Form 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
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þ |
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 |
For the quarterly period ended June 30, 2010
OR
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o |
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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)
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Pennsylvania
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23-2235254 |
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(State or other jurisdiction of
incorporation or organization)
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(I.R.S. Employer
Identification No.) |
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Bridge and Main Streets, Mifflintown, Pennsylvania
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17059 |
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(Address of principal executive offices)
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(Zip Code) |
(717) 436-8211
(Registrants 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.
þ Yes o No
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months
(or for such shorter period that the registrant was required to submit and post such files). .
o Yes o No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act).
o Yes þ No
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
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Class |
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Outstanding as of August 9, 2010 |
Common Stock ($1.00 par value)
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4,283,565 shares |
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
Juniata Valley Financial Corp. and Subsidiary
Consolidated Statements of Financial Condition
(Unaudited, Dollar amounts in thousands, except share data)
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June 30, |
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December 31, |
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2010 |
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2009 |
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ASSETS |
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Cash and due from banks |
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$ |
10,405 |
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$ |
18,613 |
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Interest bearing deposits with banks |
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1,860 |
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82 |
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Federal funds sold |
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9,250 |
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1,200 |
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Cash and cash equivalents |
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21,515 |
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19,895 |
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Interest bearing time deposits with banks |
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1,345 |
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1,420 |
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Securities available for sale |
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81,062 |
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77,356 |
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Restricted investment in Federal Home Loan Bank (FHLB) stock |
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2,197 |
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2,197 |
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Investment in unconsolidated subsidiary |
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3,452 |
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3,338 |
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Total loans, net of unearned interest |
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308,075 |
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311,630 |
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Less: Allowance for loan losses |
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(2,980 |
) |
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(2,719 |
) |
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Total loans, net of allowance for loan losses |
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305,095 |
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308,911 |
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Premises and equipment, net |
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6,785 |
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6,878 |
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Other real estate owned |
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296 |
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476 |
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Bank owned life insurance and annuities |
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13,327 |
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13,066 |
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Core deposit intangible |
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276 |
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299 |
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Goodwill |
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2,046 |
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2,046 |
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Accrued interest receivable and other assets |
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6,550 |
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6,227 |
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Total assets |
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$ |
443,946 |
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$ |
442,109 |
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LIABILITIES AND STOCKHOLDERS EQUITY |
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Liabilities: |
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Deposits: |
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Non-interest bearing |
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$ |
55,091 |
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$ |
55,030 |
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Interest bearing |
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324,471 |
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322,367 |
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Total deposits |
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379,562 |
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377,397 |
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Securities sold under agreements to repurchase |
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3,168 |
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3,207 |
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Long-term debt |
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5,000 |
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5,000 |
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Other interest bearing liabilities |
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1,158 |
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1,146 |
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Accrued interest payable and other liabilities |
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4,585 |
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4,756 |
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Total liabilities |
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393,473 |
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391,506 |
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Stockholders Equity: |
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Preferred stock, no par value: |
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Authorized 500,000 shares, none issued |
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Common stock, par value $1.00 per share: |
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Authorized 20,000,000 shares |
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Issued 4,745,826 shares |
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Outstanding |
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4,283,565 shares at June 30, 2010; |
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4,337,587 shares at December 31, 2009 |
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4,746 |
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4,746 |
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Surplus |
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18,320 |
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18,315 |
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Retained earnings |
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37,077 |
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36,478 |
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Accumulated other comprehensive loss |
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(593 |
) |
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(805 |
) |
Cost of common stock in Treasury: |
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462,261 shares at June 30, 2010; |
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408,239 shares at December 31, 2009 |
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(9,077 |
) |
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(8,131 |
) |
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Total stockholders equity |
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50,473 |
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50,603 |
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Total liabilities and stockholders equity |
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$ |
443,946 |
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$ |
442,109 |
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See accompanying notes to consolidated financial statements.
3
Juniata Valley Financial Corp. and Subsidiary
Consolidated Statements of Income
(Unaudited)
(Dollar amounts in thousands, except share data)
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Three Months Ended |
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Six Months Ended |
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June 30, |
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June 30, |
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2010 |
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2009 |
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2010 |
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2009 |
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Interest income: |
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Loans, including fees |
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$ |
4,896 |
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$ |
5,256 |
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$ |
9,932 |
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$ |
10,545 |
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Taxable securities |
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263 |
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320 |
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496 |
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628 |
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Tax-exempt securities |
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264 |
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278 |
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539 |
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559 |
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Federal funds sold |
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3 |
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58 |
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4 |
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|
114 |
|
Other interest income |
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10 |
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3 |
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19 |
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5 |
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Total interest income |
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5,436 |
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5,915 |
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10,990 |
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11,851 |
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Interest expense: |
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Deposits |
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1,347 |
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1,821 |
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2,866 |
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3,699 |
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Securities sold under agreements to repurchase |
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1 |
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1 |
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Short-term borrowings |
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1 |
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1 |
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Long-term debt |
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36 |
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35 |
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70 |
|
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|
69 |
|
Other interest bearing liabilities |
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4 |
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6 |
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7 |
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11 |
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Total interest expense |
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1,387 |
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1,862 |
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2,945 |
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3,781 |
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Net interest income |
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4,049 |
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|
|
4,053 |
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|
|
8,045 |
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|
8,070 |
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Provision for loan losses |
|
|
282 |
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|
|
77 |
|
|
|
567 |
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|
|
212 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Net interest income after provision for loan losses |
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|
3,767 |
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|
|
3,976 |
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7,478 |
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7,858 |
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|
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|
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Noninterest income: |
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|
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|
|
|
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Trust fees |
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90 |
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|
|
86 |
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|
|
210 |
|
|
|
170 |
|
Customer service fees |
|
|
387 |
|
|
|
426 |
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|
769 |
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|
798 |
|
Earnings on bank-owned life insurance and annuities |
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138 |
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|
112 |
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|
|
260 |
|
|
|
218 |
|
Commissions from sales of non-deposit products |
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125 |
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|
150 |
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|
221 |
|
|
|
258 |
|
Income from unconsolidated subsidiary |
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|
63 |
|
|
|
48 |
|
|
|
119 |
|
|
|
96 |
|
Securities impairment charge |
|
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|
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|
(226 |
) |
|
|
|
|
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|
(226 |
) |
Gain on sale or call of securities |
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15 |
|
|
|
|
|
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27 |
|
|
|
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|
Gain on sales of other assets |
|
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7 |
|
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|
27 |
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|
6 |
|
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33 |
|
Prior period income from insurance sales |
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|
|
|
|
|
|
|
|
|
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|
323 |
|
Other noninterest income |
|
|
199 |
|
|
|
286 |
|
|
|
435 |
|
|
|
481 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total noninterest income |
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|
1,024 |
|
|
|
909 |
|
|
|
2,047 |
|
|
|
2,151 |
|
|
|
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|
|
|
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|
|
|
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Noninterest expense: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Employee compensation expense |
|
|
1,308 |
|
|
|
1,214 |
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|
2,594 |
|
|
|
2,500 |
|
Employee benefits |
|
|
403 |
|
|
|
411 |
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|
819 |
|
|
|
855 |
|
Occupancy |
|
|
216 |
|
|
|
236 |
|
|
|
449 |
|
|
|
475 |
|
Equipment |
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|
136 |
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|
162 |
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|
255 |
|
|
|
324 |
|
Data processing expense |
|
|
346 |
|
|
|
337 |
|
|
|
711 |
|
|
|
670 |
|
Director compensation |
|
|
86 |
|
|
|
108 |
|
|
|
173 |
|
|
|
218 |
|
Professional fees |
|
|
136 |
|
|
|
90 |
|
|
|
229 |
|
|
|
211 |
|
Taxes, other than income |
|
|
125 |
|
|
|
127 |
|
|
|
255 |
|
|
|
255 |
|
FDIC Insurance premiums |
|
|
150 |
|
|
|
317 |
|
|
|
297 |
|
|
|
405 |
|
Amortization of intangibles |
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|
12 |
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|
|
12 |
|
|
|
23 |
|
|
|
23 |
|
Other noninterest expense |
|
|
381 |
|
|
|
301 |
|
|
|
639 |
|
|
|
570 |
|
|
|
|
|
|
|
|
|
|
|
|
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|
Total noninterest expense |
|
|
3,299 |
|
|
|
3,315 |
|
|
|
6,444 |
|
|
|
6,506 |
|
|
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|
|
|
|
|
|
|
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|
Income before income taxes |
|
|
1,492 |
|
|
|
1,570 |
|
|
|
3,081 |
|
|
|
3,503 |
|
Provision for income taxes |
|
|
354 |
|
|
|
405 |
|
|
|
755 |
|
|
|
928 |
|
|
|
|
|
|
|
|
|
|
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|
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|
Net income |
|
$ |
1,138 |
|
|
$ |
1,165 |
|
|
$ |
2,326 |
|
|
$ |
2,575 |
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|
Earnings per share |
|
|
|
|
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Basic |
|
$ |
0.26 |
|
|
$ |
0.27 |
|
|
$ |
0.54 |
|
|
$ |
0.59 |
|
Diluted |
|
$ |
0.26 |
|
|
$ |
0.27 |
|
|
$ |
0.54 |
|
|
$ |
0.59 |
|
Cash dividends declared per share |
|
$ |
0.20 |
|
|
$ |
0.19 |
|
|
$ |
0.40 |
|
|
$ |
0.38 |
|
Weighted average basic shares outstanding |
|
|
4,309,610 |
|
|
|
4,338,545 |
|
|
|
4,319,816 |
|
|
|
4,339,583 |
|
Weighted average diluted shares outstanding |
|
|
4,312,778 |
|
|
|
4,342,086 |
|
|
|
4,323,423 |
|
|
|
4,343,850 |
|
See accompanying notes to consolidated financial statements.
4
Juniata Valley Financial Corp. and Subsidiary
Consolidated Statements of Changes in Stockholders Equity
(Unaudited)
(Dollars in thousands, except share data)
Six Months Ended June 30, 2010
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|
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|
|
|
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|
|
|
|
|
|
|
|
|
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|
Number |
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|
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|
Accumulated |
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|
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|
of |
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|
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|
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|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Shares |
|
|
Common |
|
|
|
|
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
Stockholders |
|
|
|
Outstanding |
|
|
Stock |
|
|
Surplus |
|
|
Earnings |
|
|
Loss |
|
|
Stock |
|
|
Equity |
|
Balance at December 31, 2009 |
|
|
4,337,587 |
|
|
$ |
4,746 |
|
|
$ |
18,315 |
|
|
$ |
36,478 |
|
|
$ |
(805 |
) |
|
$ |
(8,131 |
) |
|
$ |
50,603 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,326 |
|
|
|
|
|
|
|
|
|
|
|
2,326 |
|
Change in unrealized gains on
securities
available for sale, net of
reclassification
adjustment and tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170 |
|
|
|
|
|
|
|
170 |
|
Defined benefit retirement plan
adjustments, net of tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,538 |
|
Cash dividends at $0.40 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,727 |
) |
|
|
|
|
|
|
|
|
|
|
(1,727 |
) |
Stock-based compensation activity |
|
|
|
|
|
|
|
|
|
|
24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24 |
|
Purchase of treasury stock, at cost |
|
|
(58,100 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,026 |
) |
|
|
(1,026 |
) |
Treasury stock issued for stock option
and stock purchase plans |
|
|
4,078 |
|
|
|
|
|
|
|
(19 |
) |
|
|
|
|
|
|
|
|
|
|
80 |
|
|
|
61 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2010 |
|
|
4,283,565 |
|
|
$ |
4,746 |
|
|
$ |
18,320 |
|
|
$ |
37,077 |
|
|
$ |
(593 |
) |
|
$ |
(9,077 |
) |
|
$ |
50,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2009
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Total |
|
|
|
Shares |
|
|
Common |
|
|
|
|
|
|
Retained |
|
|
Comprehensive |
|
|
Treasury |
|
|
Stockholders |
|
|
|
Outstanding |
|
|
Stock |
|
|
Surplus |
|
|
Earnings |
|
|
Loss |
|
|
Stock |
|
|
Equity |
|
Balance at December 31, 2008 |
|
|
4,341,055 |
|
|
$ |
4,746 |
|
|
$ |
18,324 |
|
|
$ |
34,758 |
|
|
$ |
(1,247 |
) |
|
$ |
(8,096 |
) |
|
$ |
48,485 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,575 |
|
|
|
|
|
|
|
|
|
|
|
2,575 |
|
Change in unrealized losses on
securities
available for sale, net of reclassification
adjustment and tax effects |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,558 |
|
Cash dividends at $0.38 per share |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,649 |
) |
|
|
|
|
|
|
|
|
|
|
(1,649 |
) |
Stock-based compensation activity |
|
|
|
|
|
|
|
|
|
|
19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19 |
|
Purchase of treasury stock, at cost |
|
|
(7,600 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(128 |
) |
|
|
(128 |
) |
Treasury stock issued for stock option
and stock purchase plans |
|
|
9,132 |
|
|
|
|
|
|
|
(49 |
) |
|
|
|
|
|
|
|
|
|
|
182 |
|
|
|
133 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at June 30, 2009 |
|
|
4,342,587 |
|
|
$ |
4,746 |
|
|
$ |
18,294 |
|
|
$ |
35,684 |
|
|
$ |
(1,264 |
) |
|
$ |
(8,042 |
) |
|
$ |
49,418 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
5
Juniata Valley Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Operating activities: |
|
|
|
|
|
|
|
|
Net income |
|
$ |
2,326 |
|
|
$ |
2,575 |
|
Adjustments to reconcile net income to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
Provision for loan losses |
|
|
567 |
|
|
|
212 |
|
Depreciation |
|
|
256 |
|
|
|
309 |
|
Net amortization of securities premiums |
|
|
143 |
|
|
|
97 |
|
Amortization of core deposit intangible |
|
|
23 |
|
|
|
23 |
|
Amortization of deferred net loan costs |
|
|
11 |
|
|
|
18 |
|
Deferral of net loan costs (fees) |
|
|
8 |
|
|
|
(9 |
) |
Securities impairment charge |
|
|
|
|
|
|
226 |
|
Net realized gains on sales or calls of securities |
|
|
(27 |
) |
|
|
|
|
Net gains on sales of other assets |
|
|
(6 |
) |
|
|
(33 |
) |
Earnings on bank owned life insurance and annuities |
|
|
(260 |
) |
|
|
(218 |
) |
Deferred income tax expense (credit) |
|
|
2 |
|
|
|
(54 |
) |
Equity in earnings of unconsolidated subsidiary, net of dividends of
$19 and $17 |
|
|
(100 |
) |
|
|
(79 |
) |
Stock-based compensation expense |
|
|
24 |
|
|
|
19 |
|
Increase in accrued interest receivable and other assets |
|
|
(375 |
) |
|
|
(163 |
) |
(Decrease) increase in accrued interest payable and other liabilities |
|
|
(149 |
) |
|
|
552 |
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
2,443 |
|
|
|
3,475 |
|
|
|
|
|
|
|
|
|
|
Investing activities: |
|
|
|
|
|
|
|
|
Purchases of: |
|
|
|
|
|
|
|
|
Securities available for sale |
|
|
(26,286 |
) |
|
|
(31,937 |
) |
Premises and equipment |
|
|
(163 |
) |
|
|
(86 |
) |
Bank owned life insurance and annuities |
|
|
(44 |
) |
|
|
(68 |
) |
Proceeds from: |
|
|
|
|
|
|
|
|
Maturities of and principal repayments on securities available for sale |
|
|
22,701 |
|
|
|
21,568 |
|
Bank owned life insurance and annuities |
|
|
33 |
|
|
|
35 |
|
Sale of other real estate owned |
|
|
570 |
|
|
|
228 |
|
Sale of other assets |
|
|
11 |
|
|
|
113 |
|
Net decrease in interest-bearing time deposits |
|
|
75 |
|
|
|
|
|
Net decrease in loans receivable |
|
|
2,846 |
|
|
|
6,528 |
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(257 |
) |
|
|
(3,619 |
) |
|
|
|
|
|
|
|
|
|
Financing activities: |
|
|
|
|
|
|
|
|
Net increase in deposits |
|
|
2,165 |
|
|
|
15,226 |
|
Net decrease in short-term borrowings and securities
sold under agreements to repurchase |
|
|
(39 |
) |
|
|
(8,861 |
) |
Cash dividends |
|
|
(1,727 |
) |
|
|
(1,649 |
) |
Purchase of treasury stock |
|
|
(1,026 |
) |
|
|
(128 |
) |
Treasury stock issued for employee stock plans |
|
|
61 |
|
|
|
133 |
|
|
|
|
|
|
|
|
Net cash (used in) provided by financing activities |
|
|
(566 |
) |
|
|
4,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash and cash equivalents |
|
|
1,620 |
|
|
|
4,577 |
|
Cash and cash equivalents at beginning of period |
|
|
19,895 |
|
|
|
12,457 |
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
21,515 |
|
|
$ |
17,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental information: |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
3,044 |
|
|
$ |
3,841 |
|
Income taxes paid |
|
$ |
770 |
|
|
$ |
700 |
|
Supplemental schedule of noncash investing and financing activities: |
|
|
|
|
|
|
|
|
Transfer of loans to other real estate owned and repossessed assets |
|
$ |
384 |
|
|
$ |
524 |
|
See accompanying notes to consolidated financial statements.
6
Juniata Valley Financial Corp. and Subsidiary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 Basis of Presentation and Accounting Policies
The financial information includes the accounts of Juniata Valley Financial Corp. (the
Corporation) and its wholly owned subsidiary, The Juniata Valley Bank (the Bank). All
significant intercompany accounts and transactions have been eliminated.
The accompanying unaudited consolidated financial statements have been prepared in accordance with
U.S. generally accepted accounting principles for interim financial information. Accordingly, they
do not include all of the information and footnotes required by U.S. generally accepted accounting
principles (U.S. GAAP) for complete financial statements. In the opinion of management, all
adjustments considered necessary for fair presentation have been included. Operating results for
the six-month period ended June 30, 2010, are not necessarily indicative of the results for the
year ended December 31, 2010. For further information, refer to the consolidated financial
statements and footnotes thereto included in Juniata Valley Financial Corp.s Annual Report on Form
10-K for the year ended December 31, 2009.
The Corporation has evaluated events and transactions occurring subsequent to the balance sheet
date of June 30, 2010 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.
NOTE 2 Recent Accounting Pronouncements
ASU 2010-09
The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU)
2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure
Requirements. The amendments in the ASU remove the requirement for a Securities Exchange Commission
(SEC) filer to disclose a date through which subsequent events have been evaluated in both issued
and revised financial statements. Revised financial statements include financial statements revised
as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB
also clarified that if the financial statements have been revised, then an entity that is not an
SEC filer should disclose both the date that the financial statements were issued or available to
be issued and the date the revised financial statements were issued or available to be issued. The
FASB believes these amendments remove potential conflicts with the SECs literature.
In addition, the amendments in the ASU require an entity that is a conduit bond obligor for conduit
debt securities that are traded in a public market to evaluate subsequent events through the date
of issuance of its financial statements and must disclose such date.
All of the amendments in the ASU were effective upon issuance (February 24, 2010) except for the
use of the issued date for conduit debt obligors. That amendment was effective for interim or
annual periods ending after June 15, 2010.
This guidance did not have an impact on the Corporations financial position or results of
operations.
ASU 2010-13
The FASB issued ASU 2010-13, CompensationStock Compensation (Topic 718): Effect of
Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in
Which the Underlying Equity Security Trades. The ASU codifies the consensus reached in Emerging
Issues Task Force (EITF) Issue No. 09-J. The amendments to the codification clarify that an
employee share-based payment award with an exercise price denominated in the currency of a market
in which a substantial portion of the entitys equity shares trades should not be considered to
contain a condition that is not a market, performance, or service condition. Therefore, an entity
would not classify such an award as a liability if it otherwise qualifies as equity.
7
The amendments in the ASU are effective for fiscal years, and interim periods within those fiscal
years, beginning on or after December 15, 2010. Earlier adoption is permitted. The amendments are
to be applied by recording a cumulative-effect adjustment to beginning retained earnings. The
amendments will not have an impact on the Corporations financial position or results of
operations.
ASU 2010-18
ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a
Pool That Is Accounted for as a Single Asset, codifies the consensus reached in EITF Issue No.
09-I, Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a
Single Asset. The amendments to the Codification provide that modifications of loans that are
accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from
the pool even if the modification of those loans would otherwise be considered a troubled debt
restructuring. An entity will continue to be required to consider whether the pool of assets in
which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does
not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for
within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the
troubled debt restructuring accounting provisions within Subtopic 310-40.
ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under
Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010.
Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time
election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be
applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to
subsequent acquisitions of loans with credit deterioration. The Corporation does not expect the
adoption of this standard will have a significant impact on the Corporations financial condition
or results of operations.
ASU 2010-20
ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing
Receivables and the Allowance for Credit Losses, will help investors assess the credit risk of a
companys receivables portfolio and the adequacy of its allowance for credit losses held against
the portfolios by expanding credit risk disclosures.
This ASU requires more information about the credit quality of financing receivables in the
disclosures to financial statements, such as aging information and credit quality indicators. Both
new and existing disclosures must be disaggregated by portfolio segment or class. The
disaggregation of information is based on how a company develops its allowance for credit losses
and how it manages its credit exposure.
The amendments in this Update apply to all public and nonpublic entities with financing
receivables. Financing receivables include loans and trade accounts receivable. However,
short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair
value, and debt securities are exempt from these disclosure amendments.
The effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies,
the amendments that require disclosures as of the end of a reporting period are effective for
periods ending on or after December 15, 2010. The amendments that require disclosures about
activity that occurs during a reporting period are effective for periods beginning on or after
December 15, 2010. The Corporation does not expect the adoption of this standard will have a
significant impact on the Corporations financial condition or results of operations.
8
NOTE 3 Comprehensive Income
U.S. GAAP requires that recognized revenue, expenses, gains, and losses be included in net income.
Although certain changes in assets and liabilities, such as unrealized gains and losses on
available for sale securities and the liability associated with defined benefit plans, are reported
as a separate component of the equity section of the consolidated statements of financial
condition, such items, along with net income, are components of comprehensive income.
The components of comprehensive income and related tax effects are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2010 |
|
|
Three Months Ended June 30, 2009 |
|
|
|
Before |
|
|
Tax Expense |
|
|
|
|
|
|
Before |
|
|
Tax Expense |
|
|
|
|
|
|
Tax |
|
|
or |
|
|
Net-of-Tax |
|
|
Tax |
|
|
or |
|
|
Net-of-Tax |
|
|
|
Amount |
|
|
(Benefit) |
|
|
Amount |
|
|
Amount |
|
|
(Benefit) |
|
|
Amount |
|
Net income |
|
$ |
1,492 |
|
|
$ |
354 |
|
|
$ |
1,138 |
|
|
$ |
1,570 |
|
|
$ |
405 |
|
|
$ |
1,165 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available for sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during the period |
|
|
49 |
|
|
|
17 |
|
|
|
32 |
|
|
|
(33 |
) |
|
|
(11 |
) |
|
|
(22 |
) |
Unrealized gains from unconsolidated subsidiary |
|
|
8 |
|
|
|
|
|
|
|
8 |
|
|
|
7 |
|
|
|
|
|
|
|
7 |
|
Less reclassification adjustment for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains included in net income |
|
|
(15 |
) |
|
|
(5 |
) |
|
|
(10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
securities impairment charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
77 |
|
|
|
149 |
|
Change in pension liability |
|
|
32 |
|
|
|
11 |
|
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income |
|
|
74 |
|
|
|
23 |
|
|
|
51 |
|
|
|
200 |
|
|
|
66 |
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
1,566 |
|
|
$ |
377 |
|
|
$ |
1,189 |
|
|
$ |
1,770 |
|
|
$ |
471 |
|
|
$ |
1,299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2010 |
|
|
Six Months Ended June 30, 2009 |
|
|
|
Before |
|
|
Tax Expense |
|
|
|
|
|
|
Before |
|
|
Tax Expense |
|
|
|
|
|
|
Tax |
|
|
or |
|
|
Net-of-Tax |
|
|
Tax |
|
|
or |
|
|
Net-of-Tax |
|
|
|
Amount |
|
|
(Benefit) |
|
|
Amount |
|
|
Amount |
|
|
(Benefit) |
|
|
Amount |
|
Net income |
|
$ |
3,081 |
|
|
$ |
755 |
|
|
$ |
2,326 |
|
|
$ |
3,503 |
|
|
$ |
928 |
|
|
$ |
2,575 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) on available for sale
securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gains (losses) arising during the period |
|
|
264 |
|
|
|
90 |
|
|
|
174 |
|
|
|
(262 |
) |
|
|
(89 |
) |
|
|
(173 |
) |
Unrealized gains from unconsolidated subsidiary |
|
|
14 |
|
|
|
|
|
|
|
14 |
|
|
|
7 |
|
|
|
|
|
|
|
7 |
|
Less reclassification adjustment for: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gains included in net income |
|
|
(27 |
) |
|
|
(9 |
) |
|
|
(18 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
securities impairment charge |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
226 |
|
|
|
77 |
|
|
|
149 |
|
Change in pension liability |
|
|
64 |
|
|
|
22 |
|
|
|
42 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
315 |
|
|
|
103 |
|
|
|
212 |
|
|
|
(29 |
) |
|
|
(12 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
$ |
3,396 |
|
|
$ |
858 |
|
|
$ |
2,538 |
|
|
$ |
3,474 |
|
|
$ |
916 |
|
|
$ |
2,558 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of accumulated other comprehensive loss, net of tax consist of the following (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
6/30/2010 |
|
|
12/31/2009 |
|
Unrealized gains on available for sale securities |
|
$ |
946 |
|
|
$ |
776 |
|
Unrecognized expense for defined benefit pension |
|
|
(1,539 |
) |
|
|
(1,581 |
) |
|
|
|
|
|
|
|
Accumulated other comprehensive loss |
|
$ |
(593 |
) |
|
$ |
(805 |
) |
|
|
|
|
|
|
|
9
NOTE 4 Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Three Months |
|
|
|
Ended |
|
|
Ended |
|
(Amounts, except earnings per share, in thousands) |
|
June 30, 2010 |
|
|
June 30, 2009 |
|
Net income |
|
$ |
1,138 |
|
|
$ |
1,165 |
|
Weighted-average common shares outstanding |
|
|
4,310 |
|
|
|
4,338 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.26 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
4,310 |
|
|
|
4,338 |
|
Common stock equivalents due to effect of stock options |
|
|
3 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Total weighted-average common shares and equivalents |
|
|
4,313 |
|
|
|
4,342 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.26 |
|
|
$ |
0.27 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months |
|
|
Six Months |
|
|
|
Ended |
|
|
Ended |
|
|
|
June 30, 2010 |
|
|
June 30, 2009 |
|
Net income |
|
$ |
2,326 |
|
|
$ |
2,575 |
|
Weighted-average common shares outstanding |
|
|
4,320 |
|
|
|
4,340 |
|
|
|
|
|
|
|
|
Basic earnings per share |
|
$ |
0.54 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average common shares outstanding |
|
|
4,320 |
|
|
|
4,340 |
|
Common stock equivalents due to effect of stock options |
|
|
4 |
|
|
|
4 |
|
|
|
|
|
|
|
|
Total weighted-average common shares and equivalents |
|
|
4,324 |
|
|
|
4,344 |
|
|
|
|
|
|
|
|
Diluted earnings per share |
|
$ |
0.54 |
|
|
$ |
0.59 |
|
|
|
|
|
|
|
|
NOTE 5 Commitments, Contingent Liabilities and Guarantees
In the ordinary course of business, the Corporation makes commitments to extend credit to its
customers through letters of credit, loan commitments and lines of credit. At June 30, 2010, the
Corporation had $38,781,000 outstanding in loan commitments and other unused lines of credit
extended to its customers as compared to $46,589,000 at December 31, 2009.
The Corporation 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 Corporation to guarantee the performance of a customer to a third party. Generally, all
letters of credit have expiration dates within one year of issuance. 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 Corporation generally holds collateral and/or personal guarantees
supporting these commitments. The Corporation had outstanding $903,000 and $974,000 of letters of
credit commitments as of June 30, 2010 and December 31, 2009, 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 June 30, 2010 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.
10
NOTE 6 Defined Benefit Retirement Plan
The Corporation had a defined benefit retirement plan covering substantially all of its employees,
prior to January 1, 2008. Effective January 1, 2008, the plan was amended to close the plan to new
entrants. The benefits are based on years of service and the employees compensation. The
Corporations funding policy is to contribute annually the maximum amount that can be deducted for
federal income taxes purposes. Contributions are intended to provide not only for benefits
attributed to service to date but also for those expected to be earned in the future. The
Corporation has made no contributions in the first six months of 2010 and does not expect to
contribute to the defined benefit plan in the remainder of 2010. Pension expense included the
following components for the three and six month periods ended June 30, 2010 and 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Year-to-Date Through |
|
|
|
June 30, |
|
|
June 30, |
|
(Dollars in thousands) |
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Components of net periodic pension
cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost |
|
$ |
47 |
|
|
$ |
47 |
|
|
$ |
93 |
|
|
$ |
94 |
|
Interest cost |
|
|
118 |
|
|
|
112 |
|
|
|
236 |
|
|
|
224 |
|
Expected return on plan assets |
|
|
(144 |
) |
|
|
(115 |
) |
|
|
(287 |
) |
|
|
(230 |
) |
Additional recognized amounts |
|
|
32 |
|
|
|
39 |
|
|
|
64 |
|
|
|
79 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic pension cost |
|
$ |
53 |
|
|
$ |
83 |
|
|
$ |
106 |
|
|
$ |
167 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 Acquisition
In 2006, the Corporation acquired a branch office in Richfield, PA. The acquisition included real
estate, deposits and loans. The assets and liabilities of the acquired business were recorded on
the consolidated statement of financial condition at their estimated fair values as of September 8,
2006, and their results of operations have been included in the consolidated statements of income
since such date.
Included in the purchase price of the branch was goodwill and core deposit intangible of $2,046,000
and $449,000, respectively. The core deposit intangible is being amortized over a ten-year period
on a straight line basis. During the first six months of 2010 and 2009, amortization expense was
$23,000. Accumulated amortization of core deposit intangible through June 30, 2010 was $173,000.
The goodwill is not amortized, but is measured annually for impairment.
NOTE 8 Investment in Unconsolidated Subsidiary
The Corporation owns 39.16% of the outstanding common stock of The First National Bank of Liverpool
(FNBL), Liverpool, PA. This investment is accounted for under the equity method of accounting. The
investment is being carried at $3,452,000 as of June 30, 2010. The Corporation increases its
investment in FNBL for its share of earnings and decreases its investment by any dividends received
from FNBL. A loss in value of the investment which is other than a temporary decline will be
recognized. 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 FNBL to
sustain an earnings capacity which would justify the carrying amount of the investment.
NOTE 9 Securities
Accounting Standards Codification (ASC) Topic 320, Investments Debt and Equity Securities,
clarifies the interaction of the factors that should be considered when determining whether a debt
security is other-than-temporarily impaired. For debt securities, management must assess whether
(a) it has the intent to sell the security and (b) it is more likely than not that it will be
required to sell the security prior to its anticipated recovery. These steps are done before
assessing whether the entity will recover the cost basis of the investment. Previously, this
assessment required management to assert it has both the intent and the ability to hold a security
for a period of time sufficient to allow for an anticipated recovery in fair value to avoid
recognizing an other-than-temporary impairment. This change does not affect the need to forecast
recovery of the value of the security through either cash flows or market price.
11
In instances when a determination is made that an other-than-temporary impairment exists but the
investor 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, this guidance changes the
presentation and amount of the other-than-temporary impairment recognized in the income statement.
The other-than-temporary impairment is separated into (a) 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 (b) 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.
The amortized cost and fair value of securities as of June 30, 2010 and December 31, 2009, by
contractual maturity, are shown below (in thousands). Expected maturities may differ from
contractual maturities because the securities may be called or prepaid with or without prepayment
penalties.
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
Type and maturity |
|
Cost |
|
|
Value |
|
|
Gains |
|
|
Losses |
|
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year but within five years |
|
$ |
32,035 |
|
|
$ |
32,471 |
|
|
$ |
436 |
|
|
$ |
|
|
After five years but within ten years |
|
|
5,499 |
|
|
|
5,524 |
|
|
|
25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37,534 |
|
|
|
37,995 |
|
|
|
461 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year |
|
|
6,402 |
|
|
|
6,450 |
|
|
|
48 |
|
|
|
|
|
After one year but within five years |
|
|
30,289 |
|
|
|
31,159 |
|
|
|
897 |
|
|
|
(27 |
) |
After five years but within ten years |
|
|
2,116 |
|
|
|
2,141 |
|
|
|
36 |
|
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
38,807 |
|
|
|
39,750 |
|
|
|
981 |
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year but within five years |
|
|
1,000 |
|
|
|
1,030 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
1,030 |
|
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
1,337 |
|
|
|
1,429 |
|
|
|
92 |
|
|
|
|
|
Equity securities |
|
|
975 |
|
|
|
858 |
|
|
|
67 |
|
|
|
(184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
79,653 |
|
|
$ |
81,062 |
|
|
$ |
1,631 |
|
|
$ |
(222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities Available for Sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
Amortized |
|
|
Fair |
|
|
Unrealized |
|
|
Unrealized |
|
Type and maturity |
|
Cost |
|
|
Value |
|
|
Gains |
|
|
Losses |
|
U.S. Treasury securities and obligations of U.S.
Government agencies and corporations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year but within five years |
|
$ |
32,503 |
|
|
$ |
32,620 |
|
|
$ |
194 |
|
|
$ |
(77 |
) |
After five years but within ten years |
|
|
940 |
|
|
|
933 |
|
|
|
|
|
|
|
(7 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,443 |
|
|
|
33,553 |
|
|
|
194 |
|
|
|
(84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Obligations of state and political subdivisions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Within one year |
|
|
6,775 |
|
|
|
6,863 |
|
|
|
88 |
|
|
|
|
|
After one year but within five years |
|
|
32,022 |
|
|
|
32,972 |
|
|
|
958 |
|
|
|
(8 |
) |
After five years but within ten years |
|
|
544 |
|
|
|
562 |
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39,341 |
|
|
|
40,397 |
|
|
|
1,064 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate notes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
After one year but within five years |
|
|
1,000 |
|
|
|
1,026 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,000 |
|
|
|
1,026 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mortgage-backed securities |
|
|
1,425 |
|
|
|
1,515 |
|
|
|
90 |
|
|
|
|
|
Equity securities |
|
|
975 |
|
|
|
865 |
|
|
|
58 |
|
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
76,184 |
|
|
$ |
77,356 |
|
|
$ |
1,432 |
|
|
$ |
(260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
12
The following table shows gross unrealized losses and fair value, aggregated by category and
length of time that individual securities have been in a continuous unrealized loss position, at
June 30, 2010 and December 31, 2009 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses at June 30, 2010 |
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Obligations of state and political
subdivisions |
|
$ |
3,498 |
|
|
$ |
(38 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
3,498 |
|
|
$ |
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
3,498 |
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
3,498 |
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
363 |
|
|
|
(45 |
) |
|
|
256 |
|
|
|
(139 |
) |
|
|
619 |
|
|
|
(184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
3,861 |
|
|
$ |
(83 |
) |
|
$ |
256 |
|
|
$ |
(139 |
) |
|
$ |
4,117 |
|
|
$ |
(222 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Losses at December 31, 2009 |
|
|
|
Less Than 12 Months |
|
|
12 Months or More |
|
|
Total |
|
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
Fair |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Treasury securities and
obligations of U.S. Government
agencies and corporations |
|
$ |
10,897 |
|
|
$ |
(84 |
) |
|
$ |
|
|
|
$ |
|
|
|
$ |
10,897 |
|
|
$ |
(84 |
) |
Obligations of state and political
subdivisions |
|
|
2,532 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
2,532 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt securities |
|
|
13,429 |
|
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
13,429 |
|
|
|
(92 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities |
|
|
140 |
|
|
|
(23 |
) |
|
|
496 |
|
|
|
(145 |
) |
|
|
636 |
|
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total temporarily impaired securities |
|
$ |
13,569 |
|
|
$ |
(115 |
) |
|
$ |
496 |
|
|
$ |
(145 |
) |
|
$ |
14,065 |
|
|
$ |
(260 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses noted above are considered to be temporary impairments. Decline in the
value of our debt securities is due only to interest rate fluctuations, rather than erosion of
quality. As a result, we believe that the payment of contractual cash flows, including principal
repayment, is not at risk. As management does not intend to sell the securities, does not believe
the Corporation 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. There are no debt securities that have had unrealized losses for more than 12 months.
Equity securities owned by the Corporation consist of common stock of various financial services
providers (Bank Stocks) that have traditionally been high-performing stocks prior to 2008. During
2008 and into 2009, market values of most of the Bank Stocks materially declined. Considerations
used to determine other-than-temporary impairment status for individual holdings include the length
of time the stock has remained in an unrealized loss position, the percentage of unrealized loss
compared to the carrying cost of the stock, dividend reduction or suspension, market analyst
reviews and expectations, and other pertinent developments that would affect expectations for
recovery or further decline. There are seven equity securities that comprise a group of securities
with unrealized losses for 12 months or more at June 30, 2010 and December 31, 2009. In the
aggregate, the unrealized loss on this group of securities increased very slightly from period to
period; however, some individual securities within this group declined in value more than others.
Of the two securities in the group that experienced the greatest decline in value, one has declined
to 78% of cost and continues to pay full dividends. The other has sustained unrealized losses, but
of an immaterial nature. Therefore, based on the quarterly analysis performed as of June 30, 2010
to assess impairment of the
investment portfolio, management has determined that none of the unrealized losses in the Bank
stock portfolio are other than temporary.
We understand that stocks can be cyclical and will experience some down periods. Historically, bank
stocks have sustained cyclical losses, followed by periods of substantial gains. When market values
of the bank stocks recover, accounting standards do not allow reversal of any previous
other-than-temporary impairment charge until the security is sold, at which time any proceeds above
the carrying value will be recognized as gains on the sale of investment securities.
13
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 fair value of the pledged assets amounted to $29,416,000 and
$30,403,000 at June 30, 2010 and December 31, 2009, respectively.
In addition to cash received from the scheduled maturities of securities, some investment
securities available for sale are sold at current market values during the course of normal
operations. Following is a summary of proceeds received from all investment securities
transactions, and the resulting realized gains and losses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
|
2010 |
|
|
2009 |
|
Gross proceeds from sales of securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Securities available for sale: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross realized gains |
|
$ |
15 |
|
|
$ |
|
|
|
$ |
27 |
|
|
$ |
|
|
Gross realized losses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 10 Fair Value Measurements
ASC Topic 820, Fair Value Measurements and Disclosures, is effective January 1, 2008, for financial
assets and financial liabilities and on January 1, 2009, for non-financial assets and non-financial
liabilities. This guidance defines fair value, establishes a framework for measuring fair value
under generally accepted accounting principles and expands disclosures about fair value
measurements.
Fair value measurement and disclosure guidance defines fair value as the price that would be
received to sell the asset or transfer the 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 to be 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.
14
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 entitys own assumptions about the assumptions market participants would use in pricing
the asset or liability developed based on the best information available in the circumstances. In
that regard, the guidance establishes a fair value hierarchy for valuation inputs that gives the
highest priority to quoted prices in active markets for identical assets or liabilities and the
lowest priority to unobservable inputs. The fair value hierarchy is as follows:
Level 1 Inputs Unadjusted quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access at the measurement date.
Level 2 Inputs Inputs other than quoted prices included in Level 1 that are observable
for the asset or liability, either directly or indirectly. These might include quoted prices
for similar assets or liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that
are observable for the asset or liability (such as interest rates, volatilities, prepayment
speeds, credit risks, etc.) or inputs that are derived principally from or corroborated by
market data by correlation or other means.
Level 3 Inputs Unobservable inputs for determining the fair values of assets or
liabilities that reflect an entitys own assumptions about the assumptions that market
participants would use in pricing the assets or liabilities.
A description of the valuation methodologies used for instruments measured at fair value, as well
as the general classification of such instruments 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, the Corporations creditworthiness, among other things, as well as
unobservable parameters. Any such valuation adjustments are applied consistently over time. The
Corporations 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 Corporations valuation methodologies are appropriate and consistent with other market
participants, the use of different methodologies or assumptions to determine the fair value of
certain financial instruments could result in a different estimate of fair value at the reporting
date.
Securities Available for Sale. Debt securities classified as available for sale are reported at
fair value utilizing Level 2 inputs. For these securities, the Corporation 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 bonds terms and conditions, among other things. Equity securities classified as available
for sale are reported at fair value using Level 1 inputs.
Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral
if repayment is expected solely from the collateral. Collateral values are estimated using Level 3
inputs based on customized discounting criteria.
Other Real Estate Owned. Assets included in other real estate owned are reported at fair value on a
non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider
the sales prices of similar properties in the proximate vicinity.
15
The following table summarizes financial assets and financial liabilities measured at fair value as
of June 30, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the
fair value hierarchy utilized to measure fair value (in thousands). There were no transfers of
assets between fair value Level 1 and Level 2 for the quarter ended June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant Other |
|
|
|
|
|
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
June 30, 2010 |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Measured at fair value on a recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities available-for-sale |
|
$ |
858 |
|
|
$ |
858 |
|
|
$ |
|
|
|
$ |
|
|
Debt securities available-for-sale |
|
|
80,204 |
|
|
|
|
|
|
|
80,204 |
|
|
|
|
|
Measured at fair value on a non-recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
|
1,805 |
|
|
|
|
|
|
|
|
|
|
|
1,805 |
|
Other real estate owned |
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
296 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Level 1) |
|
|
(Level 2) |
|
|
(Level 3) |
|
|
|
|
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
|
|
|
|
Quoted Prices in |
|
|
Other |
|
|
Significant Other |
|
|
|
December 31, |
|
|
Active Markets for |
|
|
Observable |
|
|
Unobservable |
|
|
|
2009 |
|
|
Identical Assets |
|
|
Inputs |
|
|
Inputs |
|
Measured at fair value on a recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity securities available-for-sale |
|
$ |
865 |
|
|
$ |
865 |
|
|
$ |
|
|
|
$ |
|
|
Debt securities available-for-sale |
|
|
76,491 |
|
|
|
|
|
|
|
76,491 |
|
|
|
|
|
Measured at fair value on a non-recurring basis: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impaired loans |
|
|
1,167 |
|
|
|
|
|
|
|
|
|
|
|
1,167 |
|
Other real estate owned |
|
|
476 |
|
|
|
|
|
|
|
|
|
|
|
476 |
|
Certain non-financial assets and non-financial liabilities measured at fair value on a
recurring basis include reporting units measured at fair value in the first step of a goodwill
impairment test. Certain non-financial assets measured at fair value on a non-recurring basis
include non-financial assets and non-financial liabilities measured at fair value in the second
step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived
assets measured at fair value for impairment assessment. As stated above, this guidance was
applicable to these fair value measurements beginning January 1, 2009 and were not significant at
June 30, 2010.
Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires disclosures about fair value of financial
instruments for interim reporting periods of publicly traded companies as well as in annual
financial statements.
The estimated fair values of the Corporations financial instruments are as follows (in thousands):
16
Financial Instruments
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2010 |
|
|
December 31, 2009 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
Financial assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and due from banks |
|
$ |
10,405 |
|
|
$ |
10,405 |
|
|
$ |
18,613 |
|
|
$ |
18,613 |
|
Interest bearing deposits with banks |
|
|
1,860 |
|
|
|
1,860 |
|
|
|
82 |
|
|
|
82 |
|
Federal funds sold |
|
|
9,250 |
|
|
|
9,250 |
|
|
|
1,200 |
|
|
|
1,200 |
|
Interest bearing time deposits with banks |
|
|
1,345 |
|
|
|
1,404 |
|
|
|
1,420 |
|
|
|
1,447 |
|
Securities |
|
|
81,062 |
|
|
|
81,062 |
|
|
|
77,356 |
|
|
|
77,356 |
|
Restricted investment in FHLB stock |
|
|
2,197 |
|
|
|
2,197 |
|
|
|
2,197 |
|
|
|
2,197 |
|
Total loans, net of unearned interest |
|
|
308,075 |
|
|
|
325,297 |
|
|
|
311,630 |
|
|
|
324,061 |
|
Accrued interest receivable |
|
|
2,171 |
|
|
|
2,171 |
|
|
|
2,284 |
|
|
|
2,284 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest bearing deposits |
|
|
55,091 |
|
|
|
55,091 |
|
|
|
55,030 |
|
|
|
55,030 |
|
Interest bearing deposits |
|
|
324,471 |
|
|
|
330,984 |
|
|
|
322,367 |
|
|
|
327,724 |
|
Securities sold under agreements to repurchase |
|
|
3,168 |
|
|
|
3,168 |
|
|
|
3,207 |
|
|
|
3,207 |
|
Long-term debt |
|
|
5,000 |
|
|
|
5,030 |
|
|
|
5,000 |
|
|
|
5,077 |
|
Other interest bearing liabilities |
|
|
1,158 |
|
|
|
1,160 |
|
|
|
1,146 |
|
|
|
1,148 |
|
Accrued interest payable |
|
|
582 |
|
|
|
582 |
|
|
|
681 |
|
|
|
681 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-balance sheet financial instruments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments to extend credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Letters of credit |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Management uses its best judgment in estimating the fair value of the Corporations financial
instruments; however, there are inherent weaknesses in any estimation technique. Therefore, the
fair value estimates herein are not necessarily indicative of the amounts the Corporation could
have realized in sales transactions on the dates indicated. The estimated fair value amounts have
been measured as of their respective quarter 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 than the amounts reported at each quarter end.
The information presented above should not be interpreted as an estimate of the fair value of the
entire Corporation since a fair value calculation is provided only for a limited portion of the
Corporations assets and liabilities. Due to a wide range of valuation techniques and the degree of
subjectivity used in making the estimates, comparisons between the Corporations disclosures and
those of other companies may not be meaningful.
The following describes the estimated fair value of the Corporations financial instruments as well
as the significant methods and assumptions used to determine these estimated fair values.
Carrying values approximate fair value for cash and due from banks, interest-bearing demand
deposits with other banks, federal funds sold, restricted stock in the Federal Home Loan Bank,
interest receivable, non-interest bearing demand deposits, securities sold under agreements to
repurchase, and interest payable.
Interest bearing time deposits with banks The estimated fair value is determined by discounting
the contractual future cash flows, using the rates currently offered for deposits of similar
remaining maturities.
Securities Available for Sale Debt securities classified as available for sale are reported at
fair value utilizing Level 2 inputs. For these securities, the Corporation 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 bonds terms and conditions, among other
things. Equity securities classified as available for sale are reported at fair value using Level 1
inputs.
17
Loans For variable-rate loans that reprice frequently and which entail no significant changes in
credit risk, carrying values approximated fair value. Substantially all commercial loans and real
estate mortgages are variable rate loans. The fair value of other loans (i.e. consumer loans and
fixed-rate real estate mortgages) are estimated by calculating the present value of the cash flow
difference between the current rate and the market rate, for the average maturity, discounted
quarterly at the market rate.
Impaired Loans Certain impaired loans are reported at the fair value of the underlying collateral
if repayment is expected solely from the collateral. Collateral values are estimated using Level 3
inputs based on customized discounting criteria.
Fixed rate time deposits The estimated fair value is determined by discounting the contractual
future cash flows, using the rates currently offered for deposits of similar remaining maturities.
Long-term debt and other interest bearing liabilities The fair values of long-term debt and
other interest bearing liabilities are estimated using discounted cash flow analysis, based on
incremental borrowing rates for similar types of borrowing arrangements.
Commitments to extend credit and letters of credit The fair value of commitments to extend
credit is estimated using the fees currently charged to enter into similar agreements, taking into
account market interest rates, the remaining terms and present credit worthiness of the
counterparties. The fair value of guarantees and letters of credit is based on fees currently
charged for similar agreements.
NOTE 11 Subsequent Events
On July 20, 2010, the Board of Directors declared a regular cash dividend for the third quarter of
2010 of $0.21 per share to shareholders of record on August 13, 2010, payable on September 1, 2010.
18
Item 2. Managements Discussion and Analysis of Financial Condition and Results of
Operations
Forward Looking Statements:
The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding
forward-looking statements. When used in this discussion, the words believes, anticipates,
contemplates, expects, and similar expressions are intended to identify forward-looking
statements. Such statements are subject to certain risks and uncertainties which could cause actual
results, performance or achievements expressed or implied by such forward-looking statements to
differ materially from those projected. Those risks and uncertainties include changes in interest
rates and their impact on the level of deposits, loan demand and value of loan collateral, changes
in the market value of the securities portfolio, increased competition from other financial
institutions, governmental monetary policy, legislation and changes in banking regulations, changes
in levels of FDIC deposit insurance premiums and assessments, risks associated with the effect of
opening a new branch, the ability to control costs and expenses, and general economic conditions.
The Corporation undertakes no obligation to update such forward-looking statements to reflect
events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.
Critical Accounting Policies:
Disclosure of the Corporations significant accounting policies is included in the notes to the
consolidated financial statements of the Corporations Annual Report on Form 10-K for the year
ended December 31, 2009. 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
managements evaluation of the investment portfolio for other-than-temporary impairment.
General:
The following discusses the consolidated financial condition of the Corporation as of June 30,
2010, as compared to December 31, 2009, and the consolidated results of operations for the three
and six months ended June 30, 2010, compared to the same periods in 2009. This discussion should be
read in conjunction with the interim consolidated financial statements and related footnotes
included herein.
Introduction:
Juniata Valley Financial Corp. is a Pennsylvania corporation organized in 1983 to become the
holding company of The Juniata Valley Bank. The Bank is a state-chartered bank headquartered in
Mifflintown, Pennsylvania. Juniata Valley Financial Corp. and its subsidiary bank derive
substantially all of their income from banking and bank-related services, including interest earned
on residential real estate, commercial mortgage, commercial and consumer loans, interest earned on
investment securities and fee income from deposit services and other financial services to its
customers through 12 locations in central Pennsylvania. Juniata Valley Financial Corp. also owns
39.16% of the First National Bank of Liverpool (Liverpool), located in Liverpool, Pennsylvania.
The Corporation accounts for Liverpool as an unconsolidated subsidiary using the equity method of
accounting.
Financial Condition:
As of June 30, 2010, total assets increased by $1,837,000, or 0.4%, as compared to December 31,
2009. Deposits increased by $2.2 million, with interest-bearing deposits increasing by $2.1
million, and non-interest bearing deposits increasing by $0.1 million.
19
The table below shows changes in deposit volumes by type of deposit (in thousands of dollars)
between December 31, 2009 and June 30, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Change |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
Deposits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Demand, non-interest bearing |
|
$ |
55,091 |
|
|
$ |
55,030 |
|
|
$ |
61 |
|
|
|
0.1 |
% |
NOW and money market |
|
|
80,343 |
|
|
|
75,766 |
|
|
|
4,577 |
|
|
|
6.0 |
% |
Savings |
|
|
47,797 |
|
|
|
42,536 |
|
|
|
5,261 |
|
|
|
12.4 |
% |
Time deposits, $100,000 and more |
|
|
38,510 |
|
|
|
38,453 |
|
|
|
57 |
|
|
|
0.1 |
% |
Other time deposits |
|
|
157,821 |
|
|
|
165,612 |
|
|
|
(7,791 |
) |
|
|
(4.7 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total deposits |
|
$ |
379,562 |
|
|
$ |
377,397 |
|
|
$ |
2,165 |
|
|
|
0.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Overall, loans, net of unearned interest decreased by $3.6 million, between December 31, 2009 and
June 30, 2010. As shown in the table below (in thousands of dollars), the net decrease in
outstanding loans since December 31, 2009 has been related primarily to decreases in most loan
categories, partially offset by an increase in real estate mortgage loans.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, |
|
|
December 31, |
|
|
Change |
|
|
|
2010 |
|
|
2009 |
|
|
$ |
|
|
% |
|
Loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial, financial and agricultural |
|
$ |
20,911 |
|
|
$ |
33,783 |
|
|
$ |
(12,872 |
) |
|
|
(38.1 |
%) |
Real estate commercial |
|
|
34,242 |
|
|
|
39,299 |
|
|
|
(5,057 |
) |
|
|
(12.9 |
%) |
Real estate construction |
|
|
23,546 |
|
|
|
24,578 |
|
|
|
(1,032 |
) |
|
|
(4.2 |
%) |
Real estate mortgage |
|
|
157,062 |
|
|
|
135,854 |
|
|
|
21,208 |
|
|
|
15.6 |
% |
Home equity |
|
|
53,010 |
|
|
|
52,893 |
|
|
|
117 |
|
|
|
0.2 |
% |
Obligations of states and political
subdivisions |
|
|
9,653 |
|
|
|
13,553 |
|
|
|
(3,900 |
) |
|
|
(28.8 |
%) |
Personal |
|
|
9,651 |
|
|
|
11,670 |
|
|
|
(2,019 |
) |
|
|
(17.3 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans |
|
$ |
308,075 |
|
|
$ |
311,630 |
|
|
|
($3,555 |
) |
|
|
(1.1 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
A summary of the transactions in the allowance for loan losses for each of the six months
ended June 30, 2010 and 2009 (in thousands) are presented below.
|
|
|
|
|
|
|
|
|
|
|
Periods Ended June 30, |
|
|
|
2010 |
|
|
2009 |
|
Balance of allowance January 1 |
|
$ |
2,719 |
|
|
$ |
2,610 |
|
Loans charged off |
|
|
(312 |
) |
|
|
(331 |
) |
Recoveries of loans previously charged off |
|
|
6 |
|
|
|
5 |
|
|
|
|
|
|
|
|
Net charge-offs |
|
|
(306 |
) |
|
|
(326 |
) |
Provision for loan losses |
|
|
567 |
|
|
|
212 |
|
|
|
|
|
|
|
|
Balance of allowance end of period |
|
$ |
2,980 |
|
|
$ |
2,496 |
|
|
|
|
|
|
|
|
|
Ratio of net charge-offs during period to
average loans outstanding |
|
|
0.10 |
% |
|
|
0.11 |
% |
|
|
|
|
|
|
|
As of June 30, 2010, the Corporation has evaluated large commercial loan relationships and other
significant loans for impairment. Of the loans that were evaluated, there are three loan
relationships, on which a determination has been made that it is probable that principal and
interest will not be collected in full. These three loan relationships have an aggregate
outstanding balance of $2,561,000. The amount of impairment estimated for these
collateral-dependent loans is $756,000. Specific allocations totaling $756,000 have been included
within the loan loss reserve for these loans, adjusting the carrying value of these loans to the
fair value of $1,805,000. Other loans evaluated for impairment
have an aggregate outstanding balance of $4,788,000, but it has been determined that there is
sufficient collateral to expect full repayment, and no impairment charge has been recorded.
Management believes that the specific reserve is adequate to cover potential future losses related
to these relationships. Otherwise, there are no material loans classified for regulatory purposes
as loss, doubtful, substandard, or special mention which management expects to significantly impact
future operating results, liquidity or capital resources. Following is a summary of the Banks
non-performing loans on June 30, 2010 as compared to December 31, 2009.
20
|
|
|
|
|
|
|
|
|
(Dollar amounts in thousands) |
|
June 30, 2010 |
|
|
December 31, 2009 |
|
Non-performing loans |
|
|
|
|
|
|
|
|
Nonaccrual loans |
|
$ |
5,117 |
|
|
$ |
2,629 |
|
Accruing loans past due 90 days or more |
|
|
923 |
|
|
|
1,369 |
|
Restructured loans |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,040 |
|
|
$ |
3,998 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average loans outstanding |
|
$ |
311,526 |
|
|
$ |
310,813 |
|
|
|
|
|
|
|
|
|
|
Ratio of non-performing loans to
average loans outstanding |
|
|
1.94 |
% |
|
|
1.29 |
% |
Stockholders equity decreased by $130,000, or 0.3%, from December 31, 2009 to June 30, 2010.
Net income of $2,326,000 increased stockholders equity, while dividends paid of $1,727,000 and
cash used to purchase Corporation stock into treasury of $1,026,000 reduced the Corporations
capital position. The Corporation repurchased stock into treasury pursuant to its stock repurchase
program. During the first six months of 2010, the Corporation purchased 58,100 shares. Securities
available for sale increased in market value, representing an increase to equity of $170,000, net
of taxes while accounting for stock-based compensation activity increased equity by $24,000. An
adjustment of $42,000 was made to equity to record the amortization of net periodic pension costs
of the Corporations defined benefit retirement plan.
Management is not aware of any current recommendations of applicable regulatory authorities that,
if implemented, would have a material effect on the Corporations liquidity, capital resources, or
operations.
Subsequent to June 30, 2010, the following events took place:
On July 20, 2010, the Board of Directors declared a regular cash dividend for the third quarter of
2010 of $0.21 per share to shareholders of record on August 13, 2010, payable on September 1, 2010.
Comparison of the Three Months Ended June 30, 2010 and 2009
Operations Overview:
Net income for the second quarter of 2010 was $1,138,000, a decrease of $27,000, or 2.3%, compared
to the second quarter of 2009. Basic and diluted earnings per share were $0.26 in the second
quarter of 2010, compared to $0.27 in the second quarter in 2009. Annualized return on average
equity for the second quarter in 2010 was 9.01%, compared to the prior years ratio for the same
period of 9.47%. For the quarter ended June 30, annualized return on average assets was 1.03% in
2010, versus 1.07% in 2009. The decrease in net income was primarily a result of the increase in
the provision for loan losses during the second quarter of 2010.
21
Presented below are selected key ratios for the two periods:
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Return on average assets (annualized) |
|
|
1.03 |
% |
|
|
1.07 |
% |
Return on average equity (annualized) |
|
|
9.01 |
% |
|
|
9.47 |
% |
Average equity to average assets |
|
|
11.42 |
% |
|
|
11.26 |
% |
|
|
|
|
|
|
|
|
|
Non-interest income, excluding securities
gains and impairment charges, as a
percentage of average assets (annualized) |
|
|
0.91 |
% |
|
|
1.04 |
% |
Non-interest expense as a percentage of
average assets (annualized) |
|
|
2.98 |
% |
|
|
3.03 |
% |
There were items that impact comparability when making comparisons of the second quarters of
2010 and 2009. Charges to earnings for equity securities deemed to be other-than-temporarily
impaired occurred in the second quarter of 2009. Also in the second quarter of 2009, a special
deposit insurance assessment was charged to banks by the FDIC, and a refund was received from the
Commonwealth of Pennsylvania for sales tax overpaid in prior years. During the second quarter of
2010, the Corporation recorded small gains from the call of certain securities in the investment
portfolio and from the sale of property carried as other real estate owned.
The discussion that follows further explains changes in the components of net income when comparing
the second quarter of 2010 with the second quarter of 2009.
Net Interest Income:
Net interest income was $4,049,000 for the second quarter of 2010, as compared to $4,053,000 in the
same quarter in 2009. Average earning assets grew by 0.8%, while the net interest margin on a fully
tax equivalent basis decreased by 16 basis points.
Interest on loans decreased $360,000, or 6.8%, in the second quarter of 2010 as compared to the
same period in 2009. The average weighted interest rate decrease of 67 basis points lowered
interest income by approximately $274,000, with the remaining decrease attributable to a lower
volume of loans.
Interest earned on investment securities and money market investments decreased $119,000 in the
second quarter of 2010 as compared to 2009, with average balances increasing $2.5 million during
the period. The yield on money market investments (federal funds and interest bearing deposits)
decreased by 110 basis points in the second quarter of 2010 as compared to the second quarter of
2009, due to the reduction in interest bearing balances with other financial institutions.
Likewise, the overall pre-tax yield on the investment securities portfolio decreased during that
same timeframe by 65 basis points.
Average interest-bearing deposits and securities sold under agreements to repurchase increased by
$916,000, while average non-interest bearing deposits grew by $4,470,000. This change in the mix of
deposits, in addition to the lower general rate environment, contributed to the reduction in the
cost to fund earning assets, which was reduced by 49 basis points, to 1.39%, in the second quarter
of 2010.
Total average earning assets during the second quarter of 2010 were $400,901,000, compared to
$397,760,000 during the second quarter of 2009, yielding 5.28% in 2010 versus 5.96% in 2009.
Funding costs for the earning assets were 1.39% and 1.88% for the second quarters of 2010 and 2009,
respectively. Net interest margin on a fully tax-equivalent basis for the second quarter of 2010
was 4.10%. For the same period in 2009, the fully-tax equivalent net interest margin was 4.26%.
22
Provision for Loan Losses:
In the second quarter of 2010, the provision for loan losses was $282,000, as compared to a
provision of $77,000 in the second quarter of 2009. Management regularly reviews the adequacy of
the loan loss reserve and makes assessments as to specific loan impairment, historical charge-off
expectations, general economic conditions in the Banks market area, specific loan quality and
other factors. The increased provision was primarily the result of the decrease in value of the
collateral supporting one impaired loan relationship.
Non-interest Income:
Non-interest income in the second quarter of 2010 was $1,024,000, compared to $909,000 in the
second quarter of 2009, an increase of $115,000. As mentioned in the overview above, there were
items that impact comparability of non-interest income when making comparisons of the two quarters.
The following table quantifies the impact of these items.
|
|
|
|
|
|
|
|
|
|
|
Year-to-date through June 30, |
|
Non-interest income (in thousands) |
|
2010 |
|
|
2009 |
|
Securities other-than-temporary impairment charge |
|
$ |
|
|
|
$ |
(226 |
) |
Gains on the sale or call of securities |
|
|
27 |
|
|
|
|
|
Gains on the sale of former branch locations |
|
|
|
|
|
|
14 |
|
Net gains on sale of OREO |
|
|
6 |
|
|
|
19 |
|
Refund of overcharged PA sales tax from years 2004-2006 |
|
|
|
|
|
|
40 |
|
Prior period income from credit-life insurance sales |
|
|
|
|
|
|
323 |
|
|
|
|
|
|
|
|
Total positive impact on non-interest income |
|
$ |
33 |
|
|
$ |
170 |
|
|
|
|
|
|
|
|
In the second quarter of 2009, management identified other-than-temporary impairment on two
equities in the Corporations common stock portfolio and accordingly, an impairment charge to
earnings of $226,000 was recorded. The same type of analysis in the second quarter of 2010 resulted
in no other-than-temporary impairment charge in the quarter. As seen in the table above, while net
gains on the disposition of property were recorded from different events, the result was similar in
each of the two periods, $22,000 in 2010 versus $27,000 in 2009. As a result of petitions to the
state of Pennsylvania disputing certain charges for state sales tax over the periods of 2004
through 2006, the Corporation received a refund of $40,000 in the second quarter of 2009. These
types of transactions generally do not occur on a regular basis as part of recurring operating
income. In the aggregate, the positive impact of these items on non-interest income was $137,000
greater in the second quarter of 2010 than in the same period in 2009. Thus, adjusting for those
items that impacted comparability, non-interest income would have been $22,000 lower for the 2010
period in comparison to the 2009 period.
Trust fee income was $4,000 or 4.7% higher in the second quarter of 2010 as compared to the second
quarter of 2009, while commissions from sales of non-deposit products in the second quarter of 2010
were 16.7%, or $25,000, lower than in the same quarter of the previous year.
As a percentage of average assets, annualized non-interest income, exclusive of net gains on the
sale of securities and impairment charge, was 0.91% in the second quarter of 2010 as compared to
1.04% in the same period of 2009. If all items impacting comparability were excluded from the
computation, the ratios would be 0.91% in 2010 compared to 0.99% in 2009.
Non-interest Expense:
Total non-interest expense decreased $16,000, or 0.5%, in the second quarter of 2010 as compared to
2009. In June of 2009, a one-time special deposit insurance assessment by the FDIC of $194,000 was
recorded. All financial institutions insured by the FDIC incurred the cost of a special assessment
at that time based upon each banks insurance risk. In addition to the special assessment, the
calculation of the regular deposit insurance premium was revised and the rate was increased,
creating a negative variance of $27,000 in the second quarter of 2010 versus the second quarter of
2009.
Employee compensation and benefits costs increased by $86,000, or 5.3%, in the second quarter of
2010 compared to the second quarter of 2009, primarily due to an increase in part time salaries and
medical insurance costs.
23
As a percentage of average assets, annualized non-interest expense was 2.98% in the second quarter
of 2010 as compared to 3.03% in the same period of 2009. If the special FDIC assessment in 2009
were excluded from the computation, the ratio would be 2.85% in 2009.
Provision for income taxes:
Income tax expense in the second quarter of 2010 was $354,000, or 12.6%, less than in the same time
period in 2009. The effective tax rate in the second quarter of 2010 was 23.7% versus 25.8% in
2009. The ratio of tax-free interest-earning assets to total assets increased in 2010, providing
for a greater amount of non-taxable interest income.
Comparison of the Six Months Ended June 30, 2010 and 2009
Operations Overview:
Net income for the first six months of 2010 was $2,326,000, a decrease of $249,000, or 9.7%,
compared to the same period in 2009. Basic and diluted earnings per share were $0.54 in the first
half of 2010, compared to $0.59 in the first half of 2009. Annualized return on average equity for
the first six months of 2010 was 9.18%, compared to the prior years ratio for the same period of
10.52%. For the year-to-date period ended June 30, annualized return on average assets was 1.06% in
2010, versus 1.19% in 2009. The decrease in net income was primarily a result of the increase in
the provision for loan losses, and the net effect of the valuation of certain assets in 2009.
Presented below are selected key ratios for the two periods:
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended |
|
|
|
June 30, |
|
|
|
2010 |
|
|
2009 |
|
Return on average assets (annualized) |
|
|
1.06 |
% |
|
|
1.19 |
% |
Return on average equity (annualized) |
|
|
9.18 |
% |
|
|
10.52 |
% |
Average equity to average assets |
|
|
11.53 |
% |
|
|
11.34 |
% |
|
|
|
|
|
|
|
|
|
Non-interest income, excluding securities
gains and impairment charges, as a
percentage of average assets (annualized) |
|
|
0.92 |
% |
|
|
1.10 |
% |
Non-interest expense as a percentage of
average assets (annualized) |
|
|
2.93 |
% |
|
|
3.01 |
% |
There were several items that impact comparability when making comparisons of the two periods.
Charges to earnings for equity securities deemed to be other-than-temporarily impaired and gains on
the sale of properties occurred in the first six months of 2009. Additionally in 2009, noninterest
income was recorded for Pennsylvania sales tax refunds and for deferred fees earned on the sale of
credit life insurance. In the area of non-interest expense, in 2009, a special assessment was
charged to banks by the FDIC.
The discussion that follows further explains these and other changes in the components of net
income when comparing the year-to-date results of operations for 2010 and 2009.
Net Interest Income:
Net interest income was $8,045,000 for the first six months of 2010, as compared to $8,070,000 in
the same period in 2009.
Interest on loans decreased $613,000, or 5.8%, in the first six months of 2010 as compared to the
same period in 2009. An average weighted interest rate decrease of 42 basis points, partially
offset by an increase of $1,144,000 in the average balance of the loan portfolio, was responsible
for lower interest income in comparison to the 2009 period.
Interest earned on investment securities and money market investments decreased $248,000 in the
first six months of 2010 as compared to 2009, with average balances increasing $4,499,000 during
the period. The yield on money market investments (federal funds and interest bearing deposits)
decreased by 32 basis points in the first half of 2010 as compared to the first half of 2009, due
to the reduction in balances and rates in interest bearing deposits. Likewise,
the overall pre-tax yield on the investment securities portfolio decreased during that same
timeframe by 78 basis points.
24
Average interest-bearing deposits and securities sold under agreements to repurchase increased by
$3,943,000, while average non-interest bearing deposits grew by $3,284,000, when comparing the
first half of 2010 to the same period in 2009. This change in the mix of deposits, in addition to
the sustained low rate environment, contributed to the reduction in the cost to fund earning
assets, which was reduced by 45 basis points, to 1.49%, in the first half of 2010.
Total average earning assets during the first half of 2010 were $398,078,000, compared to
$392,435,000 during the first half of 2009, yielding 5.54% in 2010 versus 6.06% in 2009. Funding
costs for the earning assets were 1.49% and 1.94% for the six months ended June 30, 2010 and 2009,
respectively. Net interest margin on a fully tax-equivalent basis for the first half of 2010 was
4.26%. For the same period in 2009, the fully-tax equivalent net interest margin was 4.31%.
Provision for Loan Losses:
In the first six months of 2010, the provision made for loan losses was $567,000. Management
regularly reviews the adequacy of the loan loss reserve and makes assessments as to specific loan
impairment, historical charge-off expectations, general economic conditions in the Banks market
area, specific loan quality and other factors. In the first six months of 2009, a loan loss
provision of $212,000 was recorded. The increase in the provision in the 2010 period resulted from
the reduction in the value of collateral supporting several impaired loans.
Non-interest income:
Non-interest income in the first six months of 2010 was $2,047,000, compared to $2,151,000 in the
first six months of 2009, a decrease of $104,000. As mentioned in the overview above, there were
several items that impact comparability on non-interest income when making comparisons of the two
periods. The following table quantifies the impact of these items.
|
|
|
|
|
|
|
|
|
|
|
Year-to-date through June 30, |
|
Non-interest income (in thousands) |
|
2010 |
|
|
2009 |
|
Securities other-than-temporary impairment charge |
|
$ |
|
|
|
$ |
(226 |
) |
Gains on the sale or call of securities |
|
|
27 |
|
|
|
|
|
Gains on the sale of former branch locations |
|
|
|
|
|
|
14 |
|
Net gains on sale of OREO |
|
|
6 |
|
|
|
19 |
|
Refund of overcharged PA sales tax from years 2004-2006 |
|
|
|
|
|
|
40 |
|
Prior period income from credit-life insurance sales |
|
|
|
|
|
|
323 |
|
|
|
|
|
|
|
|
Total positive impact on non-interest income |
|
$ |
33 |
|
|
$ |
170 |
|
|
|
|
|
|
|
|
In the first six months of 2009, management identified other-than-temporary impairment on two
equities in the Corporations common stock portfolio and, accordingly, an impairment charge to
earnings of $226,000 was recorded. The Corporation recognized no gains from the sales or calls of
securities during the first half of 2009, while a gain of $27,000 was recorded in the first half of
2010. Property used formerly as a branch location was sold during 2009, yielding a gain of $14,000
in 2009. As a result of petitions to the state of Pennsylvania disputing certain charges for state
sales tax over the periods of 2004 through 2006, the Corporation received a refund of $40,000 in
the first half of 2009. Included also in non-interest income in the first half of 2009 was an
adjustment of $323,000, representing previously unrecorded fees earned in prior periods from the
sales of insurance policies on loans. The adjustment was deemed by management to be immaterial to
the consolidated financial statements in all prior periods and therefore required no prior period
restatement of earnings. These types of transactions generally do not occur on a regular basis as
part of recurring operating income. In the aggregate, the positive impact of these transactions on
non-interest income was $137,000 greater in the first half of 2009 than in the same period in 2010.
Trust fees earned in the first six months of 2010 were $40,000 higher than those earned in the
first six months of 2009, primarily due to estate fees earned. Fees for customer service on deposit
accounts in the first half of 2010 decreased slightly compared to the same period in 2009 by
$29,000, or 3.6%, due to reduced activity in the overdraft protection product. At $221,000,
commissions from the sale of non-deposit products were 14.3% less than the $258,000 in commissions
earned in 2009. Income from bank owned life insurance and annuities increased in the first half of
2010 compared to the first half of 2009 by $42,000, or 19.3%, as a result of carrier
diversification. Income from our unconsolidated subsidiary was $119,000, representing earnings
recorded under the equity method of accounting for
the ownership of 39.16% of the First National Bank of Liverpool during the first six months of
2010, a 24.0% increase over the previous years same period.
25
As a percentage of average assets, annualized non-interest income, exclusive of net gains on the
sale of securities and impairment charge, was 0.92% in the first six months of 2010 as compared to
1.10% in the same period of 2009. If the items impacting comparability were excluded from the
computation, the ratios would be 0.92% in 2010 and 0.93% in 2009.
Noninterest expense:
Total non-interest expense decreased $62,000, or 1.0%, in the first six months of 2010 as compared
to 2009. In June of 2009, a one-time special deposit insurance assessment by the FDIC of $194,000
was recorded. All financial institutions insured by the FDIC incurred the cost of a special
assessment at that time based upon each banks insurance risk. In addition to the special
assessment, the calculation of the regular deposit insurance premium was revised and the rate was
increased, creating a negative variance of $86,000 in the first half of 2010 versus the first half
of 2009.
Employee compensation and benefits costs increased by $58,000, or 1.7%, in first half of 2010
compared to the first half of 2009, primarily due to an increase in part time salaries and medical
insurance costs. Other changes in noninterest expense in the comparable periods included an
increase of $22,000 in costs to maintain foreclosed assets.
As a percentage of average assets, annualized noninterest expense was 2.93% in the first six months
of 2010 as compared to 3.01% in the same period of 2009. If the items that affected comparability
were excluded from the computation, the ratios would be 2.93% in both periods.
Provision for income taxes:
Income tax expense in the first six months of 2010 was $173,000, or 18.6%, less than in the same
time period in 2009. The effective tax rate in 2010 was 24.5% versus 26.5% in 2009. The ratio of
tax-free interest-earning assets to total assets increased in 2010, providing for a lesser amount
of non-taxable interest income.
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 Corporation 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 Corporation to
maintain a high level of liquidity in all economic environments. Principal sources of asset
liquidity are provided by securities maturing in one year or less, 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
Corporation is a member of the Federal Home Loan Bank of Pittsburgh for the purpose of providing
short-term liquidity when other sources are unable to fill these needs. During the first six months
of 2010, the average balance of short-term borrowings from the Federal Home Loan Bank was $313,000,
with none outstanding on June 30, 2010. As of June 30, 2010, the Corporation had long-term debt of
$5,000,000 and had unused borrowing capacity with the Federal Home Loan Bank of $150 million.
Funding derived from securities sold under agreements to repurchase (accounted for as
collateralized financing transactions) is available through corporate cash management accounts for
business customers. This product gives the Corporation the ability to pay interest on corporate
checking accounts.
In view of the sources previously mentioned, management believes that the Corporations liquidity
is capable of providing the funds needed to meet loan demand.
Off-Balance Sheet Arrangements:
The Corporations 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 letters of credit issued using the same credit standards as
on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as
long as there is no violation of any condition established in the contract. Letters of credit are
conditional commitments issued to guarantee the financial performance obligation of a customer to a
third party.
26
Unused commitments and letters of credit at June 30, 2010, were $38,781,000 and $903,000,
respectively. 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 to
the Corporation. Management believes that any amounts actually drawn upon can be funded in the
normal course of operations. The Corporation has no investment in or financial relationship with
any unconsolidated entities that are reasonably likely to have a material effect on liquidity or
the availability of capital resources.
Interest Rate Sensitivity:
Interest rate sensitivity management is the responsibility of the Asset/Liability Management
Committee. This process involves the development and implementation of strategies to maximize net
interest margin, while minimizing the earnings risk associated with changing interest rates.
Traditional gap analysis identifies the maturity and re-pricing terms of all assets and
liabilities. A simulation analysis is used to assess earnings and capital at risk from movements in
interest rates. See Item 3 for a description of the complete simulation process and results.
Capital Adequacy:
Bank regulatory authorities in the United States issue risk-based capital standards. These capital
standards relate a banking Corporations 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. The
risk-based capital standards require all banks to have Tier 1 capital of at least 4% and total
capital, including Tier 1 capital, of at least 8% of risk-adjusted assets. Tier 1 capital includes
common stockholders equity and qualifying perpetual preferred stock together with related
surpluses and retained earnings. Total capital is comprised of Tier 1 capital, limited life
preferred stock, qualifying debt instruments, and the reserves for possible loan losses. Banking
regulators have also issued leverage ratio requirements. The leverage ratio requirement is measured
as the ratio of Tier 1 capital to adjusted average assets. At June 30, 2010, the Bank exceeded the
regulatory requirements to be considered a well capitalized financial institution, i.e., a
leverage ratio exceeding 5%, Tier 1 capital exceeding 6% and total capital exceeding 10%.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market risk is the exposure to economic loss that arises from changes in the values of certain
financial instruments. The types of market risk exposures generally faced by financial institutions
include equity market price risk, interest rate risk, foreign currency risk and commodity price
risk. Due to the nature of its operations, only equity market price risk and interest rate risk are
significant to the Corporation.
Equity market price risk is the risk that changes in the values of equity investments could have a
material impact on the financial position or results of operations of the Corporation. The
Corporations equity investments consist of common stocks of publicly traded financial
institutions.
Recent declines and volatility in the values of financial institution stocks have significantly
reduced the likelihood of realizing significant gains in the near-term. Although the Corporation
has realized occasional gains from this portfolio in the past, the primary objective of the
portfolio is to achieve value appreciation in the long term while earning consistent attractive
after-tax yields from dividends. The carrying value of the financial institutions stocks accounted
for 0.2% of the Corporations total assets as of June 30, 2010. Management performs an impairment
analysis on the entire investment portfolio, including the financial institutions stocks on a
quarterly basis. As of June 30, 2010, no other-than-temporary impairment was identified. There is
no assurance that further declines in market values of the common stock portfolio in the future
will not result in other-than-temporary impairment charges, depending upon facts and
circumstances present.
The equity investments in the Corporations portfolio had an adjusted cost basis of approximately
$975,000 and a fair value of $858,000 at June 30, 2010. Net unrealized losses in this portfolio
were approximately $117,000 at June 30, 2010.
In addition to its equity portfolio, the Corporations investment management and trust services
revenue could be impacted by fluctuations in the securities markets. A portion of the Corporations
trust revenue is based on the value of
the underlying investment portfolios. If securities values decline, the Corporations trust revenue
could be negatively impacted.
27
Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on
the Corporations liquidity position and could affect its ability to meet obligations and continue
to grow. Second, movements in interest rates can create fluctuations in the Corporations net
interest income and changes in the economic value of equity.
The primary objective of the Corporations asset-liability management process is to maximize
current and future net interest income within acceptable levels of interest rate risk while
satisfying liquidity and capital requirements. Management recognizes that a certain amount of
interest rate risk is inherent, appropriate and necessary to ensure profitability. A simulation
analysis is used to assess earnings and capital at risk from movements in interest rates. The model
considers three major factors of (1) volume differences, (2) repricing differences, and (3) timing
in its income simulation. As of the most recent model run, data was disseminated into appropriate
repricing buckets, based upon the static position at that time. The interest-earning assets and
interest-bearing liabilities were assigned a multiplier to simulate how much that particular
balance sheet item would re-price when interest rates change. Finally, the estimated timing effect
of rate changes is applied, and the net interest income effect is determined on a static basis (as
if no other factors were present). As the table below indicates, based upon rate shock simulations
on a static basis, the Corporations balance sheet is relatively rate-neutral as rates would change
downward. Each 100 basis point increase results in approximately $119,000 decline in net interest
income in the static environment. This negative effect of rising rates is offset to a large degree
by the positive effect of imbedded options that include loans floating off their floors and likely
internal deposit pricing strategies. Over a one-year period, the net effect of an immediate 100,
200, 300 and 400 basis point rate increase would change net interest income by $(77,000),
$(78,000), $(50,000) and $(19,000), respectively. Rate shock modeling was done for a declining rate
of 25 basis points only, as the federal funds target rate currently is between zero and 0.25%. As
the table below indicates, the net effect of interest rate risk on net interest income is positive
in a rising rate environment. Juniatas rate risk policies provide for maximum limits on net
interest income that can be at risk for 100 through 400 basis point changes in interest rates.
Effect of Interest Rate Risk on Net Interest Income
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Net |
|
|
Change in Net |
|
|
|
|
Change in |
|
Interest Income |
|
|
Interest Income |
|
|
Total Change in |
|
Interest Rates |
|
Due to Interest |
|
|
Due to Imbedded |
|
|
Net Interest |
|
(Basis Points) |
|
Rate Risk (Static) |
|
|
Options |
|
|
Income |
|
400 |
|
$ |
(473 |
) |
|
$ |
454 |
|
|
$ |
(19 |
) |
300 |
|
|
(355 |
) |
|
|
305 |
|
|
|
(50 |
) |
200 |
|
|
(236 |
) |
|
|
158 |
|
|
|
(78 |
) |
100 |
|
|
(119 |
) |
|
|
42 |
|
|
|
(77 |
) |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
-25 |
|
|
29 |
|
|
|
(35 |
) |
|
|
(6 |
) |
The net interest income at risk position remained within the guidelines established by the
Corporations asset/liability policy.
No material change has been noted in the Banks equity value at risk. Please refer to the Annual
Report on Form 10-K as of December 31, 2009 for further discussion of this matter.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of June 30, 2010, the Corporation carried out an evaluation, under the supervision and with the
participation of the Corporations management, including the Corporations Chief Executive Officer
and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure
controls and procedures pursuant to 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 Corporation reports filed or submitted under
the Exchange Act is recorded, processed, summarized and reported within the time periods specified
in the Securities and Exchange Commissions rules and forms. These controls and procedures include, without
28
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 issuers
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 Corporations Chief Executive Officer and Chief
Financial Officer concluded that the Corporations disclosure controls and procedures were
effective as of the end of the period covered by this quarterly report.
It should be noted that any system of controls, however well designed and operated, can provide
only reasonable, and not absolute, assurance that the objectives of the system are met. In
addition, the design of any control system is based in part upon certain assumptions about the
likelihood of future events. Because of these and other inherent limitations of control systems,
there can be no assurance that any design will succeed in achieving its stated goals under all
potential conditions, regardless of how remote.
Attached as Exhibits 31 and 32 to this quarterly report are certifications of the Chief Executive
Officer and the Chief Financial Officer required in accordance with Rule 13a-14(a) of the Exchange
Act. This portion of the Corporations 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 Corporations internal control over financial reporting
since December 31, 2009.
PART II OTHER INFORMATION
|
|
|
Item 1. |
|
LEGAL PROCEEDINGS |
In the opinion of management of the Corporation, there are no legal proceedings
pending to which the Corporation or its subsidiary is a party or to which their
property is subject, which, if determined adversely to the Corporation or its
subsidiary, would be material in relation to the Corporations or its subsidiarys
financial condition. There are no proceedings pending other than ordinary routine
litigation incident to the business of the Corporation or its subsidiary. In
addition, no material proceedings are pending or are known to be threatened or
contemplated against the Corporation or its subsidiary by government authorities.
In addition to the risk factors that were disclosed in the Annual Report on Form
10-K as of December 31, 2009, the Corporation has added the following.
Recently enacted financial reform legislation may have a significant impact on the
Corporation and results of its Operation.
On July 21, 2010, the President of the United States signed into law the Dodd-Frank
Wall Street Reform and Consumer Protection Act (the Act). The goals of the new
legislation include restoring public confidence in the financial system following
the 2007-2008 financial and credit crises, preventing another financial crisis and
allowing regulators to identify failings in the system before another crisis can
occur. Among other things, the Act creates the Financial Stability Oversight
Council, with oversight authority for monitoring and regulating systemic risk, and
the Bureau of Consumer Financial Protection, which will have broad regulatory and
enforcement powers over consumer financial products and services. The Act also
changes the responsibilities of the current federal banking regulators, imposes
additional corporate governance and disclosure requirements in areas such as
executive compensation and proxy access, and limits or prohibits proprietary trading
and hedge fund and private equity activities of banks. The scope of the Act impacts
many aspects of the financial services industry, and it requires the development and
adoption of many implementing
regulations over the next several months and years; thus, the effects of the Act on
the financial
29
services industry will depend, in large part, upon the extent to which
regulators exercise the authority granted to them under the Act and the approaches
taken in implementing regulations. The Corporation and the entire financial
services industry have begun to assess the potential impact of the Act on business
and operations, but at this early stage, the likely impact cannot be ascertained
with any degree of certainty. However, it would appear that the Corporation is
likely to be impacted by the Act in the areas of corporate governance, deposit
insurance assessments, capital requirements and restrictions on fees charges that
may be charged to consumers.
|
|
|
Item 2. |
|
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
The following table provides information on repurchases by the Corporation of its
common stock in each month of the quarter ended June 30, 2010:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
|
April 1-30, 2010 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
|
205,936 |
|
May 1-31, 2010 |
|
|
20,000 |
|
|
|
17.40 |
|
|
|
20,000 |
|
|
|
185,936 |
|
June 1-30, 2010 |
|
|
22,000 |
|
|
|
17.92 |
|
|
|
22,000 |
|
|
|
163,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals |
|
|
42,000 |
|
|
|
|
|
|
|
42,000 |
|
|
|
163,936 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On March 23, 2001, the Corporation announced plans to buy back 100,000
(200,000 on a post-split basis) shares of its common stock. There is no expiration
date to this buyback plan, but subsequent to the initial plan, the Board of
Directors authorized the repurchase of 400,000 additional shares in 2005 and then
authorized 200,000 additional shares in September of 2008. As of August 9, 2010, the
number of shares that may yet be purchased under the program was 163,936. No
repurchase plan or program expired during the period covered by the table. The
Corporation 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. |
|
|
|
Item 3. |
|
DEFAULTS UPON SENIOR SECURITIES |
Not applicable
|
|
|
Item 4. |
|
(Removed and Reserved) |
|
|
|
Item 5. |
|
OTHER INFORMATION |
None
|
3.1 |
|
Amended and Restated Articles of Incorporation (incorporated
by reference to Exhibit 4.1 to the Corporations Form S-3 Registration
Statement No. 333-129023 filed with the SEC on October 14, 2005) |
|
|
3.2 |
|
Bylaws (incorporated by reference to Exhibit 3.2 to the
Corporations report on Form 8-K filed with the SEC on December 21, 2007) |
|
|
10.1 |
|
2004 Executive Annual Incentive Plan
(incorporated by reference to Exhibit 10.15 to the
Corporations report on Form 10-K filed with the SEC
on March 16, 2005) |
|
|
10.2 |
|
Exhibits A-B to 2004 Executive Annual
Incentive Plan (incorporated by reference to Exhibit 10.1 to the Corporations report on Form 8-K filed
with the SEC on March 19, 2010)
|
30
|
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 |
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 08-09-2010 |
By |
/s/ Marcie A. Barber
|
|
|
|
Marcie A. Barber, President and |
|
|
|
Chief Executive Officer |
|
|
|
|
|
Date 08-09-2010 |
By |
/s/ JoAnn N. McMinn
|
|
|
|
JoAnn N. McMinn, Chief Financial |
|
|
|
Officer, Principal Accounting
Officer and Principal Financial Officer |
|
|
31