JUNIATA VALLEY FINANCIAL CORP - Quarter Report: 2010 September (Form 10-Q)

 

 

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2010

OR

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

For the transition period from  _________  to  _________ 

Commission File Number 000-13232

Juniata Valley Financial Corp.

(Exact name of registrant as specified in its charter)

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

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

(717) 436-8211

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 issuer’s classes of common stock, as of the latest practicable date.

Class		Outstanding as of November 8, 2010
Common Stock ($1.00 par value)		4,275,265 shares

 

 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2010 and December 31, 2009 (Unaudited)			3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2010 and 2009 (Unaudited)			4
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)			5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2010 and 2009 (Unaudited)			6
Notes to Consolidated Financial Statements			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			19
Item 3. Quantitative and Qualitative Disclosures about Market Risk			27
Item 4. Controls and Procedures			28
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			30
Item 3. Defaults upon Senior Securities			31
Item 4. (Removed and Reserved)			31
Item 5. Other Information			31
Item 6. Exhibits			31
Signatures			31
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2

PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Juniata Valley Financial Corp. and Subsidiary

(Unaudited, Dollar amounts in thousands, except share data)

		September 30,				December 31,
		2010				2009
ASSETS
Cash and due from banks		$	10,178			$	18,613
Interest bearing deposits with banks			355				82
Federal funds sold			5,000				1,200
Cash and cash equivalents			15,533				19,895
Interest bearing time deposits with banks			1,345				1,420
Securities available for sale			78,900				77,356
Restricted investment in Federal Home Loan Bank (FHLB) stock			2,197				2,197
Investment in unconsolidated subsidiary			3,503				3,338
Total loans, net of unearned interest			304,260				311,630
Less: Allowance for loan losses			(2,811	)			(2,719	)
Total loans, net of allowance for loan losses			301,449				308,911
Premises and equipment, net			7,176				6,878
Other real estate owned			494				476
Bank owned life insurance and annuities			13,459				13,066
Core deposit intangible			265				299
Goodwill			2,046				2,046
Accrued interest receivable and other assets			5,622				6,227
Total assets		$	431,989			$	442,109
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing		$	53,886			$	55,030
Interest bearing			318,662				322,367
Total deposits			372,548				377,397
Securities sold under agreements to repurchase			2,875				3,207
Long-term debt			—				5,000
Other interest bearing liabilities			1,178				1,146
Accrued interest payable and other liabilities			4,634				4,756
Total liabilities			381,235				391,506
Stockholders’ Equity:
Preferred stock, no par value:
Authorized — 500,000 shares, none issued			—				—
Common stock, par value $1.00 per share:
Authorized — 20,000,000 shares
Issued — 4,745,826 shares
Outstanding —
4,275,265 shares at September 30, 2010;
4,337,587 shares at December 31, 2009			4,746				4,746
Surplus			18,332				18,315
Retained earnings			37,462				36,478
Accumulated other comprehensive loss			(564	)			(805	)
Cost of common stock in Treasury:
470,561 shares at September 30, 2010;
408,239 shares at December 31, 2009			(9,222	)			(8,131	)
Total stockholders’ equity			50,754				50,603
Total liabilities and stockholders’ equity		$	431,989			$	442,109

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

(Unaudited)

(Dollar amounts in thousands, except share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Interest income:
Loans, including fees		$	4,824			$	5,126			$	14,756			$	15,671
Taxable securities			257				281				753				909
Tax-exempt securities			245				305				784				864
Federal funds sold			3				33				7				147
Other interest income			10				2				29				7
Total interest income			5,339				5,747				16,329				17,598
Interest expense:
Deposits			1,288				1,770				4,154				5,469
Securities sold under agreements to repurchase			1				1				2				2
Short-term borrowings			—				—				1				1
Long-term debt			29				36				99				105
Other interest bearing liabilities			2				5				9				16
Total interest expense			1,320				1,812				4,265				5,593
Net interest income			4,019				3,935				12,064				12,005
Provision for loan losses			70				165				637				377
Net interest income after provision for loan losses			3,949				3,770				11,427				11,628
Noninterest income:
Trust fees			90				83				300				253
Customer service fees			335				437				1,104				1,235
Earnings on bank-owned life insurance and annuities			133				130				393				348
Commissions from sales of non-deposit products			80				66				301				324
Income from unconsolidated subsidiary			60				50				179				146
Securities impairment charge			(40	)			—				(40	)			(226	)
Gain on sale or call of securities			4				—				31				—
Gain (Loss) on sales of other assets			30				(33	)			36				—
Prior period income from insurance sales			—				—				—				323
Other noninterest income			244				219				679				700
Total noninterest income			936				952				2,983				3,103
Noninterest expense:
Employee compensation expense			1,232				1,199				3,826				3,699
Employee benefits			363				391				1,182				1,246
Occupancy			243				218				692				693
Equipment			148				149				403				473
Data processing expense			366				324				1,077				994
Director compensation			88				100				261				318
Professional fees			128				90				357				301
Taxes, other than income			124				125				379				380
FDIC Insurance premiums			138				121				435				526
Amortization of intangibles			11				11				34				34
Other noninterest expense			317				276				956				846
Total noninterest expense			3,158				3,004				9,602				9,510
Income before income taxes			1,727				1,718				4,808				5,221
Provision for income taxes			442				430				1,197				1,358
Net income		$	1,285			$	1,288			$	3,611			$	3,863
Earnings per share
Basic		$	0.30			$	0.30			$	0.84			$	0.89
Diluted		$	0.30			$	0.30			$	0.84			$	0.89
Cash dividends declared per share		$	0.21			$	0.20			$	0.61			$	0.58
Weighted average basic shares outstanding			4,283,024				4,342,587				4,307,417				4,340,595
Weighted average diluted shares outstanding			4,286,350				4,346,353				4,310,989				4,344,720

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

(Unaudited)

(Dollars in thousands, except share data)

Nine Months Ended September 30, 2010
		Number																Accumulated
		of																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															3,611												3,611
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects																			178								178
Defined benefit retirement plan adjustments, net of tax effects																			63								63
Total comprehensive income																											3,852
Cash dividends at $0.61 per share															(2,627	)											(2,627	)
Stock-based compensation activity											36																36
Purchase of treasury stock, at cost			(66,400	)																			(1,171	)			(1,171	)
Treasury stock issued for stock option and stock purchase plans			4,078								(19	)											80				61
Balance at September 30, 2010			4,275,265			$	4,746			$	18,332			$	37,462			$	(564	)		$	(9,222	)		$	50,754
Nine Months Ended September 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															3,863												3,863
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects																			305								305
Defined benefit retirement plan adjustments, net of tax effects																			(5	)							(5	)
Total comprehensive income																											4,163
Cash dividends at $0.58 per share															(2,518	)											(2,518	)
Stock-based compensation activity											29																29
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 September 30, 2009			4,342,587			$	4,746			$	18,304			$	36,103			$	(947	)		$	(8,042	)		$	50,164

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

(Unaudited)

(Dollars in thousands)

		Nine Months Ended September 30,
		2010				2009
Operating activities:
Net income		$	3,611			$	3,863
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			637				377
Depreciation			406				457
Net amortization of securities premiums			216				156
Amortization of core deposit intangible			34				34
Amortization of deferred net loan costs			17				35
Deferral of net loan costs (fees)			35				(3	)
Securities impairment charge			40				226
Net realized gains on sales or calls of securities			(31	)			—
Net gains on sales of other assets			(36	)			—
Earnings on bank owned life insurance and annuities			(393	)			(348	)
Deferred income tax expense			15				94
Equity in earnings of unconsolidated subsidiary, net of dividends of $28 and $34			(151	)			(112	)
Stock-based compensation expense			36				29
Decrease in accrued interest receivable and other assets			559				78
Decrease in accrued interest payable and other liabilities			(74	)			(1	)
Net cash provided by operating activities			4,921				4,885
Investing activities:
Purchases of:
Securities available for sale			(39,157	)			(43,026	)
Premises and equipment			(704	)			(103	)
Bank owned life insurance and annuities			(66	)			(94	)
Proceeds from:
Maturities of and principal repayments on securities available for sale			37,636				25,757
Bank owned life insurance and annuities			50				52
Sale of fixed assets			—				33
Sale of other real estate owned			747				435
Sale of other assets			11				80
Net decrease in interest-bearing time deposits			75				3,726
Net decrease in loans receivable			6,043				3,169
Net cash provided by (used in) investing activities			4,635				(9,971	)
Financing activities:
Net (decrease) increase in deposits			(4,849	)			15,002
Net decrease in short-term borrowings and securities sold under agreements to repurchase			(332	)			(8,644	)
Repayment of long-term debt			(5,000	)			—
Cash dividends			(2,627	)			(2,518	)
Purchase of treasury stock			(1,171	)			(128	)
Treasury stock issued for employee stock plans			61				133
Net cash (used in) provided by financing activities			(13,918	)			3,845
Net decrease in cash and cash equivalents			(4,362	)			(1,241	)
Cash and cash equivalents at beginning of period			19,895				12,457
Cash and cash equivalents at end of period		$	15,533			$	11,216
Supplemental information:
Interest paid		$	4,358			$	5,668
Income taxes paid		$	1,145			$	910
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate owned and repossessed assets		$	730			$	609

See accompanying notes to consolidated financial statements.

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 nine-month period ended September 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 September 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 SEC’s 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 Corporation’s financial position or results of operations.

ASU 2010-13

The FASB issued ASU 2010-13, Compensation—Stock 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 entity’s 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.

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 Corporation’s 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 that the adoption of this standard will have a significant impact on the Corporation’s 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 company’s 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 that the adoption of this standard will have a significant impact on the Corporation’s financial condition or results of operations.

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 September 30, 2010												Three Months Ended September 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		$	1,727			$	442			$	1,285			$	1,718			$	430			$	1,288
Other comprehensive income:
Unrealized gains (losses) on available for sale securities:
Unrealized gains (losses) arising during the period			(25	)			(9	)			(16	)			506				172				334
Unrealized gains (losses) from unconsolidated subsidiary			1				—				1				(12	)			—				(12	)
Less reclassification adjustment for:
gains included in net income			(4	)			(1	)			(3	)			—				—				—
securities impairment charge			40				14				26				—				—				—
Change in pension liability			32				11				21				(7	)			(2	)			(5	)
Other comprehensive income			44				15				29				487				170				317
Total comprehensive income		$	1,771			$	457			$	1,314			$	2,205			$	600			$	1,605
		Nine Months Ended September 30, 2010												Nine Months Ended September 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		$	4,808			$	1,197			$	3,611			$	5,221			$	1,358			$	3,863
Other comprehensive income:
Unrealized gains (losses) on available for sale securities:
Unrealized gains arising during the period			239				81				158				236				80				156
Unrealized gains (losses) from unconsolidated subsidiary			14				—				14				(5	)			—				(5	)
Less reclassification adjustment for:
gains included in net income			(31	)			(11	)			(20	)			—				—				—
securities impairment charge			40				14				26				226				77				149
Change in pension liability			96				33				63				—				—				—
Other comprehensive income			358				117				241				457				157				300
Total comprehensive income		$	5,166			$	1,314			$	3,852			$	5,678			$	1,515			$	4,163

Components of accumulated other comprehensive loss, net of tax consist of the following (in thousands):

		9/30/2010				12/31/2009
Unrealized gains on available for sale securities		$	954			$	776
Unrecognized expense for defined benefit pension			(1,518	)			(1,581	)
Accumulated other comprehensive loss		$	(564	)		$	(805	)

NOTE 4 — Earnings per Share

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

(Amounts, except earnings per share, in thousands)

		Three Months				Three Months
		Ended				Ended
		September 30, 2010				September 30, 2009
Net income		$	1,285			$	1,288
Weighted-average common shares outstanding			4,283				4,342
Basic earnings per share		$	0.30			$	0.30
Weighted-average common shares outstanding			4,283				4,342
Common stock equivalents due to effect of stock options			3				4
Total weighted-average common shares and equivalents			4,286				4,346
Diluted earnings per share		$	0.30			$	0.30

		Nine Months				Nine Months
		Ended				Ended
		September 30, 2010				September 30, 2009
Net income		$	3,611			$	3,863
Weighted-average common shares outstanding			4,307				4,341
Basic earnings per share		$	0.84			$	0.89
Weighted-average common shares outstanding			4,307				4,341
Common stock equivalents due to effect of stock options			4				4
Total weighted-average common shares and equivalents			4,311				4,345
Diluted earnings per share		$	0.84			$	0.89

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 September 30, 2010, the Corporation had $21,185,000 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 $968,000 and $974,000 of letters of credit commitments as of September 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 September 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.

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 under the plan are based on years of service and the employees’ compensation. The Corporation’s 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 nine 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 nine month periods ended September 30, 2010 and 2009:

(Dollars in thousands)

		Three Months Ended								Year-to-Date Through
		September 30,								September 30,
		2010				2009				2010				2009
Components of net periodic pension cost
Service cost		$	47			$	47			$	140			$	141
Interest cost			118				112				354				336
Expected return on plan assets			(144	)			(116	)			(431	)			(346	)
Additional recognized amounts			32				40				96				120
Net periodic pension cost		$	53			$	83			$	159			$	251

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 nine months of 2010 and 2009, amortization expense was $34,000. Accumulated amortization of core deposit intangible through September 30, 2010 was $184,000. 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 $3,503,000 as of September 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.

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 September 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.

		September 30, 2010
										Gross				Gross
Securities Available for Sale		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		$	33,139			$	33,612			$	473			$	—
After five years but within ten years			4,500				4,513				13				—
			37,639				38,125				486				—
Obligations of state and political subdivisions
Within one year			5,312				5,373				70				(9	)
After one year but within five years			29,530				30,367				877				(40	)
After five years but within ten years			1,771				1,787				17				(1	)
			36,613				37,527				964				(50	)
Corporate notes
After one year but within five years			1,000				1,033				33				—
			1,000				1,033				33				—
Mortgage-backed securities			1,291				1,380				89				—
Equity securities			935				835				67				(167	)
Total		$	77,478			$	78,900			$	1,639			$	(217	)

		December 31, 2009
										Gross				Gross
Securities Available for Sale		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	)

The following table shows gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2010 and December 31, 2009 (in thousands):

		Unrealized Losses at September 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		$	5,251			$	(45	)		$	880			$	(5	)		$	6,131			$	(50	)
Debt securities			5,251				(45	)			880				(5	)			6,131				(50	)
Equity securities			370				(67	)			245				(100	)			615				(167	)
Total temporarily impaired securities		$	5,621			$	(112	)		$	1,125			$	(105	)		$	6,746			$	(217	)

		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 two 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 (“OTTI”) 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 were seven equity securities that comprise a group of securities with unrealized losses for 12 months or more at September 30, 2010 and December 31, 2009 prior to an analysis for OTTI. 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 76% of cost and continues to pay full dividends. The other has sustained unrealized losses in excess of 50%, with no prospects or signs of improvement. Therefore, based on the quarterly analysis performed as of September 30, 2010 to assess impairment of the investment portfolio, management has determined that the unrealized loss in this one investment is “other than temporary” and recorded a charge to earnings of $40,000.

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.

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 $30,863,000 and $30,403,000 at September 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 and some securities are called pursuant to call features built into the bonds. Following is a summary of proceeds received from all investment securities transactions, and the resulting realized gains and losses (in thousands):

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2010				2009				2010				2009
Gross proceeds from sales of securities		$	—			$	—			$	—			$	—
Securities available for sale:
Gross realized gains from called securities		$	4			$	—			$	31			$	—
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.

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

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

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

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

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 Corporation’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

Securities Available for Sale. Debt securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the 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 bond’s 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.

The following table summarizes financial assets and financial liabilities measured at fair value as of September 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 September 30, 2010.

						(Level 1)				(Level 2)				(Level 3)
										Significant				Significant
						Quoted Prices in				Other				Other
		September 30,				Active Markets for				Observable				Unobservable
		2010				Identical Assets				Inputs				Inputs
Measured at fair value on a recurring basis:
Equity securities available-for-sale		$	835			$	835			$	—			$	—
Debt securities available-for-sale			78,065				—				78,065				—
Measured at fair value on a non-recurring basis:
Impaired loans			1,568				—				—				1,568
Other real estate owned			494				—				—				494

						(Level 1)				(Level 2)				(Level 3)
										Significant				Significant
						Quoted Prices in				Other				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