10-Q 1 tv476879_10q.htm FORM 10-Q

 

 

 

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

 

 2 

 

 

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

 

 3 

 

 

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

 

 4 

 

 

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.

 

 5 

 

 

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

 

 6 

 

 

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

 

 7 

 

 

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.

 

 8 

 

 

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.

 

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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.

 

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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.

 

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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 

 

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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.

 

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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)

 

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   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).

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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.

 

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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 

 

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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 

 

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   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 

 

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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 

 

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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. 

 

 27 

 

 

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 

 

 28 

 

 

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 

 

 29 

 

 

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.

 

 30 

 

 

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.

 

 31 

 

 

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 

 

 32 

 

 

       (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.

 33 

 

 

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   -    -    -    - 

 

 34 

 

 

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.

 

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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.

 

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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.

 

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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%

 

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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.

 

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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.

 

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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.

 

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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%.

 

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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%.

 

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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