10-Q 1 tv519985_10q.htm FORM 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 March 31, 2019

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 every Interactive Data File required to be submitted 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 such files).

x  Yes   ¨  No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

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

 

Securities registered pursuant to Section 12(b) of the Act: 

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered

N/A

  

N/A

  

N/A

  

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 May 10, 2019
Common Stock ($1.00 par value)   5,100,248 shares

 

 

 

 

 

 

TABLE OF CONTENTS

 

PART I - FINANCIAL INFORMATION  
   
Item 1. Financial Statements  
     
  Consolidated Statements of Financial Condition as of March 31, 2019 (Unaudited) and December 31, 2018 3
     
  Consolidated Statements of Income for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 4
     
  Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 5
     
  Consolidated Statements of Stockholders’ Equity for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 6
     
  Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2019 and 2018 (Unaudited) 7
     
  Notes to Consolidated Financial Statements (Unaudited) 8
     
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
     
Item 3. Not applicable.  
     
Item 4. Controls and Procedures 45
     
PART II - OTHER INFORMATION  
     
Item 1. Legal Proceedings 46
     
Item 1A. Risk Factors 46
     
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 46
     
Item 3. Defaults upon Senior Securities 46
     
Item 4. Mine Safety Disclosures 46
     
Item 5. Other Information 46
     
Item 6. Exhibits 47
     
  Signatures 48

 

 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)  March 31, 2019   December 31, 2018 
ASSETS          
Cash and due from banks  $15,002   $15,617 
Interest bearing deposits with banks   5,539    110 
Federal funds sold   3,736    729 
Cash and cash equivalents   24,277    16,456 
           
Interest bearing time deposits with banks   2,800    3,290 
Equity securities   1,127    1,118 
Securities available for sale   140,208    141,953 
Restricted investment in bank stock   2,535    2,441 
Total loans   414,979    417,631 
Less: Allowance for loan losses   (2,994)   (3,034)
Total loans, net of allowance for loan losses   411,985    414,597 
Premises and equipment, net   8,644    8,744 
Other real estate owned   744    744 
Bank owned life insurance and annuities   16,013    15,938 
Investment in low income housing partnerships   4,435    4,545 
Core deposit and other intangible assets   383    405 
Goodwill   9,047    9,139 
Mortgage servicing rights   193    200 
Accrued interest receivable and other assets   5,391    5,666 
Total assets  $627,782   $625,236 
           
LIABILITIES AND STOCKHOLDERS' EQUITY          
Liabilities:          
Deposits:          
Non-interest bearing  $128,670   $126,057 
Interest bearing   395,186    395,665 
Total deposits   523,856    521,722 
           
Securities sold under agreements to repurchase   2,683    2,911 
Short-term borrowings   -    11,600 
Long-term debt   25,000    15,000 
Other interest bearing liabilities   1,572    1,596 
Accrued interest payable and other liabilities   5,498    5,029 
Total liabilities   558,609    557,858 
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 -          
5,141,749 shares at March 31, 2019;          
5,134,249 shares at December 31, 2018          
Outstanding -          
5,098,748 shares at March 31, 2019;          
5,092,048 shares at December 31, 2018   5,142    5,134 
Surplus   24,832    24,821 
Retained earnings   42,818    42,525 
Accumulated other comprehensive loss   (2,816)   (4,299)
Cost of common stock in Treasury:          
43,001 shares at March 31, 2019;          
42,201 shares at December 31, 2018   (803)   (803)
Total stockholders' equity   69,173    67,378 
Total liabilities and stockholders' equity  $627,782   $625,236 

 

See Notes to Consolidated Financial Statements

 

 3 

 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Income (Unaudited)

 

   Three Months Ended 
  March 31, 
(Dollars in thousands, except share data)  2019   2018 
Interest income:          
Loans, including fees  $5,255   $4,551 
Taxable securities   849    775 
Tax-exempt securities   61    103 
Other interest income   53    10 
Total interest income   6,218    5,439 
Interest expense:          
Deposits   863    594 
Securities sold under agreements to repurchase   11    15 
Short-term borrowings   13    84 
Long-term debt   161    93 
Other interest bearing liabilities   11    8 
Total interest expense   1,059    794 
Net interest income   5,159    4,645 
Provision for loan losses   15    158 
Net interest income after provision for loan losses   5,144    4,487 
Non-interest income:          
Customer service fees   422    412 
Debit card fee income   308    292 
Earnings on bank-owned life insurance and annuities   69    81 
Trust fees   99    102 
Commissions from sales of non-deposit products   71    50 
Income from unconsolidated subsidiary   -    69 
Fees derived from loan activity   70    95 
Mortgage banking income   17    19 
Loss on sales and calls of securities   (56)   (15)
Change in value of equity securities   9    (6)
Other non-interest income   85    75 
Total non-interest income   1,094    1,174 
Non-interest expense:          
Employee compensation expense   1,968    1,792 
Employee benefits   741    564 
Occupancy   349    318 
Equipment   214    207 
Data processing expense   461    416 
Director compensation   51    54 
Professional fees   197    177 
Taxes, other than income   134    113 
FDIC Insurance premiums   56    70 
Amortization of intangible assets   22    11 
Amortization of investment in low-income housing partnerships   200    200 
Merger and acquisition expense   -    64 
Other non-interest expense   442    419 
Total non-interest expense   4,835    4,405 
Income before income taxes   1,403    1,256 
Income tax benefit   (10)   (71)
Net income  $1,413   $1,327 
Earnings per share          
Basic  $0.28   $0.28 
Diluted  $0.28   $0.28 
Cash dividends declared per share  $0.22   $0.22 
Weighted average basic shares outstanding   5,095,132    4,770,389 
Weighted average diluted shares outstanding   5,117,024    4,787,769 

 

See Notes to Consolidated Financial Statements

 

 4 

 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

 

   Three Months Ended March 31, 
   2019   2018 
   Before       Net of   Before       Net of 
  Tax   Tax   Tax   Tax   Tax   Tax 
(Dollars in thousands)  Amount   Effect   Amount   Amount   Effect   Amount 
Net income  $1,403   $10   $1,413   $1,256   $71   $1,327 
Other comprehensive income (loss):                              
Unrealized gains (losses) on available for sale securities:                              
Unrealized holding gains (losses) arising during the period   1,793    (377)   1,416    (2,167)   456    (1,711)
Unrealized holding losses from unconsolidated subsidiary   -    -    -    (11)   -    (11)
Less reclassification adjustment for losses included in net income for sales of debt securities (1) (3)   56    (12)   44    15    (4)   11 
Amortization of pension net actuarial cost (2) (3)   29    (6)   23    41    (9)   32 
Other comprehensive income (loss)   1,878    (395)   1,483    (2,122)   443    (1,679)
Total comprehensive income (loss)  $3,281   $(385)  $2,896   $(866)  $514   $(352)

 

(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)

March 31, 2019

 

 

   Number               Accumulated         
   of               Other       Total 
  Shares   Common       Retained   Comprehensive   Treasury   Stockholders' 
(Dollars in thousands, except share data)   Outstanding   Stock   Surplus   Earnings   Loss   Stock   Equity 
Balance, January 1, 2019   5,092,048   $5,134   $24,821   $42,525   $(4,299)  $(803)  $67,378 
Net income                  1,413              1,413 
Other comprehensive income                  -    1,483         1,483 
Cash dividends at $0.22 per share                  (1,120)             (1,120)
Stock-based compensation             19                   19 
Forfeiture of restricted stock   (800)                            - 
Common stock issued for stock plans   7,500    8    (8)             -    - 
Balance, March 31, 2019   5,098,748   $5,142   $24,832   $42,818   $(2,816)  $(803)  $69,173 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Stockholders' Equity (Unaudited)

March 31, 2018

 

 

   Number               Accumulated         
   of               Other       Total 
  Shares   Common       Retained   Comprehensive   Treasury   Stockholders' 
(Dollars in thousands, except share data)   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                  1,327              1,327 
Other comprehensive loss                       (1,679)        (1,679)
Reclassification for ASU 2016-01                  156    (156)        - 
Cash dividends at $0.22 per share                  (1,049)             (1,049)
Stock-based compensation             18                   18 
Purchase of treasury stock   (1,928)                       (40)   (40)
Treasury stock issued for stock plans   2,000         (3)             38    35 
Common stock issued for stock plans   5,220    5    (5)                  - 
Balance, March 31, 2018   4,772,948   $4,816   $18,575   $41,310   $(5,869)  $(833)  $57,999 

 

See Notes to Consolidated Financial Statements

 

 6 

 

 

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

 

  Three Months Ended March 31, 
(Dollars in thousands)  2019   2018 
Operating activities:          
Net income  $1,413   $1,327 
Adjustments to reconcile net income to net cash provided by operating activities:          
Provision for loan losses   15    158 
Depreciation   196    204 
Net amortization of securities premiums   133    145 
Net amortization of loan origination fees   20    15 
Deferred net loan origination costs   (47)   (55)
Amortization of core deposit intangible asset   22    11 
Amortization of investment in low income housing partnership   200    200 
Net (amortization) accretion of purchase fair value adjustments   (31)   13 
Net realized loss on sales and calls of available for sale securities   56    15 
Change in value of equity securities   (9)   6 
Earnings on bank owned life insurance and annuities   (69)   (81)
Deferred income tax expense (benefit)   24    (56)
Income from unconsolidated subsidiary, net of dividends of $0 and $25, respectively   -    (44)
Stock-based compensation expense   19    18 
Proceeds from mortgage loans sold to others   24    23 
Mortgage banking income   (17)   (19)
Decrease (increase) in accrued interest receivable and other assets   483    (706)
Decrease in accrued interest payable and other liabilities   (61)   (447)
Net cash provided by operating activities   2,371    727 
Investing activities:          
Purchases of:          
Securities available for sale   (11,214)   (4,119)
Premises and equipment   (96)   (41)
Bank owned life insurance and annuities   (6)   (6)
Proceeds from:          
Sales of securities available for sale   11,107    4,285 
Maturities of and principal repayments on securities available for sale   3,512    2,779 
(Purchase) redemption of FHLB stock   (94)   200 
Investment in low income housing partnerships   (90)   (100)
Net decrease in interest bearing time deposits with banks   490    - 
Net decrease (increase) in loans   2,654    (5,342)
Net cash provided by (used in) investing activities   6,263    (2,344)
Financing activities:          
Net increase in deposits   2,135    10,455 
Net decrease in short-term borrowings and securities sold under agreements to repurchase   (11,828)   (5,529)
Issuance of long-term debt   15,000    - 
Repayment of long-term debt   (5,000)   - 
Cash dividends   (1,120)   (1,049)
Purchase of treasury stock   -    (40)
Treasury stock issued for employee stock plans   -    35 
Net cash (used in) provided by financing activities   (813)   3,872 
Net increase in cash and cash equivalents   7,821    2,255 
Cash and cash equivalents at beginning of year   16,456    9,897 
Cash and cash equivalents at end of period  $24,277   $12,152 
Supplemental information:          
Interest paid  $933   $792 
Supplemental schedule of noncash investing and financing activities:          
Transfer of loans to other real estate owned  $-   $22 
Transfer of loans to repossessed vehicles   -    12 

 

See Notes to Consolidated Financial Statements

 

 7 

 

 

JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

1. Basis of Presentation and Accounting Policies

 

The consolidated financial statements include the accounts of Juniata Valley Financial Corp. (the “Company” 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, which previously owned 39.16% of Liverpool Community Bank (“Liverpool” or “LBC”), completed the acquisition of the remainder of Liverpool’s outstanding common stock. 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 (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates and such differences could be material to the financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three month period ended March 31, 2019 are not necessarily indicative of the results for the year ending December 31, 2019. 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, 2018.

 

The Company has evaluated events and transactions occurring subsequent to the consolidated statement of financial condition date of March 31, 2019 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

 

2. RECENT ACCOUNTING STANDARDS UPDATES (“ASU”)

 

Adoption of New Accounting Standards

 

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.

 

In July 2018, the FASB issued ASU-2018-10, Codification Improvements to Topic 842, Leases. ASU 2018-10 clarifies the intended application of certain narrow aspects of the guidance in ASU 2016-02. The amendments are similar in nature to those in the FASB’s ongoing project to make improvements to clarify the Codification or correct unintended application of the guidance. Key amendments in this ASU include:

 

  · Updating the definition of the rate implicit in the lease to clarify that the rate cannot be less than zero;
  · Clarifying application of guidance for lessors when determining impairment of net investment in the lease;
  · Clarifying whether lessors and lessees should recognize certain transition adjustments to earnings rather than through equity;
  · Clarifying certain transition guidance for amounts previously recognized in business combinations.

 

In July 2018, the FASB also issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. ASU 2018-11 provides entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

 

 8 

 

 

ASU 2018-11 also provides lessors with a practical expedient, by class of underlying asset, to elect not to separate nonlease components from the associated lease component and, instead, to account for those components as a single component if the nonlease components otherwise would be accounted for under the new revenue guidance (Topic 606) and both the timing and pattern of transfer of the nonlease component(s) and associated lease component are the same, and the lease component, if accounted for separately, would be classified as an operating lease. If the nonlease component or components associated with the lease component are the predominant component of the combined component, an entity is required to account for the combined component in accordance with Topic 606. Otherwise, the entity must account for the combined component as an operating lease in accordance with Topic 842.

 

Effective Date: ASU 2016-02 was effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. The effective date of the amendments in ASU 2018-10 and ASU 2018-11 were the same as the effective date for ASU 2016-02.

 

The Company adopted ASU 2016-02 on January 1, 2019 using the optional transition method. The Company also elected the following practical expedients: the package of practical expedients, combining lease and nonlease components by class of underlying asset, and using hindsight in determining the lease terms. The adoption of this standard resulted in the recording of a ROU asset and lease liability of $556,000 as of January 1, 2019 for the Company’s four operating lease obligations. The adoption of this standard did not have a material impact on the Company’s operations, cash flows or capital ratios, nor has it caused the Company to no longer be well capitalized. See Note 14 for more information.

 

Newly Issued, Not Yet Effective Standards

 

ASU 2018-14, Compensation—Retirement Benefits—Defined Benefit Plans—General (Topic 715-20): Disclosure Framework—Changes to the Disclosure Requirements for Defined Benefit Plans

 

Issued: August 2018

 

Summary: ASU 2018-14 modifies the disclosure requirements under ASC 715-20 for employers that sponsor defined benefit pension or other postretirement plans. Those modifications include the removal and addition of disclosure requirements as well as clarifying specific disclosure requirements.

 

Effective Date: The amendments are effective for public business entities for fiscal years ending after December 15, 2020. For all other entities, the amendments are effective for annual reporting periods ending after December 15, 2021. Early adoption is permitted. This Update will have no impact on the Company’s consolidated financial position and results of operations because Juniata’s Board of Directors resolved to terminate the Company’s defined benefit retirement plan, The Juniata Valley Bank Retirement Plan, effective November 30, 2018. All participants have been properly notified and settlement of all obligations is expected to occur in the third quarter of 2019. See Note 11 for additional information.

 

ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement

 

Issued: August 2018

 

Summary: ASU 2018-13 modifies the disclosure requirements for fair value measurements required under ASC 820. Those modifications include the removal and addition of disclosure requirements as well as clarifying specific disclosure requirements.

 

Effective Date: The amendments become effective for all entities for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted upon issuance of this ASU. An entity is permitted to early adopt all disclosure requirements in the ASU or early adopt only the removed and modified disclosures and delay adoption of the additional disclosures until their effective date. This Update is not expected to have an impact on the Company’s consolidated financial position or results of operations.

 

 9 

 

 

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.

 

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 debt securities. For an available for sale 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 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 taken steps to prepare for the implementation when it becomes effective by forming an internal taskforce, gathering pertinent data, participating in training courses, and partnering with a software provider that specializes in ALLL analysis, as well as assessing the sufficiency of data currently available through its core database.

 

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.

 

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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.

 

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 subject to the limitation that cash would be paid for no more than 20% and no less than 15% of Liverpool’s outstanding 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.

 

The purchase price included goodwill and a core deposit intangible of $3,691,000 and $289,000, respectively. The core deposit intangible is being amortized over a ten-year period using a sum of the year’s digits basis. The goodwill is not being amortized but is tested annually for impairment, or more frequently if circumstances require. 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 reflecting circumstances at the merger date. During the three months ended March 31, 2019, Juniata recorded a $92,000 adjustment to goodwill relating to the tax treatment of Liverpool’s acquired net operating loss resulting in goodwill related to the Liverpool acquisition of $3,599,000 as illustrated in the table below.

 

Allocation of the purchase price was as follows:

 

  Recorded at       Recorded at 
(Dollars in thousands)  April 30, 2018   Change   March 31, 2019 
Step One Purchase Price Consideration               
April 30, 2018 JUVF basis in LCB (before gain)  $4,622   $-   $4,622 
Increase in Step One basis from equity gain in acquisition   415    -    415 
Total Step One adjusted basis   5,037    -    5,037 
                
Step Two Purchase Price Consideration               
Purchase price assigned to LCB common shares exchanged for 315,284 JUVF common shares  $6,463   $-   $6,463 
Purchase price assigned to LCB common shares exchanged for cash including
cash in lieu of fractional shares		   1,362    -    1,362 
Total Step Two purchase price consideration   7,825    -    7,825 
Total purchase price   12,862    -    12,862 
                
LCB net assets acquired:               
Tangible common equity   9,246    -    9,246 
Adjustments to reflect assets acquired and liabilities assumed at fair value:               
Total fair value adjustments   (95)   -    (95)
Associated deferred income taxes   20    92    112 
Fair value adjustment to net assets acquired, net of tax   (75)   92    17 
Total LCB net assets acquired   9,171    92    9,263 
Goodwill resulting from the merger  $3,691   $(92)  $3,599 

 

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

 

  Recorded at       Recorded at 
(Dollars in thousands)  April 30, 2018   Change   March 31, 2019 
Total purchase price  $12,862   $-   $12,862 
Net assets acquired:               
Cash and cash equivalents   8,923    -    8,923 
Investments in time deposits with banks   3,675    -    3,675 
Loans   31,331    -    31,331 
Premises and equipment   125    -    125 
Accrued interest receivable   123    -    123 
Core deposit and other intangibles   289    -    289 
Bank owned life insurance   632    -    632 
FHLB stock   124    -    124 
Other assets   267    92    359 
Deposits   (36,052)   -    (36,052)
Accrued interest payable   (17)   -    (17)
Other liabilities   (249)   -    (249)
    9,171    92    9,263 
Goodwill  $3,691   $(92)  $3,599 

 

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.

 

Summarized below is the acquired Liverpool purchased credit impaired loan portfolio as of April 30, 2018.

 

(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 

 

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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 months ended March 31, 2018 that was attributable to the partial ownership of Liverpool 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 March 31, 2018 were adjusted to exclude $69,000 from the income from unconsolidated subsidiary, $64,000 in merger-related expenses and the resulting $1,000 tax expense. A 21% tax rate was assumed. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.

 

    
(Dollars in thousands; except share data)  March 31, 2018 
Net interest income after loan loss provision  $4,962 
Noninterest income   1,147 
Noninterest expense   4,462 
Net income available to common shareholders   1,637 
Net income per common share   0.32 

 

4. Accumulated other Comprehensive loss

 

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

 

        
(Dollars in thousands)  March 31, 2019   December 31, 2018 
Unrealized losses on available for sale securities  $(1,186)  $(2,647)
Unrecognized expense for defined benefit pension   (1,630)   (1,652)
Accumulated other comprehensive loss  $(2,816)  $(4,299)

 

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:

 

  Three Months Ended March 31, 
(Dollars in thousands, except earnings per share data)  2019   2018 
Net income  $1,413   $1,327 
Weighted-average common shares outstanding   5,095    4,770 
Basic earnings per share  $0.28   $0.28 
           
Weighted-average common shares outstanding  $5,095   $4,770 
Common stock equivalents due to effect of stock options   22    17 
Total weighted-average common shares and equivalents   5,117    4,787 
Diluted earnings per share  $0.28   $0.28 

 

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6. Securities

 

Equity Securities

 

Equity securities owned by the Company consist of common stock of various financial services providers. Upon the adoption of ASU 2016-01 on January 1, 2018, all of the Company’ equity securities are within the scope of ASC Topic 321, Investments – Equity Securities. Topic 321 requires all equity securities within its scope to be measured at fair value with changes in fair value recognized in net income. As of March 31, 2019, the Company had $1,127,000 in equity securities recorded at fair value and $1,118,000 in equity securities recorded at fair value at December 31, 2018. The Company recorded a net gain of $9,000 during the three months ended March 31, 2019 and a net loss of $6,000 during the three months ended March 31, 2018 on the consolidated statements of income for the change in fair value of equity securities.

 

Securities Available for Sale

 

Securities classified as available for sale, which include marketable investment securities, are within the scope of ASC Topic 320, Investments – Debt Securities. Topic 320 requires all debt securities within its scope to be stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of other comprehensive income (loss). Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Interest and dividends are recognized as income when earned. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains or losses on the disposition of securities available for sale are based on the net proceeds and the adjusted carrying amount of the securities sold, determined on a specific identification basis.

 

The Company’s available for sale investment portfolio includes primarily bonds issued by U.S. Government sponsored agencies (approximately 17% of the investment portfolio), mortgage-backed securities issued by Government-sponsored agencies and backed by residential mortgages (approximately 78%) and municipal bonds (approximately 5%) as of March 31, 2019. 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 March 31, 2019 and December 31, 2018, 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.

 

   March 31, 2019 
          Gross   Gross 
  Amortized   Fair   Unrealized   Unrealized 
(Dollars in thousands)  Cost   Value   Gains   Losses 
Securities Available for Sale                
Type and Maturity Obligations of U.S. Government agencies and corporations                    
After one year but within five years  $20,999   $20,708   $-   $(291)
After five years but within ten years   2,999    2,963    -    (36)
    23,998    23,671    -    (327)
Obligations of state and political subdivisions                    
Within one year   823    824    1    - 
After one year but within five years   3,688    3,692    10    (6)
After five years but within ten years   2,226    2,204    -    (22)
    6,737    6,720    11    (28)
Mortgage-backed securities   110,981    109,817    355    (1,519)
Total securities available for sale  $141,716   $140,208   $366   $(1,874)

 

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   December 31, 2018 
          Gross   Gross 
  Amortized   Fair   Unrealized   Unrealized 
(Dollars in thousands)  Cost   Value   Gains   Losses 
Securities Available for Sale                
Type and Maturity Obligations of U.S. Government agencies and corporations                    
After one year but within five years  $20,998   $20,355   $-   $(643)
After five years but within ten years   2,999    2,911    -    (88)
    23,997    23,266    -    (731)
Obligations of state and political subdivisions                    
Within one year   826    826    -    - 
After one year but within five years   14,751    14,686    13    (78)
After five years but within ten years   2,779    2,669    -    (110)
    18,356    18,181    13    (188)
Mortgage-backed securities   102,957    100,506    172    (2,623)
Total  $145,310   $141,953   $185   $(3,542)

 

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 $39,537,000 and $50,157,000 at March 31, 2019 and December 31, 2018, respectively.

 

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

 

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 
  March 31, 
(Dollars in thousands)  2019   2018 
Gross proceeds from sales and calls of securities  $11,107   $4,285 
Securities available for sale:          
Gross realized gains from sold and called securities  $5   $- 
Gross realized losses from sold and called securities   (61)   (15)
Net losses from sales and calls of securities  $(56)  $(15)

 

Topic 320 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).

 

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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 March 31, 2019 and December 31, 2018:

 

   Unrealized Losses at March 31, 2019 
   Less Than 12 Months   12 Months or More   Total 
   Number           Number           Number         
  of   Fair   Unrealized   of   Fair   Unrealized   of   Fair   Unrealized 
(Dollars in thousands)  Securities   Value   Losses   Securities   Value   Losses   Securities   Value   Losses 
Obligations of U.S. Government agencies  and corporations   -   $-   $-    14   $23,671   $(327)   14   $23,671   $(327)
Obligations of state and  political subdivisions   -    -    -    4    2,786    (28)   4    2,786    (28)
Mortgage-backed securities   -    -    -    44    76,640    (1,519)   44    76,640    (1,519)
Total temporarily impaired securities   -   $-   $-    62   $103,097   $(1,874)   62   $103,097   $(1,874)

 

   Unrealized Losses at December 31, 2018 
   Less Than 12 Months   12 Months or More   Total 
   Number           Number           Number         
  of   Fair   Unrealized   of   Fair   Unrealized   of   Fair   Unrealized 
(Dollars in thousands)   Securities   Value   Losses   Securities   Value   Losses   Securities   Value   Losses 
Obligations of U.S. Government agencies and corporations   -   $-   $-    14   $23,267   $(731)   14   $23,267   $(731)
Obligations of state and political subdivisions   8    5,055    (10)   13    8,242    (178)   21    13,297    (188)
Mortgage-backed securities   3    6,726    (32)   43    77,170    (2,591)   46    83,896    (2,623)
Total temporarily impaired securities   11   $11,781   $(42)   70   $108,679   $(3,500)   81   $120,460   $(3,542)

 

At March 31, 2019, 14 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. All of these securities have been in a continuous loss position for 12 months or more.

 

At March 31, 2019, 4 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. All of these securities have been in a continuous loss position for 12 months or more.

 

At March 31, 2019, 44 mortgage-backed securities had an unrealized loss that did not exceed 2.0% of the amortized cost of the securities portfolio. All of these securities have 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, March 31, 2019, March 31, 2018 and December 31, 2018, respectively.

 

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7. Loans and Related Allowance for Credit Losses

 

Loans that the Company originated and 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. Loans acquired through a business combination are discussed under the heading “Acquired Loans”. Interest income on all loans, other than nonaccrual loans, is accrued over the term of the loans based on the amount of principal outstanding. Unearned income is amortized to income over the life of the loans, using the interest method.

 

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

 

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

 

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

 

Loans Held for Sale

 

The Company 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.

 

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

 

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

 

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

 

Commercial Real Estate Lending

 

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

 

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

 

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

 

Real Estate Construction Lending

 

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

 

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

 

In underwriting commercial real estate construction loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, 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.

 

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

 

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

 

Obligations of States and Political Subdivisions

 

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

 

Personal Lending

 

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

 

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

 

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

 

Allowance for Credit Losses

 

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

 

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

 

 19 

 

 

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 March 31, 2019 was adequate.

 

There are two components of the allowance: 1) specific allowances allocated to loans evaluated for impairment under ASC Section 310-10-35; and 2) allowances calculated for pools of loans evaluated collectively for impairment under ASC Subtopic 450-20 (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, accounts receivable aging, 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 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.

 

 20 

 

 

The component of the allowance for pooled loan contingencies relates to other loans that have been segmented into risk rated categories. In accordance with ASC Subtopic 450-20, when measuring estimated credit losses, these loans are grouped into homogenous pools with similar characteristics and evaluated collectively considering both quantitative measures, such as historical loss, and qualitative measures, in the form of environmental adjustments.

 

Some portfolio segments are further disaggregated and evaluated collectively for impairment based on "class segments," which are largely based on the type of collateral underlying each loan. For commercial, financial and agricultural loans, class segments include commercial loans secured by other-than real estate collateral. Real estate – commercial class segments include loans secured by farmland, multi-family properties, owner-occupied non-farm, non-residential properties and other nonfarm non-residential properties. Real estate – mortgage includes loans secured by first and junior liens on residential real estate. Construction loan class segments include loans secured by commercial real estate, loans to commercial borrowers secured by residential real estate and loans to individuals secured by residential real estate. Personal loan class segments include direct consumer installment loans, indirect automobile loans and other revolving and unsecured loans to individuals.

 

Quantitative factor determination:

An average annual loss rate is calculated for each pool through an analysis of historical losses over a five-year look-back period. Using data for each loan, a loss emergence period is determined within each segmented class pool. The loss emergence period reflects the approximate length of time from the point when a loss is incurred (the loss trigger event) to the point of loss confirmation (the date of eventual charge-off). The loss emergence period is applied to the average annual loss to produce the qualitative factor for each pooled class segment.

 

Qualitative factor determination:

Historical loss rates computed in the quantitative component reflects an estimate of the level of incurred losses in the portfolio based on historical experience. Management considers that the current conditions may deviate from those that prevailed over the historical look-back period. Thus, the quantitative rates are an imperfect estimate, necessitating an evaluation of qualitative considerations (i.e. environmental factors) to incorporate these risks.

 

Management considered qualitative, environmental risk factors including:

 

  · National, regional and local economic and business conditions, and developments that affect the collectability of the portfolio, including the condition of various market segments;
  · Changes in the volume and severity of past due loans, the volume of nonaccrual loans, and the volume and severity of adversely classified loans;
  · Changes in the nature and volume of the portfolio and terms of loans;
  · Changes in the experience, ability and depth of lending and credit management and other relevant staff;
  · Existence and effect of any concentrations of credit and changes in the level of such concentrations;
  · Changes in the quality of the loan review system;
  · Changes in lending policies and procedures including changes in underwriting standards and collection, charge-off and recovery practices;
  · Changes in the value of underlying collateral for collateral-dependent loans; and
  · Effect of external influences, including competition, legal and regulatory requirements.

 

Within each loan segment, an analysis was performed over a ten-year look-back period to discover peak historical losses, and with this data, management established ranges of risk from minimal to very high, for each risk factor, to produce a supportable anchor for risk assignment. Based on the framework for risk factor evaluation and range of adjustments established through the anchoring process, a risk assessment and corresponding adjustment was assigned for each portfolio segment as of March 31, 2019. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.

 

The combination of quantitative and qualitative factors was applied to year-end balances in each pooled segment to establish the overall allowance.

 

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.

 

 21 

 

 

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 March 31, 2019 and December 31, 2018.

 

      Special             
(Dollars in thousands)  Pass   Mention   Substandard   Doubtful   Total 
As of March 31, 2019                         
Commercial, financial and agricultural  $44,320   $4,097   $956   $-   $49,373 
Real estate - commercial   124,394    7,566    6,944    892    139,796 
Real estate - construction   34,638    303    2,206    -    37,147 
Real estate - mortgage   155,860    24    2,600    152    158,636 
Obligations of states and political subdivisions   19,870    -    -    -    19,870 
Personal   10,143    -    14    -    10,157 
Total  $389,225   $11,990   $12,720   $1,044   $414,979 

 

      Special             
(Dollars in thousands)  Pass   Mention   Substandard   Doubtful   Total 
As of December 31, 2018                         
Commercial, financial and agricultural  $42,757   $2,992   $814   $-   $46,563 
Real estate - commercial   125,352    8,590    6,459    894    141,295 
Real estate - construction   34,131    -    2,528    29    36,688 
Real estate - mortgage   160,774    24    2,569    181    163,548 
Obligations of states and political subdivisions   19,129    -    -    -    19,129 
Personal   10,389    -    19    -    10,408 
Total  $392,532   $11,606   $12,389   $1,104   $417,631 

 

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. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process at March 31, 2019 and December 31, 2018 totaled $47,000 and $94,000, respectively. Charge-offs 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.

 

 22 

 

 

The following table summarizes information regarding impaired loans by portfolio class as of March 31, 2019 and December 31, 2018.

 

   As of March 31, 2019   As of December 31, 2018 
        Unpaid           Unpaid     
  Recorded    Principal   Related   Recorded   Principal   Related 
(Dollars in thousands)  Investment    Balance   Allowance   Investment   Balance   Allowance 
Impaired loans                               
With no related allowance recorded:                               
Real estate - commercial  $1,214    $1,612   $-   $909   $1,303   $- 
Acquired with credit deterioration   531     585    -    544    592    - 
Real estate - construction   -     -    -    27    1,123    - 
Real estate - mortgage   1,309     1,970    -    1,180    1,912    - 
Acquired with credit deterioration   944     1,050    -    971    1,061    - 
Personal   14     14    -    17    17    - 
                                
Total:                               
Real estate - commercial   1,214    $1,612   $-   $909   $1,303   $- 
Acquired with credit deterioration   531     585    -    544    592    - 
Real estate - construction   -     -    -    27    1,123    - 
Real estate - mortgage   1,309     1,970    -    1,180    1,912    - 
Acquired with credit deterioration   944     1,050    -    971    1,061    - 
Personal   14     14    -    17    17    - 
   $4,012    $5,231   $-   $3,648   $6,008   $- 

 

Average recorded investment of impaired loans and related interest income recognized for the three months ended March 31, 2019 and 2018 are summarized in the tables below.

 

   Three Months Ended March 31, 2019   Three Months Ended March 31, 2018 
   Average   Interest   Cash Basis   Average   Interest   Cash Basis 
  Recorded   Income   Interest   Recorded   Income   Interest 
(Dollars in thousands)  Investment   Recognized   Income   Investment   Recognized   Income 
Impaired loans                              
With no related allowance recorded:                              
Commercial, financial and agricultural  $-   $-   $-   $235   $-   $- 
Real estate - commercial   1,062    3    -    2,965    -    - 
Acquired with credit deterioration   538    -    -    181    -    - 
Real estate - construction   14    -    -    -    -    - 
Real estate - mortgage   1,245    5    12    2,166    5    1 
Acquired with credit deterioration   958    -    -    333    -    - 
Personal   16    -    -    -    -    - 
                               
Total:                              
Commercial, financial and agricultural  $-   $-   $-   $235   $-   $- 
Real estate - commercial   1,062    3    -    2,965    -    - 
Acquired with credit deterioration   538    -    -    181    -    - 
Real estate - construction   14    -    -    -    -    - 
Real estate - mortgage   1,245    5    12    2,166    5    1 
Acquired with credit deterioration   958    -    -    333    -    - 
Personal   16    -    -    -    -    - 
   $3,833   $8   $12   $5,880   $5   $1 

 

 23 

 

 

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2019 and December 31, 2018.

 

(Dollars in thousands)  March 31, 2019   December 31, 2018 
Nonaccrual loans:          
Real estate - commercial  $892   $908 
Real estate - construction   -    29 
Real estate - mortgage   885    753 
Personal   14    17 
Total  $1,791   $1,707 

 

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 March 31, 2019 and December 31, 2018.

 

                           Loans Past 
                           Due Greater 
   30-59   60-89   Greater               than 90 
  Days Past   Days Past   than 90   Total Past       Total   Days and 
(Dollars in thousands)  Due   Due   Days   Due   Current   Loans   Accruing (1) 
As of March 31, 2019                                   
Commercial, financial and agricultural  $11    -    -   $11   $49,362   $49,373   $- 
Real estate - commercial:                                   
Real estate - commercial   80    121    892    1,093    138,172    139,265    - 
Acquired with credit deterioration   -    137    -    137    394    531    - 
Real estate - construction   332    -    -    332    36,815    37,147    - 
Real estate - mortgage:                                   
Real estate - mortgage   228    -    494    722    156,970    157,692    - 
Acquired with credit deterioration   139    -    6    145    799    944    6 
Obligations of states and political subdivisions   -    -    -    -    19,870    19,870    - 
Personal   72    25    14    111    10,046    10,157    - 
Total  $862   $283   $1,406   $2,551   $412,428   $414,979   $6 

 

                           Loans Past 
                           Due Greater 
   30-59   60-89   Greater               than 90 
  Days Past   Days Past   than 90   Total Past       Total   Days and 
(Dollars in thousands)  Due   Due   Days   Due   Current   Loans   Accruing (1) 
As of December 31, 2018                                   
Commercial, financial and agricultural  $6   $-   $-   $6   $46,557   $46,563   $- 
Real estate - commercial:                                   
Real estate - commercial   -    -    1,214    1,214    139,890    141,104    306 
Acquired with credit deterioration   140    -    -    140    51    191    - 
Real estate - construction   32    -    29    61    36,627    36,688    - 
Real estate - mortgage:                                   
Real estate - mortgage   824    561    175    1,560    161,651    163,211    23 
Acquired with credit deterioration   259    -    7    266    71    337    7 
Obligations of states and political subdivisions   -    -    -    -    19,129    19,129    - 
Personal   24    15    17    56    10,352    10,408    - 
Total  $1,285   $576   $1,442   $3,303   $414,328   $417,631   $336 

 

(1) These loans are guaranteed, or well-secured, and there is an effective means of collection in process.

 

 24 

 

 

The following tables summarize information regarding troubled debt restructurings by loan portfolio class at March 31, 2019 and December 31, 2018.

 

       Pre-Modification   Post-Modification     
  Number of   Outstanding Recorded   Outstanding Recorded     
(Dollars in thousands)  Contracts   Investment   Investment   Recorded Investment 
As of March 31, 2019                    
Accruing troubled debt restructurings:                    
Real estate - commercial   1   $306   $326   $324 
Real estate - mortgage   8    498    527    426 
Non-accruing troubled debt restructurings:                    
Real estate - mortgage   1    25    25    16 
    10   $829   $878   $766 

 

       Pre-Modification   Post-Modification     
  Number of   Outstanding Recorded   Outstanding Recorded     
(Dollars in thousands)  Contracts   Investment   Investment   Recorded Investment 
As of December 31, 2018                    
Accruing troubled debt restructurings:                    
Real estate - mortgage   8   $522   $550   $428 
Non-accruing troubled debt restructurings:                    
Real estate - mortgage   1    25    25    17 
    9   $547   $575   $445 

 

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 March 31, 2019, 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 months ended March 31, 2019 or 2018 within 12 months of restructure. On December 31, 2018, there were no specific reserves carried for the troubled debt restructurings, nor any charge-offs related to the troubled debt restructured loans. 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 were no loan terms modified resulting in troubled debt restructuring during the three months ended March 31, 2018. The following table lists the loans whose terms were modified resulting in a troubled debt restructuring during the three months ended March 31, 2019.

 

       Pre-Modification   Post-Modification     
  Number of   Outstanding Recorded   Outstanding Recorded     
(Dollars in thousands)  Contracts   Investment   Investment   Recorded Investment 
Three Months Ended March 31, 2019                    
Accruing troubled debt restructurings:                    
Real estate - commercial   1   $306   $326   $324 
Real estate - mortgage   1    9    9    8 
    2   $315   $335   $332 

 

 25 

 

 

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, March 31, 2019

 

                    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, 2019  $275   $1,074    $558   $1,035   $20   $72   $3,034 
Charge-offs   -    (15)    -    (47)   -    (11)   (73)
Recoveries   2    7     -    5    -    4    18 
Provisions   6    (23)    14    12    1    5    15 
Ending balance, March 31, 2019  $283   $1,043    $572   $1,005   $21   $70   $2,994 
collectively evaluated for impairment  $283   $1,043    $572   $1,005   $21   $70   $2,994 
                                     
Loans receivable:                                    
Ending balance  $49,373   $139,796    $37,147   $158,636   $19,870   $10,157   $414,979 
individually evaluated for impairment   -   $1,214    $-   $1,309   $-   $14    2,537 
acquired with credit deterioration   -    531     -    944    -   $-    1,475 
collectively evaluated for impairment  $49,373   $138,051    $37,147   $156,383   $19,870   $10,143   $410,967 

 

As of, and for the periods ended, March 31, 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, January 1, 2018  $273   $1,022   $288   $1,285   $-   $71   $2,939 
Charge-offs   -    (51)   -    (11)   -    (11)   (73)
Recoveries   3    5    -    -    -    3    11 
Provisions   43    83    52    (15)   -    (5)   158 
Ending balance, March 31, 2018  $319   $1,059   $340   $1,259   $-   $58   $3,035 
collectively evaluated for impairment  $319   $1,059   $340   $1,259   $-   $58   $3,035 
                                    
Loans receivable:                                   
Ending balance  $51,262   $138,470   $33,329   $143,580   $13,428   $9,111   $389,180 
individually evaluated for impairment   2    899    -    2,099    -    -    3,000 
acquired with credit deterioration   -    170    -    329    -    -    499 
collectively evaluated for impairment  $51,260   $137,401   $33,329   $141,152   $13,428   $9,111   $385,681 

 

As of December 31, 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, January 1, 2018  $273   $1,022   $288   $1,285   $-   $71   $2,939 
Charge-offs   -    (60)   -    (183)   -    (42)   (285)
Recoveries   10    5    -    12    -    16    43 
Provisions   (8)   107    270    (79)   20    27    337 
Ending balance, December 31, 2018  $275   $1,074   $558   $1,035   $20   $72   $3,034 
collectively evaluated for impairment  $275   $1,074   $558   $1,035   $20   $72   $3,034 
                                    
Loans receivable:                                   
Ending balance  $46,563   $141,295   $36,688   $163,548   $19,129   $10,408   $417,631 
individually evaluated for impairment   -    909    27    1,180    -    17    2,133 
acquired with credit deterioration   -    544    -    971    -    -    1,515 
collectively evaluated for impairment  $46,563   $139,842   $36,661   $161,397   $19,129   $10,391   $413,983 

 

 26 

 

 

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 the remainder of the outstanding common stock of Liverpool Community Bank on April 30, 2018, and as a result, carries goodwill of $3,599,000 relating to the acquisition.

 

Total goodwill at March 31, 2019 and December 31, 2018 was $9,047,000 and $9,139,000, respectively. Goodwill is not amortized but is tested 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 month periods ended March 31, 2019 or 2018.

 

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. Amortization expense recognized for the intangibles related to the FNBPA acquisition in the three months ended March 31, 2019 was $10,000.

 

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 the three months ended March 31, 2019 was $12,000.

 

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

 

   FNBPA   LCB 
   Acquisition   Acquisition 
   Core   Core 
(Dollars in thousands)  Deposit   Deposit 
   Intangible   Intangible 
Beginning Balance at Acquisition Date  $303   $289 
Amortization expense recorded prior to January 1, 2018   108    - 
Amortization expense recorded in the twelve months ended December 31, 2018   44    35 
Unamortized balance as of December 31, 2018   151    254 
Amortization expense recorded in the three months ended March 31, 2019   10    12 
Unamortized balance as of March 31, 2019  $141   $242 
           
Scheduled remaining amortization expense for years ended:          
December 31, 2019  $28   $37 
December 31, 2020   33    44 
December 31, 2021   27    39 
December 31, 2022   22    33 
December 31, 2023   16    28 
After December 31, 2023   15    61 

 

 27 

 

 

9. Unconsolidated Subsidiary

 

The Company no longer has an investment in an unconsolidated subsidiary following its acquisition of the remainder of the outstanding common stock 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.

 

10. Fair Value Measurement

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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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.

 

 29 

 

 

The following tables summarize financial assets and financial liabilities measured at fair value as of March 31, 2019 and December 31, 2018, 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 three months ended March 31, 2019 or 2018.

 

       (Level 1)   (Level 2)   (Level 3) 
       Quoted Prices in   Significant   Significant 
       Active Markets   Other   Other 
(Dollars in thousands)  March 31,   for Identical   Observable   Unobservable 
   2019   Assets   Inputs   Inputs 
Measured at fair value on a recurring basis:                    
Debt securities available-for-sale:                    
Obligations of U.S. Government agencies and corporations  $23,671   $-   $23,671   $- 
Obligations of state and political subdivisions   6,720    -    6,720    - 
Mortgage-backed securities   109,817    -    109,817    - 
                     
Measured at fair value on a non-recurring basis:                    
Impaired loans  $1,044   $-   $-   $1,044 
Other real estate owned   149    -    -    149 
Mortgage servicing rights   193    -    -    193 

 

       (Level 1)   (Level 2)   (Level 3) 
       Quoted Prices in   Significant   Significant 
       Active Markets   Other   Other 
(Dollars in thousands)  December 31,   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  $23,266   $-   $23,266   $- 
Obligations of state and political subdivisions   18,181    -    18,181    - 
Mortgage-backed securities   100,506    -    100,506    - 
                     
Measured at fair value on a non-recurring basis:                    
Impaired loans  $1,104   $-   $-   $1,104 
Other real estate owned   149    -    -    149 
Mortgage servicing rights   200    -    -    200 

 

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)                  
March 31, 2019  Fair Value
Estimate		   Valuation Technique  Unobservable Input  Range   Weighted
Average		 
Impaired loans  $1,044   Appraisal of collateral (1)  Appraisal and liquidation adjustments (2)   0% - 15%    14% 
Other real estate owned   149   Appraisal of collateral (1)  Appraisal and liquidation adjustments (2)   2%    2%
Mortgage servicing rights   193   Multiple of annual servicing fee  Estimated pre-payment speed, based on rate and term   300% - 400%    370%

 

 30 

 

 

(Dollars in thousands)                  
December 31, 2018  Fair Value
Estimate		   Valuation Technique  Unobservable Input  Range   Weighted
Average		 
Impaired loans  $1,104   Appraisal of collateral (1)  Appraisal and liquidation adjustments (2)   0% - 15%    14% 
Other real estate owned   149   Appraisal of collateral (1)  Appraisal and liquidation adjustments (2)   2%    2% 
Mortgage servicing rights   200   Multiple of annual servicing fee  Estimated pre-payment speed, based on rate and term   300% - 400%    369% 

 

(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.

 

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

 

   Financial Instruments 
   March 31, 2019   December 31, 2018 
(Dollars in thousands)  Carrying   Fair   Carrying   Fair 
   Value   Value   Value   Value 
Financial assets:                    
Cash and due from banks  $15,002   $15,002   $15,617   $15,617 
Interest bearing deposits with banks   5,539    5,539    110    110 
Federal funds sold   3,736    3,736    729    729 
Interest bearing time deposits with banks   2,800    2,792    3,290    3,290 
Securities   141,335    141,335    141,953    141,953 
Restricted investment in FHLB stock   2,535    2,535    2,441    2,441 
Loans, net of allowance for loan losses   411,985    412,579    414,597    415,195 
Mortgage servicing rights   193    193    200    200 
Accrued interest receivable   1,709    1,709    1,681    1,681 
                     
Financial liabilities:                    
Non-interest bearing deposits  $128,670   $128,670   $126,057    126,057 
Interest bearing deposits   395,186    394,889    395,665    395,226 
Securities sold under agreements to repurchase   2,683    2,683    2,911    2,911 
Short-term borrowings   -    -    11,600    11,600 
Long-term debt   25,000    25,058    15,000    14,958 
Other interest bearing liabilities   1,572    1,573    1,596    1,597 
Accrued interest payable   415    415    289    289 
                     
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 March 31, 2019 and December 31, 2018. The tables exclude 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 
March 31, 2019                         
Financial instruments - Assets                         
Interest bearing time deposits with banks  $2,800   $2,792   $-   $2,792   $- 
Loans, net of allowance for loan losses   411,985    412,579    -    -    412,579 
Financial instruments - Liabilities                         
Interest bearing deposits  $395,186   $394,889   $-   $394,889   $- 
Long-term debt   25,000    25,058    -    25,058    - 
Other interest bearing liabilities   1,572    1,573    -    1,573    - 

 

 32 

 

 

           (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, 2018                         
Financial instruments - Assets                         
Interest bearing time deposits with banks  $3,290   $3,290   $-   $3,290   $- 
Loans, net of allowance for loan losses   414,597    415,195    -    -    415,195 
Financial instruments - Liabilities                         
Interest bearing deposits  $395,665   $395,226   $-   $395,226   $- 
Long-term debt   15,000    14,958    -    14,958    - 
Other interest bearing liabilities   1,596    1,597    -    1,597    - 

 

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.

 

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 fourth 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 and completed the second step of this strategy during the third quarter of 2018 by making a lump sum payment offer to a small group of terminated vested participants in the Company’s defined benefit plan. This second step further reduced Juniata’s remaining pension liability by approximately 9%, which resulted in a pre-tax charge to earnings of $210,000 in the third quarter of 2018. The pre-tax charge represents a further acceleration of pension expenses that would otherwise have impacted Juniata’s future earnings. The Company also made a $1,350,000 contribution to the defined benefit pension plan during the third quarter of 2018.

 

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 did not make a contribution in the three months ended March 31, 2019 and March 31, 2018.

 

Juniata’s Board of Directors resolved to terminate the JVB Plan, effective November 30, 2018. All participants have been properly notified and settlement of all obligations is expected to occur by the third quarter of 2019.

 

 33 

 

 

Pension expense included the following components for the three months ended March 31, 2019 and 2018:

 

   Three Months Ended 
(Dollars in thousands)  March 31, 
   2019   2018 
Components of net periodic pension cost (benefit):        
Interest cost  $125   $132 
Expected return on plan assets   (124)   (192)
Recognized net actuarial loss   28    41 
Net periodic pension cost (benefit)  $29   $(19)
           
Amortization of net actuarial loss recognized in other comprehensive income  $(28)  $(41)
           
Total recognized in net periodic pension cost (benefit) and other comprehensive income  $1   $(60)

 

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 March 31, 2019, the Company had $88,350,000 outstanding in loan commitments and other unused lines of credit extended to its customers as compared to $87,223,000 at December 31, 2018.

 

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had outstanding $2,356,000 and $2,749,000 of financial and performance letters of credit commitments as of March 31, 2019 and December 31, 2018, respectively. Commercial letters of credit as of March 31, 2019 and December 31, 2018 totaled $9,867,000 and $8,925,000, 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 March 31, 2019 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 ASUs that modified Topic 606. The Company elected to apply the ASU and all related ASU’s using the modified retrospective approach applied to all contracts initiated 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 Topic 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.

 

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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 Topic 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 Topic 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.

 

A description of the Company’s sources of revenue accounted for under Topic 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 month periods ended March 31, 2019 and 2018 totaled $90,000 during both periods. 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 month periods ended March 31, 2019 and 2018 totaled $9,000 and $12,000, 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 Topic 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.

 

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14. LEASES

 

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plan or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU 2016-02, Leases (Topic 842), and all subsequent ASUs that modified Topic 842 using the optional transition method. For the Company, Topic 842 affected the accounting treatment for its four operating lease agreements in which the Company is the lessee.

 

The Company elected the package of practical expedients, which removed the requirements to reassess whether any expired or existing contracts contain leases, reassess the lease classification for any expired or existing leases, and reassess the initial direct costs for any existing leases. The Company also elected two other practical expedients allowing the combination of lease and nonlease components by class of underlying asset and using hindsight in determining the lease terms since most of the leases have an extension option.

 

The four operating leases, one of which is with a related party, are comprised of real estate property for branch and office space with terms extending through 2029. Operating leases were previously not recognized on the Company’s consolidated statements of condition, but with the adoption of Topic 842, operating lease agreements are recognized on the consolidated statements of condition as a ROU asset and a corresponding lease liability. As of March 31, 2019, the Company had operating lease ROU assets totaling $534,000 included in other assets and operating lease liabilities totaling $535,000 included in other liabilities.

 

The calculated amount of the ROU assets and lease liabilities are impacted by the length of the lease term and the discount rate used to calculate the present value of the minimum lease payments. The Company’s lease agreements often include one or more options to renew at the Company’s discretion. If at lease inception, the Company considers the exercising of a renewal option to be reasonably certain, the Company will include the extended term in the calculation of the ROU asset and lease liability.

 

Topic 842 requires the use of the rate implicit in the lease as the discount rate if that rate is readily determinable. As this rate is rarely determinable, the Company utilized its incremental borrowing rate at lease inception, which is the rate the Company would have incurred to borrow on a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Because the four operating leases existed prior to the adoption of Topic 842 on January 1, 2019, the incremental borrowing rate for the remaining lease term at January 1, 2019 was used.

 

As of March 31, 2019, the weighted-average remaining operating lease term was 7.9 years and the weighted-average discount rate was 5.45%.

 

The Company elected, for the real estate class of underlying assets which is currently its only class, not to separate lease and nonlease components and to account for them as a single lease component. The Company has one operating lease agreement containing a monthly ATM surcharge, which is combined with the property rental payment as a result of electing the practical expedient. The Company’s total operating lease cost for the three months ended March 31, 2019 was $30,000, of which $6,000 was to a related party.

 

The future minimum payments for operating leases with initial or remaining terms of one year or more as of March 31, 2019 were as follows:

 

(Dollars in thousands)    
     
Twelve Months Ended:     
March 31, 2020  $120 
March 31, 2021   116 
March 31, 2022   97 
March 31, 2023   47 
March 31, 2024   47 
Thereafter   233 
Total Future Minimum Lease Payments   660 
Amounts Representing Interest   (125)
Present Value of Net Future Minimum Lease Payments  $535 

 

15. Subsequent Events

 

On April 17, 2019, the Board of Directors declared a cash dividend of $0.22 per share to shareholders of record on May 15, 2019, payable on May 31, 2019.

 

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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. 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 and 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 impact of governmental monetary and fiscal policies, as well as legislative and regulatory changes;
  · the results of regulatory examination and supervision processes;
  · the failure of assumptions underlying the establishment of reserves for loan and lease losses, and estimations of collateral values and various financial assets and liabilities;
  · the increasing time and expense associated with regulatory compliance and risk management;
  · the ability to implement business strategies, including business acquisition activities and organic branch, product, and service expansion strategies;
  · 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 on the presentation in 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 in the Company’s financial condition;
  · acts of war or terrorism;
  · disruptions due to flooding, severe weather, or other natural disasters;
  · failure of third-party service providers to perform their contractual obligations; and
  · the impact on earnings of the Company’s strategy to terminate 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, 2018, 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.

 

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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, 2018. 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 available for sale debt securities portfolio for other-than-temporary impairment. Any policies adopted after this date are included in Note 2 of this Quarterly Report.

 

General:

 

The following discussion relates to the consolidated financial condition of the Company as of March 31, 2019, compared to December 31, 2018, and the consolidated results of operations for the three months ended March 31, 2019, compared to the same period in 2018. 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. On April 30, 2018, Juniata acquired the remainder of the outstanding common stock of the Liverpool Community Bank of which it previously owned 39.16%. As of the merger date, total assets increased by approximately $49,180,000, or 8%. Juniata now operates a total of 16 locations in Pennsylvania.

 

Financial Condition:

 

Total assets as of March 31, 2019, were $627,782,000, an increase of $2,546,000, or 0.4%, compared to December 31, 2018. Comparing the balances at March 31, 2019 and December 31, 2018, total cash and cash equivalents increased by $7,821,000 and deposits increased by $2,134,000, with majority of the deposit growth occurring in non-interest bearing deposits, while total loans declined by $2,652,000. During the same period, the Company utilized cash flows from the investment portfolio to reduce higher cost borrowings. This strategy led to a strategic decline in the investment portfolio of $1,745,000 and contributed to the decline in total borrowings.

 

The table below shows changes in deposit volumes by type of deposit between December 31, 2018 and March 31, 2019.

 

(Dollars in thousands)  March 31,   December 31,   Change 
   2019   2018   $   % 
Deposits:                
Demand, non-interest bearing  $128,670   $126,057   $2,613    2.1%
Interest bearing demand and money market   146,789    147,413    (624)   (0.4)
Savings   98,971    99,236    (265)   (0.3)
Time deposits, $250,000 and more   8,390    8,368    22    0.3 
Other time deposits   141,036    140,648    388    0.3 
Total deposits  $523,856   $521,722   $2,134    0.4%

 

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Total loans decreased $2,652,000, or 0.6%, between December 31, 2018 and March 31, 2019. As shown in the table below, the majority of the decline was in commercial real estate and residential mortgage loans, which was partially offset by increases in commercial, financial and agricultural loans, obligations of states and political subdivisions, as well as real estate construction.

 

(Dollars in thousands)  March 31,   December 31,   Change 
   2019   2018   $   % 
Loans:                
Commercial, financial and agricultural  $49,373   $46,563   $2,810    6.0%
Real estate - commercial   139,796    141,295    (1,499)   (1.1)
Real estate - construction   37,147    36,688    459    1.3 
Real estate - mortgage   158,636    163,548    (4,912)   (3.0)
Obligations of states and political subdivisions   19,870    19,129    741    3.9 
Personal   10,157    10,408    (251)   (2.4)
Total loans  $414,979   $417,631   $(2,652)   (0.6)%

 

A summary of the activity in the allowance for loan losses for each of the three month periods ended March 31, 2019 and 2018 is presented below.

 

(Dollars in thousands)  Periods Ended March 31, 
   2019   2018 
Balance of allowance - January 1  $3,034   $2,939 
Loans charged off   (73)   (73)
Recoveries of loans previously charged off   18    11 
Net charge-offs   (55)   (62)
Provision for loan losses   15    158 
Balance of allowance - end of period  $2,994   $3,035 
           
Ratio of net charge-offs during period to average loans outstanding   0.01%   0.02%

 

As of March 31, 2019, 29 loans (exclusive of loans acquired with existing credit deterioration) with aggregate outstanding balances of $2,537,000 were individually evaluated for impairment. A collateral analysis was performed on each of these 29 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 March 31, 2019, there were $11,990,000 in special mention loans compared to $11,606,000 at December 31, 2018 and $12,720,000 in substandard loans compared to $12,389,000 at December 31, 2018.

 

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

 

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The following is a summary of the Bank’s non-performing loans on March 31, 2019 compared to December 31, 2018.

 

(Dollar amounts in thousands)  As of and for the   As of and for the 
   three months ended   year ended 
   March 31, 2019   December 31, 2018 
Non-performing loans          
Non-accrual loans  $1,791   $1,707 
Accruing loans past due 90 days or more, exclusive of loans acquired with credit deterioration   -    329 
Restructured loans in default and non-accruing   -    39 
Total  $1,791   $2,075 
           
Average loans outstanding   421,298    409,362 
           
Ratio of non-performing loans to average loans outstanding   0.43%   0.51%

 

Stockholders’ equity increased from December 31, 2018 to March 31, 2019 by $1,795,000, or 2.7%. The Company’s net income exceeded dividends paid by $293,000. The adjustment to accumulated other comprehensive loss to record the reclassification adjustment for losses on sales of debt securities and the amortization of the costs associated with the Company’s defined benefit retirement plan increased the Company’s equity by $67,000. The change in net unrealized gains from the change in market value of securities available for sale increased shareholders’ equity by $1,416,000 when comparing March 31, 2019 to December 31, 2018. Stock based compensation expense recorded pursuant to the Company’s Stock Option Plan added $19,000 to stockholders’ equity during the three month period.

 

Subsequent to March 31, 2019, the following event took place:

 

On April 17, 2019, the Board of Directors declared a cash dividend of $0.22 per share to shareholders of record on May 15, 2019, payable on May 31, 2019.

 

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Comparison of the Three Months Ended March 31, 2019 and 2018

 

Operations Overview:

 

Net income for the first quarter of 2019 was $1,413,000, an increase of $86,000, or 6.5%, when compared to the first quarter of 2018, while basic and diluted earnings per share were $0.28 in both periods. Annualized return on average equity for the three months ended March 31, 2019 was 8.38%, compared to 9.15% for the same period in 2018. For the three months ended March 31, annualized return on average assets was 0.90% in 2019, compared to 0.89% in 2018. The comparability of the results of operations for the three months ended March 31, 2019 were impacted by the acquisition of Liverpool Community Bank on April 30, 2018. Further details are noted in the sections that follow.

 

Presented below are selected key ratios for the two periods:

 

   Three Months Ended 
   March 31, 
   2019   2018 
Return on average assets (annualized)   0.90%   0.89%
Return on average equity (annualized)   8.38%   9.15%
Average equity to average assets   10.79%   9.73%
           
Non-interest income, excluding securities gains (losses), as a percentage of average assets (annualized)   0.74%   0.80%
           
Non-interest expense, excluding merger expenses, as a percentage of average assets (annualized)   3.09%   2.91%

 

The discussion that follows further explains changes in the components of net income when comparing the first quarter of 2019 with the first quarter of 2018.

 

Net Interest Income:

 

Net interest income, after the provision for loan losses, increased during the three months ended March 31, 2019 by $657,000, or 14.6%, when compared to the three months ended March 31, 2018. Both net interest income growth and a decline in the provision for loan losses contributed to the increase. Overall, average earning assets increased 5.0%, while average interest bearing liabilities increased 3.5%. Net interest margin, on a fully tax equivalent basis, increased from 3.45% during the three months ended March 31, 2018 to 3.65% during the three months ended March 31, 2019.

 

Average loan balances and interest on loans increased by $31,275,000 and $704,000, respectively, for the first quarter of 2019 compared to the same period in 2018. The increase in the average volume of loans outstanding and the 33 basis point increase in the weighted average yield on loans increased interest income by approximately $349,000 and $355,000, respectively.

 

Interest earned on investment securities increased $32,000 in the first quarter of 2019 compared to the first quarter of 2018, while the average balance of investment securities declined by $10,321,000, or 6.5%, during the period. The decline in the average balance decreased interest income by $50,000, while the increase in the overall pre-tax yield of 24 basis points on the investment securities portfolio added $82,000 to interest income.

 

Average earning assets increased $27,522,000, to $575,732,000, primarily due to the 8.0% increase in average loans. The yield on earning assets increased to 4.32% during the three months ended March 31, 2019 from 3.97% in the same period in 2018. The average balance of interest bearing liabilities and non-interest bearing liabilities increased over the period by $14,709,000 and $5,082,000, respectively, compared to the same 2018 period. In addition, the cost to fund interest bearing assets with interest bearing liabilities increased 22 basis points, to 0.99% during the first quarter of 2019 compared to the same period in 2018.

 

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The table below shows the net interest margin on a fully tax-equivalent basis for the three months ended March 31, 2019 and 2018.

 

Average Balance Sheets and Net Interest Income Analysis

 

 

   Three Months Ended   Three Months Ended     
(Dollars in thousands)  March 31, 2019   March 31, 2018     
   Average       Yield/   Average       Yield/   Increase (Decrease) Due To (6) 
   Balance (1)   Interest   Rate   Balance (1)   Interest   Rate   Volume   Rate   Total 
ASSETS                                             
Interest earning assets:                                             
Taxable loans (5)  $386,432   $4,950    5.12%  $361,270   $4,325    4.79%  $301   $324   $625 
Tax-exempt loans   34,866    305    3.50    28,753    226    3.14    48    31    79 
Total loans   421,298    5,255    4.99    390,023    4,551    4.67    349    355    704 
Taxable investment securities   135,364    849    2.51    136,158    775    2.28    (5)   79    74 
Tax-exempt investment securities   11,976    61    2.03    21,503    103    1.92    (45)   3    (42)
Total investment securities   147,340    910    2.47    157,661    878    2.23    (50)   82    32 
                                              
Interest bearing deposits   5,361    43    3.19    526    10    7.60    92    (59)   33 
Federal funds sold   1,733    10    2.22    -    -    0.00    -    10    10 
Total interest earning assets   575,732    6,218    4.32    548,210    5,439    3.97    391    388    779 
                                              
Other assets (7)   49,325              47,642                          
Total assets  $625,057             $595,852                          
                                              
LIABILITIES AND STOCKHOLDERS' EQUITY                                             
Interest bearing liabilities:                                             
Interest bearing demand deposits (2)  $144,582    299    0.83   $122,948    141    0.46   $25   $133   $158 
Savings deposits   99,408    24    0.10    100,028    24    0.10    -    -    - 
Time deposits   149,234    540    1.45    139,865    429    1.23    29    82    111 
Short-term and long-term borrowings and other interest bearing liabilities   36,121    196    2.17    51,795    200    1.54    (61)   57    (4)
Total interest bearing liabilities   429,345    1,059    0.99    414,636    794    0.77    (7)   272    265 
                                              
Non-interest bearing liabilities:                                             
Demand deposits   123,214              116,739                          
Other   5,084              6,477                          
Stockholders' equity   67,414              58,000                          
Total liabilities and stockholders' equity  $625,057             $595,852                          
Net interest income and net interest rate spread       $5,159    3.33%       $4,645    3.20%  $398   $116   $514 
Net interest margin on interest earning assets (3)             3.58%             3.39%               
Net interest income and net interest margin-Tax equivalent basis (4)       $5,256    3.65%       $4,732    3.45%               

 

Notes:

1) Average balances were calculated using a daily average.

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

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

4) Interest on obligations of states and municipalities is not subject to federal income tax. In order to make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 21%.

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

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

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

 

Provision for Loan Losses:

 

In the first quarter of 2019, the provision for loan losses was $15,000, compared to a provision of $158,000 in the first quarter of 2018, with the decline due to continued improvement in non-performing and classified loans. Management regularly reviews the adequacy of the allowance for loan losses and makes assessments as to specific loan impairment, charge-off expectations, general economic conditions in the Bank’s market area, specific loan quality and other factors. See the earlier discussion in the Financial Condition section explaining the information used to determine the provision.

 

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Non-interest Income:

 

Non-interest income in the first quarter of 2019 was $1,094,000 compared to $1,174,000 in the first quarter of 2018, a decline of $80,000, or 6.8%.

 

Most significantly impacting the comparative three month periods was a decline in income from unconsolidated subsidiary of $69,000. The equity method of accounting for the Liverpool investment ended with the acquisition by Juniata of the remaining outstanding Liverpool shares on April 30, 2018. Since then, all income and expense items generated by the Liverpool office have been included as part of Juniata’s operations in the appropriate line items in the financial statements. Also contributing to the decline in non-interest income was a net loss on sales and calls of securities of $56,000 in the first quarter of 2019 compared to a net loss of $15,000 in the first quarter of 2018, driven by the strategic repositioning of the investment portfolio in 2019 in an effort to improve the yield on the portfolio for a greater future return. Fees derived from loan activity during the period also declined compared to the first quarter of 2018 due to lower title insurance premiums. Partially offsetting these declines during the period were increases of $26,000 in customer service and debit card fee income and $21,000 in commissions from sales of non-deposit products, as well as a $15,000 increase in the value of equity securities in the first quarter of 2019 compared to the same period last year.

 

As a percentage of average assets, annualized non-interest income, exclusive of net losses on the sale of securities, was 0.74% in the first quarter of 2019 compared to 0.80% in the first quarter of 2018.

 

Non-interest Expense:

 

Non-interest expense was $4,835,000 for the three months ended March 31, 2019 versus $4,405,000 for the same period in 2018, an increase of $430,000.

 

Non-interest expense increased in the first quarter of 2019 compared to the same period in 2018, primarily driven by Juniata’s growth resulting from the Liverpool acquisition. Employee compensation and benefits expense increased by $353,000 in the first quarter of 2019 due to the addition of the LCB staff as well as the annual salary increase from the employee incentive program. Occupancy and equipment expenses as well as data processing expense increased by $38,000 and $45,000, respectively, in the 2019 period compared to the 2018 period primarily due to the acquisition of Liverpool. Partially offsetting these increases was a decline in merger and acquisition expense of $64,000, as no similar expenses were recorded in the 2019 period, as well as a decline of $14,000 in FDIC insurance premiums due to a lower assessment, primarily resulting from continued asset quality improvement.

 

As a percentage of average assets, annualized non-interest expense was 3.09% in the first quarter of 2019 compared to 2.96% in the first quarter of 2018. Excluding merger and acquisition expenses, annualized non-interest expense as a percentage of average assets was 2.91% in the first quarter of 2018.

 

Provision for income taxes:

 

An income tax benefit of $10,000 was recorded in the first quarter of 2019 compared to a benefit of $71,000 recorded in the first quarter of 2018. The Company qualifies for a federal tax credit for a low-income housing project investment, and the tax provisions for each period reflect the application of the tax credit. For the first quarters of 2019 and 2018, the tax credits were $226,000 and $225,000, respectively, offsetting $216,000 in regular tax expense in the 2019 period and $154,000 of regular tax expense in the 2018 period. For the first quarter of 2019, the tax credit lowered the effective tax rate from 15.4% to (0.7%) as compared to the same period in 2018, when the tax credit lowered the effective tax rate from 12.2% to (5.7%).

 

Liquidity:

 

The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs of the Company and to take advantage of income producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of the Company to maintain a high level of liquidity in all economic environments. Principal sources of asset liquidity are provided by loans and securities maturing in one year or less, and other short-term investments, such as federal funds sold and cash and due from banks. Liability liquidity, which is more difficult to measure, can be met by attracting deposits and maintaining the core deposit base. The Company is a member of the Federal Home Loan Bank of Pittsburgh for the purpose of providing short-term liquidity when other sources are unable to fill these needs. During the three months ended March 31, 2019, overnight borrowings from the Federal Home Loan Bank averaged $1,977,000. As of March 31, 2019, the Company had no short-term borrowings, but had $25,000,000 in long-term debt with the Federal Home Loan Bank, and a remaining unused borrowing capacity with the Federal Home Loan Bank of $155,699,000.

 

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

 

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

 

Off-Balance Sheet Arrangements:

 

The Company’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk, credit risk, and interest rate risk. These commitments consist mainly of loans approved but not yet funded, unused lines of credit and outstanding letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had $2,356,000 and $2,749,000 of financial and performance letters of credit commitments outstanding as of March 31, 2019 and December 31, 2018, respectively. Commercial letters of credit as of March 31, 2019 and December 31, 2018 totaled $9,867,000 and $8,925,000, 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 current amount of the liability as of March 31, 2019 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 through, or from, the Company.

 

Interest Rate Sensitivity:

 

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

 

Capital Adequacy:

 

Bank regulatory authorities in the United States issue risk-based capital standards. These capital standards relate a banking company’s capital to the risk profile of its assets and provide the basis by which all banking companies and banks are evaluated in terms of capital adequacy. Effective January 1, 2015, the risk-based capital rules were modified subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer and the regulatory capital adjustments and deductions. The new framework is commonly called “BASEL III”. The final rules revised federal regulatory agencies’ risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the Basel III framework. The final rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules established a common equity tier 1 (CET1) minimum capital requirement (4.5% of risk-weighted assets) and a higher minimum tier 1 capital requirement (from 4.0% to 6.0% of risk-weighted assets), and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The new minimum regulatory capital requirements established by BASEL III were fully phased in on January 1, 2019.

 

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

 

At March 31, 2019, the Bank exceeded the fully phased in regulatory requirements to be considered a "well capitalized" financial institution under Basel III. The Bank’s CET1 and Tier 1 Capital ratio was 14.49%, its Total Capital ratio was 15.22% and its Tier 1 leverage was 9.74%. On a consolidated basis, the Company’s CET1 and Tier 1 Capital ratio was 14.83%, and Total Capital ratio and Tier 1 leverage ratio was 15.55% and 9.96%, respectively. Thus, the Company and the Bank also maintain capital sufficient to cover the additional 2.5% capital conservation buffer.

 

Item 4. Controls and Procedures

 

Disclosure Controls and Procedures

 

As of March 31, 2019, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined by the Securities Exchange Act of 1934 (“Exchange Act”), Rule 13a-15(e). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of March 31, 2019 due to a material weakness in the Company’s internal control over financial reporting as previously described in the Company’s Annual Report on Form 10-K for the period ended December 31, 2018.

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

The material weakness was related to management not designing and maintaining controls over the annual review process for evaluating risk ratings on commercial loans. Management is in the process of remediating this material weakness by expanding and formally documenting policies and procedures pertaining to the ongoing process for evaluating risk ratings on commercial loans and officially testing the key controls.

 

At December 31, 2018, a material weakness related to management not designing and maintaining controls over the accounting for income taxes was also described in the Company’s 2018 Annual Report on Form 10-K. As of March 31, 2019, the Company has corrected this material weakness, ensuring unusual, complex, non-recurring tax items are reviewed by independent tax experts.

 

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

 

Changes in Internal Control Over Financial Reporting

 

There were no significant changes in the Company’s internal control over financial reporting during the fiscal quarter ended March 31, 2019, that has materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting.

 

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PART II - OTHER INFORMATION

 

Item 1.LEGAL PROCEEDINGS

 

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

 

Item 1A.RISK FACTORS

 

There have been no material changes to the risk factors that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

 

Item 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

The Company has an active share repurchase program in place, to which there is no expiration date. As of May 10, 2019, the number of shares that may yet be purchased under the program was 169,774. Transactions pursuant to the repurchase program in the three month period ended March 31, 2019 are shown below.

 

            Total Number of     
            Shares Purchased as   Maximum Number of 
    Total Number   Average   Part of Publicly   Shares that May Yet Be 
    of Shares   Price Paid   Announced Plans or   Purchased Under the 
Period   Purchased   per Share   Programs   Plans or Programs (1) 
                  
January 1-31, 2019    -   $-    -    170,574 
February 1-28, 2019    150    -    150    170,424 
March 1-31, 2019    650    -    650    169,774 
                      
Totals    800         800    169,774 

 

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

 

Certain regulatory restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. At March 31, 2019, $34,619,000 of undistributed earnings of the Bank, included in the consolidated stockholders’ equity, was available for distribution to the Company as dividends without prior regulatory approval, subject to regulatory capital requirements.

 

Item 3.DEFAULTS UPON SENIOR SECURITIES

 

Not applicable

 

Item 4.MINE SAFETY DISCLOSURES

 

Not applicable

 

Item 5.OTHER INFORMATION

 

None

 

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Item 6.EXHIBITS

 

  3.1 - Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3(i) to the Company’s Current Report on Form 8-K filed with the SEC on November 12, 2015)
       
  3.2 - Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K filed with the SEC on February 27, 2019)
       
  31.1 - Rule 13a – 14(a)/15d – 14(a) Certification of President and Chief Executive Officer
       
  31.2 - Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer
       
  32.1 - Section 1350 Certification of President and Chief Executive Officer
       
  32.2 - Section 1350 Certification of Chief Financial Officer

 

  101.LAB - XBRL Taxonomy Extension Label Linkbase
       
  101.PRE - XBRL Taxonomy Extension Presentation Linkbase
       
  101.INS - XBRL Instance Document
       
  101.SCH - XBRL Taxonomy Extension Schema
       
  101.CAL - XBRL Taxonomy Extension Calculation Linkbase
       
  101.DEF - XBRL Taxonomy Extension Definition Linkbase

 

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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

  Juniata Valley Financial Corp.
  (Registrant)

 

Date: May 10, 2019   By: /s/ Marcie A. Barber
        Marcie A. Barber, President
        Chief Executive Officer
        (Principal Executive Officer)
         
Date: May 10, 2019   By: /s/ JoAnn N. McMinn
        JoAnn N. McMinn
        Chief Financial Officer
        (Principal Accounting Officer and
        Principal Financial Officer)

 

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