10-Q 1 tv498017_10q.htm 10-Q

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

 

(Mark One)

 

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

 

For the quarterly period ended June 30, 2018

 

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 August 9, 2018
Common Stock ($1.00 par value)   5,093,536 shares

 

 

 

 

 

 

TABLE OF CONTENTS

 

  PART I - FINANCIAL INFORMATION  
     
Item 1. Financial Statements  
     
  Consolidated Statements of Financial Condition as of June 30, 2018 (Unaudited) and December 31, 2017 3
     
  Consolidated Statements of Income for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited) 4
     
  Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2018 and 2017 (Unaudited) 5
   
  Consolidated Statements of Stockholders’ Equity for the Six Months Ended June 30, 2018 and 2017 (Unaudited) 6
   
  Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2018 and 2017 (Unaudited) 7
     
  Notes to Consolidated Financial Statements (Unaudited) 9
     
Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations 41
     
Item 3. Quantitative and Qualitative Disclosures about Market Risk 51
     
Item 4. Controls and Procedures 53
     
  PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 54
     
Item 1A. Risk Factors 54
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 54
     
Item 3. Defaults upon Senior Securities 54
     
Item 4. Mine Safety Disclosures 54
     
Item 5. Other Information 54
     
Item 6. Exhibits 55
     
  Signatures 56

 

 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)  June 30, 2018   December 31, 2017 
ASSETS          
Cash and due from banks  $15,956   $9,839 
Interest bearing deposits with banks   291    58 
Federal funds sold   915    - 
Cash and cash equivalents   17,162    9,897 
           
Interest bearing time deposits with banks   3,780    350 
Equity securities   1,166    - 
Securities available for sale   143,237    153,824 
Restricted investment in bank stock   2,498    3,104 
Investment in unconsolidated subsidiary   -    4,812 
Total loans   421,711    383,904 
Less: Allowance for loan losses   (3,058)   (2,939)
Total loans, net of allowance for loan losses   418,653    380,965 
Premises and equipment, net   8,675    8,887 
Other real estate owned   355    355 
Bank owned life insurance and annuities   15,761    14,972 
Investment in low income housing partnerships   4,945    5,245 
Core deposit and other intangible assets   453    195 
Goodwill   9,139    5,448 
Mortgage servicing rights   215    225 
Accrued interest receivable and other assets   5,473    3,666 
Total assets  $631,512   $591,945 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Non-interest bearing  $122,101   $115,911 
Interest bearing   410,338    361,757 
Total deposits   532,439    477,668 
           
Securities sold under agreements to repurchase   3,843    9,769 
Short-term borrowings   7,500    12,000 
Long-term debt   15,000    25,000 
Other interest bearing liabilities   1,587    1,593 
Accrued interest payable and other liabilities   6,483    6,528 
Total liabilities   566,852    532,558 
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 -          
5,134,249 shares at June 30, 2018;          
4,811,611 shares at December 31, 2017          
Outstanding -          
5,093,536 shares at June 30, 2018;          
4,767,656 shares at December 31, 2017   5,134    4,811 
Surplus   24,779    18,565 
Retained earnings   41,758    40,876 
Accumulated other comprehensive loss   (6,238)   (4,034)
Cost of common stock in Treasury:          
40,713 shares at June 30, 2018;          
43,955 shares at December 31, 2017   (773)   (831)
Total stockholders' equity   64,660    59,387 
Total liabilities and stockholders' equity  $631,512   $591,945 

 

See Notes to Consolidated Financial Statements

 

 3 

 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Income (Unaudited)

 

   Three Months Ended   Six Months Ended 
(Dollars in thousands, except share data)  June 30,   June 30, 
   2018   2017   2018   2017 
Interest income:                    
Loans, including fees  $5,041   $4,514   $9,592   $8,884 
Taxable securities   765    716    1,540    1,399 
Tax-exempt securities   99    114    202    228 
Other interest income   39    4    49    11 
Total interest income   5,944    5,348    11,383    10,522 
Interest expense:                    
Deposits   745    525    1,339    994 
Securities sold under agreements to repurchase   17    6    32    9 
Short-term borrowings   59    70    143    132 
Long-term debt   60    94    153    179 
Other interest bearing liabilities   9    7    17    15 
Total interest expense   890    702    1,684    1,329 
Net interest income   5,054    4,646    9,699    9,193 
Provision for loan losses   41    135    199    240 
Net interest income after provision for loan losses   5,013    4,511    9,500    8,953 
Non-interest income:                    
Customer service fees   437    441    849    874 
Debit card fee income   324    280    616    550 
Earnings on bank-owned life insurance and annuities   86    92    167    176 
Trust fees   123    143    225    227 
Commissions from sales of non-deposit products   70    50    120    97 
Income/gain from unconsolidated subsidiary   227    58    296    105 
Fees derived from loan activity   77    59    172    104 
Mortgage banking income   17    54    36    87 
(Loss) gain on sales and calls of securities   -    4    (15)   508 
Change in value of equity securities   52    -    46    - 
Other non-interest income   83    75    158    144 
Total non-interest income   1,496    1,256    2,670    2,872 
Non-interest expense:                    
Employee compensation expense   1,933    1,758    3,725    3,497 
Employee benefits   523    581    1,087    1,235 
Occupancy   294    292    612    587 
Equipment   197    174    404    329 
Data processing expense   488    461    904    878 
Director compensation   53    63    107    123 
Professional fees   177    141    354    283 
Taxes, other than income   139    108    252    242 
FDIC Insurance premiums   79    76    149    167 
Gain on sales of other real estate owned   (10)   (58)   (10)   (45)
Amortization of intangible assets   20    18    31    35 
Amortization of investment in low-income housing partnerships   200    119    400    239 
Merger and acquisition expense   376    -    440    - 
Other non-interest expense   437    496    856    928 
Total non-interest expense   4,906    4,229    9,311    8,498 
Income before income taxes   1,603    1,538    2,859    3,327 
Income tax provision   34    244    (37)   574 
Net income  $1,569   $1,294   $2,896   $2,753 
Earnings per share                    
Basic  $0.31   $0.27   $0.59   $0.58 
Diluted  $0.31   $0.27   $0.59   $0.58 
Cash dividends declared per share  $0.22   $0.22   $0.44   $0.44 
Weighted average basic shares outstanding   4,987,137    4,768,681    4,879,361    4,762,632 
Weighted average diluted shares outstanding   5,008,218    4,779,401    4,898,248    4,770,399 

 

See Notes to Consolidated Financial Statements

 

 4 

 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

 

   Three Months Ended June 30, 
   2018   2017 
   Before       Net of   Before       Net of 
(Dollars in thousands)  Tax   Tax   Tax   Tax   Tax   Tax 
   Amount   Effect   Amount   Amount   Effect   Amount 
Net income  $1,603   $(34)  $1,569   $1,538   $(244)  $1,294 
Other comprehensive (loss) income:                              
Unrealized (losses) gains on available for sale securities:                              
Unrealized holding (losses) gains arising during the period   (528)   111    (417)   644    (219)   425 
Unrealized holding gains from unconsolidated subsidiary   16    -    16    6    -    6 
Less reclassification adjustment for (gains) losses included in net income for sales of debt securities (1) (3)   -    -    -    (4)   2    (2)
Amortization of pension net actuarial cost (2) (3)   40    (8)   32    57    (19)   38 
Other comprehensive (loss) income   (472)   103    (369)   703    (236)   467 
Total comprehensive income  $1,131   $69   $1,200   $2,241   $(480)  $1,761 

 

   Six Months Ended June 30, 
   2018   2017 
   Before       Net of   Before       Net of 
(Dollars in thousands)  Tax   Tax   Tax   Tax   Tax   Tax 
   Amount   Effect   Amount   Amount   Effect   Amount 
Net income  $2,859   $37   $2,896   $3,327   $(574)  $2,753 
Other comprehensive (loss) income:                              
Unrealized (losses) gains on available for sale securities:                              
Unrealized holding (losses) gains arising during the period   (2,695)   566    (2,129)   902    (307)   595 
Unrealized holding gains from unconsolidated subsidiary   5    -    5    15    -    15 
Less reclassification adjustment for losses (gains) included in net income for sales of debt securities (1) (3)   15    (3)   12    (508)   173    (335)
Amortization of pension net actuarial cost (2) (3)   81    (17)   64    113    (38)   75 
Other comprehensive (loss) income   (2,594)   546    (2,048)   522    (172)   350 
Total comprehensive income  $265   $583   $848   $3,849   $(746)  $3,103 

 

(1)Amounts are included in (loss) 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.

 

See Notes to Consolidated Financial Statements

 

 5 

 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Stockholders' Equity (Unaudited)

For the Six Months Ended June 30, 2018

 

   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, 2018   4,767,656   $4,811   $18,565   $40,876   $(4,034)  $(831)  $59,387 
Net income                  2,896              2,896 
Other comprehensive loss                       (2,048)        (2,048)
Reclassification for ASU 2016-01                  156    (156)        - 
Cash dividends at $0.44 per share                  (2,170)             (2,170)
Stock-based compensation             39                   39 
Purchase of treasury stock   (1,928)                       (40)   (40)
Treasury stock issued for stock plans   5,170         (7)             98    91 
Common stock issued for stock plans   7,354    8    34                   42 
Common stock issued for acquisition   315,284    315    6,148                   6,463 
Balance, June 30, 2018   5,093,536   $5,134   $24,779   $41,758   $(6,238)  $(773)  $64,660 

  

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Stockholders' Equity (Unaudited)

For the Six Months Ended June 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                  2,753              2,753 
Other comprehensive loss                       350         350 
Cash dividends at $0.44 per share                  (2,097)             (2,097)
Stock-based compensation             38                   38 
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, June 30, 2017   4,767,656   $4,811   $18,532   $40,601   $(2,859)  $(831)  $60,254 

 

See Notes to Consolidated Financial Statements

 

 6 

 

  

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in thousands)  Six Months Ended June 30, 
   2018   2017 
Operating activities:          
Net income  $2,896   $2,753 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   199    240 
Depreciation   403    321 
Net amortization of securities premiums   283    318 
Net amortization of loan origination fees   35    39 
Deferred net loan origination costs   (197)   (225)
Amortization of core deposit intangible asset   31    35 
Amortization of investment in low income housing partnership   400    239 
Net amortization of purchase fair value adjustments   (28)   (1)
Net realized loss (gain) on sales and calls of available for sale securities   15    (508)
Change in value of equity securities   (46)   - 
Net gain on sales and valuation of other real estate owned   (10)   (45)
Earnings on bank owned life insurance and annuities   (167)   (176)
Deferred income tax benefit   (108)   (75)
Equity loss (gain) in unconsolidated subsidiary, net of dividends of $75 and $36, respectively   194    (69)
Equity gain from acquisition of unconsolidated subsidiary   (415)   - 
Stock-based compensation expense   39    38 
Mortgage loans originated for sale   -    (1,579)
Proceeds from mortgage loans sold to others   46    1,544 
Mortgage banking income   (36)   (87)
(Increase) decrease in accrued interest receivable and other assets   (764)   210 
Decrease in accrued interest payable and other liabilities   (208)   (672)
Net cash provided by operating activities   2,562    2,300 
Investing activities:          
Purchases of:          
Securities available for sale   (4,119)   (21,620)
Premises and equipment   (66)   (271)
Bank owned life insurance and annuities   (18)   (13)
Proceeds from:          
Sales of securities available for sale   4,285    11,634 
Maturities of and principal repayments on securities available for sale   6,324    7,495 
Redemption of FHLB stock   730    260 
Sale of other real estate owned   77    554 
Sale of other assets   13    26 
Net cash received from acquisition   7,561    - 
Investment in low income housing partnerships   (100)   (1,591)
Net decrease in interest bearing time deposits with banks   245    - 
Net increase in loans   (6,447)   (14,355)
Net cash provided by (used in) investing activities   8,485    (17,881)
Financing activities:          
Net increase in deposits   18,721    20,045 
Net (decrease) increase in short-term borrowings and securities sold under agreements to repurchase   (10,426)   1,543 
Repayment of long-term debt   (10,000)   - 
Cash dividends   (2,170)   (2,097)
Purchase of treasury stock   (40)   (86)
Treasury stock issued for employee stock plans   91    - 
Common stock issued for employee stock plans   42    206 
Net cash (used in) provided by financing activities   (3,782)   19,611 
Net increase in cash and cash equivalents   7,265    4,030 
Cash and cash equivalents at beginning of year   9,897    9,559 
Cash and cash equivalents at end of period  $17,162   $13,589 

 

 7 

 

  

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

(Dollars in thousands)  Six Months Ended June 30, 
   2018   2017 
Supplemental information:          
Interest paid  $1,686   $1,365 
Income taxes paid   14    360 
Supplemental schedule of noncash investing and financing activities:          
Transfer of loans to other real estate owned  $86   $529 
Transfer of loans to repossessed vehicles   12    - 
Supplemental schedule of assets and liabilities in connection with merger:          
Assets acquired:          
Investment in time deposits with banks  $3,675      
Loans   31,331      
Premises and equipment   125      
Accrued interest receivable   123      
Core deposit and other intangible assets   289      
Bank owned life insurance   632      
FHLB stock   124      
Other assets   267      
   $36,566      
Liabilities assumed:          
Deposits  $36,052      
Accrued interest payable and other liabilities   266      
   $36,318      

 

See Notes to Consolidated Financial Statements

 

 8 

 

 

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” or “Juniata”) and its wholly owned subsidiary, The Juniata Valley Bank (the “Bank” or “JVB”). All significant intercompany accounts and transactions have been eliminated.

 

On April 30, 2018, the Company completed the acquisition of Liverpool Community Bank (“Liverpool” or “LCB”). Liverpool was merged with and into the Bank. Refer to Note 3 for more information.

 

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. Certain items in prior financial statements have been reclassified to conform to the current presentation. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three and six month periods ended June 30, 2018 are not necessarily indicative of the results for the year ending December 31, 2018. 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 (“Annual Report”) for the year ended December 31, 2017.

 

The Company has evaluated events and transactions occurring subsequent to the consolidated statement of financial condition date of June 30, 2018 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

 

Adoption of New Accounting Standards

 

ASU 2014-09, Revenue from Contracts with Customers (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. The revenue standard’s core principle requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. 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 deferred the effective date of the new revenue recognition standard by one year. As such, it was effective for public entities in fiscal years beginning after December 15, 2017.

 

The Company adopted the ASU 2014-09 on January 1, 2018 and elected the modified retrospective transition method. Because the amended guidance does not apply to revenue associated with financial instruments accounted for under other U.S. GAAP, the Company assessed the effect the guidance had on the recognition processes of certain recurring revenue streams related to non-interest income, in addition to when it is appropriate to recognize a gain/loss on the transfer of nonfinancial assets, such as other real estate owned. The Company did not identify any significant changes in the timing of revenue recognition when considering the amended accounting guidance. Additional disclosures related to revenue recognition appear in Note 13.

 

 9 

 

 

ASU 2018-02, Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.

 

Issued: February 2018

 

Summary: The Update allows entities to reclassify from accumulated other comprehensive income (“AOCI”) to retained earnings the 'stranded' tax effects of accounting for income tax rate changes on items accounted for in AOCI that were impacted by tax reform enacted in December 2017. Because the impact of tax rate changes is recorded in income, items accounted for in AOCI could be left with a stranded tax effect appearing as though those items do not reflect the appropriate tax rate. The FASB's changes were intended to improve the usefulness of information reported to financial statement users.

 

Effective Date: The changes are effective for years beginning after December 31, 2018, with early adoption permitted. The Company elected to adopt the changes in the first quarter of 2018, as of December 31, 2017. The amount transferred from AOCI to retained earnings totaled $588,000 and represented the impact of the Company’s corporate tax rate change from 34% to 21% at the date of enactment of the tax reform for the unrealized gains and losses on securities and the defined benefit plan accounted for in AOCI.

 

ASU 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 the 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 AOCI 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 Update emphasizes the existing requirement to use exit prices to measure fair value for disclosure purposes and clarifies that entities should not make use of a practicability exception in determining the fair value of loans. Accordingly, we refined the calculations used to determine the disclosed fair value of our loans as part of adopting this standard. The redefined calculation did not have a significant impact on our fair value disclosures.

 

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. The Company adopted ASU 2016-01 on January 1, 2018. As of this date, the Company had $197,000 in unrealized gains on equity securities (see Note 6). The adoption of this Update resulted in a reclassification of $156,000 from other comprehensive loss to retained earnings. The Company recorded $52,000 for the three months ended June 30, 2018 and $46,000 for the six months ended June 30, 2018 on the consolidated statements of income for the change in fair value of equity securities.

 

ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities

 

Issued: February 2018

 

Summary: The FASB issued this Update to clarify certain aspects of the guidance on recognizing and measuring financial assets and liabilities in ASU 2016-01:

 

·Clarification regarding the ability to discontinue application of the measurement alternative for equity securities without a readily determinable fair value;
·Clarification of the measurement date for fair value adjustments to the carrying amount of equity securities without a readily determinable fair value for which the measurement alternative is elected;
·Clarification of the unit of account for fair value adjustments to forward contracts and purchased options on equity securities without a readily determinable fair value for which the measurement alternative is expected to be elected;
·Presentation requirements for certain hybrid financial liabilities for which the fair value option is elected;
·Measurement of financial liabilities denominated in a foreign currency for which the fair value option is elected; and
·Transition guidance for equity securities without a readily determinable fair value.

 

 10 

 

 

The amendments in ASU 2018-03 are effective for public business entities for fiscal years beginning after December 15, 2017 and for interim periods within those fiscal years beginning after June 15, 2018. For all other entities, the effective date is the same as the effective date for ASU 2016-01. All entities may early adopt the amendments, including adoption in an interim period, provided they have already adopted ASU 2016-01. The Company adopted this Update in conjunction with the adoption of ASU 2016-01 on January 1, 2018. The adoption had no material impact to the Company’s consolidated financial position or results of operations.

 

ASU 2017-09, Scope of Modification Accounting

 

Issued: May 2017

 

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

 

1.The fair value of the modified award is the same as the fair value of the original award immediately before the modification. The standard indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification.
2.The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification.
3.The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification.

 

Effective Date: The amendments were effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. The Company adopted ASU 2017-09 on January 1, 2018 and it had no material impact on the Company’s consolidated financial position or results of operations.

 

ASU 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, 2018. Early adoption is permitted. The Company chose to early adopt this standard, and the financial statements as of, and for the year ended, December 31, 2017 reflected the impact of premium amortization on callable debt securities to the earliest call date. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

 

ASU 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. The amendments also provide explicit guidance on how to present the service cost component and the other components of net benefit cost in the income statement and allows only the service cost component of net benefit cost to be eligible for capitalization.

 

Effective Date: The amendments were effective for public business entities for fiscal years beginning after December 15, 2017. The Company adopted this Update on January 1, 2018, and it had no impact on the Company’s consolidated financial position and results of operations because the Company’s defined benefit plan is frozen; therefore, there is no service cost component to consider. The cost for other components related to the defined benefit plan are recorded in employee benefits expense on the consolidated statements of income.

 

 11 

 

 

ASU 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 were effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted this Update on January 1, 2018 and it did not have a material impact on the Company’s consolidated financial position or results of operations.

 

Newly Issued, Not Yet Effective Standards

 

ASU 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.

 

ASU 2017-04, Simplifying the Test for Goodwill Impairment

 

Issued: January 2017

 

Summary: ASU 2017-04 eliminates the requirement of Step 2 in the current guidance to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value in Step 1 of the current guidance.

 

Effective Date: The amendments are effective for public business entities for fiscal years beginning after December 15, 2019. The adoption of this Update is not expected to have an impact on the Company’s consolidated financial position and results of operations.

 

ASU 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.

 

 12 

 

 

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 and disclosures, 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 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.

 

ASU 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 because the Company owns most of its facilities and this ASU will apply primarily to its four small operating leases. The Company is currently evaluating the projected present value at the adoption date.

 

3. MERGER

 

On April 30, 2018, the Company completed the acquisition of Liverpool Community Bank, a Pennsylvania state-chartered bank with one branch location in Liverpool, Perry County. Liverpool was merged with and into The Juniata Valley Bank. As of the merger date, Liverpool had assets of $45,360,000, loans of $32,091,000, and equity of $9,246,000.

 

Prior to the acquisition, Juniata owned 1,214, or 39.16%, of the 3,100 outstanding common shares of Liverpool. The merger was accounted for using the acquisition method of accounting, in accordance with the provisions of ASC 805, Business Combinations. Juniata obtained control over Liverpool in a step acquisition by acquiring the previously unowned interest in Liverpool. As such, Juniata was required to remeasure its previously held equity interest in Liverpool at its acquisition date fair value and recognize the resulting gain in earnings. The purchase price for the step acquisition was calculated as the aggregate of the consideration transferred for the newly acquired interest (Step Two 60.84% interest) and the fair value of Juniata’s previously held equity interest (Step One 39.16% interest) in Liverpool.

 

On April 30, 2018, Juniata’s Step One adjusted basis in Liverpool was $5,037,000, which included a $415,000 equity gain from the acquisition, in addition to Juniata’s basis in Liverpool of $4,622,000 prior to the recording of the equity gain.

 

 13 

 

 

Liverpool shareholders (other than Juniata, whose Liverpool common stock owned of record or beneficially was cancelled) received either: (i) 202.6286 shares of common stock of Juniata or (ii) $4,050.00 in cash in exchange for each share of Liverpool common stock. As a result, Juniata issued 315,284 shares of common stock with an acquisition date fair value of approximately $6,463,000, based on Juniata’s closing stock price of $20.50 on April 30, 2018, and cash of $1,362,000, including cash in lieu of fractional shares for a total Step Two purchase price consideration of $7,825,000. The total purchase price of the merger, including both the Step One adjusted basis and Step Two purchase price consideration, was $12,862,000.

 

The assets and liabilities of Liverpool were recorded on the consolidated balance sheet at their estimated fair value as of April 30, 2018 and its results of operations have been included in the consolidated income statement since such date.

 

Included in the purchase price was goodwill and a core deposit intangible of $3,691,000 and $289,000, 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.

 

Allocation of the purchase price was as follows:

 

(Dollars in thousands)    
     
Step One Purchase Price Consideration     
April 30, 2018 JUVF basis in LCB (before gain)  $4,622 
Increase in Step One basis from equity gain in acquisition   415 
Total Step One adjusted basis   5,037 
      
Step Two Purchase Price Consideration     
Purchase price assigned to LCB common shares exchanged for 315,284 JUVF common shares  $6,463 
Purchase price assigned to LCB common shares exchanged for cash including cash in lieu of fractional shares   1,362 
Total Step Two purchase price consideration   7,825 
Total purchase price   12,862 
      
LCB net assets acquired:     
Tangible common equity   9,246 
Adjustments to reflect assets acquired and liabilities assumed at fair value:     
Total fair value adjustments   (95)
Associated deferred income taxes   20 
Fair value adjustment to net assets acquired, net of tax   (75)
Total LCB net assets acquired   9,171 
Goodwill resulting from the merger  $3,691 

 

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

 

(Dollars in thousands)    
     
Total purchase price  $12,862 
Net assets acquired:     
Cash and cash equivalents   8,923 
Investments in time deposits with banks   3,675 
Loans   31,331 
Premises and equipment   125 
Accrued interest receivable   123 
Core deposit and other intangibles   289 
Bank owned life insurance   632 
FHLB stock   124 
Other assets   267 
Deposits   (36,052)
Accrued interest payable   (17)
Other liabilities   (249)
    9,171 
Goodwill  $3,691 

 

 14 

 

 

As of April 30, 2018, the merger date, goodwill was recorded at $3,691,000. ASC 805 allows for adjustments to the estimated fair value of assets and liabilities, and the resulting goodwill for a period of up to one year after the merger date for new information that becomes available that reflects circumstances at the merger date.

 

The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $32,091,000. 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 April 30, 2018  $32,091 
Market rate adjustment   272 
Credit fair value adjustment on pools of homogeneous loans   (496)
Credit fair value adjustment on purchased credit impaired loans   (622)
Reversal of existing deferred fees and premiums   86 
Fair value of purchased loans at April 30, 2018  $31,331 

 

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 Liverpool purchased credit impaired loan portfolio as of April 30, 2018 is as follows:

 

(Dollars in thousands)    
     
Contractually required principal and interest at acquisition  $2,022 
Contractual cash flows not expected to be collected (nonaccretable discount)   (1,273)
Expected cash flows at acquisition   749 
Interest component of expected cash flows (accretable discount)   (177)
Fair value of acquired loans  $572 

 

The following table presents unaudited pro forma information as if the merger between Juniata and Liverpool had been completed on January 1, 2017. The pro forma information does not necessarily reflect the results of operations that would have occurred had Juniata merged with Liverpool at the beginning of 2017. Due to Juniata’s former 39.16% ownership in Liverpool, the income previously recorded in the three and six months ended June 30, 2018 and 2017 has been excluded, in addition to merger-related costs incurred in 2018 and the resulting tax impacts. Supplemental pro forma earnings for the three months ended June 30, 2018 were adjusted to exclude $227,000 from the income/gain from unconsolidated subsidiary, $376,000 in merger-related expenses, and the resulting $31,000 tax benefit. Supplemental pro forma earnings for the six months ended June 30, 2018 were adjusted to exclude $296,000 from the income/gain from unconsolidated subsidiary, $440,000 in merger-related expenses, and the resulting tax benefit of $30,000. The results for the comparable 2017 periods were adjusted to include the aforementioned merger-related expenses; however, those results exclude the income from unconsolidated subsidiary previously recorded in the three and six months ended June 30, 2017 of $58,000 and $105,000, respectively. The resulting tax benefits included in the three and six months ended June 30, 2017 was $91,000 and $114,000, respectively. A 21% tax rate was assumed in both the 2018 and 2017 periods. 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.

 

   (Unaudited)   (Unaudited) 
(Dollars in thousands; except share data)  Three Months ended June 30,   Six Months ended June 30, 
   2018   2017   2018   2017 
Net interest income after loan loss provision  $5,487   $4,986   $10,449   $9,903 
Noninterest income   1,312    1,240    2,460    2,852 
Noninterest expense   4,649    4,725    9,111    9,179 
Net income available to common shareholders   2,001    1,265    3,637    2,950 
Net income per common share   0.39    0.25    0.71    0.58 

 

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4. Accumulated other Comprehensive loss

 

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

 

(Dollars in thousands)        
   June 30, 2018   December 31, 2017 
Unrealized losses on available for sale securities  $(3,952)  $(1,683)
Unrecognized expense for defined benefit pension   (2,286)   (2,351)
Accumulated other comprehensive loss  $(6,238)  $(4,034)

 

5. Earnings Per Share

 

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

 

The following table sets forth the computation of basic and diluted earnings per share:

 

(Dollars in thousands, except earnings per share data)  Three Months Ended June 30, 
   2018   2017 
Net income  $1,569   $1,294 
Weighted-average common shares outstanding   4,987    4,769 
Basic earnings per share  $0.31   $0.27 
           
Weighted-average common shares outstanding   4,987    4,769 
Common stock equivalents due to effect of stock options   21    10 
Total weighted-average common shares and equivalents   5,008    4,779 
Diluted earnings per share  $0.31   $0.27 

 

   Six Months Ended June 30, 
   2018   2017 
Net income  $2,896   $2,753 
Weighted-average common shares outstanding   4,879    4,763 
Basic earnings per share  $0.59   $0.58 
           
Weighted-average common shares outstanding   4,879    4,763 
Common stock equivalents due to effect of stock options   19    7 
Total weighted-average common shares and equivalents   4,898    4,770 
Diluted earnings per share  $0.59   $0.58 

 

6. Securities

 

On January 1, 2018, the Company adopted ASU 2016-01, Measurement of Financial Assets Instruments. Upon adoption, equity securities with readily determinable fair values are stated at fair value with realized and unrealized gains and losses reported in net income. For periods prior to January 1, 2018, equity securities were classified as available for sale and stated at fair value with unrealized gains and losses reported as a separate component of AOCI, net of tax. At December 31, 2017, the fair value of equity securities classified as available for sale was $1,119,000. The adoption of ASU 2016-01 resulted in a reclassification of $156,000 in net unrealized gains from AOCI to retained earnings. As of June 30, 2018, the Company had $1,166,000 in equity investments recorded at fair value.

 

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The Company’s available for sale investment portfolio includes primarily bonds issued by U.S. Government sponsored agencies (approximately 24% of the investment portfolio), mortgage-backed securities issued by Government-sponsored agencies and backed by residential mortgages (approximately 62%) and municipal bonds (approximately 14%) as of June 30, 2018. Most of the municipal bonds are general obligation bonds with maturities or pre-refunding dates within 5 years.

 

The amortized cost and fair value of securities available for sale as of June 30, 2018 and December 31, 2017, 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.

 

   June 30, 2018 
(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                    
Within one year  $6,000   $5,984   $-   $(16)
After one year but within five years   20,997    20,168    -    (829)
After five years but within ten years   7,998    7,562    -    (436)
    34,995    33,714    -    (1,281)
Obligations of state and political subdivisions                    
Within one year   837    836    -    (1)
After one year but within five years   14,537    14,407    14    (144)
After five years but within ten years   5,243    5,043    6    (206)
    20,617    20,286    20    (351)
Mortgage-backed securities   92,633    89,237    -    (3,396)
Total securities available for sale  $148,245   $143,237   $20   $(5,028)

 

   December 31, 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                    
Within one year  $6,000   $5,969   $-   $(31)
After one year but within five years   15,000    14,689    -    (311)
After five years but within ten years   13,998    13,556    -    (442)
    34,998    34,214    -    (784)
Obligations of state and political subdivisions                    
Within one year   2,521    2,516    -    (5)
After one year but within five years   13,959    13,955    50    (54)
After five years but within ten years   8,611    8,510    18    (119)
    25,091    24,981    68    (178)
Mortgage-backed securities   94,945    93,510    38    (1,473)
Equity securities   922    1,119    197    - 
Total  $155,956   $153,824   $303   $(2,435)

 

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 $56,280,000 and $47,825,000 at June 30, 2018 and December 31, 2017, 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.

 

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

 

   Three Months Ended   Six Months Ended 
(Dollars in thousands)  June 30,   June 30, 
   2018   2017   2018   2017 
Gross proceeds from sales and calls of securities  $-   $5,056   $4,285   $11,634 
Securities available for sale:                    
Gross realized gains from sold and called securities  $-   $3   $-   $509 
Gross realized losses from sold and called securities   -    (2)   (15)   (4)
Gross gains from business combinations   -    3    -    3 
Net (losses) gains  $-   $4   $(15)  $508 

 

As of January 1, 2018, upon the adoption of ASU 2016-01, all of the Company’ equity securities are within the scope of ASC Topic 321, Investments – Equity Securities. ASC 321 requires all equity investments within its scope to be measured at fair value with changes in fair value recognized in net income. The Company recorded $52,000 for the three months ended June 30, 2018 and $46,000 for the six months ended June 30, 2018 on the consolidated statements of income for the change in fair value of equity securities.

 

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

 

The following tables show gross unrealized losses and fair values of securities available for sale, aggregated by category and length of time the individual securities have been in a continuous unrealized loss position, at June 30, 2018 and December 31, 2017:

 

   Unrealized Losses at June 30, 2018 
   Less Than 12 Months   12 Months or More   Total 
   Number           Number           Number         
(Dollars in thousands)  of   Fair   Unrealized   of   Fair   Unrealized   of   Fair   Unrealized 
   Securities   Value   Losses   Securities   Value   Losses   Securities   Value   Losses 
Obligations of U.S.                                             
Government agencies and corporations   5   $10,652   $(346)   15   $23,062   $(935)   20   $33,714   $(1,281)
Obligations of state and political subdivisions   18    10,773    (142)   6    3,759    (209)   24    14,532    (351)
Mortgage-backed securities   25    51,933    (1,594)   21    37,304    (1,802)   46    89,237    (3,396)
Total temporarily impaired securities   48   $73,358   $(2,082)   42   $64,125   $(2,946)   90   $137,483   $(5,028)

 

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   Unrealized Losses at December 31, 2017 
   Less Than 12 Months   12 Months or More   Total 
   Number           Number           Number         
(Dollars in thousands)  of   Fair   Unrealized   of   Fair   Unrealized   of   Fair   Unrealized 
   Securities   Value   Losses   Securities   Value   Losses   Securities   Value   Losses 
Obligations of U.S.                                             
Government agencies and corporations   5   $10,845   $(157)   15   $23,369   $(627)   20   $34,214   $(784)
Obligations of state and political subdivisions   23    10,491    (70)   6    3,862    (108)   29    14,353    (178)
Mortgage-backed securities   23    51,050    (518)   20    38,740    (955)   43    89,790    (1,473)
Total debt securities   51    72,386    (745)   41    65,971    (1,690)   92    138,357    (2,435)
Equity securities   1    9    -    1    4    -    2    13    - 
Total temporarily impaired securities   52   $72,395   $(745)   42   $65,975   $(1,690)   94   $138,370   $(2,435)

 

At June 30, 2018, 20 U.S. Government agency and corporation securities had unrealized losses that, in the aggregate, did not exceed 1.0% of the amortized cost of the securities portfolio. Fifteen of these securities have been in a continuous loss position for 12 months or more.

 

At June 30, 2018, 24 obligations of state and political subdivisions had unrealized losses that, in the aggregate, did not exceed 1.0% of the amortized cost of the securities portfolio. Six of these securities has been in a continuous loss position for 12 months or more.

 

At June 30, 2018, 46 mortgage-backed securities had an unrealized loss that did not exceed 3.0% of the amortized cost of the securities portfolio. Twenty-one 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 for the periods ended, June 30, 2018, June 30, 2017 and December 31, 2017, respectively.

 

Equity securities owned by the Company consist of common stock of various financial services providers. Management identified no other-than-temporary impairment as of, or for the periods ended December 31, 2017 and June 30, 2017.

 

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.

 

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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 has originated 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 mortgage banking income 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, and other methods.

 

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.

 

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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, and other resources. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers.

 

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

 

Mortgage Lending

 

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

 

The Company offers fixed-rate and adjustable rate mortgage loans with terms up to a maximum of 25-years for both permanent structures and those under construction. The Company’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Company’s residential mortgage loans originate with a loan-to-value of 80% or less. Home equity installment loans are secured by the borrower’s primary residence with a maximum loan-to-value of 95% 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.

 

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Obligations of States and Political Subdivisions

 

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

 

Personal Lending

 

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

 

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

 

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

 

Allowance for Credit Losses

 

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

 

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

 

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

 

·principal or interest has been in default for 120 days or more and for which no payment has been received during the previous four months;
·all collateral securing the loan has been liquidated and a deficiency balance remains;
·a bankruptcy notice is received for an unsecured loan;
·a confirming loss event has occurred; or
·the loan is deemed to be uncollectible for any other reason.

 

The allowance for loan losses is maintained at a level considered adequate to offset probable losses on the Company’s existing loans. The analysis of the allowance for loan losses relies heavily on changes in observable trends that may indicate potential credit weaknesses. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a 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 June 30, 2018 was adequate.

 

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

 

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

 

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

 

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

 

The component of the allowance for contingencies relates to other loans that have been segmented into risk rated categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated quarterly or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. As of June 30, 2018, Management expanded the Company’s internal credit quality risk ratings to include a pass/watch rating for loans whose performance may exhibit characteristics or conditions that could result in a downgrade to special mention in the future. The pass/watch rated loans are now reported within the pass rating classification. Prior to June 30, 2018, all watch and special mention rated loans were classified as special mention. 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. During 2017, the historical loss experience look-back period was changed from ten years to five years in conjunction with an increase in the number of homogeneous loan groups. Increasing the number of portfolio segments allows for a more granular approach to the analysis, and historical loss experience is more specific to the selected loan types. Management believes that evaluating a look-back period longer than five years is no longer appropriate since more recent information is generally considered to be the most relevant. As indicated above, the historical loss experience is averaged over a five-year look-back period for each of the defined portfolio segments. The qualitative risk factors are reviewed for relevancy each quarter and include:

 

 23 

 

 

·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 and 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;
·Effect of external factors, including competition, legal and regulatory requirements; and
·Risk from change in the historical look-back period.

 

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

 

Acquired Loans

 

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

 

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

 

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

 

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

 

Loan Portfolio Classification

 

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of June 30, 2018 and December 31, 2017. As of June 30, 2018, due to the expansion of the Company’s internal credit quality risk ratings, the amount reclassified from the special mention rating to the pass/watch rating, which is included within the pass rating classification below, was $32,603,000. Previously, both special mention and watch rated loans were reported under the special mention rating classification.

 

(Dollars in thousands)      Special             
   Pass   Mention   Substandard   Doubtful   Total 
As of June 30, 2018                         
Commercial, financial and agricultural  $56,005   $123   $2,360   $-   $58,488 
Real estate - commercial   128,496    1,410    6,727    898    137,531 
Real estate - construction   29,518    -    2,574    -    32,092 
Real estate - mortgage   165,762    -    3,445    408    169,615 
Obligations of states and political subdivisions   13,264    -    -    -    13,264 
Personal   10,700    -    21    -    10,721 
Total  $403,745   $1,533   $15,127   $1,306   $421,711 

 

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(Dollars in thousands)      Special             
   Pass   Mention   Substandard   Doubtful   Total 
As of December 31, 2017                         
Commercial, financial and agricultural  $34,826   $8,692   $2,280   $4   $45,802 
Real estate - commercial   114,299    17,928    7,189    953    140,369 
Real estate - construction   22,470    3,297    2,636    -    28,403 
Real estate - mortgage   139,861    3,551    2,859    617    146,888 
Obligations of states and political subdivisions   12,088    956    -    -    13,044 
Personal   9,360    32    6    -    9,398 
Total  $332,904   $34,456   $14,970   $1,574   $383,904 

 

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

 

The following table summarizes information regarding impaired loans by portfolio class as of June 30, 2018 and December 31, 2017.

 

   As of June 30, 2018   As of December 31, 2017 
       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  $-   $8   $-   $468   $477   $- 
Real estate - commercial   913    1,304    -    5,031    5,957    - 
Acquired with credit deterioration   532    594    -    191    247    - 
Real estate - mortgage   1,969    3,573    -    2,232    3,738    - 
Acquired with credit deterioration   1,130    1,188    -    337    384    - 
Personal   17    17    -    -    -    - 
                               
Total:                              
Commercial, financial and agricultural  $-   $8   $-   $468   $477   $- 
Real estate - commercial   913    1,304    -    5,031    5,957    - 
Acquired with credit deterioration   532    594    -    191    247    - 
Real estate - mortgage   1,969    3,573    -    2,232    3,738    - 
Acquired with credit deterioration   1,130    1,188    -    337    384    - 
Personal   17    17    -    -    -    - 
   $4,561   $6,684   $-   $8,259   $10,803   $- 

 

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Average recorded investment of impaired loans and related interest income recognized for the three and six months ended June 30, 2018 and 2017 are summarized in the tables below.

 

   Three Months Ended June 30, 2018   Three Months Ended June 30, 2017 
   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  $1   $-   $-   $386   $6   $- 
Real estate - commercial   906    -    -    4,820    82    - 
Acquired with credit deterioration   351    -    -    212    -    - 
Real estate - construction   -    -    -    1,228    -    - 
Real estate - mortgage   2,034    5    1    2,957    6    6 
Acquired with credit deterioration   730    -    -    359    -    - 
Personal   9    -    -    -    -    - 
                               
With an allowance recorded:                              
Commercial, financial and agricultural  $-   $-   $-   $18   $-   $- 
Real estate - commercial   -    -    -    919    -    - 
Real estate - mortgage   -    -    -    338    -    - 
                               
Total:                              
Commercial, financial and agricultural  $1   $-   $-   $404   $6   $- 
Real estate - commercial   906    -    -    5,739    82    - 
Acquired with credit deterioration   351    -    -    212    -    - 
Real estate - construction   -    -    -    1,228    -    - 
Real estate - mortgage   2,034    5    1    3,295    6    6 
Acquired with credit deterioration   730    -    -    359    -    - 
Personal   9    -    -    -    -    - 
   $4,031   $5   $1   $11,237   $94   $6 

 

 26 

 

  

   Six Months Ended June 30, 2018   Six Months Ended June 30, 2017 
   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  $234   $-   $-   $391   $13   $- 
Real estate - commercial   2,972    -    -    5,165    157    - 
Acquired with credit deterioration   362    -    -    425    -    - 
Real estate - construction   -    -    -    1,228    34    - 
Real estate - mortgage   2,101    10    2    3,207    11    13 
Acquired with credit deterioration   734    -    -    383    -    - 
Personal   9    -    -    -    -    - 
                               
With an allowance recorded:                              
Commercial, financial and agricultural  $-   $-   $-   $8   $-   $- 
Real estate - commercial   -    -    -    460    -    - 
Real estate - mortgage   -    -    -    356    -    - 
                               
Total:                              
Commercial, financial and agricultural  $234   $-   $-   $399   $13   $- 
Real estate - commercial   2,972    -    -    5,625    157    - 
Acquired with credit deterioration   362    -    -    425    -    - 
Real estate - construction   -    -    -    1,228    34    - 
Real estate - mortgage   2,101    10    2    3,563    11    13 
Acquired with credit deterioration   734    -    -    383    -    - 
Personal   9    -    -    -    -    - 
   $6,412   $10   $2   $11,623   $215   $13 

 

The following table presents nonaccrual loans by classes of the loan portfolio as of June 30, 2018 and December 31, 2017.

 

(Dollars in thousands)        
   June 30, 2018   December 31, 2017 
Nonaccrual loans:          
Commercial, financial and agricultural  $-   $4 
Real estate - commercial   913    953 
Real estate - mortgage   1,568    1,917 
Personal   17    - 
Total  $2,498   $2,874 

 

 27 

 

 

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 tables present the classes of the loan portfolio summarized by the past due status as of June 30, 2018 and December 31, 2017.

 

                           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 June 30, 2018                                   
Commercial, financial and agricultural  $50    -    -   $50   $58,438   $58,488   $- 
Real estate - commercial:                                   
Real estate - commercial   729    -    -    729    136,270    136,999    - 
Acquired with credit deterioration   153    -    11    164    368    532    11 
Real estate - construction   317    -    -    317    31,775    32,092    - 
Real estate - mortgage:             -                     
Real estate - mortgage   1,820    225    -    2,045    166,440    168,485    - 
Acquired with credit deterioration   342    -    59    401    729    1,130    59 
Obligations of states and political subdivisions   -    -    -    -    13,264    13,264    - 
Personal   25    5    -    30    10,691    10,721    - 
Total  $3,436   $230   $70   $3,736   $417,975   $421,711   $70 

 

                           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, 2017                                   
Commercial, financial and agricultural  $-   $-   $-   $-   $45,802   $45,802   $- 
Real estate - commercial:                                   
Real estate - commercial   16    23    -    39    140,139    140,178    - 
Acquired with credit deterioration   -    -    28    28    163    191    28 
Real estate - construction   -    -    -    -    28,403    28,403    - 
Real estate - mortgage:                                   
Real estate - mortgage   694    80    64    838    145,713    146,551    64 
Acquired with credit deterioration   -    -    123    123    214    337    123 
Obligations of states and political subdivisions   -    -    -    -    13,044    13,044    - 
Personal   66    6    -    72    9,326    9,398    - 
Total  $776   $109   $215   $1,100   $382,804   $383,904   $215 

 

The following tables summarize information regarding troubled debt restructurings by loan portfolio class at June 30, 2018 and December 31, 2017.

 

       Pre-Modification   Post-Modification     
(Dollars in thousands)  Number of   Outstanding Recorded   Outstanding Recorded     
   Contracts   Investment   Investment   Recorded Investment 
As of June 30, 2018                    
Accruing troubled debt restructurings:                    
Real estate - mortgage   8   $522   $550   $450 
                     
Non-accruing troubled debt restructurings:                    
Real estate - mortgage   1    25    25    19 
    9   $547   $575   $469 

 

 28 

 

  

       Pre-Modification   Post-Modification     
(Dollars in thousands)  Number of   Outstanding
Recorded
   Outstanding
Recorded
     
   Contracts   Investment   Investment   Recorded Investment 
As of December 31, 2017                    
Accruing troubled debt restructurings:                    
Real estate - mortgage   7   $369   $397   $315 
                     
Non-accruing troubled debt restructurings:                    
Commercial, financial, agricultural   1    19    20    4 
Real estate - mortgage   1    25    25    20 
    9   $413   $442   $339 

 

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 June 30, 2018, 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 six months ended June 30, 2018 or 2017 within 12 months of restructure. On December 31, 2017, there were no specific reserves carried for the troubled debt restructurings. There was one troubled debt restructured loan for $4,000 at December 31, 2017 for which an $8,000 charge-off was recorded in 2017. The amended terms of the restructured loans vary, and may include interest rates that have been reduced, principal payments that have been reduced or deferred for a period of time and/or maturity dates that have been extended.

 

There was one loan whose terms were modified resulting in troubled debt restructuring during the three and six months ended June 30, 2018. There were no loan terms modified resulting in troubled debt restructuring during the three months ended June 30, 2017; however, there was one troubled debt restructuring during the six months ended June 30, 2018. The following tables list the loan whose terms were modified resulting in a troubled debt restructuring during the three and six month period ended June 30, 2018.

 

       Pre-Modification   Post-Modification     
(Dollars in thousands)  Number of   Outstanding
Recorded
   Outstanding
Recorded
     
   Contracts   Investment   Investment   Recorded Investment 
Three Months Ended June 30, 2018                    
Accruing troubled debt restructurings:                    
Real estate - mortgage   1   $153   $153   $153 
    1   $153   $153   $153 

 

       Pre-Modification   Post-Modification     
(Dollars in thousands)  Number of   Outstanding
Recorded
   Outstanding
Recorded
     
   Contracts   Investment   Investment   Recorded Investment 
Six Months Ended June 30, 2018                    
Accruing troubled debt restructurings:                    
Real estate - mortgage   1   $153   $153   $153 
    1   $153   $153   $153 

 

The following table lists the loan whose terms were modified resulting in a troubled debt restructuring during the six months ended June 30, 2017.

 

       Pre-Modification   Post-Modification     
(Dollars in thousands)  Number of   Outstanding
Recorded
   Outstanding
Recorded
     
   Contracts   Investment   Investment   Recorded Investment 
Six Months Ended June 30, 2017                    
Accruing troubled debt restructurings:                    
Commercial, financial, agricultural   1   $19   $20   $16 
    1   $19   $20   $16 

 

 29 

 

 

Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process at June 30, 2018 and December 31, 2017 totaled $788,000 and $1,285,000, respectively. 

 

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

 

As of, and for the periods ended, June 30, 2018

 

                   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, April 1, 2018  $319   $1,059   $340   $1,259   $-   $58   $3,035 
Charge-offs   -    -    -    (17)   -    (12)   (29)
Recoveries   3    -    -    5    -    3    11 
Provisions   26    3    (13)   14    -    11    41 
Ending balance, June 30, 2018  $348   $1,062   $327   $1,261   $-   $60   $3,058 

 

                   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, 2018  $273   $1,022   $288   $1,285   $-   $71   $2,939 
Charge-offs   -    (51)   -    (28)   -    (23)   (102)
Recoveries   6    5    -    5    -    6    22 
Provisions   69    86    39    (1)   -    6    199 
Ending balance, June 30, 2018  $348   $1,062   $327   $1,261   $-   $60   $3,058 
collectively evaluated for impairment  $348   $1,062   $327   $1,261   $-   $60   $3,058 
                                    
Loans receivable:                                   
Ending balance  $58,488   $137,531   $32,092   $169,615   $13,264   $10,721   $421,711 
individually evaluated for impairment   -   $913   $-   $1,969   $-   $17    2,899 
acquired with credit deterioration   -   $532   $-   $1,130   $-   $-    1,662 
collectively evaluated for impairment  $58,488   $136,086   $32,092   $166,516   $13,264   $10,704   $417,150 

 

 30 

 

 

As of, and for the periods ended, June 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, April 1, 2017  $368   $1,068   $126   $1,160   $-   $83   $2,805 
Charge-offs   (37)   -    -    (19)   -    (11)   (67)
Recoveries   -    -    -    -    -    3    3 
Provisions   71    57    46    (48)   -    9    135 
Ending balance, June 30, 2017  $402   $1,125   $172   $1,093   $-   $84   $2,876 

 

                   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   (37)   -    -    (83)   -    (17)   (137)
Recoveries   -    -    -    44    -    6    50 
Provisions   121    177    (59)   (11)   -    12    240 
Ending balance, June 30, 2017  $402   $1,125   $172   $1,093   $-   $84   $2,876 
individually evaluated for impairment   8    30    -    -    -    -    38 
collectively evaluated for impairment  $394   $1,095   $172   $1,093   $-   $84   $2,838 
                                    
Loans receivable:                                   
Ending balance  $49,966   $146,124   $23,895   $148,132   $14,067   $10,045   $392,229 
individually evaluated for impairment   362    5,749    -    3,068    -    -    9,179 
acquired with credit deterioration   -    208    -    351    -    -    559 
collectively evaluated for impairment  $49,604   $140,167   $23,895   $144,713   $14,067   $10,045   $382,491 

 

As of December 31, 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, January 1, 2017  $318   $948   $231   $1,143   $-   $83   $2,723 
Charge-offs   (46)   (70)   -    (149)   -    (27)   (292)
Recoveries   5    2    -    45    -    17    69 
Provisions   (4)   142    57    246    -    (2)   439 
Ending balance, December 31, 2017  $273   $1,022   $288   $1,285   $-   $71   $2,939 
individually evaluated for impairment   -    -    -    -    -    -    - 
collectively evaluated for impairment  $273   $1,022   $288   $1,285   $-   $71   $2,939 
                                    
Loans receivable:                                   
Ending balance  $45,802   $140,369   $28,403   $146,888   $13,044   $9,398   $383,904 
individually evaluated for impairment   468    5,031    -    2,232    -    -    7,731 
acquired with credit deterioration   -    191    -    337    -    -    528 
collectively evaluated for impairment  $45,334   $135,147   $28,403   $144,319   $13,044   $9,398   $375,645 

 

8. Goodwill and other intangible assets

 

Goodwill

 

On September 8, 2006, the Company acquired a branch office in Richfield, PA. Goodwill associated with this transaction is carried at $2,046,000. On November 30, 2015, the Company acquired FNBPA Bancorp, Inc. and as a result, carries goodwill of $3,402,000 relating to the acquisition. In addition, the Company acquired Liverpool Community Bank on April 30, 2018, and as a result, carries goodwill of $3,691,000 relating to the acquisition.

 

 31 

 

 

Total goodwill at June 30, 2018 and December 31, 2017 was $9,139,000 and $5,448,000, respectively. Goodwill is not amortized but is measured annually for impairment or more frequently if certain events occur which might indicate goodwill has been impaired. There was no impairment of goodwill during the three or six month periods ended June 30, 2018 or 2017.

 

Intangible Assets

 

On November 30, 2015, a core deposit intangible in the amount of $303,000 associated with the FNBPA Bancorp, Inc. acquisition was recorded and is being amortized over a ten-year period using a sum of the year’s digits basis. Other intangible assets in the amount of $40,000 were also identified and recorded as of November 30, 2015. The other intangible assets were amortized on a straight-line basis over two years, through November 30, 2017. Amortization expense recognized for the intangibles related to the FNBPA acquisition in the three and six months ended June 30, 2018 was $11,000 and $22,000, respectively.

 

On April 30, 2018, a core deposit intangible in the amount of $289,000 associated with the Liverpool Community Bank acquisition was recorded and is being amortized over a ten-year period using a sum of the year’s digit basis. Amortization expense recognized for the intangible related to the Liverpool Community Bank acquisition in both the three and six months ended June 30, 2018 was $9,000.

 

The following table shows the amortization schedule for each of the intangible assets recorded.

 

   FNBPA   FNBPA   LCB 
   Acquisition   Acquisition   Acquisition 
   Core   Other   Core 
(Dollars in thousands)  Deposit   Intangible   Deposit 
   Intangible   Assets   Intangible 
Beginning Balance at Acquisition Date  $303   $40   $289 
Amortization expense recorded prior to January 1, 2017   59    22    - 
Amortization expense recorded in the twelve months ended December 31, 2017   49    18    - 
Unamortized balance as of December 31, 2017   195    -    - 
Amortization expense recorded in the six months ended June 30, 2018   22    -    9 
Unamortized balance as of June 30, 2018  $173   $-   $280 
                
Scheduled remaining amortization expense for years ended:               
December 31, 2018  $22        $26 
December 31, 2019   38         49 
December 31, 2020   33         44 
December 31, 2021   27         39 
December 31, 2022   21         33 
After December 31, 2022   32         89 

 

9. Unconsolidated Subsidiary

 

The Company no longer has an investment in an unconsolidated subsidiary following its acquisition of Liverpool on April 30, 2018. Prior to the acquisition, the Company owned 39.16% of the outstanding common stock of Liverpool. The investment was accounted for under the equity method of accounting. The Company increased its investment in LCB for its share of earnings and decreased its investment by any dividends received from LCB. The investment was evaluated quarterly for impairment. A loss in value of the investment which is determined to be other than a temporary decline would have been recognized as a loss in the period in which such determination was 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 the investment relating to LCB prior to the acquisition on April 30, 2018.

 

 32 

 

 

The following table illustrates the components of the income/gain from the unconsolidated subsidiary investment recorded for the three and six months ended June 30, 2018 and 2017.

 

   Three Months Ended   Six Months Ended 
   June 30, 2018   June 30, 2018 
   2018   2017   2018   2017 
Income from unconsolidated subsidiary (excluding merger-related adjustments)                    
Dividend income  $12   $12   $36   $36 
Equity income   -    46    45    69 
Total income (excluding merger-related adjustments)   12    58    81    105 
                     
Merger-related adjustments for investment in unconsolidated subsidiary                    
Adjustment to LCB book value at April 30, 2018   (239)   -    (239)   - 
Special merger-related dividend   39    -    39    - 
Fair value gain   415    -    415    - 
Total merger-related adjustments   215    -    215    - 
Total income/gain from unconsolidated subsidiary  $227   $58   $296   $105 

 

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:

 

 33 

 

 

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

 

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

 

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

 

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

 

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

 

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

 

Equities Securities – The fair value of equity securities is based upon quoted prices in active markets and is reported using Level 1 inputs.

 

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.

 

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The following tables summarize financial assets and financial liabilities measured at fair value as of June 30, 2018 and December 31, 2017, 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 six months ended June 30, 2018 or 2017.

 

       (Level 1)   (Level 2)   (Level 3) 
       Quoted Prices in   Significant   Significant 
       Active Markets   Other   Other 
(Dollars in thousands)  June 30,   for Identical   Observable   Unobservable 
   2018   Assets   Inputs   Inputs 
Measured at fair value on a recurring basis:                    
Debt securities available-for-sale:                    
Obligations of U.S. Government agencies and corporations  $33,714   $-   $33,714   $- 
Obligations of state and political subdivisions   20,286    -    20,286    - 
Mortgage-backed securities   89,237    -    89,237    - 
Equity securities   1,166    1,166    -    - 
                     
Measured at fair value on a non-recurring basis:                    
Impaired loans  $1,306   $-   $-   $1,306 
Mortgage servicing rights   215    -    -    215 

 

       (Level 1)   (Level 2)   (Level 3) 
       Quoted Prices in   Significant   Significant 
       Active Markets   Other   Other 
(Dollars in thousands)  December 31,   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  $34,214   $-   $34,214   $- 
Obligations of state and political subdivisions   24,981    -    24,981    - 
Mortgage-backed securities   93,510    -    93,510    - 
Equity securities available-for-sale   1,119    1,119    -    - 
                     
Measured at fair value on a non-recurring basis:                    
Impaired loans  $1,574   $-   $-   $1,574 
Other real estate owned   27    -    -    27 
Mortgage servicing rights   225    -    -    225 

 

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The following tables present 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)                 
June 30, 2018  Fair Value
Estimate
   Valuation Technique  Unobservable Input  Range  Weighted
Average
 
Impaired loans  $1,306   Appraisal of collateral (1)  Appraisal and liquidation adjustments (2)  0% - 16%   15%
Mortgage servicing rights   215   Multiple of annual servicing fee  Estimated pre-payment speed, based on rate and term  300% - 400%   371%

 

(Dollars in thousands)                 
December 31, 2017  Fair Value
Estimate
   Valuation Technique  Unobservable Input  Range  Weighted
Average
 
Impaired loans  $1,574   Appraisal of collateral (1)  Appraisal and liquidation adjustments (2)  0% - 13%   8%
Other real estate owned   27   Appraisal of collateral (1)  Appraisal and liquidation adjustments (2)  22%   22%
Mortgage servicing rights   225   Multiple of annual servicing fee  Estimated pre-payment speed, based on rate and term  300% - 400%   371%

 

(1)Fair value is generally determined through independent appraisals of the underlying collateral that generally include various Level 3 inputs which are not identifiable.
(2)Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

 

Fair Value of Financial Instruments

 

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

 

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

 

The following discussion 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 – As of June 30, 2018, the fair values of loans were estimated on an exit price basis due to the adoption of ASU 2016-01, incorporating discounts for credit, liquidity and marketability factors. These fair values are not comparable with the fair values disclosed as of December 31, 2017, which were based on an entrance price basis. As of that date, fair values of variable rate loans that reprice frequently and which entail no significant changes in credit risk were based on carrying values. The fair values of other loans as of that date were 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.

 

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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, considering 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 
   June 30, 2018   December 31, 2017 
(Dollars in thousands)  Carrying   Fair   Carrying   Fair 
   Value   Value   Value   Value 
Financial assets:                    
Cash and due from banks  $15,956   $15,956   $9,839   $9,839 
Interest bearing deposits with banks   291    291    58    58 
Federal funds sold   915    915    -    - 
Interest bearing time deposits with banks   3,780    3,755    350    350 
Equity securities   1,166    1,166    -    - 
Available for sale securities   143,237    143,237    153,824    153,824 
Restricted investment in FHLB stock   2,498    2,498    3,104    3,104 
Loans, net of allowance for loan losses   418,653    410,158    380,965    372,906 
Mortgage servicing rights   215    215    225    225 
Accrued interest receivable   1,675    1,675    1,582    1,582 
                     
Financial liabilities:                    
Non-interest bearing deposits  $122,101   $122,101   $115,911   $115,911 
Interest bearing deposits   410,338    409,610    361,757    361,468 
Securities sold under agreements to repurchase   3,843    3,843    9,769    9,769 
Short-term borrowings   7,500    7,500    12,000    12,000 
Long-term debt   15,000    14,896    25,000    24,885 
Other interest bearing liabilities   1,587    1,589    1,593    1,595 
Accrued interest payable   298    298    300    300 
                     
Off-balance sheet financial instruments:                    
Commitments to extend credit  $-   $-   $-   $- 
Letters of credit   -    -    -    - 

 

The following tables present the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments not previously disclosed as of June 30, 2018 and December 31, 2017. 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 
June 30, 2018                         
Financial instruments - Assets                         
Interest bearing time deposits with banks  $3,780   $3,755   $-   $3,755   $- 
Loans, net of allowance for loan losses   418,653    410,158    -    -    410,158 
Financial instruments - Liabilities                         
Interest bearing deposits  $410,338   $409,610   $-   $409,610   $- 
Long-term debt   15,000    14,896    -    14,896    - 
Other interest bearing liabilities   1,587    1,589    -    1,589    - 

 

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           (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, 2017                         
Financial instruments - Assets                         
Interest bearing time deposits with banks  $350   $350   $-   $350   $- 
Loans, net of allowance for loan losses   380,965    372,906    -    -    372,906 
Financial instruments - Liabilities                         
Interest bearing deposits  $361,757   $361,468   $-   $361,468   $- 
Long-term debt   25,000    24,885    -    24,885    - 
Other interest bearing liabilities   1,593    1,595    -    1,595    - 

 

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 six months ended June 30, 2018 and is not required to make a contribution in the remainder of 2018; however, it is considering doing so.

 

In 2017, Juniata initiated a strategy to reduce the liability associated with its defined benefit pension plan. The first step of the initiative consisted of the purchase of a single premium group annuity for a group of Juniata’s retirees, transferring the associated pension liability to the issuer of the annuity. This step reduced Juniata’s overall pension liability by approximately 12%, which resulted in a pre-tax charge to earnings of $377,000 in the third quarter of 2017. This pre-tax charge represents an acceleration of pension expenses that would otherwise have impacted Juniata’s earnings in the future. The Company initiated the second step of this strategy on July 1, 2018. Refer to Note 14 for additional information.

 

Pension expense included the following components for the three and six month periods ended June 30, 2018 and 2017:

 

   Three Months Ended   Six Months Ended 
(Dollars in thousands)  June 30,   June 30, 
   2018   2017   2018   2017 
Components of net periodic pension (benefit) cost:                    
Interest cost  $132   $161   $264   $322 
Expected return on plan assets   (192)   (202)   (384)   (403)
Recognized net actuarial loss   40    57    81    113 
Net periodic pension (benefit) cost  $(20)  $16   $(39)  $32 
                     
Amortization of net actuarial loss recognized in other comprehensive income  $(40)  $(57)  $(81)  $(113)
                     
Total recognized in net periodic pension cost and other comprehensive income  $(60)  $(41)  $(120)  $(81)

 

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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 June 30, 2018, the Company had $81,948,000 outstanding in loan commitments and other unused lines of credit extended to its customers as compared to $77,023,000 at December 31, 2017.

 

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 $3,147,000 and $2,541,000 of financial and performance letters of credit commitments as of June 30, 2018 and December 31, 2017, respectively. Commercial letters of credit as of June 30, 2018 and December 31, 2017 totaled $12,833,000 and $12,650,000, respectively. 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 June 30, 2018 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 sold qualifying residential mortgage loans to the FHLB as part of its Mortgage Partnership Finance Program (“Program”). Under the terms of the Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan sold under the Program is “credit enhanced” such that the individual loan’s rating is raised to “BBB”, as determined by the FHLB. The Program can be terminated by either the FHLB or the Company, without cause. The FHLB has no obligation to commit to purchase any mortgage loans through, or from, the Company.

 

13. REVENUE RECOGNITION

 

As disclosed in Note 2, as of January 1, 2018, the Company adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)”, as well as subsequent ASU’s that modified ASC 606. The Company elected to apply the ASU and all related ASU’s using the modified retrospective approach applied to all contracts imitated on or after the effective date, and for contracts which have remaining obligations as of the effective date, while prior period results continue to be reported under legacy U.S. GAAP. Based on this assessment, the Company concluded that ASC 606 did not materially change the method by which the Company currently recognizes revenue for these revenue streams, which is by recognizing revenues as they are earned based upon contractual terms, as transactions occur, or as services are provided and collectability is reasonably assured.

 

The Company generally acts in a principal capacity, on its own behalf, in most contracts with customers. In such transactions, revenue and related costs to provide these services are recognized on a gross basis in the financial statements. In some cases, the Company acts in an agent capacity, deriving revenue through assisting other entities in transactions with its customers. In such transactions, revenue and the related costs to provide the services are recognized on a net basis in the financial statements. These transactions primarily relate to non-deposit product commissions and fees derived from customer’s use of various interchange and ATM/debit card networks.

 

All of the Company’s revenue from contracts with customers in the scope of ASC 606 are recognized within non-interest income on the consolidated statements of income, except for the gain/loss on the sale of other real estate owned, which is included in other non-interest expense. Revenue streams not within the scope of ASC 606 included in non-interest income on the consolidated statements of income include earnings on bank-owned life insurance and annuities, income from unconsolidated subsidiary, fees derived from loan activity, mortgage banking income, gain/loss on sales and calls of securities, and the change in value of equity securities.

 

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A description of the Company’s sources of revenue accounted for under ASC 606 are as follows:

 

Customer Service Fees – fees mainly represent fees from deposit customers for transaction based, account maintenance, and overdraft services. Transaction based fees include, but are not limited to, stop payment and overdraft fees. These fees are recognized at the time of the transaction when the performance obligation has been fulfilled. Account maintenance fees and account analysis fees are earned over the course of a month, representing the period of the performance obligation, and are recognized monthly.

 

Debit Card Fee Income – consists of interchange fees from cardholder transactions conducted through the card payment network. Cardholders use debit cards to conduct point-of-sale transactions that produce interchange fees. The Company acts in an agent capacity to offer processing services for debit cards to its customers. Fees are recognized with the processing of the transactions and netted against the related fees from such transactions.

 

Trust Fees – include asset management and estate fees. Asset management fees are generally based on a fee schedule, based upon the market value of the assets under management, and recognized monthly when the service obligation is completed. Trust fees recognized during the three and six months ended June 30, 2018 totaled $98,000 and $188,000, respectively. Fees for estate management services are based on a specified fee schedule and generally recognized as the following performance obligations are fulfilled: (i) 25% of total estate fee recognized when all estate assets are collected and debts paid, (ii) 50% of the total fee is recognized when the inheritance tax return is filed, and (iii) remaining 25% is recognized when the first and final account is confirmed, settling the estate. Estate fees recognized during the three and six months ended June 30, 2018 totaled $25,000 and $37,000, respectively.

 

Commissions From Sales Of Non-Deposit Products – include, but are not limited to, brokerage services, employer-based retirement solutions, individual retirement planning, insurance solutions, and fee-based investment advisory services. The Company acts in an agent capacity to offer these services to customers. Revenue is recognized, net of related fees, in the month in which the contract is fulfilled.

 

Other Non-Interest Income – includes certain revenue streams within the scope of ASC 606 comprised primarily of ATM surcharges, commissions on check orders, and wire transfer fees. ATM surcharges are the result of customers conducting ATM transactions that generate fee income. All of these fees, as well as wire transfer fees, are transaction based and are recognized at the time of the transaction. In addition, the Company acts in an agent capacity to offer checks to its customers and recognizes commissions, net of related fees, when the contract is fulfilled.

 

Gains/Losses On Sales Of Other Real Estate Owned – are recognized when control of the property transfers to the buyer, which generally occurs when the deed is executed.

 

Contract Balances

 

A contract asset balance occurs when an entity performs a service for a customer before the customer pays consideration (resulting in a contract receivable) or before payment is due (resulting in a contract asset). A contract liability balance is an entity’s obligation to transfer a service to a customer for which the entity has already received payment (or payment is due from the customer. The company’s non-interest revenue streams are largely based on transactional activity, or standard month-end revenue accruals such as asset management fees based on month-end market values. Consideration is often received immediately or shortly after the Company satisfies its performance obligation and revenue is recognized. The Company does not typically enter into longer-term revenue contracts with customer, and therefore, does not experience significant contract balances.

 

Contract Acquisition Costs

 

The Company expenses all contract acquisition costs as costs are incurred.

 

14. Subsequent Events

 

On July 1, 2018, the Company made a lump sum payment offer to a small group of terminated vested participants in the Company’s defined benefit plan intended to reduce its overall pension liability. The Company expects to complete the lump sum offering in the third quarter of 2018. Currently, no material effect to the consolidated financial statements as a result of the offering is expected.

 

On July 17, 2018, the Board of Directors declared a cash dividend of $0.22 per share to shareholders of record on August 15, 2018, payable on August 31, 2018.

 

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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 that are not historical facts or that address trends or management's intentions, plans, beliefs, expectations or opinions. Forward-looking statements can be identified by the use of words such as “believes”, “expects”, “anticipates”, “may”, “should”, “will”, “could”, “estimates”, “projects”, “predicts”, “potential”, “continue”, “plans”, “future”, “intends”, “goal”, “strategy”, “likely”, “seek” and similar expressions. Any forward-looking statement made by us in this document is based only on information currently available to us and speaks only as of the date when made. Juniata undertakes no obligation to publicly update or revise forward looking information, whether as a result of new or updated information, future events, or otherwise. Forward-looking statements are not historical facts or guarantees of future performance, events or results and are subject to potential risks and uncertainties, many of which are outside of our control that could cause actual results to differ materially from this forward-looking information. Important factors that could cause our actual result and financial condition to differ materially from those indicated in the forward-looking statements include, 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 effects of changes in the applicable federal income tax rate;
·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;
·capital and liquidity strategies, including the impact of the capital and liquidity requirements modified by the Basel III standards;
·the effects of changes in accounting policies, standards, and interpretations of 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 presentation of the Company’s financial condition and results of operations;
·failure of third party service providers to perform their contractual obligations; and
·the impact of the Company’s strategy to reduce the liability associated with its defined benefit retirement plan.

 

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, 2017, 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, 2017. Any policies adopted after this date are included in the Note 1, Basis of Presentation and Accounting Policies. 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.

 

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General:

 

The following discussion relates to the consolidated financial condition of the Company as of June 30, 2018, as compared to December 31, 2017, and the consolidated results of operations for the three and six months ended June 30, 2018, compared to the same period in 2017. 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. 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%. On April 30, 2018, Juniata acquired the Liverpool Community Bank (“LCB”) of which it previously owned 39.16%. As of the merger date, total assets increased by approximately $49 million, or 8%. Juniata now operates a total of 16 locations in Pennsylvania.

 

Financial Condition:

 

Total assets as of June 30, 2018, were $631.5 million, an increase of $39.6 million, or 6.7%, compared to December 31, 2017. Comparing the balances at June 30, 2018 and December 31, 2017, loans increased by $37.8 million, while deposits increased by $54.8 million, predominantly in interest bearing deposits. As of April 30, 2018, after acquisition accounting adjustments, the Company acquired approximately $31.3 million in loans and $36.1 million in deposits as a result of the Liverpool acquisition. During the same period, the Company utilized a strategy to apply cash flows from the investment portfolio to reduce high cost borrowings. This strategy led to a strategic decline in the investment portfolio of $10.6 million and contributed to a decline in total borrowings of $20.4 million, as did Liverpool’s surplus funds position.

 

The table below shows changes in deposit volumes by type of deposit between December 31, 2017 and June 30, 2018.

 

(Dollars in thousands)  June 30,   December 31,   Change 
   2018   2017   $   % 
Deposits:                    
Demand, non-interest bearing  $122,101   $115,911   $6,190    5.3%
Interest bearing demand and money market   151,057    122,407    28,650    23.4 
Savings   105,224    98,966    6,258    6.3 
Time deposits, $250,000 and more   10,611    8,456    2,155    25.5 
Other time deposits   143,446    131,928    11,518    8.7 
Total deposits  $532,439   $477,668   $54,771    11.5%

 

Total loans increased $37.8 million, or 9.8%, between December 31, 2017 and June 30, 2018. As shown in the table below, all loan categories increased, except commercial real estate loans.

 

(Dollars in thousands)  June 30,   December 31,   Change 
   2018   2017   $   % 
Loans:                    
Commercial, financial and agricultural  $58,488   $45,802   $12,686    27.7%
Real estate - commercial   137,531    140,369    (2,838)   (2.0)
Real estate - construction   32,092    28,403    3,689    13.0 
Real estate - mortgage   169,615    146,888    22,727    15.5 
Obligations of states and political subdivisions   13,264    13,044    220    1.7 
Personal   10,721    9,398    1,323    14.1 
Total loans  $421,711   $383,904   $37,807    9.8%

  

 42 

 

 

A summary of the activity in the allowance for loan losses for each of the six month periods ended June 30, 2018 and 2017 is presented below.

 

(Dollars in thousands)  Periods Ended June 30, 
   2018   2017 
Balance of allowance - January 1  $2,939   $2,723 
Loans charged off   (102)   (137)
Recoveries of loans previously charged off   22    50 
Net charge-offs   (80)   (87)
Provision for loan losses   199    240 
Balance of allowance - end of period  $3,058   $2,876 
           
Ratio of net charge-offs during period to average loans outstanding   0.02%   0.02%

 

As of June 30, 2018, 35 loans (exclusive of loans acquired from FNBPA and LCB with existing credit deterioration) with aggregate outstanding balances of $2,899,000 were individually evaluated for impairment. A collateral analysis was performed on each of these 35 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 June 30, 2018, there were $1,533,000 in special mention loans compared to $34,456,000 at December 31, 2017 and $15,127,000 in substandard loans compared to $14,970,000 at December 31, 2017. As of June 30, 2018, Management expanded the Company’s internal credit quality risk ratings to include a pass/watch rating for loans whose performance may exhibit