaining expected life of the portfolio, rather than the incurred loss model under current U.S. GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the Company’s loan portfolio at the time of adoption. In preparation, the Company has partnered with a software provider specializing in ALLL analysis and is assessing the sufficiency of data currently available through its core database.

 

Accounting Standards Update 2016-02, Leases

 

Issued: February 2016

 

Summary: The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

 

Effective Date: The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company has determined that the provisions of ASU 2016-02 will result in an increase in assets to recognize the present value of the lease obligations with a corresponding increase in liabilities; however, the Company does not expect this new standard to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Accounting Standards Update 2016-01, Measurement of Financial Instruments

 

Issued: January 2016

 

Summary: The amendments in this Update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee).  The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this Update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities.

 

Effective Date: For public entities, the amendments in the Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company currently holds a small portfolio of equity investments for which the fair value fluctuates with market activity. Had ASU 2016-01 become effective on September 30, 2017, the cumulative effect adjustment to income before tax would have been $287,000 (see Note 6). The cumulative adjustment that will be recognized upon adoption of the amendments in this update in the first quarter of 2018 will be dependent upon the size of the equity portfolio and the market values at that time.

 

 

Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)

 

Issued: May 2014

 

Summary: The amendments in this Update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

 

In August 2015, the FASB issued Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date. ASU 2015-14 defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017. All other entities have an additional year. However, early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.

 

Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the third alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application (e.g. January 1, 2018) and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. That is, prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP. Early adoption is prohibited under U.S. GAAP.

 

Because the amended guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the Company’s preliminary analysis suggests that the adoption of this amended guidance is not expected to have a material impact on its consolidated financial statements, although the Company will be subject to expanded disclosure requirements upon adoption for which it is still evaluating, along with the preferred adoption method. The Company is assessing the affect the guidance will have on the recognition processes for wealth and asset management revenue, banking revenue and card and processing revenue. However, there are certain areas of the amended guidance, such as credit card interchange fees programs that are subject to interpretation. The Company is still in the process of analyzing these contracts and has not made a final conclusion regarding the applicability and related impact, if any, on the consolidated financial statements. Accordingly, the results of the Company’s materiality analysis, as well as its selected adoption method, may change as these conclusions are reached.

 

3. Merger

 

On November 30, 2015, Juniata consummated the merger with FNBPA Bancorp, Inc. (“FNBPA”), a Pennsylvania corporation. FNBPA merged with and into Juniata, with Juniata continuing as the surviving entity. Simultaneously with the consummation of the foregoing merger, First National Bank of Port Allegany (“FNB”), a national banking association and a wholly-owned subsidiary of FNBPA, merged with and into the Bank.

 

As part of this transaction, FNBPA shareholders received either 2.7813 shares of Juniata’s common stock or $50.34 in cash in exchange for each share of FNBPA common stock. As a result, Juniata issued 607,815 shares of common stock with an acquisition date fair value of approximately $10,637,000, based on Juniata’s closing stock price of $17.50 on November 30, 2015, and cash of $2,208,000, including cash in lieu of fractional shares. The fair value of total consideration paid was $12,845,000.

 

The assets and liabilities of FNB and FNBPA were recorded on the consolidated balances sheet at their estimated fair value as of November 30, 2015, and their results of operations have been included in the consolidated income statement since such date.

 

 

Included in the purchase price was goodwill and a core deposit intangible of $3,335,000 and $343,000, respectively. The core deposit intangible will be amortized over a ten-year period using a sum of the year’s digits basis. The goodwill will not be amortized, but will be measured annually for impairment or more frequently if circumstances require.

 

The allocation of the purchase price is as follows:

 

(Dollars in thousands)
Purchase price assigned to FNBPA common shares exchanged for 607,815 Juniata common shares		$	10,637
Purchase price assigned to FNBPA common shares exchanged for cash			2,208
Total purchase price			12,845
FNBPA net assets acquired:
Tangible common equity			9,854
Adjustments to reflect assets acquired and liabilities assumed at fair value:
Total fair value adjustments			(523	)
Associated deferred income taxes			179
Fair value adjustment to net assets acquired, net of tax			(344	)
Total FNBPA net assets acquired			9,510
Goodwill resulting from the merger		$	3,335

 

The following table summarizes the fair value of the assets acquired and liabilities assumed.

 

(Dollars in thousands)
Total purchase price		$	12,845
Net assets acquired
Cash and cash equivalents			3,452
Interest-bearing time deposits			350
Investment securities			35,458
Loans			47,055
Premises and equipment			419
Accrued interest receivable			550
Core deposit and other intangibles			343
Other real estate owned			114
Other assets			763
Deposits			(77,665	)
Accrued interest payable			(13	)
Other liabilities			(1,316	)
			9,510
Goodwill		$	3,335

 

As of November 30, 2015, the merger date, goodwill was recorded at $3,335,000. Accounting Standard Codification (“ASC”) 805 allows for adjustments to goodwill for a period of up to one year after the merger date for information that becomes available that reflects circumstances at the merger date. During 2016, such information became available and goodwill was adjusted by $67,000, to $3,402,000, to reflect adjustments to fair value of two assets.

 

The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $47,797,000. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired.

 

(Dollars in thousands)
Gross amortized cost basis at November 30, 2015		$	47,797
Market rate adjustment			(110	)
Credit fair value adjustment on pools of homogeneous loans			(73	)
Credit fair value adjustment on impaired loans			(559	)
Fair value of purchased loans at November 30, 2015		$	47,055

 

 

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. The credit adjustment made on pools of homogeneous loans represents the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective loan.

 

The information about the acquired FNBPA impaired loan portfolio as of November 30, 2015 is as follows:

 

(Dollars in thousands)
Contractually required principal and interest at acquisition		$	2,488
Contractual cash flows not expected to be collected (nonaccretable discount)			(1,427	)
Expected cash flows at acquisition			1,061
Interest component of expected cash flows (accretable discount)			(157	)
Fair value of acquired loans		$	904

 

The following table presents unaudited pro forma information, in thousands, as if the merger between Juniata and FNBPA had been completed on January 1, 2014. The pro forma information does not necessarily reflect the results of operations that would have occurred had Juniata merged with FNBPA at the beginning of 2014. Supplemental pro forma earnings for 2015 were adjusted to exclude $1,637,000 of merger related costs (exclusive of the corresponding tax impact) incurred in 2015; the results for 2014 were adjusted to include these charges. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.

 

(Dollars in thousands, except per share data)		Years Ended December 31,
		2015				2014
Consolidated net interest income after loan loss provision		$	17,731			$	17,089
Consolidated non-interest income			4,841				4,745
Consolidated non-interest expense			17,124				18,358
Consolidated net income			4,862				3,353
Consolidated net income per common share		$	1.01			$	0.70

 

4. Accumulated other Comprehensive loss

 

Components of accumulated other comprehensive loss, net of tax, consisted of the following:

 

(Dollars in thousands)
		September 30, 2017				December 31, 2016
Unrealized losses on available for sale securities		$	(609	)		$	(866	)
Unrecognized expense for defined benefit pension			(2,230	)			(2,343	)
Accumulated other comprehensive loss		$	(2,839	)		$	(3,209	)

 

5. Earnings Per Share

 

Basic earnings per share (“EPS”) is computed by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the Company. Potential common shares that may be issued by the Company relate solely to outstanding stock options and are determined using the treasury stock method.

 

 

The following tables set forth the computation of basic and diluted earnings per share:

 

(Dollars in thousands, except earnings per share data)		Three Months Ended September 30,
		2017				2016
Net income		$	1,206			$	1,447
Weighted-average common shares outstanding			4,768				4,804
Basic earnings per share		$	0.25			$	0.30
Weighted-average common shares outstanding			4,768				4,804
Common stock equivalents due to effect of stock options			11				1
Total weighted-average common shares and equivalents			4,779				4,805
Diluted earnings per share		$	0.25			$	0.30

 

		Nine Months Ended September 30,
		2017				2016
Net income		$	3,959			$	3,854
Weighted-average common shares outstanding			4,764				4,801
Basic earnings per share		$	0.83			$	0.80
Weighted-average common shares outstanding			4,764				4,801
Common stock equivalents due to effect of stock options			9				1
Total weighted-average common shares and equivalents			4,773				4,802
Diluted earnings per share		$	0.83			$	0.80

 

6. Securities

 

The Company’s investment portfolio includes primarily bonds issued by U.S. Government sponsored agencies (approximately 22% of the investment portfolio), mortgage-backed securities issued by Government-sponsored agencies and backed by residential mortgages (approximately 61%) and municipal bonds (approximately 16%) as of September 30, 2017. Most of the municipal bonds are general obligation bonds with maturities or pre-refunding dates within 5 years. The remaining 1% of the portfolio includes a group of equity investments in other financial institutions.

 

The amortized cost and fair value of securities as of September 30, 2017 and December 31, 2016, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.

 

		September 30, 2017
(Dollars in thousands)										Gross				Gross
		Amortized				Fair				Unrealized				Unrealized
		Cost				Value				Gains				Losses
Securities Available for Sale
Type and Maturity
Obligations of U.S. Government agencies and corporations
After one year but within five years		$	15,998			$	15,878			$	-			$	(120	)
After five years but within ten years			19,002				18,585				-				(417	)
			35,000				34,463				-				(537	)
Obligations of state and political subdivisions
Within one year			2,418				2,418				1				(1	)
After one year but within five years			12,659				12,781				123				(1	)
After five years but within ten years			10,783				10,746				46				(83	)
			25,860				25,945				170				(85	)
Mortgage-backed securities			98,251				97,485				96				(862	)
Equity securities			1,000				1,287				288				(1	)
Total		$	160,111			$	159,180			$	554			$	(1,485	)

 

 

		December 31, 2016
(Dollars in thousands)										Gross				Gross
		Amortized				Fair				Unrealized				Unrealized
		Cost				Value				Gains				Losses
Securities Available for Sale
Type and Maturity
Obligations of U.S. Government agencies and corporations
After one year but within five years		$	19,495			$	19,331			$	13			$	(177	)
After five years but within ten years			17,000				16,468				-				(532	)
			36,495				35,799				13				(709	)
Obligations of state and political subdivisions
Within one year			2,819				2,820				2				(1	)
After one year but within five years			13,268				13,240				39				(67	)
After five years but within ten years			10,923				10,599				16				(340	)
			27,010				26,659				57				(408	)
Mortgage-backed securities			86,670				85,702				114				(1,082	)
Equity securities			1,615				2,328				713				-
Total		$	151,790			$	150,488			$	897			$	(2,199	)

 

Certain obligations of the U.S. Government and state and political subdivisions are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The carrying value of the pledged assets was $49,050,000 and $36,638,000 at September 30, 2017 and December 31, 2016, respectively.

 

In addition to cash received from the scheduled maturities of securities, some investment securities available for sale are sold or called at current market values during the course of normal operations.

 

The following chart summarizes proceeds received from sales or calls of investment securities transactions and the resulting realized gains and losses.

 

		Three Months Ended								Nine Months Ended
(Dollars in thousands)		September 30,								September 30,
		2017				2016				2017				2016
Gross proceeds from sales of securities		$	10,166			$	-			$	21,800			$	4,273
Securities available for sale:
Gross realized gains from sold and called securities		$	30			$	6			$	539			$	49
Gross realized losses from sold and called securities			(28	)			-				(32	)			(15	)
Gross gains from business combinations			-				-				3				100

 

ASC Topic 320, Investments – Debt and Equity Securities, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are taken before an assessment is made as to whether the entity will recover the cost basis of the investment. For equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses in assessing potential other-than-temporary impairment. More specifically, factors considered to determine other-than-temporary impairment status for individual equity holdings include the length of time the stock has remained in an unrealized loss position, the percentage of unrealized loss compared to the carrying cost of the stock, dividend reduction or suspension, market analyst reviews and expectations, and other pertinent factors that would affect expectations for recovery or further decline.

 

In instances when a determination is made that an other-than-temporary impairment exists and the entity does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income (loss).

 

 

The following table shows gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2017 and December 31, 2016:

 

		Unrealized Losses at September 30, 2017
		Less Than 12 Months								12 Months or More								Total
(Dollars in thousands)		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Obligations of U.S. Government agencies and corporations		$	27,680			$	(320	)		$	6,782			$	(217	)		$	34,462			$	(537	)
Obligations of state and political subdivisions			6,070				(67	)			1,695				(18	)			7,765				(85	)
Mortgage-backed securities			78,495				(862	)			-				-				78,495				(862	)
Total debt securities			112,245				(1,249	)			8,477				(235	)			120,722				(1,484	)
Equity securities			-				-				4				(1	)			4				(1	)
Total temporarily impaired securities		$	112,245			$	(1,249	)		$	8,481			$	(236	)		$	120,726			$	(1,485	)

 

		Unrealized Losses at December 31, 2016
		Less Than 12 Months								12 Months or More								Total
(Dollars in thousands)		Fair				Unrealized				Fair				Unrealized				Fair				Unrealized
		Value				Losses				Value				Losses				Value				Losses
Obligations of U.S. Government agencies and corporations		$	32,783			$	(709	)		$	-			$	-			$	32,783			$	(709	)
Obligations of state and political subdivisions			17,437				(406	)			300				(2	)			17,737				(408	)
Mortgage-backed securities			68,989				(1,082	)			-				-				68,989				(1,082	)
Total temporarily impaired securities		$	119,209			$	(2,197	)		$	300			$	(2	)		$	119,509			$	(2,199	)

 

At September 30, 2017, 20 U.S. Government agency and corporation securities had unrealized losses that, in the aggregate, did not exceed 2.0% of amortized cost. Four of these securities have been in a continuous loss position for 12 months or more.

 

At September 30, 2017, 12 obligations of state and political subdivisions had unrealized losses that, in the aggregate, did not exceed 1.0% of amortized cost. Four of these securities has been in a continuous loss position for 12 months or more.

 

At September 30, 2017, 37 mortgage-backed securities had an unrealized loss that did not exceed 1.0% of amortized cost. None of these securities has been in a continuous loss position for 12 months or more.

 

The mortgage-backed securities in the Company’s portfolio are government sponsored enterprise (GSE) pass-through instruments issued by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC), which guarantees the timely payment of principal on these investments.

 

The unrealized losses noted above are considered to be temporary impairments. The decline in the values of the debt securities is due only to interest rate fluctuations, rather than erosion of issuer credit quality. As a result, the payment of contractual cash flows, including principal repayment, is not at risk. Because the Company does not intend to sell the securities, does not believe the Company will be required to sell the securities before recovery and expects to recover the entire amortized cost basis, none of the debt securities are deemed to be other-than-temporarily impaired.

 

Equity securities owned by the Company consist of common stock of various financial services providers and are evaluated quarterly for evidence of other-than-temporary impairment. There was one equity security that was in an unrealized loss position for 12 months or more as of September 30, 2017. Management has identified no other-than-temporary impairment as of, or for the periods ended, September 30, 2017, September 30, 2016 and December 31, 2016, respectively, in the equity portfolio. Management continues to track the performance of each stock owned to determine if it is prudent to recognize any other-than-temporary impairment charges. The Company has the ability and intent to hold its equity securities until recovery of unrealized losses.

 

 

7. Loans and Related Allowance for Credit Losses

 

Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the outstanding unpaid principal balances, net of any deferred fees or costs and the allowance for loan losses. Interest income on all loans, other than nonaccrual loans, is accrued over the term of the loans based on the amount of principal outstanding. Unearned income is amortized to income over the life of the loans, using the interest method.

 

The loan portfolio is segmented into commercial and consumer loans. Commercial loans are comprised of the following classes of loans: (1) commercial, financial and agricultural, (2) commercial real estate, (3) real estate construction, a portion of (4) mortgage loans and (5) obligations of states and political subdivisions. Consumer loans are comprised of a portion of (4) mortgage loans and (6) personal loans.

 

Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is generally discontinued when the contractual payment of principal or interest has become 90 days past due or reasonable doubt exists as to the full, timely collection of principal or interest. However, it is the Company’s policy to continue to accrue interest on loans over 90 days past due as long as (1) they are guaranteed or well secured and (2) there is an effective means of timely collection in process. When a loan is placed on non-accrual status, all unpaid interest credited to income in the current year is reversed against current period income, and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, accruals are resumed on loans only when the obligation is brought fully current with respect to interest and principal, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

 

The Company originates loans in the portfolio with the intent to hold them until maturity. At the time the Company no longer intends to hold loans to maturity based on asset/liability management practices, the Company transfers loans from its portfolio to held for sale at fair value. Any write-down recorded upon transfer is charged against the allowance for loan losses. Any write-downs recorded after the initial transfers are recorded as a charge to other non-interest expense. Gains or losses recognized upon sale are included in gains on sales of loans which is a component of non-interest income.

 

Loans Held for Sale

 

The Company also originates residential mortgage loans with the intent to sell. These individual loans are normally funded by the buyer immediately. The Company maintains servicing rights on these loans. Mortgage servicing rights are recognized as an asset upon the sale of a mortgage loan. A portion of the cost of the loan is allocated to the servicing right based upon relative fair value. Servicing rights are intangible assets and are carried at estimated fair value. Adjustments to fair value are recorded as non-interest income and included in gain on sales of loans in the consolidated statements of income.

 

In a business combination, the Company may acquire loans which it intends to sell. These loans are assigned a fair value by obtaining actual bids on the loans and adjusting for contingencies in the bids. These loans are carried at lower of cost or market value until sold, adjusted periodically if conditions change before the subsequent sale. Adjustments to fair value and gains or losses recognized upon sale are included in gains on sales of loans which is a component of non-interest income.

 

Commercial, Financial and Agricultural Lending

 

The Company originates commercial, financial and agricultural loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is shorter and does not exceed the projected useful life of such machinery and equipment. Most business lines of credit are written with a five year maturity, subject to an annual credit review.

 

Commercial loans are generally secured with short-term assets; however, in many cases, additional collateral, such as real estate, is provided as additional security for the loan. Loan-to-value maximum values have been established by the Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, etc.

 

 

In underwriting commercial loans, an analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of conditions affecting the borrower, is performed. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s analysis.

 

Concentration analysis assists in identifying industry specific risk inherent in commercial, financial and agricultural lending. Mitigants include the identification of secondary and tertiary sources of repayment and appropriate increases in oversight.

 

Commercial, financial and agricultural loans generally present a higher level of risk than certain other types of loans, particularly during slow economic conditions.

 

Commercial Real Estate Lending

 

The Company engages in commercial real estate lending in its primary market area and surrounding areas. The Company’s commercial real estate portfolio is secured primarily by residential housing, commercial buildings, raw land and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property and are typically secured by personal guarantees of the borrowers.

 

As economic conditions deteriorate, the Company reduces its exposure in real estate loans with higher risk characteristics. In underwriting these loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.

 

Commercial real estate loans generally present a higher level of risk than certain other types of loans, particularly during slow economic conditions.

 

Real Estate Construction Lending

 

The Company engages in real estate construction lending in its primary market area and surrounding areas. The Company’s real estate construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans.

 

The Company’s commercial real estate construction loans are generally secured with the subject property, and advances are made in conformity with a pre-determined draw schedule supported by independent inspections. Terms of construction loans depend on the specifics of the project, such as estimated absorption rates, estimated time to complete, etc.

 

In underwriting commercial real estate construction loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, etc. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.

 

Real estate construction loans generally present a higher level of risk than certain other types of loans, particularly during slow economic conditions. The difficulty of estimating total construction costs adds to the risk as well.

 

Mortgage Lending

 

The Company’s real estate mortgage portfolio is comprised of consumer residential mortgages and business loans secured by one-to-four family properties. One-to-four family residential mortgage loan originations, including home equity installment and home equity lines of credit loans, are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. These loans originate primarily within the Company’s market area or with customers primarily from the market area.

 

 

The Company offers fixed-rate and adjustable rate mortgage loans with terms up to a maximum of 25-years for both permanent structures and those under construction. The Company’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Company’s residential mortgage loans originate with a loan-to-value of 80% or less. Home equity installment loans are secured by the borrower’s primary residence with a maximum loan-to-value of 80% and a maximum term of 15 years. Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years.

 

In underwriting one-to-four family residential real estate loans, the Company evaluates the borrower’s ability to make monthly payments, the borrower’s repayment history and the value of the property securing the loan. The ability to repay is determined by the borrower’s employment history, current financial conditions, and credit background. The analysis is based primarily on the customer’s ability to repay and secondarily on the collateral or security. Most properties securing real estate loans made by the Company are appraised by independent fee appraisers. The Company generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Company does not engage in sub-prime residential mortgage originations.

 

Residential mortgage loans and home equity loans generally present a lower level of risk than certain other types of consumer loans because they are secured by the borrower’s primary residence. Risk is increased when the Company is in a subordinate position for the loan collateral.

 

Obligations of States and Political Subdivisions

 

The Company lends to local municipalities and other tax-exempt organizations. These loans are primarily tax-anticipation notes and, as such, carry little risk. Historically, the Company has never had a loss on any loan of this type.

 

Personal Lending

 

The Company offers a variety of secured and unsecured personal loans, including vehicle loans, mobile home loans and loans secured by savings deposits as well as other types of personal loans.

 

Personal loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis of the borrower’s willingness and financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial conditions and credit background.

 

Personal loans may entail greater credit risk than do residential mortgage loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

 

Allowance for Credit Losses

 

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses (“allowance”) represents management’s estimate of losses inherent in the loan portfolio as of the consolidated statement of financial condition date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded lending commitments and is recorded in other liabilities on the consolidated statement of financial condition, when necessary. The amount of the reserve for unfunded lending commitments is not material to the consolidated financial statements. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

 

For financial reporting purposes, the provision for loan losses charged to current operating income is based on management's estimates, and actual losses may vary from estimates. These estimates are reviewed and adjusted at least quarterly and are reported in earnings in the periods in which they become known.

 

 

Loans included in any class are considered for charge-off when:

·

principal or interest has been in default for 120 days or more and for which no payment has been received during the previous four months;

·

all collateral securing the loan has been liquidated and a deficiency balance remains;

·

a bankruptcy notice is received for an unsecured loan;

·

a confirming loss event has occurred; or

·

the loan is deemed to be uncollectible for any other reason.

 

The allowance for loan losses is maintained at a level considered adequate to offset probable losses on the Company’s existing loans. The analysis of the allowance for loan losses relies heavily on changes in observable trends that may indicate potential credit weaknesses. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

 

In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the level of the allowance for loan losses as of September 30, 2017 was adequate.

 

There are two components of the allowance: a specific component for loans that are deemed to be impaired; and a general component for contingencies.

 

A loan is considered to be impaired when, based on current information and events, it is probable that the Company 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 loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent.

 

The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For commercial loans secured with real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the current appraisal and the condition of the property. Appraised values may be discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include the estimated costs to sell the property. For commercial loans secured by non-real estate collateral, estimated fair values are determined based on the borrower’s financial statements, inventory reports, aging accounts receivable, equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The Company generally does not separately identify individual consumer segment loans for impairment disclosures, unless such loans are subject to a restructuring agreement.

 

Loans whose terms are modified are classified as troubled debt restructurings if the Company grants borrowers’ concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a below-market interest rate based on the loan’s risk characteristics or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period of time after modification. Loans classified as troubled debt restructurings are designated as impaired.

 

 

The component of the allowance for contingencies relates to other loans that have been segmented into risk rated categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated quarterly or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified as substandard have one or more well-defined weaknesses that jeopardize the liquidation of the debt. Substandard loans include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. Specific reserves may be established for larger, individual classified loans as a result of this evaluation, as discussed above. Remaining loans are categorized into large groups of smaller balance homogeneous loans and are collectively evaluated for impairment. This computation is generally based on historical loss experience adjusted for qualitative factors. The historical loss experience is averaged over a ten-year period for each of the portfolio segments. The ten-year timeframe was selected in order to capture activity over a wide range of economic conditions and has been consistently used by the Company for the past seven years. Qualitative risk factors are reviewed for relevancy each quarter and include:

 

·

National, regional and local economic and business conditions, as well as the condition of various market segments, including the underlying collateral for collateral dependent loans;

·

Nature and volume of the portfolio and terms of loans;

·

Experience, ability and depth of lending and credit management staff;

·

Volume and severity of past due, classified and nonaccrual loans, as well as other loan modifications;

·

Existence and effect of any concentrations of credit and changes in the level of such concentrations; and

·

Effect of external factors, including competition.

 

Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

 

Acquired Loans

 

Loans that Juniata acquires through business combinations are recorded at fair value with no carryover of the related allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

 

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require Juniata to evaluate the need for an additional allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which Juniata will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan.

 

Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if Juniata expects to fully collect the new carrying value (i.e. fair value) of the loans. As such, Juniata may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.

 

Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30, but for which a discount is attributable at least in part to credit quality, are also accounted for in accordance with this guidance. As a result, related discounts are recognized subsequently through accretion based on the contractual cash flows of the acquired loans.

 

 

Loan Portfolio Classification

 

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of September 30, 2017 and December 31, 2016.

 

(Dollars in thousands)						Special
		Pass				Mention				Substandard				Doubtful				Total
As of September 30, 2017
Commercial, financial and agricultural		$	38,540			$	8,387			$	1,617			$	7			$	48,551
Real estate - commercial			102,322				24,585				6,014				1,419				134,340
Real estate - construction			22,033				2,674				3,438				-				28,145
Real estate - mortgage			140,281				3,617				3,072				813				147,783
Obligations of states and political subdivisions			12,863				999				-				-				13,862
Personal			9,892				36				7				-				9,935
Total		$	325,931			$	40,298			$	14,148			$	2,239			$	382,616

 

(Dollars in thousands)						Special
		Pass				Mention				Substandard				Doubtful				Total
As of December 31, 2016
Commercial, financial and agricultural		$	34,510			$	5,104			$	1,213			$	-			$	40,827
Real estate - commercial			100,153				15,843				6,726				989				123,711
Real estate - construction			24,702				4,044				6,460				-				35,206
Real estate - mortgage			144,353				4,426				4,496				1,630				154,905
Obligations of states and political subdivisions			12,431				1,185				-				-				13,616
Personal			9,970				52				10				-				10,032
Total		$	326,119			$	30,654			$	18,905			$	2,619			$	378,297

 

The Company has certain loans in its portfolio that are considered to be impaired. It is the policy of the Company to recognize income on impaired loans that have been transferred to nonaccrual status on a cash basis, only to the extent that it exceeds principal balance recovery. Until an impaired loan is placed on nonaccrual status, income is recognized on the accrual basis. Collateral analysis is performed on each impaired loan at least quarterly, and results are used to determine if a specific reserve is necessary to adjust the carrying value of each individual loan down to the estimated fair value. Generally, specific reserves are carried against impaired loans based upon estimated collateral value until a confirming loss event occurs or until termination of the credit is scheduled through liquidation of the collateral or foreclosure. Charge off will occur when a confirmed loss is identified. Professional appraisals of collateral, discounted for expected selling costs, appraisal age, economic conditions and other known factors are used to determine the charge-off amount.

 

 

The following tables summarize information regarding impaired loans by portfolio class as of September 30, 2017 and December 31, 2016.

 

		As of September 30, 2017												As of December 31, 2016
						Unpaid												Unpaid
(Dollars in thousands)		Recorded				Principal				Related				Recorded				Principal				Related
		Investment				Balance				Allowance				Investment				Balance				Allowance
Impaired loans
With no related allowance recorded:
Commercial, financial and agricultural		$	356			$	364			$	-			$	436			$	439			$	-
Real estate - commercial			5,842				6,830				-				5,499				6,475				-
Acquired with credit deterioration			199				253				-				641				730				-
Real estate - construction			-				-				-				2,455				2,455				-
Real estate - mortgage			2,521				4,047				-				3,345				5,020				-
Acquired with credit deterioration			343				387				-				415				440				-
With an allowance recorded:
Real estate - mortgage		$	-			$	-			$	-			$	712				712				56
Total:
Commercial, financial and agricultural		$	356			$	364			$	-			$	436			$	439			$	-
Real estate - commercial			5,842				6,830				-				5,499				6,475				-
Acquired with credit deterioration			199				253				-				641				730				-
Real estate - construction			-				-				-				2,455				2,455				-
Real estate - mortgage			2,521				4,047				-				4,057				5,732				56
Acquired with credit deterioration			343				387				-				415				440				-
		$	9,261			$	11,881			$	-			$	13,503			$	16,271			$	56

 

 

Average recorded investment of impaired loans and related interest income recognized for the three and nine months ended September 30, 2017 and 2016 are summarized in the tables below.

 

		Three Months Ended September 30, 2017												Three Months Ended September 30, 2016
		Average				Interest				Cash Basis				Average				Interest				Cash Basis
(Dollars in thousands)		Recorded				Income				Interest				Recorded				Income				Interest
		Investment				Recognized				Income				Investment				Recognized				Income
Impaired loans
With no related allowance recorded:
Commercial, financial and agricultural		$	351			$	5			$	-			$	479			$	7			$	-
Real estate - commercial			5,336				81				-				5,972				84				-
Acquired with credit deterioration			204				-				-				679				-				-
Real estate - construction			-				-				-				2,561				34				-
Real estate - mortgage			2,795				5				6				3,136				4				14
Acquired with credit deterioration			347				-				-				482				-				-
Personal			-				-				-				1				-				-
With an allowance recorded:
Commercial, financial and agricultural		$	8			$	-			$	-			$	-			$	-			$	-
Real estate - commercial			460				-				-				50				-				-
Real estate - mortgage			-				-				-				826				-				-
Total:
Commercial, financial and agricultural		$	359			$	5			$	-			$	479			$	7			$	-
Real estate - commercial			5,796				81				-				6,022				84				-
Acquired with credit deterioration			204				-				-				679				-				-
Real estate - construction			-				-				-				2,561				34				-
Real estate - mortgage			2,795				5				6				3,962				4				14
Acquired with credit deterioration			347				-				-				482				-				-
Personal			-				-				-				1				-				-
		$	9,501			$	91			$	6			$	14,186			$	129			$	14

 

 

		Nine Months Ended September 30, 2017												Nine Months Ended September 30, 2016
		Average				Interest				Cash Basis				Average				Interest				Cash Basis
(Dollars in thousands)		Recorded				Income				Interest				Recorded				Income				Interest
		Investment				Recognized				Income				Investment				Recognized				Income
Impaired loans
With no related allowance recorded:
Commercial, financial and agricultural		$	396			$	18			$	-			$	414			$	23			$	-
Real estate - commercial			5,671				238				-				3,909				252				-
Acquired with credit deterioration			420				-				-				742				-				-
Real estate - construction			1,228				34				-				1,281				102				-
Real estate - mortgage			2,933				16				19				2,949				22				26
Acquired with credit deterioration			379				-				-				526				-				-
With an allowance recorded:
Real estate - commercial		$	-			$	-			$	-			$	50			$	-			$	-
Real estate - mortgage			356				-				-				397				-				-
Total:
Commercial, financial and agricultural		$	396			$	18			$	-			$	414			$	23			$	-
Real estate - commercial			5,671				238				-				3,959				252				-
Acquired with credit deterioration			420				-				-				742				-				-
Real estate - construction			1,228				34				-				1,281				102				-
Real estate - mortgage			3,289				16				19				3,346				22				26
Acquired with credit deterioration			379				-				-				526				-				-
		$	11,383			$	306			$	19			$	10,268			$	399			$	26

 

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, 2017 and December 31, 2016.

 

(Dollars in thousands)
		September 30, 2017				December 31, 2016
Nonaccrual loans:
Commercial, financial and agricultural		$	7			$	-
Real estate - commercial			1,419				1,016
Real estate - mortgage			2,203				3,717
Total		$	3,629			$	4,733

 

 

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of September 30, 2017 and December 31, 2016.

 

																										Loans Past
																										Due Greater
		30-59				60-89				Greater																than 90
(Dollars in thousands)		Days Past				Days Past				than 90				Total Past								Total				Days and
		Due				Due				Days				Due				Current				Loans				Accruing
As of September 30, 2017
Commercial, financial and agricultural		$	-			$	-			$	-			$	-			$	48,551			$	48,551			$	-
Real estate - commercial:
Real estate - commercial			22				-				-				22				134,119				134,141				-
Acquired with credit deterioration			170				-				29				199				-				199				29
Real estate - construction			-				-				-				-				28,145				28,145				-
Real estate - mortgage:
Real estate - mortgage			653				31				221				905				146,535				147,440				221
Acquired with credit deterioration			112				-				13				125				218				343				13
Obligations of states and political			-				-				-				-												-
subdivisions							-				-				-				13,862				13,862				-
Personal			71				-				-				71				9,864				9,935				-
Total		$	1,028			$	31			$	263			$	1,322			$	381,294			$	382,616			$	263

 

																										Loans Past
																										Due Greater
		30-59				60-89				Greater																than 90
(Dollars in thousands)		Days Past				Days Past				than 90				Total Past								Total				Days and
		Due				Due				Days				Due				Current				Loans				Accruing
As of December 31, 2016
Commercial, financial and agricultural		$	15			$	-			$	6			$	21			$	40,806			$	40,827			$	6
Real estate - commercial:
Real estate - commercial			55				-				-				55				123,015				123,070				-
Acquired with credit deterioration			-				-				452				452				189				641				452
Real estate - construction			6				-				508				514				34,692				35,206				508
Real estate - mortgage:
Real estate - mortgage			1,097				57				40				1,194				153,296				154,490				40
Acquired with credit deterioration			-				-				138				138				277				415				138
Obligations of states and political
subdivisions			-				-				-				-				13,616				13,616				-
Personal			25				3				-				28				10,004				10,032				-
Total		$	1,198			$	60			$	1,144			$	2,402			$	375,895			$	378,297			$	1,144

 

 

The following table summarizes information regarding troubled debt restructurings by loan portfolio class at September 30, 2017 and December 31, 2016.

 

						Pre-Modification				Post-Modification
(Dollars in thousands)		Number of				Outstanding Recorded				Outstanding Recorded
		Contracts				Investment				Investment				Recorded Investment
As of September 30, 2017
Accruing troubled debt restructurings:
Real estate - mortgage			7			$	369			$	397			$	321
Non-accruing troubled debt restructurings:
Real estate - mortgage			1				25				25				21
Commercial, financial, agricultural			1				19				20				7
			9			$	413			$	442			$	349

 

						Pre-Modification				Post-Modification
(Dollars in thousands)		Number of				Outstanding Recorded				Outstanding Recorded
		Contracts				Investment				Investment				Recorded Investment
As of December 31, 2016
Accruing troubled debt restructurings:
Real estate - mortgage			7			$	369			$	397			$	340
Non-accruing troubled debt restructurings:
Real estate - mortgage			1				25				25				23
			8			$	394			$	422			$	363

 

The Company’s troubled debt restructurings are also impaired loans, which may result in a specific allocation and subsequent charge-off if appropriate. As of September 30, 2017, there were no specific reserves carried for troubled debt restructured loans. There were also no defaults of troubled debt restructurings that took place during the three or nine months ended September 30, 2017 or 2016 within 12 months of restructure. On December 31, 2016, there were no specific reserves carried for troubled debt restructured loans and no charge-offs relating to the troubled debt restructurings. The amended terms of the restructured loans vary, whereby interest rates have been reduced, principal payments have been reduced or deferred for a period of time and/or maturity dates have been extended.

 

There were no loan terms modified resulting in troubled debt restructuring during the three months ended September 30, 2017 or 2016. The following tables summarize the loans whose terms have been modified resulting in troubled debt restructurings during the nine month periods ending September 30, 2017 and 2016.

 

						Pre-Modification				Post-Modification
(Dollars in thousands)		Number of				Outstanding Recorded				Outstanding Recorded
		Contracts				Investment				Investment				Recorded Investment
Nine Months Ended September 30, 2017
Accruing troubled debt restructurings:
Commercial, financial, agricultural			1			$	19			$	20			$	7
			1			$	19			$	20			$	7

 

						Pre-Modification				Post-Modification
(Dollars in thousands)		Number of				Outstanding Recorded				Outstanding Recorded
		Contracts				Investment				Investment				Recorded Investment
Nine Months Ended September 30, 2016
Non-accruing troubled debt restructurings:
Real estate - mortgage			1			$	25			$	25			$	24
			1			$	25			$	25			$	24

 

Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process at September 30, 2017 and December 31, 2016 totaled $1,167,000 and $1,778,000, respectively. 

 

 

The following tables summarize the activity in the allowance for loan losses and related investments in loans receivable.

 

As of, and for the periods ended, September 30, 2017

 

																		Obligations of
		Commercial,																states and
(Dollars in thousands)		financial and				Real estate -				Real estate -				Real estate -				political
		agricultural				commercial				construction				mortgage				subdivisions				Personal				Total
Allowance for loan losses:
Beginning balance, July 1, 2017		$	402			$	1,125			$	172			$	1,093			$	-			$	84			$	2,876
Charge-offs			(9	)			(70	)			-				(37	)			-				(7	)			(123	)
Recoveries			2				-				-				1				-				2				5
Provisions			(33	)			100				30				50				-				2				149
Ending balance, September 30, 2017		$	362			$	1,155			$	202			$	1,107			$	-			$	81			$	2,907

 

																		Obligations of
		Commercial,																states and
		financial and				Real estate -				Real estate -				Real estate -				political
		agricultural				commercial				construction				mortgage				subdivisions				Personal				Total
Allowance for loan losses:
Beginning balance, January 1, 2017		$	318			$	948			$	231			$	1,143			$	-			$	83			$	2,723
Charge-offs			(46	)			(70	)			-				(120	)			-				(24	)			(260	)
Recoveries			2				-				-				45				-				8				55
Provisions			88				277				(29	)			39				-				14				389
Ending balance, September 30, 2017		$	362			$	1,155			$	202			$	1,107			$	-			$	81			$	2,907
individually evaluated for impairment			-				-				-				-				-				-				-
collectively evaluated for impairment		$	362			$	1,155			$	202			$	1,107			$	-			$	81			$	2,907
Loans receivable:
Ending balance		$	48,551			$	134,340			$	28,145			$	147,783			$	13,862			$	9,935			$	382,616
individually evaluated for impairment			356				5,842				-				2,521				-				-				8,719
acquired with credit deterioration			-				199				-				343				-				-				542
collectively evaluated for impairment		$	48,195			$	128,299			$	28,145			$	144,919			$	13,862			$	9,935			$	373,355

 

 

As of, and for the periods ended, September 30, 2016

 

																		Obligations of
		Commercial,																states and
(Dollars in thousands)		financial and				Real estate -				Real estate -				Real estate -				political
		agricultural				commercial				construction				mortgage				subdivisions				Personal				Total
Allowance for loan losses:
Beginning balance, July 1, 2016		$	308			$	802			$	191			$	1,200			$	-			$	72			$	2,573
Charge-offs			-				(4	)			-				(10	)			-				(7	)			(21	)
Recoveries			-				-				-				-				-				4				4
Provisions			2				59				12				45				-				14				132
Ending balance, September 30, 2016		$	310			$	857			$	203			$	1,235			$	-			$	83			$	2,688

 

																		Obligations of
		Commercial,																states and
		financial and				Real estate -				Real estate -				Real estate -				political
		agricultural				commercial				construction				mortgage				subdivisions				Personal				Total
Allowance for loan losses:
Beginning balance, January 1, 2016		$	264			$	836			$	191			$	1,140			$	-			$	47			$	2,478
Charge-offs			(4	)			(146	)			-				(28	)			-				(20	)			(198	)
Recoveries			-				24				-				1				-				17				42
Provisions			50				143				12				122				-				39				366
Ending balance, September 30, 2016		$	310			$	857			$	203			$	1,235			$	-			$	83			$	2,688
individually evaluated for impairment			-				50				-				94				-				-				144
collectively evaluated for impairment		$	310			$	807			$	203			$	1,141			$	-			$	83			$	2,544
Loans receivable:
Ending balance		$	38,653			$	124,586			$	30,752			$	159,522			$	13,857			$	9,909			$	377,279
individually evaluated for impairment			353				6,067				2,561				4,056				-				-				13,037
acquired with credit deterioration			-				650				-				422				-				-				1,072
collectively evaluated for impairment		$	38,300			$	117,869			$	28,191			$	155,044			$	13,857			$	9,909			$	363,170

 

As of December 31, 2016

 

																		Obligations of
		Commercial,																states and
(Dollars in thousands)		financial and				Real estate -				Real estate -				Real estate -				political
		agricultural				commercial				construction				mortgage				subdivisions				Personal				Total
Allowance for loan losses:
Beginning balance, January 1, 2016		$	264			$	836			$	191			$	1,140			$	-			$	47			$	2,478
Charge-offs			(4	)			(146	)			-				(103	)			-				(26	)			(279	)
Recoveries			-				24				-				15				-				19				58
Provisions			58				234				40				91				-				43				466
Ending balance, December 31, 2016		$	318			$	948			$	231			$	1,143			$	-			$	83			$	2,723
individually evaluated for impairment			-				-				-				56				-				-				56
collectively evaluated for impairment		$	318			$	948			$	231			$	1,087			$	-			$	83			$	2,667
Loans receivable:
Ending balance		$	40,827			$	123,711			$	35,206			$	154,905			$	13,616			$	10,032			$	378,297
individually evaluated for impairment			436				5,499				2,455				4,057				-				-				12,447
acquired with credit deterioration			-				641				-				415				-				-				1,056
collectively evaluated for impairment		$	40,391			$	117,571			$	32,751			$	150,433			$	13,616			$	10,032			$	364,794

 

 

8. Goodwill and other intangible assets

 

Branch Acquisition

 

On September 8, 2006, the Company acquired a branch office in Richfield, PA. Goodwill at September 30, 2017 and December 31, 2016 was $2,046,000. Core deposit intangible of $431,000 was fully amortized as of September 30, 2016. The core deposit intangible was amortized over a ten-year period on a straight-line basis. Goodwill is not amortized, but is measured annually for impairment or more frequently if certain events occur which might indicate goodwill has been impaired. Core deposit amortization expense was $7,000 and $29,000 in the three and nine months ending September 30, 2016. There was no impairment of goodwill during the three or nine month periods ended September 30, 2017 or 2016.

 

FNBPA Acquisition

 

On November 30, 2015, the Company acquired FNBPA Bancorp, Inc. (“FNBPA”) and as a result, carries goodwill of $3,402,000 relating to the acquisition. Core deposit intangible in the amount of $303,000 was recorded and is being amortized over a ten-year period using a sum of the year’s digits basis. Other intangible assets were identified and recorded as of November 30, 2015, in the amount of $40,000 and are being amortized on a straight-line basis over two years, through November 30, 2017.

 

Amortization expense recognized for intangibles related to the FNBPA acquisition in the three and nine months ended September 30, 2017 was $17,000 and $52,000, respectively. The amortization expense recognized during the three and nine months ended September 30, 2016 was $19,000 and $57,000, respectively, for intangibles related to the FNBPA acquisition.

 

		FNBPA				FNBPA				Branch
		Acquisition				Acquisition				Acquisition
		Core				Other				Core
(Dollars in thousands)		Deposit				Intangible				Deposit
		Intangible				Assets				Intangible
Beginning Balance at Acquisition Date		$	303			$	40			$	431
Amortization expense recorded prior to January 1, 2016			4				2				402
Amortization expense recorded in the twelve months ended December 31, 2016			55				20				29
Unamortized balance as of December 31, 2016			244				18			$	-
Amortization expense recorded in the Nine Months Ended September 30, 2017			37				15
Unamortized balance as of September 30, 2017		$	207			$	3
Scheduled remaining amortization expense for years ended:
December 31, 2017		$	12			$	3
December 31, 2018			44				-
December 31, 2019			38				-
December 31, 2020			33				-
December 31, 2021			27				-
After December 31, 2021			53				-

 

9. Investment in Unconsolidated Subsidiary

 

The Company owns 39.16% of the outstanding common stock of Liverpool Community Bank (LCB), Liverpool, PA. This investment is accounted for under the equity method of accounting and is being carried at $4,820,000 as of September 30, 2017. The Company increases its investment in LCB for its share of earnings and decreases its investment by any dividends received from LCB. The investment is evaluated quarterly for impairment. A loss in value of the investment which is determined to be other than a temporary decline would be recognized as a loss in the period in which such determination is made. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of LCB to sustain an earnings capacity that would justify the current carrying value of the investment. There was no impairment of goodwill relating to LCB during the three or nine month periods ended September 30, 2017 or 2016.

 

 

10. Fair Value Measurement

 

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes guidance on identifying circumstances when a transaction may not be considered orderly.

 

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed, and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

 

This guidance clarifies that, when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

 

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

 

Fair value measurement and disclosure guidance requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset (replacement cost). Valuation techniques should be consistently applied. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability. Inputs may be observable, meaning those that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from independent sources, or unobservable, meaning those that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances. In that regard, the guidance establishes a fair value hierarchy for valuation inputs that gives the highest priority to quoted prices in active markets for identical assets or liabilities and the lowest priority to unobservable inputs. The fair value hierarchy is as follows:

 

Level 1 Inputs – Unadjusted quoted prices in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 Inputs – Inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by market data by correlation or other means.

 

Level 3 Inputs – Unobservable inputs for determining the fair values of assets or liabilities that reflect an entity’s own assumptions about the assumptions that market participants would use in pricing the assets or liabilities.

 

An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement.

 

 

A description of the valuation methodologies used for assets and liabilities measured at fair value, as well as the general classification of such assets and liabilities pursuant to the valuation hierarchy, is set forth below.

 

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the Company’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Company’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Company’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

 

Securities Available for Sale – Debt securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurement from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Equity securities classified as available for sale are reported at fair value using Level 1 and Level 2 inputs.

 

Impaired Loans – Certain impaired loans are reported on a non-recurring basis at the fair value of the underlying collateral since repayment is expected solely from the collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

 

Other Real Estate Owned – Certain assets included in other real estate owned are carried at fair value as a result of impairment and accordingly are presented as measured on a non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of property in the proximate vicinity.

 

Mortgage Servicing Rights – The fair value of servicing assets is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date and are considered Level 3 inputs.

 

The following table summarizes financial assets and financial liabilities measured at fair value as of September 30, 2017 and December 31, 2016, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. There were no transfers of assets between fair value Level 1 and Level 2 during the nine months ended September 30, 2017 or 2016.

 

						(Level 1)				(Level 2)				(Level 3)
						Quoted Prices in				Significant				Significant
						Active Markets				Other				Other
(Dollars in thousands)		September 30,				for Identical				Observable				Unobservable
		2017				Assets				Inputs				Inputs
Measured at fair value on a recurring basis:
Debt securities available-for-sale:
Obligations of U.S. Government agencies and corporations		$	34,463			$	-			$	34,463			$	-
Obligations of state and political subdivisions			25,945				-				25,945				-
Mortgage-backed securities			97,485				-				97,485				-
Equity securities available-for-sale			1,287				1,107				180				-
Measured at fair value on a non-recurring basis:
Impaired loans		$	2,239			$	-			$	-			$	2,239
Other real estate owned			165				-				-				165
Mortgage servicing rights			223				-				-				223

 

 

						(Level 1)				(Level 2)				(Level 3)
						Quoted Prices in				Significant				Significant
						Active Markets				Other				Other
(Dollars in thousands)		December 31,				for Identical				Observable				Unobservable
		2016				Assets				Inputs				Inputs
Measured at fair value on a recurring basis:
Debt securities available-for-sale:
Obligations of U.S. Government agencies and corporations		$	35,799			$	-			$	35,799			$	-
Obligations of state and political subdivisions			26,659				-				26,659				-
Mortgage-backed securities			85,702				-				85,702				-
Equity securities available-for-sale			2,328				2,148				180				-
Measured at fair value on a non-recurring basis:
Impaired loans		$	2,563			$	-			$	-			$	2,563
Other real estate owned			358				-				-				358
Mortgage servicing rights			205				-				-				205

 

The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs have been used to determine fair value:

 

(Dollars in thousands)
September 30, 2017		Fair Value Estimate				Valuation Technique		Unobservable Input		Range		Weighted Average
Impaired loans		$	2,239			Appraisal of collateral (1)		Appraisal and liquidation adjustments (2)		0% - 12%			7	%
Other real estate owned			165			Appraisal of collateral (1)		Appraisal and liquidation adjustments (2)		13% - 72%			30	%
Mortgage servicing rights			223			Multiple of annual servicing fee		Estimated pre-payment speed, based on rate and term		300% - 400%			369	%

 

(Dollars in thousands)
December 31, 2016		Fair Value Estimate				Valuation Technique		Unobservable Input		Range		Weighted Average
Impaired loans		$	2,563			Appraisal of collateral (1)		Appraisal and liquidation adjustments (2)		7% - 58%			8.9	%
Other real estate owned			358			Appraisal of collateral (1)		Appraisal and liquidation adjustments (2)		30 - 72%			46	%
Mortgage servicing rights			205			Multiple of annual servicing fee		Estimated pre-payment speed, based on rate and term		300% - 400%			368	%

 

(1)

Fair value is generally determined through independent appraisals of the underlying collateral that generally include various Level 3 inputs which are not identifiable.

(2)

Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

Fair Value of Financial Instruments

 

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, the fair value estimates reported herein are not necessarily indicative of the amounts the Company could have realized in sales transactions on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different from the amounts reported at each quarter end.

 

The information presented below should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is provided only for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

 

The following describes the estimated fair value of the Company’s financial instruments as well as the significant methods and assumptions not previously disclosed used to determine these estimated fair values.

 

Carrying values approximate fair value for cash and due from banks, interest-bearing demand deposits with banks, restricted stock in the Federal Home Loan Bank, loans held for sale, interest receivable, mortgage servicing rights, non-interest bearing deposits, securities sold under agreements to repurchase, short-term borrowings and interest payable. Other than cash and due from banks, which are considered Level 1 inputs, and mortgage servicing rights, which are Level 3 inputs, these instruments are Level 2 inputs.

 

Interest bearing time deposits with banks – The estimated fair value is determined by discounting the contractual future cash flows, using the rates currently offered for deposits of similar remaining maturities.

 

Loans – For variable-rate loans that reprice frequently and which entail no significant changes in credit risk, carrying values approximated fair value. Substantially all commercial loans and real estate mortgages are variable rate loans. The fair value of other loans (i.e. consumer loans and fixed-rate real estate mortgages) is estimated by calculating the present value of the cash flow difference between the current rate and the market rate, for the average maturity, discounted quarterly at the market rate.

 

Fixed rate time deposits – The estimated fair value is determined by discounting the contractual future cash flows, using the rates currently offered for deposits of similar remaining maturities.

 

Long-term debt and other interest-bearing liabilities – The fair value is estimated using discounted cash flow analysis, based on incremental borrowing rates for similar types of arrangements.

 

Commitments to extend credit and letters of credit – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present credit-worthiness of the counterparties. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements.

 

The estimated fair values of the Company’s financial instruments are as follows:

 

		Financial Instruments
		September 30, 2017								December 31, 2016
(Dollars in thousands)		Carrying				Fair				Carrying				Fair
		Value				Value				Value				Value
Financial assets:
Cash and due from banks		$	13,219			$	13,219			$	9,464			$	9,464
Interest bearing deposits with banks			133				133				95				95
Interest bearing time deposits with banks			350				350				350				350
Securities			159,180				159,180				150,488				150,488
Restricted investment in FHLB stock			3,616				3,616				3,610				3,610
Loans held for sale			117				117				-				-
Loans, net of allowance for loan losses			379,709				374,642				375,574				366,660
Mortgage servicing rights			223				223				205				205
Accrued interest receivable			1,620				1,620				1,582				1,582
Financial liabilities:
Non-interest bearing deposits		$	109,880			$	109,880			$	104,006			$	104,006
Interest bearing deposits			363,703				363,854				351,816				354,628
Securities sold under agreements to repurchase			5,207				5,207				4,496				4,496
Short-term borrowings			27,500				27,500				27,700				27,700
Long-term debt			25,000				24,965				25,000				24,963
Other interest bearing liabilities			1,566				1,568				1,545				1,549
Accrued interest payable			298				298				268				268
Off-balance sheet financial instruments:
Commitments to extend credit		$	-			$	-			$	-			$	-
Letters of credit			-				-				-				-

 

 

The following tables present the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments not previously disclosed as of September 30, 2017 and December 31, 2016. This table excludes financial instruments for which the carrying amount approximates fair value.

 

										(Level 1)				(Level 2)				(Level 3)
										Quoted Prices in				Significant				Significant
										Active Markets				Other				Other
(Dollars in thousands)		Carrying								for Identical				Observable				Unobservable
		Amount				Fair Value				Assets or Liabilities				Inputs				Inputs
September 30, 2017
Financial instruments - Assets
Interest bearing time deposits with banks		$	350			$	350			$	-			$	350			$	-
Loans held for sale			117				117				-				117				-
Loans, net of allowance for loan losses			379,709				374,642				-				-				374,642
Financial instruments - Liabilities
Interest bearing deposits		$	363,703			$	363,854			$	-			$	363,854			$	-
Long-term debt			25,000				24,965				-				24,965				-
Other interest bearing liabilities			1,566				1,568				-				1,568				-

 

										(Level 1)				(Level 2)				(Level 3)
										Quoted Prices in				Significant				Significant
										Active Markets				Other				Other
(Dollars in thousands)		Carrying								for Identical				Observable				Unobservable
		Amount				Fair Value				Assets or Liabilities				Inputs				Inputs
December 31, 2016
Financial instruments - Assets
Interest bearing time deposits with banks		$	350			$	350			$	-			$	350			$	-
Loans, net of allowance for loan losses			375,574				366,660				-				-				366,660
Financial instruments - Liabilities
Interest bearing deposits		$	351,816			$	354,628			$	-			$	354,628			$	-
Long-term debt			25,000				24,963				-				24,963				-
Other interest bearing liabilities			1,545				1,549				-				1,549				-

 

11. Defined Benefit Retirement Plan

 

The Company sponsors a defined benefit retirement plan [The Juniata Valley Bank Retirement Plan (“JVB Plan”)], which covers substantially all of its employees employed prior to December 31, 2007. As of January 1, 2008, the JVB Plan was amended to close the plan to new entrants. All active participants as of December 31, 2007 became 100% vested in their accrued benefit and, as long as they remained eligible, continued to accrue benefits until December 31, 2012. The benefits are based on years of service and the employee’s compensation. Effective December 31, 2012, the JVB Plan was amended to cease future service accruals after that date (i.e., it was frozen).

 

As a result of the FNBPA acquisition, as of November 30, 2015, the Company assumed sponsorship of a second defined benefit retirement plan, the [Retirement Plan for the First National Bank of Port Allegany (“FNB Plan”)], which covers substantially all former FNBPA employees that were employed prior to September 30, 2008. The FNBPA Plan was amended as of December 31, 2015 to cease future service accruals to previously unfrozen participants and is now considered to be “frozen”. Effective December 31, 2016, the FNB Plan was merged into the JVB Plan, which was amended to provide the same benefits to the class of participants previously included in the FNB Plan.

 

The Company’s funding policy with respect to the JVB Plan is to contribute annually no more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide for benefits attributed to service through December 31, 2012. The Company made no contributions during the nine months ended September 30, 2017 and is not required to make a contribution in the remainder of 2017; however, it is considering doing so.

 

 

Pension expense included the following components for the three and nine month periods ended September 30, 2017 and 2016, with the 2016 year reclassified to include combined results for the JVB Plan and the former FNB Plan:

 

		Three Months Ended								Nine Months Ended
(Dollars in thousands)		September 30,								September 30,
		2017				2016				2017				2016
Components of net periodic pension cost:
Interest cost		$	161			$	167			$	483			$	501
Expected return on plan assets			(202	)			(199	)			(605	)			(597	)
Recognized net actuarial loss			57				62				170				186
Net periodic pension cost		$	16			$	30			$	48			$	90
Amortization of net actuarial loss recognized in other comprehensive income		$	(57	)		$	(62	)		$	(170	)		$	(186	)
Total recognized in net periodic pension cost and other comprehensive income		$	(41	)		$	(32	)		$	(122	)		$	(96	)

 

12. Commitments, Contingent Liabilities and Guarantees

 

In the ordinary course of business, the Company makes commitments to extend credit to its customers through letters of credit, loan commitments and lines of credit. At September 30, 2017, the Company had $90,150,000 outstanding in loan commitments and other unused lines of credit extended to its customers as compared to $59,984,000 at December 31, 2016.

 

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had outstanding $2,097,000 and $2,300,000 of financial and performance letters of credit commitments as of September 30, 2017 and December 31, 2016, respectively. Commercial letters of credit as of both September 30, 2017 and December 31, 2016 totaled $12,650,000. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The amount of the liability as of September 30, 2017 for payments under letters of credit issued was not material. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk.

 

Additionally, the Company has committed to fund and sell qualifying residential mortgage loans to the Federal Home Loan Bank of Pittsburgh in the total amount of $10,000,000. As of September 30, 2017, $5,788,000 remained to be delivered on that commitment, $140,000 of which has been committed to borrowers.

 

13. Subsequent Events

 

On October 17, 2017, the Board of Directors declared a cash dividend of $0.22 per share to shareholders of record on November 15, 2017, payable on December 1, 2017.

 

On October 5, 2017, the Company purchased a group annuity to satisfy defined benefit obligations to a group of its retirees. The transaction resulted in settlement charges of $377,000.

 

 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Forward Looking Statements:

 

The information contained in this Quarterly Report on Form 10-Q contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder) including statements which are not historical facts or that address trends or management's intentions, plans, beliefs, expectations or opinions.  Such forward looking statements are subject to risks and uncertainties and may be affected by various factors that may cause actual results to differ materially from those in the forward-looking statements including, without limitation:

 

·

the impact of adverse changes in the economy and real estate markets, including protracted periods of low-growth and sluggish loan demand;

·

the effect of market interest rates, particularly following a period of low market interest rates and current market uncertainties, and relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;

·

the effect of competition on rates of deposit and loan growth and net interest margin;

·

increases in non-performing assets, which may result in increases in the allowance for credit losses, loan charge-offs and elevated collection and carrying costs related to such non-performing assets;

·

other income growth, including the impact of regulatory changes which have reduced debit card interchange revenue;

·

investment securities gains and losses, including other than temporary declines in the value of securities which may result in charges to earnings;

·

the level of other expenses, including salaries and employee benefit expenses;

·

the impact of increased regulatory scrutiny of the banking industry;

·

the increasing time and expense associated with regulatory compliance and risk management;

·

the uncertainty and lack of clear regulatory guidance associated with the delay in implementing many of the regulations mandated by the Dodd Frank Act;

·

capital and liquidity strategies, including the expected impact of the capital and liquidity requirements modified by the Basel III standards;

·

changes in the applicable federal income tax rate that could result in the reversal of net deferred tax assets and the reduction of current tax expense;

·

the effects of changes in accounting policies, standards, and interpretations on the Company’s consolidated balance sheets and consolidated statements of income;

·

the Company’s failure to identify and to address cyber-security risks;

·

the Company’s ability to keep pace with technological changes;

·

the Company’s ability to attract and retain talented personnel;

·

the Company’s reliance on its subsidiary for substantially all of its revenues and its ability to pay dividends;

·

the effects of changes in relevant accounting principles and guidelines on the Company’s financial condition; and

·

failure of third party service providers to perform their contractual obligations.

 

The Company undertakes no obligation to publicly update or revise forward looking information, whether as a result of new or updated information, future events or otherwise.  For a more complete discussion of certain risks, uncertainties and other factors affecting the Company, refer to the Company’s Risk Factors, contained in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto), and Item 1A of Part II of this Quarterly Report on Form 10-Q.

 

Critical Accounting Policies:

 

Disclosure of the Company’s significant accounting policies is included in the notes to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the year ended December 31, 2016. Some of these policies require significant judgments, estimates, and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses, as well as management’s evaluation of the investment portfolio for other-than-temporary impairment. There have been no changes in critical accounting policies since December 31, 2016.

 

 

General:

 

The following discussion relates to the consolidated financial condition of the Company as of September 30, 2017, as compared to December 31, 2016, and the consolidated results of operations for the three and nine months ended September 30, 2017, compared to the same periods in 2016. This discussion should be read in conjunction with the interim consolidated financial statements and related notes included herein.

 

Overview:

 

Juniata Valley Financial Corp. is a Pennsylvania corporation organized in 1983 to be the holding company of The Juniata Valley Bank. The Bank is a state-chartered bank headquartered in Mifflintown, Pennsylvania. Juniata Valley Financial Corp. and its subsidiary bank derive substantially all of their income from banking and bank-related services, including interest earned on residential real estate, commercial mortgage, commercial and consumer loans, interest earned on investment securities and fee income from deposit services and other financial services to its customers through 15 locations in Pennsylvania. The Company completed its acquisition of FNBPA Bancorp, Inc. (“FNBPA”) on November 30, 2015, at which time total assets increased by approximately $92 million, or 19%. Juniata Valley Financial Corp. also owns 39.16% of Liverpool Community Bank (“LCB”), located in Liverpool, Pennsylvania. The Company accounts for LCB as an unconsolidated subsidiary using the equity method of accounting.

 

Financial Condition:

 

Total assets as of September 30, 2017, were $599.9 million, an increase of $19.6 million, or 3.4%, compared to December 31, 2016. Comparing the balances at September 30, 2017 and December 31, 2016, deposits increased by $17.8 million, with noninterest bearing deposits increasing $5.9 million and interest-bearing deposits increasing $11.9 million. The Company’s investment portfolio increased by $8.7 million and total loans increased by $4.3 million during the nine months ended September 30, 2017.

 

The table below shows changes in deposit volumes by type of deposit between December 31, 2016 and September 30, 2017.

 

(Dollars in thousands)		September 30,				December 31,				Change
		2017				2016				$				%
Deposits:
Demand, non-interest bearing		$	109,880			$	104,006			$	5,874				5.6	%
Interest bearing demand and money market			122,833				118,429				4,405				3.7
Savings			99,414				95,449				3,965				4.2
Time deposits, $250,000 and more			7,559				5,773				1,786				30.9
Other time deposits			133,897				132,165				1,731				1.3
Total deposits		$	473,583			$	455,822			$	17,761				3.9	%

 

Overall, loans increased $4.3 million, or 1.1%, between December 31, 2016 and September 30, 2017, as shown in the table below, primarily due to increases in commercial and commercial real estate loans, partially offset by reductions in residential real estate and construction loans.

 

(Dollars in thousands)		September 30,				December 31,				Change
		2017				2016				$				%
Loans:
Commercial, financial and agricultural		$	48,551			$	40,827			$	7,724				18.9	%
Real estate - commercial			134,340				123,711				10,629				8.6
Real estate - construction			28,145				35,206				(7,061	)			(20.1	)
Real estate - mortgage			147,783				154,905				(7,122	)			(4.6	)
Obligations of states and political subdivisions			13,862				13,616				246				1.8
Personal			9,935				10,032				(97	)			(1.0	)
Total loans		$	382,616			$	378,297			$	4,319				1.1	%

 

 

A summary of the activity in the allowance for loan losses for each of the nine month periods ended September 30, 2017 and 2016 is presented below.

 

(Dollars in thousands)		Periods Ended September 30,
		2017				2016
Balance of allowance - January 1		$	2,723			$	2,478
Loans charged off			(260	)			(198	)
Recoveries of loans previously charged off			55				42
Net charge-offs			(205	)			(156	)
Provision for loan losses			389				366
Balance of allowance - end of period		$	2,907			$	2,688
Ratio of net charge-offs during period to average loans outstanding			0.05	%			0.04	%

 

As of September 30, 2017, 46 loans (exclusive of loans acquired from FNBPA with existing credit deterioration), with aggregate outstanding balances of $8,719,000 were individually evaluated for impairment. A collateral analysis was performed on each of these 46 loans in order to establish a portion of the reserve needed to carry the impaired loans at fair value. There were no loans determined to have insufficient collateral, thus, the establishment of a specific reserve was not required for any of the impaired loans.

 

As of September 30, 2017, there was $40,298,000 in special mention loans compared to $30,654,000 at December 31, 2016 and $14,148,000 in substandard loans compared to $18,905,000 at December 31, 2016. Causing some of the variance was a $2.5 million relationship that was upgraded from substandard classification at December 31, 2016 to special mention in 2017. Additionally, there were two relationships totaling $9.1 million that were downgraded to special mention classification in 2017.

 

Management believes that the specific reserves carried are adequate to cover potential future losses related to these relationships. Other than as described herein, Management does not believe there are any trends, events or uncertainties that are reasonably expected to have a material impact on future results of operations, liquidity, or capital resources. Further, based on known information, Management believes that the effects of current and past economic conditions and other unfavorable business conditions may influence certain borrowers’ abilities to comply with their repayment terms, and as such, continues to monitor the financial strength of these borrowers closely.

 

The following is a summary of the Bank’s non-performing loans on September 30, 2017 as compared to December 31, 2016.

 

(Dollar amounts in thousands)		As of and for the				As of and for the
		nine months ended				year ended
		September 30, 2017				December 31, 2016
Non-performing loans
Non-accrual loans		$	3,608			$	4,733
Accruing loans past due 90 days or more, exclusive of loans acquired with credit deterioration			221				554
Non-accruing restructured loans in default			21				25
Total		$	3,850			$	5,312
Average loans outstanding			385,623				379,177
Ratio of non-performing loans to average loans outstanding			1.00	%			1.40	%

 

Stockholders’ equity increased from December 31, 2016 to September 30, 2017 by $1,358,000, or 2.3%. The Company’s net income exceeded dividends paid by $814,000. The adjustment to accumulated other comprehensive loss to record the amortization of the net actuarial loss of the Company’s defined benefit retirement plan increased the Company’s equity by $112,000. The change in unrealized gains from both the change in market value of securities available for sale and from the unconsolidated subsidiary increased shareholders’ equity by $258,000 when comparing September 30, 2017 to December 31, 2016. Stock based compensation expense recorded pursuant to the Company’s Stock Option Plan added $54,000 to stockholders’ equity during the nine month period, and payments for exercised stock options and the Employee Stock Purchase Plan added $172,000 and $34,000, respectively. Treasury stock purchases during the nine months ended September 30, 2017 decreased stockholders’ equity by $86,000.

 

 

Subsequent to September 30, 2017, the following events took place:

 

On October 17, 2017, the Board of Directors declared a cash dividend of $0.22 per share to shareholders of record on November 15, 2017, payable on December 1, 2017.

 

On October 5, 2017, the Company purchased a group annuity to satisfy defined benefit obligations to a group of its retirees. The transaction resulted in settlement charges of $377,000.

 

Comparison of the Three Months Ended September 30, 2017 and 2016

 

Operations Overview:

 

Net income for the third quarter of 2017 was $1,206,000, a decrease of $241,000, or 16.7%, when compared to the third quarter of 2016. The decrease was primarily due to the recognition of life insurance proceeds of $364,000 in the third quarter of 2016; no similar recognition occurred in the corresponding 2017 period. Basic and diluted earnings per share were $0.25 in the third quarter of 2017 compared to $0.30 in the third quarter of 2016. Presented below are selected key ratios for the two periods:

 

		Three Months Ended
		September 30,
		2017				2016
Return on average assets (annualized)			0.81	%			1.02	%
Return on average equity (annualized)			8.00	%			9.35	%
Average equity to average assets			10.10	%			10.87	%
Non-interest income, excluding securities gains, as a percentage of average assets (annualized)			0.82	%			1.10	%
Non-interest expense as a percentage of average assets (annualized)			2.97	%			3.04	%

 

The discussion that follows further explains changes in the components of net income when comparing the third quarter of 2017 with the third quarter of 2016.

 

Net Interest Income:

 

Net interest income was $4,705,000 for the third quarter of 2017, as compared to $4,488,000 in the same quarter in 2016. Overall, average earning assets increased 5.6%, while average interest bearing liabilities increased 7.0%. Net interest margin, on a fully tax equivalent basis, declined 3 basis points during the three months ended September 30, 2017 compared to the same period in 2016.

 

Average loan balances increased by $11,565,000, or 3.1%, and interest on loans was $251,000 higher in the third quarter of 2017 compared to the same period in 2016. The increase in the average volume of loans outstanding and the 13 basis point increase in the weighted average yield on loans increased interest income by approximately $144,000 and $107,000, respectively.

 

Interest earned on investment securities increased $151,000 in the third quarter of 2017 as compared to the third quarter of 2016. The overall pre-tax yield on the investment securities portfolio increased during the period by 16 basis points, adding $67,000 to interest income, while the average balance of investment securities increased by $17.8 million, adding $84,000 to interest income.

 

Total average earning assets during the third quarter of 2017 were $548.3 million, compared to $519.1 million during the third quarter of 2016, yielding 3.98% and 3.89%, respectively. Average interest bearing liabilities increased by $27.6 million, while average non-interest bearing deposits increased by $1.6 million. The cost to fund interest earning assets with interest bearing liabilities increased by 15 basis points, to 0.71%, in the third quarter of 2017 compared to the third quarter of 2016.

 

Net interest margin on a fully tax-equivalent basis for the third quarter of 2017 was 3.56%, while it was 3.59% for the same period in 2016.

 

 

Average Balance Sheets and Net Interest Income Analysis

 

		Three Months Ended												Three Months Ended
(Dollars in thousands)		September 30, 2017												September 30, 2016
		Average								Yield/				Average								Yield/				Increase (Decrease) Due To (6)
		Balance (1)				Interest				Rate				Balance (1)				Interest				Rate				Volume				Rate				Total
ASSETS
Interest earning assets:
Taxable loans (5)		$	358,478			$	4,381				4.89	%		$	348,305			$	4,133				4.75	%		$	138			$	110			$	248
Tax-exempt loans			29,737				226				3.04				28,345				223				3.13				6				(3	)			3
Total loans			388,215				4,607				4.75				376,650				4,356				4.62				144				107				251
Taxable investment securities			135,104				729				2.16				119,693				590				1.97				74				65				139
Tax-exempt investment securities			24,454				112				1.83				22,071				100				1.81				10				2				12
Total investment securities			159,558				841				2.11				141,764				690				1.95				84				67				151
Interest bearing deposits			530				9				6.79				657				3				1.82				(6	)			12				6
Federal funds sold			-				-								65				-				0.61				-				-				-
Total interest earning assets			548,303				5,457				3.98				519,136				5,049				3.89				222				186				408
Other assets (7)			49,289												50,302
Total assets		$	597,592											$	569,438
LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2)		$	126,149				114				0.36			$	123,629				68				0.22			$	1			$	45			$	46
Savings deposits			100,323				26				0.10				97,861				24				0.10				1				1				2
Time deposits			140,859				421				1.20				138,913				369				1.06				(2	)			54				52
Short-term and long-term borrowings and other interest bearing liabilities			55,653				191				1.37				34,983				100				1.14				73				18				91
Total interest bearing liabilities			422,984				752				0.71				395,386				561				0.56				73				118				191
Non-interest bearing liabilities:
Demand deposits			107,494												105,847
Other			6,787												6,583
Stockholders' equity			60,327												61,622
Total liabilities  and stockholders' equity		$	597,592											$	569,438
Net interest income and net interest rate spread						$	4,705				3.27	%						$	4,488				3.33	%		$	149			$	68			$	217
Net interest margin on  interest earning assets (3)											3.43	%											3.46	%
Net interest income and net interest margin-Tax equivalent basis (4)						$	4,879				3.56	%						$	4,654				3.59	%

 

Notes:

1) Average balances were calculated using a daily average.

2) Includes interest-bearing demand and money market accounts.

3) Net margin on interest earning assets is net interest income divided by average interest earning assets.

4) Interest on obligations of states and municipalities is not subject to federal income tax. In order to make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 34%.

5) Non-accruing loans are included in the above table until they are charged off.

6) The change in interest due to rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

7) Includes gross unrealized gains (losses) on securities available for sale.

 

Provision for Loan Losses:

 

In the third quarter of 2017, the provision for loan losses was $149,000, as compared to a provision of $132,000 in the third quarter of 2016. Management regularly reviews the adequacy of the loan loss reserve and makes assessments as to specific loan impairment, historical charge-off expectations, general economic conditions in the Bank’s market area, specific loan quality and other factors. Factors affecting the provision for loan losses were the increased loan balances considered in the analysis and credit concentrations. See the earlier discussion in the Financial Condition section, explaining the information used to determine the provision.

 

 

Non-interest Income:

 

Non-interest income in the third quarter of 2017 was $1,219,000 compared to $1,571,000 in the third quarter of 2016, representing a decrease of $352,000, or 22.4%.

 

Most significantly impacting the comparative third quarter periods was $364,000 in life insurance proceeds recognized in 2016. Excluding securities gains and life insurance proceeds, non-interest income in the third quarters of 2017 and 2016 were $1,217,000 and $1,201,000, respectively, reflecting a 1.3% increase in the 2017 period.

 

The Company originates mortgages to sell on the secondary market, while retaining the servicing rights; the Company has built a servicing portfolio of approximately $23.4 million as of September 30, 2017. The mortgage servicing right asset, as of September 30, 2017, was $223,000. Mortgage banking income is made up of origination and servicing fees collected from the buyer, origination points collected from the borrower and an adjustment to the fair value of the mortgage servicing rights asset. In the third quarter of 2017, mortgage banking income was $83,000, an increase of $42,000, or 102.4%, from the third quarter of 2016, due to increased mortgage activity.

 

Customer service fees decreased $43,000, or 9.1%, in the third quarter of 2017, and bank-owned life insurance decreased by $14,000, or 13.1%, compared to the third quarter of 2016. Offsetting these declines were increases in fees derived from loan and trust activity, which grew 32.8% and 15.5%, respectively. Less significant changes in non-interest income categories included slight changes in debit card fee income, income from unconsolidated subsidiary, and other miscellaneous income.

 

As a percentage of average assets, annualized non-interest income, exclusive of net gains on the sale of securities, was 0.82% in the third quarter of 2017 as compared to 1.10% in the third quarter of 2016. Excluding proceeds from life insurance, the ratio for the third quarter of 2016 was 0.84%

 

Non-interest Expense:

 

Total non-interest expense for the third quarter of 2017 was $4,442,000 which was $112,000, or 2.6%, higher than the third quarter of 2016. The increase was primarily due to the addition of $53,000 in amortization expense in the third quarter of 2017 related to an increase in the investment in a low-income housing community project and an increase of $57,000 in consulting fees and other costs to maintain employee benefits. Foreclosure costs also increased in the three months ended September 30, 2017 over the comparable 2016 period by $16,000.

 

Noninterest expense decreases in the third quarter of 2017 were recorded in data processing expense, which was $53,000, or 10.8%, less than the third quarter of 2016, with the loss on the sales of foreclosed properties also decreasing by $31,000, or 62.0%, in the 2017 period in comparison to the 2016 period.

 

As a percentage of average assets, annualized non-interest expense was 2.97% in the third quarter of 2017 compared to 3.04% in the third quarter of 2016.

 

Provision for income taxes:

 

Income tax expense in the third quarter of 2017 was $127,000 as compared to the $150,000 recorded in the third quarter of 2016. The Company qualifies for a federal tax credit for a low-income housing project investment, and the tax provisions for each period reflect the application of the tax credit. For the third quarter of 2017, the tax credit of $198,000 lowered the effective tax rate from 24.4% to 9.5%. In the third quarter of 2016, the tax credit of $143,000 lowered the effective tax rate from 18.3% to 9.4%.

 

 

Comparison of the Nine Months Ended September 30, 2017 and 2016

 

Operations Overview:

 

Net income for the nine months ended September 30, 2017 was $3,959,000, an increase of $105,000, or 2.7%, compared to the nine months ended September 30, 2016. Basic and diluted earnings per share were $0.83 in the first nine months of 2017, representing an increase of 3.8% from the $0.80 per share earned in the first nine months of 2016. Annualized return on average equity for the first nine months in 2017 was 8.81%, compared to 8.38% for the same period in the prior year, an increase of 5.1%. For the nine months ended September 30, annualized return on average assets was 0.89% in both 2017 and 2016.

 

Presented below are selected key ratios for the two periods:

 

		Nine Months Ended
		September 30,
		2017				2016
Return on average assets (annualized)			0.89	%			0.89	%
Return on average equity (annualized)			8.81	%			8.38	%
Average equity to average assets			10.11	%			10.67	%
Non-interest income, excluding securities gains, as a percentage of average assets (annualized)			0.81	%			0.92	%
Non-interest expense as a percentage of average assets (annualized)			2.91	%			3.01	%

 

The discussion that follows explains changes in the components of net income when comparing the first nine months of 2017 with the first nine months of 2016.

 

Net Interest Income:

 

Net interest income was $13,898,000 for the first nine months of 2017, as compared to $13,648,000 for the same period in 2016, an increase of $250,000, or 1.8%. Average earning assets increased by $18.9 million, or 3.6%, while average interest bearing liabilities increased by $16.3 million, or 4.0%. Net interest margin on a fully tax-equivalent basis declined 6 basis points during the nine months ended September 30, 2017 compared to the same period in 2016.

 

On average, loans outstanding increased by $7.8 million, or 2.1%. Interest on loans increased $336,000, or 2.6%, in the first nine months of 2017 compared to the same period in 2016. The higher volume and weighted average yield on loans increased interest income by $125,000 and $211,000, respectively..

 

Interest earned on investment securities increased $323,000 in the first nine months of 2017 compared to 2016, with average balances increasing $12.4 million during the period. The overall pre-tax yield on the investment securities portfolio increased during the period by 12 basis points.

 

Average interest-bearing liabilities increased by $16.3 million, while average noninterest bearing deposits increased $1.1 million during the nine months ended September 30, 2017. The cost of interest bearing liabilities rose 10 basis points as a result of increases in the federal funds borrowing rate in the current period.

 

Total average earning assets during the first nine months of 2017 were $545.0 million, compared to $526.0 million during the first nine months of 2016, yielding 3.91% in 2017 and 3.88% in the 2016 period. Interest bearing funding costs for earning assets were 0.66% and 0.56% for the first nine months of 2017 and 2016, respectively. Net interest margin on a fully tax-equivalent basis for the first nine months of 2017 was 3.53%. For the same period in 2016, the fully-tax equivalent net interest margin was 3.59%.

 

 

Average Balance Sheets and Net Interest Income Analysis

 

		Nine Months Ended												Nine Months Ended
(Dollars in thousands)		September 30, 2017												September 30, 2016
		Average								Yield/				Average								Yield/				Increase (Decrease) Due To (6)
		Balance (1)				Interest				Rate				Balance (1)				Interest				Rate				Volume				Rate				Total
ASSETS
Interest earning assets:
Taxable loans (5)		$	354,753			$	12,798				4.81	%		$	347,183			$	12,479				4.79	%		$	133			$	186			$	319
Tax-exempt loans			30,870				693				2.99				30,671				676				2.94				(8	)			25				17
Total loans			385,623				13,491				4.66				377,854				13,155				4.64				125				211				336
Taxable investment securities			133,694				2,128				2.12				122,526				1,831				1.99				110				187				297
Tax-exempt investment securities			25,093				340				1.81				23,869				314				1.75				10				16				26
Total investment securities			158,787				2,468				2.07				146,395				2,145				1.95				120				203				323
Interest bearing deposits			556				20				4.80				884				10				1.51				(5	)			15				10
Federal funds sold			-				-								902				3				0.44				(1	)			(2	)			(3	)
Total interest earning assets			544,966				15,979				3.91				526,035				15,313				3.88				239				427				666
Other assets (7)			47,949												48,336
Total assets		$	592,915											$	574,371
LIABILITIES AND
STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2)		$	123,580				281				0.30			$	121,858				186				0.20			$	1			$	94			$	95
Savings deposits			99,502				74				0.10				97,415				78				0.11				1				(5	)			(4	)
Time deposits			139,343				1,200				1.15				139,966				1,086				1.04				(14	)			128				114
Short-term and long-term borrowings and other interest bearing liabilities			57,087				526				1.23				41,375				315				1.02				71				140				211
Total interest bearing liabilities			419,512				2,081				0.66				403,257				1,665				0.56				59				357				416
Non-interest bearing liabilities:
Demand deposits			107,136												106,042
Other			6,340												6,410
Stockholders' equity			59,927												61,305
Total liabilities  and stockholders' equity		$	592,915											$	574,371
Net interest income and net interest rate spread						$	13,898				3.25	%						$	13,648				3.32	%		$	180			$	70			$	250
Net interest margin on  interest earning assets (3)											3.40	%											3.46	%
Net interest income and net interest margin-Tax equivalent basis (4)						$	14,430				3.53	%						$	14,158				3.59	%

 

Notes:

1) Average balances were calculated using a daily average.

2) Includes interest-bearing demand and money market accounts.

3) Net margin on interest earning assets is net interest income divided by average interest earning assets.

4) Interest on obligations of states and municipalities is not subject to federal income tax. In order to make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 34%.

5) Non-accruing loans are included in the above table until they are charged off.

6) The change in interest due to rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.

7) Includes gross unrealized gains (losses) on securities available for sale.

 

Provision for Loan Losses:

 

In the first nine months of 2017, the provision for loan losses was $389,000, as compared to a provision of $366,000 in the first nine months of 2016. Management regularly reviews the adequacy of the loan loss reserve and makes assessments as to specific loan impairment, historical charge-off expectations, general economic conditions in the Bank’s market area, specific loan quality and other factors. See the earlier discussion in the Financial Condition section, explaining the information used to determine the provision.

 

 

Non-interest Income:

 

Non-interest income in the first nine months of 2017 was $4,091,000, a decrease of $4,000, or 0.1%, compared to $4,095,000 in the first nine months of 2016. Significantly impacting non-interest income comparisons between the two periods were securities gains of $510,000 from an executed tax strategy during the first nine months of 2017 and gains on securities and loans of $134,000 and $113,000, respectively, during the same period in 2016. Also significantly impacting the nine month comparison was a gain on life insurance proceeds of $364,000 recorded in the first nine months of 2016; no similar recognition occurred in the corresponding 2017 period. Excluding all gains, non-interest income in the first nine months of 2017 was $3,581,000, an increase over the same period in 2016 by $97,000, or 2.8%.

 

Mortgage banking income increased $64,000, or 60.4%, during the nine months ended September 30, 2017 compared to same period in 2016. Debit card fee income also increased over the same period in 2016, increasing $55,000, or 7.2%, during the first nine months of 2017 compared to the same period in 2016. Partially offsetting these increases were lower volumes of sales of non-deposit products resulting in a decline in commission income in of $41,000, or 22.7%, during the first nine months of 2017. Less significant changes in non-interest income categories included slight changes in customer service fees, earnings on bank-owned life insurance, trust fees, income from unconsolidated subsidiary, fees derived from loan activity, and other non-interest income, combining for an increase in non-interest income of $19,000 in the first nine months of 2017 compared to the same time period in 2016.

 

As a percentage of average assets, annualized non-interest income, excluding all gains, was 0.81% in the first nine months of 2017 and 2016.

 

Non-interest Expense:

 

Total non-interest expense was $12,940,000 for the first nine months of 2017, a $16,000, or 0.1%, decrease in comparison to the first nine months of 2016. Expenses of $372,000, related to the aforementioned FNBPA acquisition were recorded in the first nine months of 2016 while no such expenses were incurred in the 2017 period. Excluding the merger and acquisition expenses, non-interest expense for the first nine months of 2016 was $12,584,000, or 2.8%, less than the comparable period in 2017. The increase in non-interest expense in 2017 was partially attributable to an increase in employee benefit expense of $103,000 relating to an increase in medical insurance claims year-to-date in 2017 compared to the same period in 2016, as well as an increase of $53,000 in amortization expense from the increased investment in a low-income housing community project. Other non-interest expense increased 18.8% during the nine months ended September 30, 2017 compared to the same period in 2016. Contributing to this increase was an increase in electronic banking losses of $85,000 primarily due to fraudulent debit card transactions and increased consulting fees. Other significant variances in the first nine months of 2017 versus the same period in 2016 included an increase in net gains on sales of foreclosed properties of $82,000 and a $45,000 decrease in FDIC premiums due to improved asset quality.

 

As a percentage of average assets, annualized non-interest expense was 2.91% in the first nine months of 2017 compared to 3.01% in the first nine months of 2016. Excluding merger and acquisition expenses, annualized non-interest expense as a percentage of average assets was 2.92% in the first nine months of 2016.

 

Provision for income taxes:

 

Income tax expense in the first nine months of 2017 was $701,000 as compared to the $567,000 recorded in the first nine months of 2016. The Company qualifies for a federal tax credit for its low-income housing project investment, and the tax provisions for each period reflect the application of the tax credit. The tax credit recorded in each of the first nine months periods of 2017 and 2016 was $484,000 and $429,000, respectively, offsetting $1,185,000 in regular tax expense in the 2017 period and $996,000 of regular tax expense in the 2016 period. For the first nine months of 2017, the tax credit lowered the effective tax rate from 25.4% to 15.0% as compared to the same period in 2016, in which the tax credit lowered the effective tax rate from 22.5% to 12.8%.

 

 

Liquidity:

 

The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs of the Company and to take advantage of income producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of the Company to maintain a high level of liquidity in all economic environments. Principal sources of asset liquidity are provided by loans and securities maturing in one year or less, and other short-term investments, such as federal funds sold and cash and due from banks. Liability liquidity, which is more difficult to measure, can be met by attracting deposits and maintaining the core deposit base. The Company is a member of the Federal Home Loan Bank of Pittsburgh for the purpose of providing short-term liquidity when other sources are unable to fill these needs. During the first nine months of 2017, overnight borrowings from the Federal Home Loan Bank averaged $26,067,000. As of September 30, 2017, the Company had short-term borrowings and long-term debt with the Federal Home Loan Bank of $27,500,000 and $25,000,000, respectively, and had remaining unused borrowing capacity with the Federal Home Loan Bank of $110.6 million.

 

Funding derived from securities sold under agreements to repurchase (accounted for as collateralized financing transactions) is available through corporate cash management accounts for business customers. This product gives the Company the ability to pay interest on corporate checking accounts.

 

In view of the sources previously mentioned, management believes that the Company's liquidity is capable of providing the funds needed to meet operational cash needs.

 

Off-Balance Sheet Arrangements:

 

The Company’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk, credit risk, and interest rate risk. These commitments consist mainly of loans approved but not yet funded, unused lines of credit and outstanding letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had $2,097,000 and $2,300,000 of financial and performance letters of credit commitments outstanding as of September 30, 2017 and December 31, 2016, respectively. Commercial letters of credit as of September 30, 2017 and December 31, 2016 totaled $12,650,000. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2017 for payments under letters of credit issued was not material. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk.

 

Additionally, the Company has committed to fund and sell qualifying residential mortgage loans to the Federal Home Loan Bank of Pittsburgh in the total amount of $10,000,000. As of September 30, 2017, $5,788,000 remained to be delivered on that commitment, $140,000 of which has been committed to borrowers.

 

The Company is expected to act as a source of financial strength to its unconsolidated subsidiary (LCB). The Company believes that commitment is not reasonably likely to have a material effect on its liquidity or the availability of capital resources.

 

Interest Rate Sensitivity:

 

Interest rate sensitivity management is overseen by the Asset/Liability Management Committee. This process involves the development and implementation of strategies to maximize net interest margin, while minimizing the earnings risk associated with changing interest rates. Traditional gap analysis identifies the maturity and re-pricing terms of all assets and liabilities. A simulation analysis is used to assess earnings and capital at risk from movements in interest rates. See Item 3 for a description of the complete simulation process and results.

 

Capital Adequacy:

 

Bank regulatory authorities in the United States issue risk-based capital standards. These capital standards relate a banking company’s capital to the risk profile of its assets and provide the basis by which all banking companies and banks are evaluated in terms of capital adequacy. Effective January 1, 2015, the risk-based capital rules were modified subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer and the regulatory capital adjustments and deductions. The new framework is commonly called “BASEL III”. The final rules revised federal regulatory agencies’ risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the Basel III framework. The final rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules established a new common equity tier 1 (CET1) minimum capital requirement (4.5% of risk-weighted assets) and a higher minimum tier 1 capital requirement (from 4.0% to 6.0% of risk-weighted assets), and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property.

 

 

Basel III requires financial institutions to maintain: (a)  a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%); (b) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum tier 1 capital ratio of 8.5% upon full implementation); (c) a minimum ratio of total (that is, tier 1 plus tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and (d)  a minimum leverage ratio of 3.0%, calculated as the ratio of tier 1 capital balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). In addition, the proposed rules also limit a banking organization’s capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation buffer”.

 

According to the rules, CET1 is comprised of common stock plus related surplus, net of treasury stock and other contra-equity components, retained earnings and accumulated other comprehensive income. However, certain banking institutions, including the Bank, were permitted to make a one-time election to opt out of the requirement to include most components of AOCI in CET1. This opt-out option was available only until March 31, 2015. The Bank elected to opt-out.

 

At September 30, 2017, the Bank exceeded the regulatory requirements to be considered a "well capitalized" financial institution under the new rules. The Bank’s CET1 and Tier 1 Capital ratio was 12.44%, its Total Capital ratio was 13.20% and its Tier 1 leverage was 8.34%. On a consolidated basis, the Company’s CET1 and Tier 1 Capital ratio was 14.16%, and Total Capital ratio and Tier 1 leverage ratio was 14.93% and 9.51%, respectively.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

 

Market risk is the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include equity market price risk, interest rate risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity market price risk and interest rate risk are significant to the Company.

 

Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Company. The Company’s equity investments consist of common stocks of publicly traded financial institutions.

 

There can be volatility in the values of financial institution stocks, but the primary objective of the portfolio is to achieve value appreciation in the long term while earning consistently attractive after-tax yields from dividends. The carrying value of the financial institutions stocks accounted for 0.2% of the Company’s total assets as of September 30, 2017. Management performs an impairment analysis on the entire investment portfolio, including the financial institutions stocks, on a quarterly basis. For the nine months ended September 30, 2017, no “other-than-temporary” impairment was identified. There is no assurance that declines in market values of the common stock portfolio in the future will not result in “other-than-temporary” impairment charges, depending upon facts and circumstances present.

 

The equity investments in the Company’s portfolio had a cost basis of approximately $1,000,000 and a fair value of $1,287,000 at September 30, 2017. Net unrealized gains in this portfolio were approximately $287,000 at September 30, 2017.

 

In addition to its equity portfolio, the Company’s investment management and trust services revenue could be impacted by fluctuations in the securities markets. A portion of the Company’s trust revenue is based on the value of the underlying investment portfolios. If securities values decline, the Company’s trust revenue could be negatively impacted.

 

 

Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Company’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Company’s net interest income and changes in the economic value of equity.

 

The primary objective of the Company’s asset-liability management process is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure profitability. A simulation analysis is used to assess earnings and capital at risk from movements in interest rates. The model considers three major factors: (1) volume differences; (2) repricing differences; and (3) timing in its income simulation. As of the most recent model run, data was disseminated into appropriate repricing buckets, based upon the static position at that time. The interest-earning assets and interest-bearing liabilities were assigned a multiplier to simulate how much that particular balance sheet item would re-price when interest rates change. Finally, the estimated timing effect of rate changes is applied, and the net interest income effect is determined on a static basis (as if no other factors were present). As the table below indicates, based upon rate shock simulations on a static basis over a one-year period, the net effect of an immediate 100, 200, 300 and 400 basis point rate increase would change net interest income by ($63,000), ($322,000), ($969,000) and ($2,092,000), respectively. The net effect of an immediate 100, 200, 300, and 400 basis point rate decline would change net interest income by ($277), ($121), ($225), and ($348), respectively. The existence of rate floors on variable rate loans aid in mitigating against large fluctuations in the change in net interest income in a decreasing rate environment.

 

Effect of Interest Rate Risk on Net Interest Income
(Dollars in thousands)
	Change in Interest Rates (Basis Points)			Total Change in Net Interest Income
	400			$	(2,092	)
	300				(969	)
	200				(322	)
	100				(63	)
	0				-
	(100)				(277	)
	(200)				(121	)
	(300)				(225	)
	(400)				(348	)

 

The Company’s rate risk policies provide for maximum limits on net interest income that can be at risk for 100 through 400 basis point changes in interest rates. The net interest income at risk position remained within the guidelines established by the Company’s asset/liability policy.

 

No material change has been noted in the Bank’s equity value at risk. Please refer to the Annual Report on Form 10-K as of December 31, 2016 for further discussion of this topic.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

As of September 30, 2017, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined by the Securities Exchange Act of 1934 (“Exchange Act”), Rule 13a-15(e). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

 

 

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote.

 

Attached as Exhibits 31 and 32 to this quarterly report are certifications of the Chief Executive Officer and the Chief Financial Officer required by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act. This portion of the Company’s quarterly report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.

 

Changes in Internal Control Over Financial Reporting

 

There were no significant changes in the Company’s internal control over financial reporting during the fiscal quarter ended September 30, 2017, that has materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting.

 

PART II - OTHER INFORMATION

 

Item 1.

LEGAL PROCEEDINGS

 

In the opinion of management of the Company, there are no legal or governmental proceedings pending to which the Company or its subsidiary is a party or to which its property is subject, which, if determined adversely to the Company or its subsidiary, would be material in relation to the Company’s or its subsidiary’s financial condition. There are no proceedings pending other than ordinary routine litigation incident to the business of the Company or its subsidiary. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Company or its subsidiary by government authorities.

 

Item 1A.

RISK FACTORS

 

There have been no material changes to the risk factors that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2016.

 

Item 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The Company has an active share repurchase program in place, to which there is no expiration date. As of November 9, 2017, the number of shares that may yet be purchased under the program was 173,990. Transactions pursuant to the repurchase program in the three month period ended September 30, 2017 are shown below.

 

											Total Number of
											Shares Purchased as				Maximum Number of
			Total Number				Average				Part of Publicly				Shares that May Yet Be
			of Shares				Price Paid				Announced Plans or				Purchased Under the
Period			Purchased				per Share				Programs				Plans or Programs (1)
July 1-31, 2017				-			$	-				-				173,990
August 1-31, 2017				-				-				-				173,990
September 1-30, 2017				-				-				-				173,990
Totals				-								-				173,990

 

 

No repurchase plan or program expired during the quarter. The Company has no stock repurchase plan or program that it has determined to terminate prior to expiration or under which it does not intend to make further purchases.

 

Certain regulatory restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. At September 30, 2017, $33,771,000 of undistributed earnings of the Bank, included in the consolidated stockholders’ equity, was available for distribution to the Company as dividends without prior regulatory approval, subject to regulatory capital requirements.

 

Item 3.

DEFAULTS UPON SENIOR SECURITIES

 

Not applicable

 

Item 4.

MINE SAFETY DISCLOSURES

 

Not applicable

 

Item 5.

OTHER INFORMATION

 

None

 

Item 6.

EXHIBITS

 

	3.1 - Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3 (I) to the Company’s Form 8-K Current Report filed with the SEC on November 12, 2015)
	3.2 – Bylaws (incorporated by reference to Exhibit 3.2 to the Company’s report on Form 8-K filed with the SEC on December 21, 2007)
	3.3 - Bylaw Amendment – (incorporated by reference to the Company’s Current Report on Form 8-K filed with the SEC on February 28, 2012)
	31.1 - Rule 13a – 14(a)/15d – 14(a) Certification of President and Chief Executive Officer
	31.2 - Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer
	32.1 - Section 1350 Certification of President and Chief Executive Officer
	32.2 - Section 1350 Certification of Chief Financial Officer
	101.LAB - XBRL Taxonomy Extension Label Linkbase
	101.PRE - XBRL Taxonomy Extension Presentation Linkbase
	101.INS - XBRL Instance Document
	101.SCH - XBRL Taxonomy Extension Schema
	101.CAL - XBRL Taxonomy Extension Calculation Linkbase
	101.DEF - XBRL Taxonomy Extension Definition Linkbase

 

 

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.

 

	Juniata Valley Financial Corp.
	(Registrant)

 

Date:	11-09-2017		By:	/s/ Marcie A. Barber
				Marcie A. Barber, President
				Chief Executive Officer
				(Principal Executive Officer)
Date:	11-09-2017		By:	/s/ JoAnn N. McMinn
				JoAnn N. McMinn
				Chief Financial Officer
				(Principal Accounting Officer and
				Principal Financial Officer)