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JUNIATA VALLEY FINANCIAL CORP - Quarter Report: 2020 June (Form 10-Q)

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2020

OR

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

For the transition period from                                                   to

Commission File Number                        000-13232                                                                            

JUNIATA VALLEY FINANCIAL CORP.

(Exact name of registrant as specified in its charter)

Pennsylvania

23-2235254

(State or other jurisdiction of

(I.R.S. Employer

incorporation or organization)

Identification No.)

Bridge and Main Streets, Mifflintown, Pennsylvania

17059

(Address of principal executive offices)

(Zip Code)

(855) 582-5101

(Registrant’s telephone number, including area code)

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

Title of each class

    

Trading Symbol(s)

    

Name of each exchange on which registered

None

N/A

N/A

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.

Yes        No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes        No

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes        No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class

    

Outstanding as of August 10, 2020

Common Stock ($1.00 par value)

5,086,718 shares

Table of Contents

TABLE OF CONTENTS

PART I - FINANCIAL INFORMATION

Item 1.

Financial Statements

Consolidated Statements of Financial Condition as of June 30, 2020 (Unaudited) and December 31, 2019

3

Consolidated Statements of Income for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)

4

Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)

5

Consolidated Statements of Stockholders’ Equity for the Three and Six Months Ended June 30, 2020 and 2019 (Unaudited)

6

Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2020 and 2019 (Unaudited)

8

Notes to Consolidated Financial Statements (Unaudited)

10

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

38

Item 3.

Not applicable.

Item 4.

Controls and Procedures

53

PART II - OTHER INFORMATION

Item 1.

Legal Proceedings

54

Item 1A.

Risk Factors

54

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

56

Item 3.

Defaults upon Senior Securities

56

Item 4.

Mine Safety Disclosures

56

Item 5.

Other Information

56

Item 6.

Exhibits

57

Signatures

58

2

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Financial Condition

(Unaudited)

(Dollars in thousands, except share data)

    

June 30, 2020

    

December 31, 2019

ASSETS

 

  

 

  

Cash and due from banks

$

12,259

$

12,658

Interest bearing deposits with banks

 

3,935

 

82

Cash and cash equivalents

 

16,194

 

12,740

Interest bearing time deposits with banks

 

1,470

 

2,210

Equity securities

 

990

 

1,144

Debt securities available for sale

 

285,878

 

210,686

Restricted investment in bank stock

 

3,487

 

3,442

Total loans

 

420,596

 

400,590

Less: Allowance for loan losses

 

(3,558)

 

(2,961)

Total loans, net of allowance for loan losses

 

417,038

 

397,629

Premises and equipment, net

 

9,039

 

9,243

Bank owned life insurance and annuities

 

16,411

 

16,266

Investment in low income housing partnerships

 

3,504

 

3,904

Core deposit and other intangible assets

 

280

 

318

Goodwill

 

9,047

 

9,047

Mortgage servicing rights

 

172

 

180

Accrued interest receivable and other assets

 

5,148

 

3,823

Total assets

$

768,658

$

670,632

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

Liabilities:

 

  

 

  

Deposits:

 

  

 

  

Non-interest bearing

$

160,682

$

134,703

Interest bearing

 

434,153

 

397,234

Total deposits

 

594,835

 

531,937

Short-term borrowings and repurchase agreements

 

24,107

 

13,129

Federal Reserve Bank ("FRB") advances

31,298

Long-term debt

 

35,000

 

45,000

Other interest bearing liabilities

 

1,590

 

1,603

Accrued interest payable and other liabilities

 

4,926

 

5,256

Total liabilities

 

691,756

 

596,925

Commitments and contingent liabilities

Stockholders’ Equity:

 

  

 

  

Preferred stock, no par value: Authorized - 500,000 shares, none issued

 

 

Common stock, par value $1.00 per share: Authorized 20,000,000 shares Issued - 5,151,279 shares at June 30, 2020; 5,141,749 shares at December 31, 2019 Outstanding - 5,086,718 shares at June 30, 2020; 5,099,729 shares at December 31, 2019

 

5,151

 

5,142

Surplus

 

24,946

 

24,898

Retained earnings

 

44,355

 

43,954

Accumulated other comprehensive income

 

3,556

 

516

Cost of common stock in Treasury: 64,561 shares at June 30, 2020; 42,020 shares at December 31, 2019

 

(1,106)

 

(803)

Total stockholders’ equity

 

76,902

 

73,707

Total liabilities and stockholders’ equity

$

768,658

$

670,632

See Notes to Consolidated Financial Statements

3

Table of Contents

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Income (Unaudited)

Three Months Ended

Six Months Ended

(Dollars in thousands, except share data)

June 30, 

June 30, 

    

2020

    

2019

    

2020

    

2019

Interest and dividend income:

  

  

Loans, including fees

$

4,781

$

5,611

$

9,659

$

10,866

Taxable securities

 

1,257

 

940

 

2,430

 

1,789

Tax-exempt securities

 

40

 

32

 

63

 

93

Other interest income

 

10

 

129

 

65

 

182

Total interest income

 

6,088

 

6,712

 

12,217

 

12,930

Interest expense:

 

  

 

  

 

  

 

  

Deposits

 

730

 

973

 

1,560

 

1,836

Short-term borrowings and repurchase agreements

 

 

11

 

8

 

35

FRB advances

7

 

7

Long-term debt

 

230

 

165

 

513

 

326

Other interest bearing liabilities

 

3

 

11

 

10

 

22

Total interest expense

 

970

 

1,160

 

2,098

 

2,219

Net interest income

 

5,118

 

5,552

 

10,119

 

10,711

Provision for loan losses

 

196

 

(459)

 

552

 

(444)

Net interest income after provision for loan losses

 

4,922

 

6,011

 

9,567

 

11,155

Non-interest income:

 

  

 

  

 

  

 

  

Customer service fees

 

276

 

429

 

691

 

851

Debit card fee income

 

372

 

364

 

696

 

672

Earnings on bank-owned life insurance and annuities

 

63

 

71

 

127

 

140

Trust fees

 

91

 

91

 

204

 

190

Commissions from sales of non-deposit products

 

73

 

95

 

147

 

166

Fees derived from loan activity

 

23

 

64

 

90

 

134

Mortgage banking income

 

14

 

19

 

30

 

36

Gain (loss) on sales and calls of securities

 

551

 

 

562

 

(56)

Change in value of equity securities

 

18

 

6

 

(154)

 

15

Other non-interest income

 

76

 

75

 

158

 

160

Total non-interest income

 

1,557

 

1,214

 

2,551

 

2,308

Non-interest expense:

 

  

 

  

 

  

 

  

Employee compensation expense

 

1,803

 

2,068

 

3,806

 

4,036

Employee benefits

 

394

 

857

 

1,122

 

1,598

Occupancy

 

271

 

321

 

585

 

670

Equipment

 

231

 

218

 

465

 

432

Data processing expense

 

563

 

528

 

1,064

 

989

Professional fees

 

191

 

365

 

364

 

562

Taxes, other than income

 

124

 

144

 

262

 

278

FDIC Insurance premiums

 

39

 

51

 

79

 

107

Loss (gain) on sales of other real estate owned

 

 

14

 

 

14

Amortization of intangible assets

 

19

 

22

 

38

 

44

Amortization of investment in low-income housing partnerships

 

200

 

200

 

400

 

400

Long-term debt prepayment penalty

 

524

 

 

524

 

Other non-interest expense

 

458

 

506

 

868

 

999

Total non-interest expense

 

4,817

 

5,294

 

9,577

 

10,129

Income before income taxes

 

1,662

 

1,931

 

2,541

 

3,334

Income tax provision (benefit)

 

57

 

86

 

(102)

 

76

Net income

$

1,605

$

1,845

$

2,643

$

3,258

Earnings per share

 

  

 

  

 

  

 

  

Basic

$

0.32

$

0.36

$

0.52

$

0.64

Diluted

$

0.31

$

0.36

$

0.52

$

0.64

See Notes to Consolidated Financial Statements

4

Table of Contents

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)

(Dollars in thousands)

Three Months Ended June 30, 

2020

2019

Before Tax

Tax

Net of Tax

Before Tax

Tax

Net of Tax

    

Amount

    

Effect

    

Amount

    

Amount

    

Effect

    

Amount

Net income

$

1,662

$

(57)

$

1,605

$

1,931

$

(86)

$

1,845

Other comprehensive income:

 

  

 

  

 

  

 

  

 

  

 

  

Available for sale securities:

 

  

 

  

 

  

 

  

 

  

 

  

Unrealized holding gains (losses) arising during the period

 

(331)

 

69

 

(262)

 

1,722

 

(361)

 

1,361

Less reclassification adjustment for gains included in net income for sales of debt securities (1) (4)

 

(551)

 

116

 

(435)

 

 

 

Unrealized losses on cash flow hedge

(184)

39

(145)

Less reclassification adjustment for gains included in net income (3) (4)

(22)

4

(18)

Pension net gain

 

 

 

 

2,634

 

(553)

 

2,081

Pension loss due to change in assumptions

 

 

 

 

(1,478)

 

310

 

(1,168)

Amortization of pension net actuarial loss (2) (4)

 

 

 

 

306

 

(65)

 

241

Other comprehensive income (loss)

 

(1,088)

 

228

 

(860)

 

3,184

 

(669)

 

2,515

Total comprehensive income

$

574

$

171

$

745

$

5,115

$

(755)

$

4,360

(Dollars in thousands)

Six Months Ended June 30, 

2020

2019

Pre-Tax

Tax

Net-of-Tax

Pre-Tax

Tax

Net-of-Tax

    

Amount

    

Effect

    

Amount

    

Amount

    

Effect

    

Amount

Net income

$

2,541

$

102

$

2,643

$

3,334

$

(76)

$

3,258

Other comprehensive income:

 

  

 

  

 

  

 

  

 

  

 

  

Available for sale securities:

 

  

 

  

 

  

 

  

 

  

 

  

Unrealized holding gains arising during the period

 

4,617

 

(970)

 

3,647

 

3,515

 

(738)

 

2,777

Less reclassification adjustment for (gains) losses included in net income (1) (4)

 

(562)

 

118

 

(444)

 

56

 

(12)

 

44

Unrealized losses on cash flow hedge

(184)

39

(145)

Less reclassification adjustment for gains included in net income (3) (4)

(22)

4

(18)

Pension net gain

 

 

 

 

2,634

 

(553)

 

2,081

Pension loss due to change in assumptions

 

 

 

 

(1,478)

 

310

 

(1,168)

Amortization of pension net actuarial loss (2) (4)

 

 

 

 

334

 

(70)

 

264

Other comprehensive income

 

3,849

 

(809)

 

3,040

 

5,061

 

(1,063)

 

3,998

Total comprehensive income

$

6,390

$

(707)

$

5,683

$

8,395

$

(1,139)

$

7,256

(1)Amounts are included in (loss) gain on sales and calls of securities on the consolidated statements of income as a separate element within total non-interest income.
(2)Amounts are included in the computation of net periodic benefit cost and are included in employee benefits expense on the consolidated statements of income as a separate element within total non-interest expense.
(3)Amounts are included in interest expense on short-term borrowings and repurchase agreements on the consolidated statements of income.
(4)Income tax amounts are included in the provision for income taxes on the consolidated statements of income.

See Notes to Consolidated Financial Statements

5

Table of Contents

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Stockholders’ Equity (Unaudited)

Three months ended June 30, 2020

Accumulated

(Dollars in thousands, except share data)

 

Number 

 

 

 

Other

 

 

Total

of Shares

    

Common

    

    

Retained

    

Comprehensive

    

Treasury

    

Stockholders’

    

Outstanding

    

Stock

    

Surplus

    

Earnings

Income (Loss)

    

Stock

    

Equity

Balance, April 1, 2020

5,093,859

$

5,151

$

24,918

$

43,870

$

4,416

$

(989)

$

77,366

Net income

1,605

1,605

Other comprehensive loss

(860)

(860)

Cash dividends at $0.22 per share

(1,120)

(1,120)

Stock-based compensation

34

34

Purchase of treasury stock

(11,600)

(193)

(193)

Treasury stock issued for stock plans

4,459

(6)

76

70

Balance, June 30, 2020

5,086,718

$

5,151

$

24,946

$

44,355

$

3,556

$

(1,106)

$

76,902

Six months ended June 30, 2020

Accumulated

(Dollars in thousands, except share data)

 

Number 

 

 

 

Other

 

 

Total

of Shares

    

Common

    

    

Retained

    

Comprehensive

    

Treasury

    

Stockholders’

    

Outstanding

    

Stock

    

Surplus

    

Earnings

Income

    

Stock

    

Equity

Balance, January 1, 2020

5,099,729

$

5,142

$

24,898

$

43,954

$

516

$

(803)

$

73,707

Net income

 

  

 

  

 

  

 

2,643

 

  

 

  

 

2,643

Other comprehensive income

 

  

 

  

 

  

 

 

3,040

 

  

 

3,040

Cash dividends at $0.44 per share

 

  

 

  

 

  

 

(2,242)

 

  

 

  

 

(2,242)

Stock-based compensation

 

  

 

  

 

63

 

  

 

  

 

  

 

63

Purchase of treasury stock

 

(27,000)

(379)

 

(379)

Treasury stock issued for stock plans

 

4,459

(6)

76

 

70

Common stock issued for stock plans

 

9,530

 

9

 

(9)

 

  

 

  

 

  

 

Balance, June 30, 2020

 

5,086,718

$

5,151

$

24,946

$

44,355

$

3,556

$

(1,106)

$

76,902

6

Table of Contents

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Stockholders’ Equity (Unaudited)

Three months ended June 30, 2019

Accumulated

(Dollars in thousands, except share data)

Number 

 

 

Retained

 

Other

 

 

Total

of Shares

    

Common

    

    

Earnings

    

Comprehensive

    

Treasury

    

Stockholders’

Outstanding

    

Stock

    

Surplus

    

(adjusted)

    

Income (Loss)

    

Stock

    

Equity

Balance at April 1, 2019

5,098,748

$

5,142

$

24,832

$

42,901

$

(2,899)

$

(803)

$

69,173

Net income

1,845

1,845

Other comprehensive income

2,515

2,515

Cash dividends at $0.22 per share

(1,124)

(1,124)

Stock-based compensation

28

28

Treasury stock issued for stock plans

4,880

(2)

91

89

Balance, June 30, 2019

5,103,628

$

5,142

$

24,858

$

43,622

$

(384)

$

(712)

$

72,526

Six months ended June 30, 2019

Accumulated

(Dollars in thousands, except share data)

 

Number 

 

 

 

Other

 

 

Total

of Shares

    

Common

    

    

Retained

    

Comprehensive

    

Treasury

    

Stockholders’

    

Outstanding

    

Stock

    

Surplus

    

Earnings

Income (Loss)

    

Stock

    

Equity

Balance, January 1, 2019

5,092,048

$

5,134

$

24,821

$

42,525

$

(4,299)

$

(803)

$

67,378

Net income

 

  

 

  

 

  

 

3,258

 

  

 

  

 

3,258

Other comprehensive income

 

  

 

  

 

  

 

  

 

3,998

 

  

 

3,998

Reclassification for ASU 2018-02

 

  

 

  

 

  

 

83

(83)

 

  

 

Cash dividends at $0.44 per share

 

  

 

  

 

  

 

(2,244)

 

  

 

  

 

(2,244)

Stock-based compensation

 

  

 

  

 

47

 

  

 

  

 

  

 

47

Forfeiture of restricted stock

(800)

Treasury stock issued for stock plans

 

4,880

 

 

(2)

 

  

 

  

 

91

 

89

Common stock issued for stock plans

 

7,500

 

8

(8)

 

  

 

  

 

  

 

Balance, June 30, 2019

 

5,103,628

$

5,142

$

24,858

$

43,622

$

(384)

$

(712)

$

72,526

See Notes to Consolidated Financial Statements

7

Table of Contents

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)

(Dollars in thousands)

Six Months Ended June 30, 

    

2020

    

2019

Operating activities:

Net income

$

2,643

$

3,258

Adjustments to reconcile net income to net cash provided by operating activities:

 

  

 

  

Provision for loan losses

 

552

 

(444)

Depreciation

 

406

 

396

Net amortization of securities premiums

 

527

 

305

Net amortization of loan origination fees

 

28

 

50

Deferred net loan origination costs

 

(319)

 

(161)

Amortization of intangibles

 

38

 

44

Amortization of investment in low income housing partnerships

 

400

 

400

Net amortization of purchase fair value adjustments

 

(53)

 

(134)

Net realized (gain) loss on sales and calls of available for sale securities

 

(562)

 

56

Change in value of equity securities

 

154

 

(15)

Net gain on sales of other real estate owned

 

 

14

Earnings on bank owned life insurance and annuities

 

(127)

 

(140)

Deferred income tax expense

 

132

 

132

Stock-based compensation expense

 

63

 

47

Proceeds from mortgage loans sold to others

 

38

 

46

Mortgage banking income

 

(30)

 

(36)

Increase in accrued interest receivable and other assets

 

(2,309)

 

(1,798)

(Decrease) increase in accrued interest payable and other liabilities

 

(506)

 

2,443

Net cash provided by operating activities

 

1,075

 

4,463

Investing activities:

 

  

 

  

Purchases of:

 

  

 

  

Securities available for sale

 

(152,324)

 

(54,716)

FHLB stock

 

(45)

 

(657)

Premises and equipment

 

(202)

 

(170)

Bank owned life insurance and annuities

 

(18)

 

(17)

Proceeds from:

 

 

  

Sales of securities available for sale

 

36,136

 

11,107

Maturities of and principal repayments on securities available for sale

 

45,086

 

8,753

Sale of other real estate owned

 

 

135

Investment in low income housing partnerships

 

 

(90)

Net decrease in interest bearing time deposits with banks

 

740

 

590

Net (increase) decrease in loans

 

(19,615)

 

10,847

Net cash used in investing activities

 

(90,242)

 

(24,218)

Financing activities:

 

  

 

  

Net increase in deposits

 

62,896

 

12,656

Net increase (decrease) in short-term borrowings and securities sold under agreements to repurchase

 

10,978

 

(11,654)

Issuance of FRB advances

31,298

Issuance of long-term debt

 

 

45,000

Repayment of long-term debt

 

(10,000)

 

(15,000)

Cash dividends

 

(2,242)

 

(2,244)

Purchase of treasury stock

 

(379)

 

Treasury stock issued for employee stock plans

 

70

 

89

Net cash provided by financing activities

 

92,621

 

28,847

Net increase in cash and cash equivalents

 

3,454

 

9,092

Cash and cash equivalents at beginning of year

 

12,740

 

16,456

Cash and cash equivalents at end of period

$

16,194

$

25,548

8

Table of Contents

(Dollars in thousands)

Six Months Ended June 30, 

    

2020

    

2019

Supplemental information:

Interest paid

$

2,182

$

2,058

Income tax paid

 

200

 

18

Supplemental schedule of noncash investing and financing activities:

 

  

 

  

Right-of-Use assets obtained in exchange for lease obligations

 

 

556

See Notes to Consolidated Financial Statements


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JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

The consolidated financial statements include the accounts of Juniata Valley Financial Corp. (the “Company” or “Juniata”) and its wholly owned subsidiary, The Juniata Valley Bank (the “Bank” or “JVB”). All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates, and such differences could be material to the financial statements. Additionally, effects of the COVID-19 pandemic may negatively impact significant estimates and the assumptions underlying those estimates. Estimates that are particularly susceptible to material change include the determination of the allowance for loan losses, and possible impairment of goodwill and other intangible assets. 

In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three and six month periods ended June 30, 2020 are not necessarily indicative of the results for the year ending December 31, 2020. For further information, refer to the consolidated financial statements and notes thereto included in Juniata Valley Financial Corp.’s Annual Report on Form 10-K (“Annual Report”) for the year ended December 31, 2019.

The Company has evaluated events and transactions occurring subsequent to the consolidated statement of financial condition date of June 30, 2020 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

2. RECENT ACCOUNTING STANDARDS UPDATES

Not Yet Adopted:

ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

Issued: June 2016

Summary: ASU 2016-13 requires credit losses on most financial assets to be measured at amortized cost and certain other instruments to be measured using an expected credit loss model (referred to as the current expected credit loss (“CECL”) model). Under this model, entities will estimate credit losses over the entire contractual term of the instrument (considering estimated prepayments, but not expected extensions or modifications unless reasonable expectation of a troubled debt restructuring exists) from the date of initial recognition of that instrument.

The ASU also replaces the current accounting model for purchased credit impaired loans and debt securities. The allowance for credit losses for purchased financial assets with a more-than insignificant amount of credit deterioration since origination (“PCD assets”), should be determined in a similar manner to other financial assets measured on an amortized cost basis. However, upon initial recognition, the allowance for credit losses is added to the purchase price (“gross up approach”) to determine the initial amortized cost basis. The subsequent accounting for PCD financial assets is the same expected loss model described above.

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Further, the ASU made certain targeted amendments to the existing impairment model for available for sale debt securities. For an available for sale debt security for which there is neither the intent nor a more-likely-than-not requirement to sell, an entity will record credit losses as an allowance rather than a write-down of the amortized cost basis.

Effective Date: On November 15, 2019, the FASB voted and approved to delay the effective date of this ASU for smaller reporting companies until fiscal years beginning after December 15, 2022. Since the Company is a smaller reporting company, the delay of the effective date of ASU 2016-13 approved by the FASB applies to the Company. While the Company’s senior management is currently in the process of evaluating the impact of the amended guidance on its consolidated financial statements and disclosures, it expects the allowance for loan and lease losses (“ALLL”) to increase upon adoption because the allowance will be required to cover the full remaining expected life of the portfolio, rather than the incurred loss under current U.S. GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the Company’s loan portfolio at the time of adoption. In preparation, the Company has taken steps to prepare for the implementation when it becomes effective by forming an internal taskforce, gathering pertinent data, participating in training courses, and partnering with a software provider that specializes in ALLL analysis, as well as assessing the sufficiency of data currently available through its core database.

3. ACCUMULATED OTHER COMPREHENSIVE INCOME

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

(Dollars in thousands)

June 30, 2020

    

Gains and (Losses) on Cash Flow Hedges

    

Unrealized Gains and (Losses) on Available for Sale Securities

    

Defined Benefit Pension Items

    

Total

Beginning balance, December 31, 2019

$

$

516

$

$

516

Current period other comprehensive income (loss):

Other comprehensive income (loss) before reclassification

(145)

3,647

3,502

Amounts reclassified from accumulated other comprehensive income

(18)

(444)

(462)

Net current period other comprehensive income (loss)

 

(163)

 

3,203

 

 

3,040

Ending balance, June 30, 2020

$

(163)

$

3,719

$

$

3,556

(Dollars in thousands)

December 31, 2019

    

Gains and (Losses) on Cash Flow Hedges

    

Unrealized Gains and (Losses) on Available for Sale Securities

    

Defined Benefit Pension Items

    

Total

Beginning balance, December 31, 2018

$

$

(2,647)

$

(1,652)

$

(4,299)

Current period other comprehensive income:

Other comprehensive income before reclassification

3,129

634

3,763

Amounts reclassified from accumulated other comprehensive income

34

1,101

1,135

Net current period other comprehensive income

 

 

3,163

 

1,735

 

4,898

Reclassification for ASU 2018-02

(83)

(83)

Ending balance, December 31, 2019

$

$

516

$

$

516

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4. EARNINGS PER SHARE

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

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

(Dollars in thousands, except earnings per share data)

Three Months Ended June 30, 

2020

    

2019

Net income

$

1,605

$

1,845

Weighted-average common shares outstanding

 

5,091

 

5,102

Basic earnings per share

$

0.32

$

0.36

Weighted-average common shares outstanding

5,091

 

5,102

Common stock equivalents due to effect of stock options

 

5

 

20

Total weighted-average common shares and equivalents

5,096

5,122

Diluted earnings per share

$

0.31

$

0.36

(Dollars in thousands, except earnings per share)

Six Months Ended June 30, 

    

2020

    

2019

Net income

$

2,643

$

3,258

Weighted-average common shares outstanding

 

5,097

 

5,098

Basic earnings per share

$

0.52

$

0.64

Weighted-average common shares outstanding

 

5,097

 

5,098

Common stock equivalents due to effect of stock options

 

6

 

21

Total weighted-average common shares and equivalents

$

5,103

$

5,119

Diluted earnings per share

$

0.52

$

0.64

Anti-dilutive stock options outstanding

 

3

 

5. SECURITIES

Equity Securities

Equity securities owned by the Company consist of common stock of various financial services providers. ASC Topic 321, Investments – Equity Securities requires all equity securities within its scope to be measured at fair value with changes in fair value recognized in net income. As of June 30, 2020, the Company had $990,000 in equity securities recorded at fair value and $1,144,000 in equity securities recorded at fair value at December 31, 2019. The Company recorded a net gain of $18,000 and a net loss of $154,000 during the three and six months ended June 30, 2020, respectively, and net gains of $6,000 and $15,000 during the three and six months ended June 30, 2019, respectively, on the Consolidated Statements of Income as a result of  the change in fair value of the Company’s equity securities during the applicable period.

Debt Securities Available for Sale

Debt securities classified as available for sale, which include marketable investment securities, are within the scope of ASC Topic 320, Investments – Debt Securities. Topic 320 requires all debt securities within its scope to be stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of other comprehensive income (loss). Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on

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various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Interest and dividends are recognized as income when earned. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains or losses on the disposition of securities available for sale are based on the net proceeds and the adjusted carrying amount of the securities sold, determined on a specific identification basis.

The Company’s available for sale investment portfolio includes primarily bonds issued by U.S. Government sponsored enterprises (approximately 2% of the investment portfolio), municipal bonds (approximately 3%), corporate debt securities (approximately 2%) and mortgage-backed securities issued by Government-sponsored entities and backed by residential mortgages (approximately 93%) as of June 30, 2020. Most of the municipal bonds are general obligation bonds with maturities or pre-refunding dates within 5 years.

The amortized cost and fair value of securities available for sale as of June 30, 2020 and December 31, 2019, by contractual maturity, are shown in the tables below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.

(Dollars in thousands)

    

June 30, 2020

Gross

    

Gross

Amortized

Fair

Unrealized

Unrealized

Debt Securities Available for Sale

    

Cost

    

Value

    

Gains

    

Losses

Type and Maturity

 

  

 

  

 

  

 

  

Obligations of U.S. Government sponsored enterprises

 

  

 

  

 

 

  

After one year but within five years

$

2,000

$

2,004

$

4

$

After five years but within ten years

 

4,000

 

4,020

 

20

 

 

6,000

 

6,024

 

24

 

Obligations of state and political subdivisions

 

  

 

  

 

  

 

  

Within one year

 

545

 

547

 

2

After one year but within five years

 

4,022

 

4,078

 

56

After five years but within ten years

 

2,789

 

2,995

 

206

 

7,356

 

7,620

 

264

 

Corporate debt securities

 

  

 

  

 

  

 

  

Within one year

 

1,026

 

1,064

 

38

 

After five years but within ten years

 

6,065

6,120

120

(65)

 

7,091

 

7,184

 

158

 

(65)

Mortgage-backed securities

 

260,729

265,050

4,547

(226)

Total

$

281,176

$

285,878

$

4,993

$

(291)

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(Dollars in thousands)

December 31, 2019

    

    

    

    

    

Gross

    

Gross

Amortized

Fair

Unrealized

Unrealized

Debt Securities Available for Sale

Cost

Value

Gains

Losses

Type and Maturity

 

  

 

  

 

  

 

  

Obligations of U.S. Government sponsored enterprises

 

  

 

  

 

  

 

  

After one year but within five years

$

14,998

$

14,970

$

1

$

(29)

After five years but within ten years

 

6,000

 

5,950

 

 

(50)

 

20,998

 

20,920

 

1

 

(79)

Obligations of state and political subdivisions

 

  

 

  

 

  

 

  

Within one year

 

1,020

 

1,024

 

4

After one year but within five years

 

2,810

 

2,823

 

13

After five years but within ten years

 

723

 

728

 

5

 

4,553

 

4,575

 

22

 

Mortgage-backed securities

 

184,488

185,191

1,132

(429)

Total

$

210,039

$

210,686

$

1,155

$

(508)

Certain obligations of the U.S. Government and state and political subdivisions are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The carrying value of the pledged assets was $70,596,000 and $50,365,000 at June 30, 2020 and December 31, 2019, respectively.

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

The following table summarizes proceeds received from sales or calls of available for sale investment securities transactions and the resulting realized gains and losses during the six months ended June 30, 2020 and 2019.

(Dollars in thousands)

Six Months Ended

June 30, 

    

2020

    

2019

Gross proceeds from sales and calls of securities

$

36,136

$

11,107

Securities available for sale:

 

 

  

Gross realized gains from sold and called securities

$

592

$

5

Gross realized losses from sold and called securities

 

(30)

 

(61)

Net gains (losses) from sales and calls of securities

$

562

$

(56)

Topic 320 clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. Management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are taken before an assessment is made as to whether the entity will recover the cost basis of the investment. In instances when a determination is made that an other-than-temporary impairment exists and the entity does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive income.

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The following tables show gross unrealized losses and fair values of debt securities available for sale, aggregated by category and length of time the individual securities have been in a continuous unrealized loss position at June 30, 2020 and December 31, 2019:

Unrealized Losses at June 30, 2020

Less Than 12 Months

12 Months or More

Total

(Dollars in thousands)

    

Number

    

    

    

Number

    

    

    

Number

    

    

of

Fair

Unrealized 

of

Fair

Unrealized 

of

Fair

Unrealized 

Securities

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

Corporate debt securities

1

$

2,970

$

(65)

 

$

$

 

1

$

2,970

$

(65)

Mortgage-backed securities

 

15

86,025

(226)

 

 

15

86,025

(226)

Total temporarily impaired securities

 

16

$

88,995

$

(291)

 

$

$

 

16

$

88,995

$

(291)

Unrealized Losses at December 31, 2019

Less Than 12 Months

12 Months or More

Total

(Dollars in thousands)

    

Number

    

    

    

Number

    

    

    

Number

    

    

of

Fair

Unrealized 

of

Fair

Unrealized 

of

Fair

Unrealized 

Securities

Value

Losses

Securities

Value

Losses

Securities

Value

Losses

Obligations of U.S. Government sponsored enterprises

 

9

$

16,919

$

(79)

 

$

$

 

9

$

16,919

$

(79)

Mortgage-backed securities

 

13

 

47,466

 

(204)

 

16

 

22,049

 

(225)

 

29

 

69,515

 

(429)

Total temporarily impaired securities

 

22

$

64,385

$

(283)

 

16

$

22,049

$

(225)

 

38

$

86,434

$

(508)

At June 30, 2020, one corporate debt security and fifteen mortgage-backed securities had unrealized losses. None of these securities have been in a continuous loss position for twelve months or more. The unrealized loss on the corporate debt security was immaterial as of June 30, 2020. The mortgage-backed securities in the Company’s portfolio are government sponsored enterprise (“GSE”) pass-through instruments issued by the Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”), which guarantees the timely payment of principal on these investments.

The unrealized losses noted in the tables above are considered to be temporary impairments. The decline in the values of the debt securities is due only to interest rate fluctuations, rather than erosion of issuer credit quality. As a result, the payment of contractual cash flows, including principal repayment, is not at risk. Because the Company does not intend to sell the securities, does not believe the Company will be required to sell the securities before recovery and expects to recover the entire amortized cost basis, no debt securities were deemed to be other-than-temporarily impaired for the periods ended June 30, 2020 and December 31, 2019, respectively.

6. LOANS AND RELATED ALLOWANCE FOR CREDIT LOSSES

Loans that the Company originated and has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the outstanding unpaid principal balances, net of any deferred fees or costs and the allowance for loan losses. Loans acquired through a business combination are discussed under the heading “Acquired Loans”. Interest income on all loans, other than nonaccrual loans, is accrued over the term of the loans based on the amount of principal outstanding. Unearned income is amortized to income over the life of the loans, using the interest method.

The loan portfolio includes the following classes: (1) commercial, financial and agricultural, (2) real estate - commercial, (3) real estate - construction, (4) real estate – mortgage, (5) obligations of states and political subdivisions, and (6) personal loans.

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Interest income on consumer, mortgage and commercial loans is discontinued and loans are placed on non-accrual status at the time the loan is 90 days delinquent unless the loan is well-secured and in process of collection. Loans are charged off to the extent principal or interest is deemed uncollectible. Past due status is based on the contractual terms of the loan. In all cases, loans are placed on non-accrual or charged off at an earlier date if collection of principal or interest is considered doubtful. Non-accrual loans and loans past due 90 days still on accrual include both homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

Interest received on such loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Under the cost-recovery method, interest income is not recognized until the loan principal balance is reduced to zero. Under the cash-basis method, interest income is recorded when the payment is received in cash. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current, the loan has performed in accordance with the contractual terms for a reasonable period of time and future payments are reasonably assured.

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

Loans Held for Sale

The Company has originated residential mortgage loans with the intent to sell. These individual loans are normally funded by the buyer immediately. The Company maintains servicing rights on these loans. Mortgage servicing rights are recognized as an asset upon the sale of a mortgage loan. A portion of the cost of the loan is allocated to the servicing right based upon fair value. Servicing rights are intangible assets and are carried at estimated fair value. Adjustments to fair value are recorded as non-interest income and included in mortgage banking income in the consolidated statements of income.

Commercial, Financial and Agricultural Lending

The Company originates commercial, financial and agricultural loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is shorter and does not exceed the projected useful life of such machinery and equipment. Most business lines of credit are written with a five year maturity, subject to an annual credit review.

Commercial loans are generally secured with short-term assets; however, in many cases, additional collateral, such as real estate, is provided as additional security for the loan. Loan-to-value maximum values have been established by the Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, and other methods.

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

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

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

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Real Estate - Commercial Lending

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

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

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

Real Estate - Construction Lending

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

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

In underwriting commercial real estate - construction loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history and the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, and other resources. Appraisals on properties securing real estate - commercial loans originated by the Company are performed by independent appraisers.

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

Real Estate - Mortgage Lending

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

The Company offers fixed-rate and adjustable rate real estate - mortgage loans with a term up to a maximum of 25-years for both permanent structures and those under construction. The Company’s one-to-four family residential mortgage originations are secured primarily by properties located in its primary market area and surrounding areas. The majority of the Company’s residential real estate - mortgage loans originate with a loan-to-value of 80% or less. Home equity installment loans are secured by the borrower’s primary residence with a maximum loan-to-value of 80% and a maximum term of 15 years. Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years.

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

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

Obligations of States and Political Subdivisions

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

Personal Lending

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

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

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

Allowance for Credit Losses

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

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

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

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

The allowance consists of specific and general components. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered troubled debt restructurings (“TDRs”) and classified as impaired.

Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. If a loan is impaired, a portion of the allowance is allocated so that the loan is reported, net, at the present value of estimated future cash flows using the loan’s existing rate or at the fair value of collateral if repayment is expected solely from the collateral.

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

Troubled debt restructurings are individually evaluated for impairment and included in the separately identified impairment disclosures. Loans whose terms are modified are classified as troubled debt restructurings if the Company grants borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a below-market interest rate based on the loan’s risk characteristics, an extension of a loan’s stated maturity date or a significant delay in payment. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period after modification. For TDRs that subsequently default, the Company determines the amount of the allowance on that loan in accordance with the accounting policy for the allowance for loan losses on loans individually

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identified as impaired. The Company incorporates recent historical experience related to TDRs, including the performance of TDRs that subsequently default, into the calculation of the allowance by loan portfolio class.

Acquired Loans

Loans that Juniata acquires through business combinations are recorded at fair value with no carryover of the related allowance for loan losses. Some of these loans have shown evidence of credit deterioration since origination. These purchased credit impaired (“PCI”) loans are recorded at the amount paid, such that there is no carryover of the seller’s allowance for loan losses. After acquisition, losses are recognized by an increase in the allowance for loan losses.

Such purchased credit impaired loans are accounted for individually or aggregated into pools of loans based on common risk characteristics, such as credit score, loan type, and date of origination. Juniata estimates the amount and timing of expected cash flows for each loan or pool, and the expected cash flows in excess of amount paid is recorded as interest income over the remaining life of the loan or pool (accretable yield). The excess of the loan’s or pool’s contractual principal and interest over expected cash flows is not recorded (nonaccretable difference).

Over the life of the loan or pool, expected cash flows continue to be estimated. If the present value of expected cash flows is less than the carrying amount, a loss is recorded as a provision for loan losses. If the present value of expected cash flows is greater than the carrying amount, it is recognized as part of future interest income.

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

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

Paycheck Protection Program Loans

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was enacted, establishing the Paycheck Protection Program (“PPP”) which is administered by the Small Business Administration (“SBA”). The PPP is intended to provide economic relief to small businesses nationwide adversely impacted under the COVID-19 Emergency Declaration issued on March 13, 2020. The PPP, which began on April 3, 2020, provides small businesses with funds to cover up to eight weeks of payroll costs, including benefits. It also provides for forgiveness of up to the full principal amount of qualifying loans.

On June 5, 2020, the Paycheck Protection Program Flexibility Act of 2020 (“PPP Flexibility Act”) extended the covered period for loan forgiveness from eight weeks after the date of loan disbursement to 24 weeks. The 24 week period applies to all borrowers, but borrowers that received an SBA loan number before June 5, 2020, have the option to use an eight week period. The PPP Flexibility Act also amended the requirements regarding forgiveness of PPP loans, reducing the portion of PPP loan proceeds that must be used for payroll costs for the full amount of the PPP loan to be eligible for forgiveness from 75% to 60%. Additionally, the PPP Flexibility Act extended the maturity date for PPP loans made on, or after June 5, 2020, from two years to five years; however, lenders and borrowers may mutually agree to modify PPP loans made before such date to reflect the longer maturity. The Company is participating in the PPP, and as of June 30, 2020, has funded 462 PPP loans totaling $30,751,000, net of remaining deferred fees of $687,000. As of June 30, 2020, 454 of the Company’s PPP loans had maturity dates of two years, while the remaining eight loans, totaling $74,000, had five year maturities. All the Company’s PPP loans are part of the Commercial, Financial and Agricultural loan segment.

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Loan Portfolio Classification

The following table presents the loan portfolio by class at June 30, 2020 and December 31, 2019.

(Dollars in thousands)

    

    

 

June 30, 2020

 

December 31, 2019

Commercial, financial and agricultural

$

76,364

$

51,785

Real estate - commercial

123,581

126,613

Real estate - construction

 

54,000

 

46,459

Real estate - mortgage

 

143,136

 

150,538

Obligations of states and political subdivisions

16,390

16,377

Personal

 

7,125

 

8,818

Total

$

420,596

$

400,590

The following table summarizes the activity in the allowance for loan losses by loan class, for the three and six months ended June 30, 2020 and 2019.

(Dollars in thousands)

    

    

    

    

Obligations

    

    

    

Commercial,

of states

financial and

Real estate-

Real estate-

and political

Real estate-

agricultural

commercial

construction

subdivisions

mortgage

Personal

Total

Three Months Ended

June 30, 2020

Balance, beginning of period

$

433

$

758

$

904

$

23

$

1,147

$

68

$

3,333

Provision for loan losses

 

(122)

 

120

 

203

 

(1)

 

4

 

(8)

 

196

Charge-offs

 

 

 

 

 

(4)

 

(3)

 

(7)

Recoveries

 

 

 

30

 

 

2

 

4

 

36

Balance, end of period

$

311

$

878

$

1,137

$

22

$

1,149

$

61

$

3,558

June 30, 2019

Balance, beginning of period

$

283

$

1,043

$

572

$

21

$

1,005

$

70

$

2,994

Provision for loan losses

 

(10)

 

(312)

 

(177)

 

1

 

16

 

23

 

(459)

Charge-offs

 

 

 

 

 

(2)

 

(26)

 

(28)

Recoveries

 

1

 

307

 

193

 

 

 

7

 

508

Balance, end of period

$

274

$

1,038

$

588

$

22

$

1,019

$

74

$

3,015

Six Months Ended

June 30, 2020

Balance, beginning of period

$

321

$

754

$

718

$

17

$

1,081

$

70

$

2,961

Provision for loan losses

 

(10)

 

124

 

357

 

5

 

69

 

7

 

552

Charge-offs

 

 

 

 

 

(4)

 

(24)

 

(28)

Recoveries

 

 

 

62

 

 

3

 

8

 

73

Balance, end of period

$

311

$

878

$

1,137

$

22

$

1,149

$

61

$

3,558

June 30, 2019

Balance, beginning of period

$

275

$

1,074

$

558

$

20

$

1,035

$

72

$

3,034

Provision for loan losses

 

(4)

 

(335)

 

(163)

 

2

 

28

 

28

 

(444)

Charge-offs

 

 

(15)

 

 

 

(49)

 

(37)

 

(101)

Recoveries

 

3

 

314

 

193

 

 

5

 

11

 

526

Balance, end of period

$

274

$

1,038

$

588

$

22

$

1,019

$

74

$

3,015

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The following table summarizes loans by loan class, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of June 30, 2020 and December 31, 2019.

(Dollars in thousands)

    

    

    

    

Obligations

    

    

    

Commercial,

of states

financial and

Real estate-

Real estate-

and political

Real estate-

agricultural

commercial

construction

subdivisions

mortgage

Personal

Total

June 30, 2020

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Loans allocated by:

individually evaluated for impairment

$

549

$

3,160

$

$

$

911

$

$

4,620

acquired with credit deterioration

354

663

1,017

collectively evaluated for impairment

75,815

120,067

54,000

16,390

141,562

7,125

414,959

$

76,364

$

123,581

$

54,000

$

16,390

$

143,136

$

7,125

$

420,596

Allowance for loan losses allocated by:

individually evaluated for impairment

$

$

$

$

$

2

$

$

2

acquired with credit deterioration

collectively evaluated for impairment

311

878

1,137

22

1,147

61

3,556

$

311

$

878

$

1,137

$

22

$

1,149

$

61

$

3,558

December 31, 2019

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Loans allocated by:

individually evaluated for impairment

$

$

1,206

$

$

$

1,296

$

14

$

2,516

acquired with credit deterioration

366

704

1,070

collectively evaluated for impairment

51,785

125,041

46,459

16,377

148,538

8,804

397,004

$

51,785

$

126,613

$

46,459

$

16,377

$

150,538

$

8,818

$

400,590

Allowance for loan losses allocated by:

individually evaluated for impairment

$

$

$

$

$

$

$

acquired with credit deterioration

collectively evaluated for impairment

321

754

718

17

1,081

70

2,961

$

275

$

1,074

$

558

$

20

$

1,035

$

72

$

2,961

The Company has certain loans in its portfolio that are considered to be impaired. It is the policy of the Company to recognize income on impaired loans that have been transferred to nonaccrual status on a cash basis, only to the extent that it exceeds anticipated principal balance recovery. Until an impaired loan is placed on nonaccrual status, income is recognized on the accrual basis. Collateral analysis is performed on each impaired loan at least quarterly, and results are used to determine if a specific reserve is necessary to adjust the carrying value of each individual loan down to the estimated fair value. Generally, specific reserves are carried against impaired loans based upon estimated collateral value until a confirming loss event occurs or until termination of the credit is scheduled through liquidation of the collateral or foreclosure. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process at June 30, 2020 and December 31, 2019 totaled $319,000 and $248,000, respectively. Charge-offs will occur when a confirmed loss is identified. Professional appraisals of collateral, discounted for expected selling costs, appraisal age, economic conditions and other known factors, are used to determine the charge-off amount.

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Table of Contents

The following table summarizes information regarding impaired loans by portfolio class as of June 30, 2020 and December 31, 2019.

(Dollars in thousands)

As of June 30, 2020

As of December 31, 2019

    

Recorded

    

Unpaid Principal

    

Related

    

Recorded

    

Unpaid Principal

    

Related

Investment

Balance

Allowance

Investment

Balance

Allowance

Impaired loans

With no related allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial, financial and agricultural

$

549

$

549

$

$

$

$

Real estate - commercial

3,160

3,304

1,206

1,304

Acquired with credit deterioration

 

354

390

 

 

366

 

395

 

Real estate – construction

 

 

1,029

 

 

 

1,054

 

Real estate - mortgage

 

790

 

1,523

 

 

1,296

 

2,006

 

Acquired with credit deterioration

 

663

825

 

 

704

 

840

 

Personal

 

 

 

 

14

 

14

 

With an allowance recorded:

 

 

  

 

  

 

  

 

  

 

  

Real estate - mortgage

$

121

$

120

$

2

$

$

$

Total:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial, financial and agricultural

$

549

$

549

$

$

$

$

Real estate - commercial

3,160

3,304

1,206

1,304

Acquired with credit deterioration

 

354

 

390

 

 

366

 

395

 

Real estate - construction

 

 

1,029

 

 

 

1,054

 

Real estate – mortgage

 

911

 

1,643

 

2

 

1,296

 

2,006

 

Acquired with credit deterioration

 

663

 

825

 

 

704

 

840

 

Personal

 

 

 

 

14

 

14

 

$

5,637

$

7,740

$

2

$

3,586

$

5,613

$

Average recorded investment of impaired loans and related interest income recognized for the three and six months ended June 30, 2020 and 2019 are summarized in the tables below.

(Dollars in thousands)

Three Months Ended June 30, 2020

Three Months Ended June 30, 2019

    

Average

    

Interest

    

Cash Basis

    

Average

    

Interest

    

Cash Basis

Recorded

Income

Interest

Recorded

Income

Interest

Investment

Recognized

Income

Investment

Recognized

Income

Impaired loans

With no related allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial, financial and agricultural

$

581

$

$

$

382

$

22

$

Real estate - commercial

 

3,412

 

5

 

8

 

1,228

 

32

 

Acquired with credit deterioration

 

354

 

 

 

458

 

 

Real estate - mortgage

 

877

 

4

 

11

 

1,291

 

4

 

11

Acquired with credit deterioration

 

668

 

 

 

860

 

 

Personal

 

 

 

 

14

 

 

With an allowance recorded:

 

 

 

 

  

 

  

 

  

Real estate - mortgage

$

121

$

$

$

$

$

Total:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial, financial and agricultural

$

581

$

$

$

382

$

22

$

Real estate - commercial

 

3,412

 

5

 

8

 

1,228

 

32

 

Acquired with credit deterioration

 

354

 

 

 

458

 

 

Real estate - construction

 

 

 

 

 

 

Real estate - mortgage

 

998

 

4

 

11

 

1,291

 

4

 

11

Acquired with credit deterioration

 

668

 

 

 

860

 

 

Personal

 

 

 

 

14

 

 

$

6,013

$

9

$

19

$

4,233

$

58

$

11

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Table of Contents

(Dollars in thousands)

Six Months Ended June 30, 2020

Six Months Ended June 30, 2019

    

Average

    

Interest

    

Cash Basis

    

Average

    

Interest

    

Cash Basis

Recorded

Income

Interest

Recorded

Income

Interest

Investment

Recognized

Income

Investment

Recognized

Income

Impaired Loans

With no related allowance recorded:

 

  

 

  

 

  

 

  

 

  

 

  

Commercial, financial and agricultural

$

384

$

$

$

382

$

22

$

Real estate - commercial

 

2,746

 

10

 

20

 

1,076

 

35

 

Acquired with credit deterioration

 

357

 

 

 

465

 

 

Real estate - construction

 

 

 

 

14

 

 

Real estate - mortgage

 

1,010

 

8

 

22

 

1,226

 

9

 

23

Acquired with credit deterioration

 

678

 

 

 

874

 

 

Personal

 

5

 

 

 

16

 

 

With an allowance recorded:

 

 

  

 

  

 

  

 

  

 

  

Real estate - mortgage

$

121

$

$

$

$

$

Total:

 

 

  

 

  

 

  

 

  

 

  

Commercial, financial and agricultural

$

384

$

$

$

382

$

22

$

Real estate - commercial

2,746

10

20

1,076

35

Acquired with credit deterioration

 

357

 

 

 

465

 

 

Real estate - construction

 

 

 

 

14

 

 

Real estate - mortgage

 

1,131

 

8

 

22

 

1,226

 

9

 

23

Acquired with credit deterioration

 

678

 

 

 

874

 

 

Personal

 

5

 

 

 

16

 

 

$

5,301

$

18

$

42

$

4,053

$

66

$

23

The recorded investment in loans excludes accrued interest receivable and loan origination fees, net due to immateriality. For purposes of this disclosure, the unpaid principal balance is not reduced for partial charge-offs. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is generally discontinued when the contractual payment of principal or interest has become 90 days past due or reasonable doubt exists as to the full, timely collection of principal or interest. However, it is the Company’s policy to continue to accrue interest on loans over 90 days past due as long as (1) they are guaranteed or well secured and (2) there is an effective means of timely collection in process. When a loan is placed on non-accrual status, all unpaid interest credited to income in the current year is reversed against current period income, and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, accruals are resumed on loans only when the obligation is brought fully current with respect to interest and principal, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The Company’s nonaccrual and charge-off policies are the same, regardless of the loan type.

The following table presents nonaccrual loans by classes of the loan portfolio as of June 30, 2020 and December 31, 2019.

(Dollars in thousands)

    

    

 

June 30, 2020

 

December 31, 2019

Non-accrual loans:

Commercial, financial and agricultural

$

549

$

Real estate - commercial

2,861

903

Real estate - mortgage

 

534

 

902

Personal

 

 

14

Total

$

3,944

$

1,819

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The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. Past due status is determined by the contractual terms of the loan. The following tables present the classes of the loan portfolio summarized by the past due status as of June 30, 2020 and December 31, 2019.

    

    

    

    

    

    

    

Loans

Past Due

Greater

(Dollars in thousands)

Greater

than 89

3059 Days

6089 Days

than 89

Total Past

Days and

Current

Past Due(2)

Past Due

Days

Due

Total Loans

Accruing(1)

As of June 30, 2020

Commercial, financial and agricultural

$

76,355

$

$

$

9

$

9

$

76,364

$

Real estate - commercial

 

123,127

 

54

 

1

 

45

 

100

 

123,227

 

Real estate - construction

 

54,000

 

 

 

 

 

54,000

 

Real estate - mortgage

 

141,689

 

149

 

190

 

445

 

784

 

142,473

 

133

Obligations of states and political subdivisions

 

16,390

 

 

 

 

 

16,390

 

Personal

 

7,121

 

 

4

 

 

4

 

7,125

 

Subtotal

418,682

203

195

499

897

419,579

133

Loans acquired with credit deterioration

Real estate - commercial

 

354

 

 

 

 

 

354

 

Real estate - mortgage

 

570

 

 

 

93

 

93

 

663

 

93

Subtotal

924

93

93

1,017

93

$

419,606

$

203

$

195

$

592

$

990

$

420,596

$

226

Loans

Past Due

Greater

(Dollars in thousands)

Greater

than 89

3059 Days

6089 Days

than 89

Total Past

Days and

    

Current

    

Past Due(2)

    

Past Due

    

Days

    

Due

    

Total Loans

    

Accruing(1)

As of December 31, 2019

Commercial, financial and agricultural

$

51,725

$

60

$

$

$

60

$

51,785

$

Real estate - commercial

 

126,180

 

19

 

 

48

 

67

 

126,247

 

Real estate - construction

 

46,172

 

287

 

 

 

287

 

46,459

 

Real estate - mortgage

 

148,366

 

348

 

149

 

971

 

1,468

 

149,834

 

359

Obligations of states and political subdivisions

 

16,377

 

 

 

 

 

16,377

 

Personal

 

8,725

 

55

 

 

38

 

93

 

8,818

 

24

Subtotal

397,545

769

149

1,057

1,975

399,520

383

Loans acquired with credit deterioration

Real estate - commercial

 

366

 

 

 

 

 

366

 

Real estate - mortgage

 

330

 

371

 

 

3

 

374

 

704

 

3

Subtotal

696

371

3

374

1,070

3

$

398,241

$

1,140

$

149

$

1,060

$

2,349

$

400,590

$

386

(1)These loans are guaranteed, or well-secured, and there is an effective means of collection in process.
(2)Loans are considered past due when the borrower is in arrears on two or more monthly payments.

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Table of Contents

Troubled Debt Restructurings

The following tables summarize information regarding troubled debt restructurings by loan portfolio class at June 30, 2020 and December 31, 2019.

(Dollars in thousands)

Number of

    

Contracts

    

Recorded Investment

As of June 30, 2020

 

  

 

  

Accruing troubled debt restructurings:

 

  

 

  

Real estate - commercial

1

$

302

Real estate - mortgage

 

7

377

 

8

$

679

(Dollars in thousands)

Number of

    

Contracts

    

Recorded Investment

As of December 31, 2019

 

  

 

  

Accruing troubled debt restructurings:

 

  

 

  

Real estate - commercial

 

1

$

306

Real estate - mortgage

 

7

397

 

8

$

703

The Company’s troubled debt restructurings are also impaired loans, which may result in a specific allocation and subsequent charge-off if appropriate. As of June 30, 2020, there were no specific reserves carried for troubled debt restructured loans. There were no troubled debt restructured loans in default within 12 months of restructure during the three or six months ended June 30, 2020. One troubled debt restructured loan for $324,000 was in default within 12 months of restructure during the three and six months ended June 30, 2019. On December 31, 2019, there were no specific reserves carried for the troubled debt restructurings, nor any charge-offs related to the troubled debt restructured loans. The amended terms of the restructured loans vary, and may include interest rates that have been reduced, principal payments that have been reduced or deferred for a period of time and/or maturity dates that have been extended.

There were no loan terms modified resulting in troubled debt restructuring during the three and six months ended June 30, 2020, nor during the three months ended June 30, 2019. The following table lists the loan whose terms were modified resulting in a troubled debt restructuring during the six months ended June 30, 2019.

(Dollars in thousands)

    

    

Pre-Modification

    

Post-Modification

    

Number of

Outstanding

Outstanding

Contracts

Recorded Investment

Recorded Investment

Recorded Investment

Six months ended June 30, 2019

  

  

  

  

Accruing troubled debt restructurings:

 

  

 

  

 

  

 

  

Real estate - commercial

 

1

$

306

$

326

$

324

 

1

$

306

$

326

$

324

The CARES Act permits financial institutions to exclude loan modifications to borrowers affected by the COVID-19 pandemic from TDR treatment if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration. A loan modification accounted for in accordance with the CARES Act is not treated as a TDR for accounting or disclosure purposes.  

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Additionally, on April 7, 2020, the federal banking supervisory agencies issued a Revised Interagency Statement on Loan Modifications by Financial Institutions Working with Customers Affected by the Coronavirus (“Interagency Policy Statement”). The interagency statement offers some practical expedients for evaluating whether loan modifications that occur in response to the COVID-19 pandemic are TDRs. A lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (i.e. six months) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government (e.g., a state program that requires all institutions within that state to suspend mortgage payments for a specified period). Accordingly, any loan modification made in response to the COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR because the borrower is not experiencing financial difficulty.

As of June 30, 2020, Juniata approved interest and/or principal payment deferrals on 242 loans totaling $90,210,000 for individuals and businesses affected by the economic impacts of COVID-19. None of the borrowers approved for these designated deferrals were delinquent as of March 20, 2020, the date on which the Company’s COVID-19 Modification Program went into effect, and the modification terms are short-term, thus the loan modifications are not considered to be troubled-debt restructures under the interagency statement guidance. Additionally, none of the borrowers approved for these designated deferrals were delinquent as of the date of this quarterly report.

Credit Quality Indicators

The Company categorizes loans into risk categories based on relevant information about the ability of borrowers to service their debt such as: current financial information, historical payment experience, credit documentation, public information, and current economic trends, among other factors. The Company analyzes loans individually by classifying the loans as to credit risk. This individual analysis includes loans to commercial customers with an aggregate loan exposure greater than $500,000 and for lines of credit in excess of $50,000. This individual analysis is performed on a continuing basis with all such loans reviewed annually. The Company uses the following definitions for risk ratings:

Special Mention. Loans classified as special mention have a potential weakness that deserves management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the loan or of the institution’s credit position at some future date. Loans in this category are reviewed no less than quarterly.

Substandard. Loans classified as substandard are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans so classified have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They are characterized by the distinct possibility that the institution will sustain some loss if the deficiencies are not corrected. Loans in this category are reviewed no less than monthly.

Doubtful. Loans classified as doubtful have all the weaknesses inherent in those classified as substandard, with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans in this category are reviewed no less than monthly.

Loans not falling into one of the categories above that are analyzed individually as part of the above described process are considered to be pass-rated loans.

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The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Company’s internal risk rating system as of June 30, 2020 and December 31, 2019. The increase in the special mention category at June 30, 2020 compared to December 31, 2019 was predominantly the result of downgrading two participated relationships totaling $10,495,000 from pass to special mention during the second quarter.

(Dollars in thousands)

Special

As of June 30, 2020

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

Commercial, financial and agricultural

$

71,595

$

3,770

$

459

$

540

$

76,364

Real estate - commercial

 

108,947

 

8,775

 

3,843

 

2,016

 

123,581

Real estate - construction

 

44,420

 

7,625

 

1,955

 

 

54,000

Real estate - mortgage

 

141,251

 

311

 

1,515

 

59

 

143,136

Obligations of states and political subdivisions

 

16,390

 

 

 

 

16,390

Personal

 

7,125

 

 

 

 

7,125

Total

$

389,728

$

20,481

$

7,772

$

2,615

$

420,596

(Dollars in thousands)

Special

As of December 31, 2019

    

Pass

    

Mention

    

Substandard

    

Doubtful

    

Total

Commercial, financial and agricultural

$

46,725

$

4,080

$

980

$

$

51,785

Real estate - commercial

 

113,851

 

5,668

 

7,046

 

48

 

126,613

Real estate - construction

 

44,954

 

287

 

1,218

 

 

46,459

Real estate - mortgage

 

148,164

 

327

 

1,951

 

96

 

150,538

Obligations of states and political subdivisions

 

16,377

 

 

 

 

16,377

Personal

 

8,804

 

 

14

 

 

8,818

Total

$

378,875

$

10,362

$

11,209

$

144

$

400,590

7. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

On September 8, 2006, the Company acquired a branch office in Richfield, PA. Goodwill associated with this transaction is carried at $2,046,000. On November 30, 2015, the Company acquired FNBPA Bancorp, Inc. and, as a result, carries goodwill of $3,402,000 relating to the acquisition. On April 30, 2018, the Company acquired the remainder of the outstanding common stock of Liverpool Community Bank and, as a result, carries goodwill of $3,599,000 relating to the acquisition.

Total goodwill at June 30, 2020 and December 31, 2019 was $9,047,000. Goodwill is not amortized but is tested annually for impairment or more frequently if certain events occur which might indicate goodwill has been impaired. Due to the severe economic impact of COVID-19, testing was performed as of March 31, 2020, and management concluded that no impairment of goodwill existed as of that date. No goodwill impairment test was conducted at June 30, 2020 because the Company’s stock was trading above book value per share and there were no other circumstances indicating impairment may exist.

Intangible Assets

On November 30, 2015, a core deposit intangible in the amount of $303,000 associated with the FNBPA Bancorp, Inc. acquisition was recorded and is being amortized over a ten-year period using a sum of the year’s digits basis. Amortization expense recognized for the intangibles related to the FNBPA acquisition in the three and six months ended June 30, 2020 was $8,000 and $16,000, respectively.

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On April 30, 2018, a core deposit intangible in the amount of $289,000 associated with the Liverpool Community Bank acquisition was recorded and is being amortized over a ten-year period using a sum of the year’s digit basis. Amortization expense recognized for the intangible related to the Liverpool Community Bank acquisition in the three and six months ended June 30, 2020 was $11,000 and $22,000, respectively.

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

(Dollars in thousands)

    

FNBPA

    

LCB

Acquisition

Acquisition

Core

Core

Deposit

Deposit

Intangible

Intangible

Beginning Balance at Acquisition Date

$

303

$

289

Amortization expense recorded prior to January 1, 2019

 

152

 

35

Amortization expense recorded in the twelve months

 

  

 

  

ended December 31, 2019

 

38

 

49

Unamortized balance as of December 31, 2019

 

113

 

205

Amortization expense recorded in the

 

six months ended June 30, 2020

16

 

22

Unamortized balance as of June 30, 2020

$

97

$

183

Scheduled remaining amortization expense for years ended:

 

 

December 31, 2020

$

17

$

22

December 31, 2021

27

 

39

December 31, 2022

 

22

 

33

December 31, 2023

 

16

 

28

December 31, 2024

 

10

23

After December 31, 2024

5

38

8. BORROWINGS

Borrowings consisted of the following as of June 30, 2020 and December 31, 2019.

(Dollars in thousands)

June 30, 

December 31, 

    

2020

    

2019

Securities sold under agreements to repurchase

$

4,107

$

3,429

Overnight advances with FHLB

 

 

9,700

Short-term debt with FHLB

20,000

Federal Reserve Bank advances

31,298

Long-term debt with FHLB

 

35,000

 

45,000

$

90,405

$

58,129

Borrowings increased $32,276,000, or 55.5%, at June 30, 2020 compared to December 31, 2019. The Company executed a three-year cash flow hedge on $20,000,000 in three-month advances from the FHLB in the second quarter of 2020. The Company also began participating in the Federal Reserve Bank’s Paycheck Protection Program Liquidity Facility (“PPPLF”) during the quarter and received $31,298,000 in advances as of June 30, 2020. The advances are collateralized by the PPP loans granted by the Company. The maturity date of the PPPLF advance equals the maturity date of the underlying PPP loans pledged to secure the extension of credit. The maturity date of the PPPLF’s extension of credit will be accelerated if an underlying PPP loan goes into default if the Company sells the PPP loan to the SBA to realize on the

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SBA guarantee. The maturity date of the PPPLF’s extension of credit also will be accelerated to the extent of any loan forgiveness reimbursement received by the Company from the SBA. The interest rate on the advances is fixed at 0.35%.

Long-term debt is comprised only of FHLB advances with an original maturity of one year or more. In April 2020, Juniata executed a balance sheet strategy by repaying $10,000,000 in FHLB long-term advances, at a weighted average rate of 2.75%, to create a smaller, more efficient balance sheet. A prepayment penalty of $524,000 was incurred. The following table summarizes the scheduled maturities of the remaining long-term debt as of June 30, 2020.

(Dollars in thousands)

Scheduled

Weighted Average

Year

    

Maturities

    

Interest Rate

2024

 

$

20,000

 

2.42

%

2025

 

15,000

 

2.41

$

35,000

 

2.42

%

9. FAIR VALUE MEASUREMENT

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

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

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

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

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

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

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

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

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

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

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

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

Debt Securities Available for Sale – Debt securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurement from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things.

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Derivatives – The fair values of derivatives are based on valuation models using observable market data as of the measurement date utilizing Level 2 inputs. The Company’s derivatives are comprised of interest rate swaps traded in an over-the-counter market where quoted market prices are not always available; therefore, the fair values are determined using quantitative models that utilize multiple market inputs. The inputs will vary based on the type of curves, prepayment rates and volatility factors used to value the position. Most market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Impaired Loans – Certain impaired loans are reported on a non-recurring basis at the fair value of the underlying collateral since repayment is expected solely from the collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements.

Other Real Estate Owned – Certain assets included in other real estate owned are carried at fair value as a result of impairment and accordingly are presented as measured on a non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of property in the proximate vicinity.

Mortgage Servicing Rights – The fair value of servicing assets is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date and are considered Level 3 inputs.

The following tables summarize assets and liabilities measured at fair value as of June 30, 2020 and December 31, 2019 segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. There were no transfers of assets between fair value Level 1 and Level 2 during the six months ended June 30, 2020 or 2019.

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Quoted Prices in

Significant

Significant

(Dollars in thousands)

Active Markets

Other

Other

for Identical

Observable

Unobservable

June 30, 2020

Assets

Inputs

Inputs

Total

Assets measured at fair value on a recurring basis:

 

  

 

  

 

  

 

  

Debt securities available for sale:

 

  

 

  

 

  

 

  

Obligations of U.S. Government agencies and corporations

$

$

6,024

$

$

6,024

Obligations of state and political subdivisions

 

 

7,620

 

 

7,620

Corporate debt securities

7,184

7,184

Mortgage-backed securities

 

 

265,050

 

 

265,050

Total debt securities available for sale

$

$

285,878

$

$

285,878

Equity securities

$

990

$

$

$

990

Mortgage servicing rights

$

$

$

172

$

172

Liabilities measured at fair value on a recurring basis:

 

  

 

  

 

  

 

  

Interest rate swaps

$

$

206

$

$

206

Assets measured at fair value on a non-recurring basis:

 

  

 

  

 

  

 

  

Impaired loans

$

$

$

103

$

103

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Table of Contents

    

(Level 1)

    

(Level 2)

    

(Level 3)

    

Quoted Prices in

Significant

Significant

(Dollars in thousands)

Active Markets

Other

Other

for Identical

Observable

Unobservable

December 31, 2019

Assets

Inputs

Inputs

Total

Assets measured at fair value on a recurring basis:

 

  

 

  

 

  

 

  

Debt securities available for sale:

 

  

 

  

 

  

 

  

Obligations of U.S. Government agencies and corporations

$

$

20,920

$

$

20,920

Obligations of state and political subdivisions

 

 

4,575

 

 

4,575

Mortgage-backed securities

 

 

185,191

 

 

185,191

Total debt securities available for sale

$

$

210,686

$

$

210,686

Equity securities

$

1,144

$

$

$

1,144

Mortgage servicing rights

$

$

$

180

$

180

Assets measured at fair value on a non-recurring basis:

 

  

 

  

 

  

 

  

Impaired loans

$

$

$

144

$

144

Assets measured at fair value on a nonrecurring basis for which Level 3 inputs have been used to determine fair value are immaterial to the Company’s consolidated financial statements.

Fair Value of Financial Instruments

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

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

The following discussion describes the estimated fair value of the Company’s financial instruments as well as the significant methods and assumptions not previously disclosed used to determine these estimated fair values.

Carrying values approximate fair value for cash and due from banks, interest-bearing demand deposits with banks, restricted stock in the Federal Home Loan Bank, loans held for sale, interest receivable, mortgage servicing rights, non-interest bearing deposits, securities sold under agreements to repurchase, short-term borrowings and interest payable. Other than cash and due from banks, which are considered Level 1 inputs, and mortgage servicing rights, which are Level 3 inputs, these instruments are Level 2 inputs.

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

Financial Instruments

(Dollars in thousands)

June 30, 2020

December 31, 2019

    

Carrying

    

Fair

    

Carrying

    

Fair

Value

Value

Value

Value

Financial assets:

Cash and due from banks

$

12,259

$

12,259

$

12,658

$

12,658

Interest bearing deposits with banks

 

3,935

 

3,935

 

82

 

82

Interest bearing time deposits with banks

 

1,470

 

1,470

 

2,210

 

2,210

Securities

 

286,868

 

286,868

 

211,830

 

211,830

Restricted investment in bank stock

3,487

 

N/A

 

3,442

 

N/A

Loans, net of allowance for loan losses

 

417,038

 

418,706

 

397,629

 

403,359

Accrued interest receivable

 

2,404

 

2,404

 

1,607

 

1,607

Financial liabilities:

 

  

 

  

 

  

 

  

Non-interest bearing deposits

$

160,682

$

160,682

$

134,703

$

134,703

Interest bearing deposits

 

434,153

 

438,699

 

397,234

 

399,848

Securities sold under agreements to repurchase

 

4,107

 

N/A

 

3,429

 

N/A

Short-term borrowings

 

20,000

 

20,001

 

9,700

 

9,700

FRB advances

31,298

31,298

Long-term debt

 

35,000

 

37,520

 

45,000

 

45,809

Interest rate swaps

206

206

Other interest bearing liabilities

 

1,590

 

1,592

 

1,603

 

1,603

Accrued interest payable

 

389

 

389

 

473

 

473

Off-balance sheet financial instruments:

 

  

 

  

 

  

 

  

Commitments to extend credit

$

$

$

$

Letters of credit

 

 

 

 

The following tables present the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments not previously disclosed as of June 30, 2020 and December 31, 2019. The tables exclude financial instruments for which the carrying amount approximates fair value.

    

    

    

(Level 1)

    

(Level 2)

    

(Level 3)

Quoted Prices in

Significant

Significant

(Dollars in thousands)

Active Markets

Other

Other

Carrying

for Identical

Observable

Unobservable

Amount

Fair Value

Assets or Liabilities

Inputs

Inputs

June 30, 2020

Financial instruments - Assets

 

  

 

  

 

  

 

  

 

  

Interest bearing time deposits with banks

$

1,470

$

1,470

$

$

1,470

$

Loans, net of allowance for loan losses

 

417,038

 

418,706

 

 

 

418,706

Financial instruments - Liabilities

 

 

 

  

 

 

  

Interest bearing deposits

$

434,153

$

438,699

$

$

438,699

$

Long-term debt

 

35,000

 

37,520

 

 

37,520

 

Other interest bearing liabilities

 

1,590

 

1,592

 

 

1,592

 

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(Level 1)

(Level 2)

(Level 3)

Quoted Prices in

Significant

Significant

(Dollars in thousands)

Active Markets

Other

Other

Carrying

for Identical

Observable

Unobservable

    

Amount

    

Fair Value

    

Assets or Liabilities

    

Inputs

    

Inputs

December 31, 2019

Financial instruments - Assets

 

  

 

  

 

  

 

  

 

  

Interest bearing time deposits with banks

$

2,210

$

2,210

$

$

2,210

$

Loans, net of allowance for loan losses

 

397,629

 

403,359

 

 

 

403,359

Financial instruments - Liabilities

 

 

 

  

 

 

  

Interest bearing deposits

$

397,234

$

399,848

$

$

399,848

$

Long-term debt

 

45,000

 

45,809

 

 

45,809

 

Other interest bearing liabilities

 

1,603

 

1,603

 

 

1,603

 

10. DEFINED BENEFIT RETIREMENT PLAN

The Company sponsored a defined benefit retirement plan, The Juniata Valley Bank Retirement Plan (“JVB Plan”), which covered substantially all of its employees employed prior to December 31, 2007. As of January 1, 2008, the JVB Plan was amended to close the plan to new entrants. All active participants as of December 31, 2007 became 100% vested in their accrued benefit and, as long as they remained eligible, continued to accrue benefits until December 31, 2012. The benefits were based on years of service and the employee’s compensation. Effective December 31, 2012, the JVB Plan was amended to cease future service accruals after that date (i.e., it was frozen).

As a result of the FNBPA acquisition, as of November 30, 2015, the Company assumed sponsorship of a second defined benefit retirement plan, the Retirement Plan for the First National Bank of Port Allegany (“FNB Plan”), which covered substantially all former FNBPA employees that were employed prior to September 30, 2008. The FNBPA Plan was amended as of December 31, 2015 to cease future service accruals to previously unfrozen participants and was considered to be “frozen”. Effective December 31, 2016, the FNB Plan was merged into the JVB Plan, which was amended to provide the same benefits to the class of participants previously included in the FNB Plan.

Juniata’s Board of Directors resolved to terminate the JVB Plan, effective November 30, 2018. All participants were properly notified. During the second quarter of 2019, JVB Plan participants elected preferences for receiving their vested benefit in the form of either lump sum payments or annuities. All obligations were satisfied in the third quarter of 2019, and the JVB Plan was liquidated. Excess funds of $431,000 were transferred to fund the Company’s 401(k) Safe Harbor Plan.

Pension expense included the following components for the three and six months ended June 30, 2019:

Three Months Ended

Six Months Ended

(Dollars in thousands)

June 30, 

June 30, 

    

2019

    

2019

Components of net periodic pension cost:

Interest cost

$

125

$

250

Expected return on plan assets

 

(124)

 

(248)

Recognized net actuarial loss

 

306

 

334

Net periodic pension cost

 

307

336

Total recognized in other comprehensive income

(306)

(334)

Total recognized in net periodic pension cost and other comprehensive income

$

1

$

2

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11. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES

In the ordinary course of business, the Company makes commitments to extend credit to its customers through letters of credit, loan commitments and lines of credit. At June 30, 2020, the Company had $117,522,000 outstanding in loan commitments and other unused lines of credit extended to its customers as compared to $110,485,000 at December 31, 2019.

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had outstanding $2,632,000 and $2,624,000 of financial and performance letters of credit commitments as of June 30, 2020 and December 31, 2019, respectively. Commercial letters of credit as of June 30, 2020 and December 31, 2019 totaled $7,975,000 and $7,725,000, respectively. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The amount of the liability as of June 30, 2020 for payments under letters of credit issued was not material. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk.

Additionally, the Company has sold qualifying residential mortgage loans to the FHLB as part of its Mortgage Partnership Finance Program (“Program”). Under the terms of the Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan sold under the Program is “credit enhanced” such that the individual loan’s rating is raised to “BBB”, as determined by the FHLB. The Program can be terminated by either the FHLB or the Company, without cause. The FHLB has no obligation to commit to purchase any mortgage loans through, or from, the Company.

12. DERIVATIVES

The Company began utilizing interest rate swap agreements as part of its asset liability management strategy to help manage its interest rate risk position in the second quarter of 2020. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements.

Interest rate swaps with a notional amount totaling $40,000,000 as of June 30, 2020, were designated as cash flow hedges on certain FHLB advances. Because the interest rate swap agreements did not commence until the second quarter of 2020, there was no notional value as of December 31, 2019. The interest rate swaps were determined to be fully effective during the period presented, and as such, no amount of ineffectiveness has been included in net income. The aggregate fair value of the swaps is recorded in either other assets or other liabilities on the Consolidated Statements of Condition with changes in fair value recorded in other comprehensive income. The Company expects the hedges to remain fully effective during the remaining terms of the swaps.

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The Company presents derivative positions gross on the balance sheet. The following table reflects the derivatives recorded on the Consolidated Statements of Condition as of June 30, 2020.

(Dollars in thousands)

June 30, 2020

    

Notional

    

Fair

Amount

Value

Included in other liabilities:

Derivatives designated as hedges:

Interest rate swap - pay fixed / receive floating on 3-month FHLB advance

$

20,000

$

(122)

Interest rate swaps - forward-starting on long-term FHLB advances

 

20,000

 

(84)

Total included in other liabilities

$

(206)

The effect of cash flow hedge accounting on accumulated other comprehensive income for the period ended June 30, 2020 is as follows:

(Dollars in thousands)

June 30, 2020

    

Amount of Gain

    

Location of Gain

    

Amount of Gain

(Loss) Recognized in

(Loss) Reclassified

(Loss) Reclassified

OCI on Derivatives

from OCI into Income

from OCI into Income

Interest rate contracts

$

(163)

Interest expense on short-term borrowings and repurchase agreements

$

18

The effect of cash flow hedge accounting on the Consolidated Statements of Income for the three and six months ended June 30, 2020 was as follows:

Location and Amount of Gain or Loss Recognized in Income on Fair Value and Cash Flow Hedging Relationships

(Dollars in thousands)

June 30, 2020

    

Interest

    

Other

Income

Income

(Expense)

(Expense)

Effects of cash flow hedging:

Gain on cash flow hedging relationships:

Amount reclassified from AOCI into income

$

22

$

Total

$

22

$

13. SUBSEQUENT EVENTS

On July 21, 2020, the Board of Directors declared a cash dividend of $0.22 per share to shareholders of record on August 17, 2020, payable on September 1, 2020.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements:

The information contained in this Quarterly Report on Form 10-Q contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder) including statements that are not historical facts or that address trends or management’s intentions, plans, beliefs, expectations or opinions. Any forward-looking statement made by us in this document is based only on information currently available to us and speaks only as of the date when made. Juniata undertakes no obligation to publicly update or revise forward looking information, whether as a result of new or updated information, future events, or otherwise. Forward-looking statements are not historical facts or guarantees of future performance, events or results and are subject to potential risks and uncertainties, many of which are outside of our control that could cause actual results to differ materially from this forward-looking information. Important factors that could cause our actual result and financial condition to differ materially from those indicated in the forward-looking statements include, without limitation:

the scope and duration of the COVID-19 pandemic, actions taken by governmental authorities in response to the pandemic and the direct and indirect impacts of the pandemic on the Company, its customers and third parties;
the impact of adverse changes in the economy and real estate markets, including protracted periods of low-growth and sluggish loan demand;
the effect of market interest rates and uncertainties, and relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;
the effect of competition on rates of deposit and loan growth and net interest margin;
increases in non-performing assets, which may result in increases in the allowance for credit losses, loan charge-offs and elevated collection and carrying costs related to such non-performing assets;
other income growth, including the impact of regulatory changes which have reduced debit card interchange revenue;
investment securities gains and losses, including other than temporary declines in the value of securities which may result in charges to earnings;
the effects of changes in the applicable federal income tax rate;
the level of other expenses, including salaries and employee benefit expenses;
the impact of increased regulatory scrutiny of the banking industry;
the impact of governmental monetary and fiscal policies, as well as legislative and regulatory changes;
the results of regulatory examination and supervision processes;
the failure of assumptions underlying the establishment of reserves for loan and lease losses, and estimates of collateral values and various financial assets and liabilities;
the increasing time and expense associated with regulatory compliance and risk management;
the ability to implement business strategies, including business acquisition activities and organic branch, product, and service expansion strategies;
capital and liquidity strategies, including the impact of the capital and liquidity requirements modified by the Basel III standards;
the effects of changes in accounting policies, standards, and interpretations on the presentation in the Company’s consolidated balance sheets and consolidated statements of income;
the Company’s failure to identify and address cyber-security risks;
the Company’s ability to keep pace with technological changes;
the Company’s ability to attract and retain talented personnel;
the Company’s reliance on its subsidiary for substantially all of its revenues and its ability to pay dividends;
acts of war or terrorism;
disruptions due to flooding, severe weather, or other natural disasters; and
failure of third-party service providers to perform their contractual obligations.

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For a more complete discussion of certain risks, uncertainties and other factors affecting the Company, refer to the Company’s Risk Factors, contained in Item 1A of the Company’s Annual Report on Form 10-K for the year ended December 31, 2019, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto), and Item 1A of Part II of this Quarterly Report on Form 10-Q and of the Quarterly Report on Form 10-Q as March 31, 2020.

COVID-19 and the CARES Act:

On March 13, President Trump declared a National Emergency due to the spread of COVID-19 in the United States. Subsequently, businesses deemed non-essential were closed and all economic activity was dramatically slowed.

On March 27, 2020, the CARES Act was signed into law, providing relief from certain requirements under U.S. GAAP. The CARES Act permits the suspension of ASC 310-40 for loan modifications that are made by financial institutions in response to the COVID-19 pandemic if (1) the borrower was not more than 30 days past due as of December 31, 2019, and (2) the loan modification is made between March 1, 2020 and the earlier of December 31, 2020 or 60 days after the end of the coronavirus emergency declaration. A loan modification accounted for in accordance with the CARES Act is not treated as a TDR for accounting or disclosure purposes.

On April 7, 2020, the banking agencies issued a statement, “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working With Customers Affected by the Coronavirus (Revised)” (“Interagency Statement”), to encourage banks to work prudently with borrowers and to describe the agencies’ interpretation of how accounting rules under ASC 310-40 apply to certain COVID-19-related modifications.

The interagency statement interprets, but does not suspend, ASC 310-40. It indicates that a lender can conclude that a borrower is not experiencing financial difficulty if either (1) short-term (i.e. six months) modifications are made in response to COVID-19, such as payment deferrals, fee waivers, extensions of repayment terms, or other delays in payment that are insignificant related to loans in which the borrower is less than 30 days past due on its contractual payments at the time a modification program is implemented, or (2) the modification or deferral program is mandated by the federal government or a state government. Accordingly, any loan modification made in response to the COVID-19 pandemic that meets either of these practical expedients would not be considered a TDR because the borrower is not experiencing financial difficulty.

In response to the COVID-19 pandemic, the Company established a COVID-19 Modification Program on March 20, 2020 to offer payment relief to certain borrowers. Through this program, the Company has approved interest and/or principal payment deferrals on loans for individuals and businesses affected by the economic impacts of the COVID-19 pandemic.

As part of the CARES Act and in recognition of the challenging circumstances faced by small businesses, Congress created the Paycheck Protection Program (“PPP”), which the Company is a participant. PPP covered loans are fully guaranteed as to principal and accrued interest by the SBA, and therefore, require a zero percent risk weight for risk-based capital requirements. The SBA reimburses PPP lenders for any amount of a PPP covered loan that is forgiven. PPP lenders are not held liable for any representations made by PPP borrowers in connection with a borrower's request for PPP covered loan forgiveness.

To provide liquidity to small business lenders and the broader credit markets, and to help stabilize the financial system, on April 7, 2020, the Federal Reserve Banks extended credit under the Paycheck Protection Program Liquidity Facility (“PPPLF”). Under the PPPLF, each Federal Reserve Bank can extend non-recourse loans to institutions eligible to make PPP covered loans. Under the PPPLF, only PPP covered loans guaranteed by the SBA under the Paycheck Protection Program with respect to both principal and interest and that are originated by an eligible institution may be pledged as collateral to the Federal Reserve Banks. The Company was approved and has subsequently received $31,298,000 in PPPLF advances as of June 30, 2020.

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Critical Accounting Policies:

Disclosure of the Company’s significant accounting policies is included in the Company’s critical accounting policies in its Annual Report on Form 10-K for the year ended December 31, 2019. 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.

General:

The following discussion relates to the consolidated financial condition of the Company as of June 30, 2020, compared to December 31, 2019, and the consolidated results of operations for the three and six months ended June 30, 2020, compared to the same periods in 2019. This discussion should be read in conjunction with the interim consolidated financial statements and related notes included herein.

Overview:

Juniata Valley Financial Corp. is a Pennsylvania corporation organized in 1983 to be the holding company of The Juniata Valley Bank. The Bank is a state-chartered bank headquartered in Mifflintown, Pennsylvania. Juniata Valley Financial Corp. and its subsidiary bank derive substantially all of their income from banking and bank-related services, including interest earned on residential real estate, commercial mortgage, commercial and consumer loans, interest earned on investment securities and fee income from deposit services and other financial services provided to its customers.

Financial Condition:

Total assets as of June 30, 2020, were $768,658,000, an increase of $98,000,000, or 14.6%, compared to December 31, 2019. Comparing asset balances at June 30, 2020 and December 31, 2019, debt securities available for sale increased by $75,192,000, mainly driven by a $62,898,000 increase in deposits due to government stimulus programs and decreased consumer spending. Over the same period, loans increased by $20,006,000, predominantly due to PPP loan funding. Short-term debt increased by $10,978,000 at June 30, 2020 compared to year-end 2019, while long-term debt declined by $10,000,000 over the same period. Additionally, advances from the Federal Reserve Bank increased $31,298,000 as of June 30, 2020 compared to December 31, 2019 due to Juniata’s participation in the PPPLF. Stockholders’ equity increased by $3,195,000 at June 30, 2020 compared to December 31, 2019 primarily due to an increase in unrealized gains on debt securities.

The table below shows changes in deposit volumes by type of deposit between December 31, 2019 and June 30, 2020.

(Dollars in thousands)

June 30, 

December 31, 

Change

 

    

2020

    

2019

    

$

    

%

 

Deposits:

Demand, non-interest bearing

 

$

160,682

 

$

134,703

 

$

25,979

 

19.3

%

Interest bearing demand and money market

171,328

150,157

21,171

 

14.1

Savings

110,752

96,980

13,772

 

14.2

Time deposits, $250,000 and more

9,067

6,923

2,144

 

31.0

Other time deposits

143,006

143,174

(168)

 

(0.1)

Total deposits

 

$

594,835

 

$

531,937

 

$

62,898

 

11.8

%

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Total loans increased $20,006,000, or 5.0%, between December 31, 2019 and June 30, 2020. The Company is participating in the PPP established through the CARES Act, and as of June 30, 2020, has funded 462 PPP loans through the SBA, for a total of $30,751,000, net of remaining deferred fees of $687,000. While PPP loan origination activity was significant in the second quarter, paydowns exceeded non-PPP loan production. As shown in the table below, most of the decline was in real estate - commercial and mortgage loans, as well as personal loans. These declines were partially offset by increases in commercial, financial and agricultural and real estate - construction loans.

(Dollars in thousands)

June 30, 

December 31, 

Change

 

    

2020

    

2019

    

$

    

%

 

Loans:

Commercial, financial and agricultural

 

$

76,364

 

$

51,785

 

$

24,579

 

47.5

%

Real estate - commercial

123,581

126,613

(3,032)

 

(2.4)

Real estate - construction

54,000

46,459

7,541

 

16.2

Real estate - mortgage

143,136

150,538

(7,402)

 

(4.9)

Obligations of states and political subdivisions

16,390

16,377

13

 

0.1

Personal

7,125

8,818

(1,693)

 

(19.2)

Total loans

 

$

420,596

 

$

400,590

 

$

20,006

 

5.0

%

A summary of the activity in the allowance for loan losses for each of the six month periods ended June 30, 2020 and 2019 is presented below.

(Dollars in thousands)

Six months ended June 30, 

 

    

2020

    

2019

 

Balance of allowance - January 1

 

$

2,961

 

$

3,034

Loans charged off

(28)

(101)

Recoveries of loans previously charged off

73

526

Net recoveries

45

425

Provision for loan losses

552

(444)

Balance of allowance - end of period

 

$

3,558

 

$

3,015

Ratio of net recoveries during period to average loans outstanding

(0.01)

%  

(0.10)

%

The $597,000 increase in the allowance at June 30, 2020 compared to December 31, 2019 was the result of the additional probability of losses inherent in the loan portfolio, particularly in segments most affected by the economic conditions, such as hospitality and restaurants. Additional consideration was also included for estimated elevated losses within the COVID-19 deferral loan pool.

As of June 30, 2020, 33 loans (exclusive of loans acquired with existing credit deterioration) with aggregate outstanding balances of $4,620,000 were individually evaluated for impairment. A collateral analysis was performed on each of these loans to establish a portion of the reserve needed to carry the impaired loans at fair value.

As of June 30, 2020, there were $20,481,000 in special mention loans compared to $10,362,000 at December 31, 2019. The majority of this increase was caused by the downgrading of two participated relationships totaling $10,495,000 at June 30, 2020, from pass to special mention during the second quarter. As of June 30, 2020, there were $7,772,000 in substandard loans compared to $11,209,000 at December 31, 2019, and $2,615,000 in doubtful loans at June 30, 2020 compared to $144,000 at December 31, 2019 due to the downgrading of a $2,512,000 relationship from substandard to doubtful in 2020.

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Management believes the reserves carried are adequate to cover probable incurred losses related to these relationships as of June 30, 2020. However, there are uncertainties about the lasting effects of the COVID-19 impact on the economy. Such effects could have a material impact on future results of operations if businesses are not able to remain solvent and unemployment remains at elevated levels. We believe we have sufficient liquidity, capital and loss allowance reserves to withstand losses that may occur but we continue to closely monitor the financial strength of borrowers whose ability to comply with repayment terms may become permanently impaired.

The following is a summary of the Bank’s non-performing loans on June 30, 2020 compared to December 31, 2019.

June 30, 2020

December 31, 2019

Non-performing loans

Non-accrual loans

$

3,944

$

1,819

Accruing loans past due 90 days or more, exclusive of loans acquired with credit deterioration

 

133

 

383

Total

$

4,077

$

2,202

Loans outstanding

$

420,596

$

400,590

Ratio of non-performing loans to loans outstanding

0.97

%  

0.55

%

Total non-performing loans at June 30, 2020 increased $1,875,000 over total non-performing loans at December 31, 2019 due to the addition of one loan relationship totaling $2,556,000 at June 30, 2020.

The Company has approved interest and/or principal payment deferrals on loans for individuals and businesses affected by the economic impacts of the COVID-19 pandemic. As of June 30, 2020, Juniata approved interest and/or principal payment deferrals on 242 loans totaling $90,210,000 for individuals and businesses affected by the economic impacts of COVID-19. None of the borrowers approved for these designated deferrals were delinquent as of the date of this quarterly report. The modification terms of these loans are short-term; thus, the loan modifications are not considered to be troubled-debt restructures.

As of August 7, 2020, 206 of these payment deferral loans, totaling $56,646,000, have completed the agreed-upon deferment period and have returned to normal debt service. A group of 28 payment deferral loans, totaling $21,718,000, have been granted a second deferment period and one loan with a balance of $1,803,000 has entered into a third deferment period. The loans that remain in payment deferment consist primarily of commercial real estate loans for the hospitality and fitness/recreation industries.

Stockholders’ equity increased from December 31, 2019 to June 30, 2020 by $3,195,000, or 4.3%, mainly due to an increase in net unrealized gains resulting from the change in market value of debt securities available for sale.

Subsequent to June 30, 2020, the following event took place:

On July 21, 2020, the Board of Directors declared a cash dividend of $0.22 per share to shareholders of record on August 17, 2020, payable on September 1, 2020.

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Comparison of the Three Months Ended June 30, 2020 and 2019

Operations Overview:

Net income for the second quarter of 2020 was $1,605,000, a decrease of $240,000 when compared to the second quarter of 2019. Basic and diluted earnings per share were $0.32 and $0.31, respectively, in the second quarter of 2020 compared to basic and diluted earnings per share of $0.36 in the second quarter of 2019.

Annualized return on average equity for the three months ended June 30, 2020 was 8.40%, compared to the return on average equity of 10.63% for the same period in 2019. For the three months ended June 30, annualized return on average assets was 0.88% in 2020, compared to 1.16% in 2019.

Presented below are selected key ratios for the two periods:

Three Months Ended

June 30, 

    

2020

    

2019

    

Return on average assets (annualized)

 

0.88

%  

1.16

%

Return on average equity (annualized)

 

8.40

%  

10.63

%

Average equity to average assets

10.44

%  

10.92

%

Non-interest income, excluding gain/loss on sales and calls of securities and change in value of equity securities, as a percentage of average assets (annualized)

 

0.54

%  

0.76

%

Non-interest expense as a percentage of average assets (annualized)

 

2.63

%  

3.33

%

The discussion that follows further explains changes in the components of net income when comparing the second quarter of 2020 with the second quarter of 2019.

Net Interest Income:

Net interest income was $5,118,000 during the three months ended June 30, 2020 compared to $5,552,000 during the three months ended June 30, 2019. Total interest income decreased by $624,000 during the second quarter of 2020 compared to the same period in 2019, partially offset by a decline of $190,000 in total interest expense.

Overall, average earning assets increased 15.4%, while average interest bearing liabilities increased 11.1%. Net interest margin, on a fully tax equivalent basis, decreased from 3.87% during the three months ended June 30, 2019 to 3.08% during the three months ended June 30, 2020.

Average loan balances increased by $4,595,000, while interest on loans declined by $830,000 during for the second quarter of 2020 compared to the same period in 2019. The decline in the yield on loans decreased interest income by $919,000, while the increase in the average volume of loans outstanding increased interest income by $89,000.

The average balance of, and interest earned on, investment securities increased $85,521,000 and $325,000, respectively, in the second quarter of 2020 compared to the second quarter of 2019. The increase in average balance on investment securities during the period increased interest income by $542,000, while the decline in yield on investment securities decreased interest income by $217,000.

Average earning assets increased $89,801,000, to $673,291,000, mainly due to a 55.5% increase in average investment securities. The yield on earning assets declined to 3.62% during the three months ended June 30, 2020 from 4.60% during the same period in 2019. The average balance of interest bearing liabilities increased over the period by $48,228,000 compared to the same 2019 period. In addition, the cost to fund interest bearing assets with interest bearing liabilities

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decreased 27 basis points, to 0.80%, during the second quarter of 2020 compared to the same period in 2019. The yields on earning assets and cost of funds were affected by changes in the Prime rate and the federal funds target range between the second quarter of 2019 and the second quarter of 2020.

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The table below shows the net interest margin on a fully tax-equivalent basis for the three months ended June 30, 2020 and 2019.

Average Balance Sheets and Net Interest Income Analysis

Three Months Ended

Three Months Ended

(Dollars in thousands)

June 30, 2020

June 30, 2019

Average

Yield/

Average

Yield/

Increase (Decrease) Due To (6)

    

Balance(1)

    

Interest

    

Rate

    

Balance(1)

    

Interest

    

Rate

    

Volume

    

Rate

    

Total

ASSETS

  

  

  

  

  

  

  

  

  

Interest earning assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Taxable loans (5)

$

385,635

$

4,556

 

4.73

%  

$

376,297

$

5,305

 

5.64

%  

$

132

$

(881)

 

$

(749)

Tax-exempt loans

 

28,665

 

225

 

3.14

 

33,408

 

306

 

3.66

 

(43)

 

(38)

 

 

(81)

Total loans

 

414,300

 

4,781

 

4.62

 

409,705

 

5,611

 

5.48

 

89

 

(919)

 

 

(830)

Taxable investment securities

 

233,051

 

1,257

 

2.16

 

148,240

 

940

 

2.54

 

538

 

(221)

 

 

317

Tax-exempt investment securities

 

6,599

 

40

 

2.42

 

5,889

 

32

 

2.17

 

4

 

4

 

 

8

Total investment securities

 

239,650

 

1,297

 

2.16

 

154,129

 

972

 

2.52

 

542

 

(217)

 

 

325

Interest bearing deposits

 

12,528

 

9

 

0.29

 

13,980

 

96

 

2.75

 

(10)

 

(77)

 

 

(87)

Federal funds sold

 

6,813

 

1

 

0.03

 

5,676

 

33

 

2.33

 

6

 

(38)

 

 

(32)

Total interest earning assets

 

673,291

 

6,088

 

3.62

 

583,490

 

6,712

 

4.60

 

627

 

(1,251)

 

 

(624)

Other assets (7)

 

58,737

 

  

 

  

 

52,255

 

  

 

  

 

  

 

  

 

 

  

Total assets

$

732,028

 

  

 

  

$

635,745

 

  

 

  

 

  

 

  

 

 

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

  

Interest bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

 

  

 

 

  

Interest bearing demand deposits (2)

$

165,610

 

79

 

0.19

$

156,804

 

361

 

0.92

$

20

$

(302)

 

$

(282)

Savings deposits

 

107,140

 

15

 

0.06

 

99,650

 

25

 

0.10

 

2

 

(12)

 

 

(10)

Time deposits

 

152,553

 

636

 

1.67

 

149,202

 

587

 

1.57

 

13

 

36

 

 

49

Short-term and long-term borrowings and other interest bearing liabilities

 

58,170

 

240

 

1.65

 

29,589

 

187

 

2.53

 

181

 

(128)

 

 

53

Total interest bearing liabilities

 

483,473

 

970

 

0.80

 

435,245

 

1,160

 

1.07

 

216

 

(406)

 

 

(190)

Non-interest bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

  

Demand deposits

 

158,672

 

  

 

  

 

125,279

 

  

 

  

 

 

  

 

 

  

Other

 

13,426

 

  

 

  

 

5,819

 

  

 

  

 

 

  

 

 

  

Stockholders’ equity

 

76,457

 

  

 

  

 

69,402

 

  

 

  

 

 

  

 

 

  

Total liabilities and stockholders’ equity

$

732,028

 

  

 

  

$

635,745

 

  

 

  

 

  

 

 

  

Net interest income and net interest rate spread

 

  

$

5,118

 

2.81

%  

 

  

$

5,552

 

3.54

%  

$

411

$

(845)

 

$

(434)

Net interest margin on interest earning assets (3)

 

  

 

  

 

3.04

%  

 

  

 

  

 

3.81

%  

 

  

 

 

 

Net interest income and net interest margin - Tax equivalent basis (4)

 

  

$

5,188

 

3.08

%  

 

  

$

5,642

 

3.87

%  

 

  

Notes:

1)Average balances were calculated using a daily average.
2)Includes interest-bearing demand and money market accounts.
3)Net margin on interest earning assets is net interest income divided by average interest earning assets.
4)Interest on obligations of states and municipalities is not subject to federal income tax. To make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 21%.
5)Non-accruing loans are included in the above table until they are charged off.
6)The change in interest due to rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
7)Includes gross unrealized gains (losses) on securities available for sale.

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Provision for Loan Losses:

In the second quarter of 2020, a $196,000 provision for loan losses was recorded, due primarily to the additional probability of losses inherent in the loan portfolio, particularly in segments most affected by the economic conditions, such as hospitality and restaurants. Additional consideration was also included for estimated elevated losses within the COVID-19 deferral loan pool. In the second quarter of 2019, a provision credit of $459,000 was recorded due to continued improvement in non-performing and classified loans, including the payoff of a loan in April 2019 that was previously classified as doubtful, resulting in a recovery of $307,000 to the allowance for loan losses. Management regularly reviews the adequacy of the allowance for loan losses and makes assessments as to specific loan impairment, charge-off expectations, general economic conditions in the Bank’s market area, specific loan quality and other factors. See the earlier discussion in the Financial Condition section explaining the information used to determine the provision.

Non-interest Income:

Non-interest income in the second quarter of 2020 was $1,557,000 compared to $1,214,000 in the second quarter of 2019, an increase of $343,000, or 28.3%.

Most significantly impacting non-interest income during the comparative three month periods was a $551,000 increase on the gains on the sales and calls of securities in 2020 over the comparable 2019 period due to the execution of a balance sheet strategy that produced securities gains of $549,000, which offset a $524,000 prepayment penalty on the repayment of long-term debt. Partially offsetting this increase was a $153,000 decrease in customer service fees, predominantly in overdraft fees, in the second quarter of 2020 compared to the second quarter of 2019, as consumer spending declined.

As a percentage of average assets, annualized non-interest income was 0.85% in the second quarter of 2020 compared to 0.76% in the second quarter of 2019. Excluding the gain/loss on sales and calls of securities and change in value of equity securities, the percentage of average assets to annualized non-interest income was 0.54% in the second quarter of 2020 compared to 0.76% in the second quarter of 2019.

Non-interest Expense:

Non-interest expense was $4,817,000 for the three months ended June 30, 2020 compared to $5,294,000 for the same period in 2019, a decrease of $477,000.

Non-interest expense decreased in the second quarter of 2020 compared to the same period in 2019, primarily driven by a decline of $728,000 in employee compensation and benefits due to furloughed staff necessitated by Pennsylvania’s mandated COVID-19 shutdown, lower medical claims expense, and the elimination of pension-related expenses in 2020 compared to the second quarter of 2019 when a $278,000 pre-tax pension settlement charge to earnings was recorded. Also contributing to the decline in non-interest expense were lower occupancy and professional fees. Partially offsetting these declines was a $524,000 prepayment penalty on the extinguishment of long-term debt recorded during the second quarter of 2020.

As a percentage of average assets, annualized non-interest expense was 2.63% in the second quarter of 2020 compared to 3.33% in the second quarter of 2019. Excluding the long-term debt prepayment penalty recorded during the three months ended June 30, 2020 and the pension settlement charge recorded during the three months ended June 30, 2019, annualized non-interest expense was 2.35% in the second quarter of 2020 versus 3.16% in the second quarter of 2019.

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Provision for income taxes:

An income tax provision of $57,000 was recorded in the second quarter of 2020 compared to a tax provision of $86,000 recorded in the second quarter of 2019, primarily due to lower taxable income in the 2020 period.

The Company qualifies for a federal tax credit for a low-income housing project investment, and the tax provisions for each period reflect the application of the tax credit. For the second quarters of 2020 and 2019, the tax credits were $226,000 and $227,000, respectively, offsetting $283,000 and $313,000 in tax expense in the 2020 and 2019 periods, respectively. For the second quarter of 2020, the tax credit lowered the effective tax rate from 17.0% to 3.4% compared to the same period in 2019, when the tax credit lowered the effective tax rate from 16.2% to 4.5%.

Comparison of the Six Months Ended June 30, 2020 and 2019

Operations Overview:

Net income for the first six months of 2020 was $2,643,000, a decrease of $615,000, or 18.9%, when compared to the first six months of 2019, while basic and diluted earnings per share were $0.52 during the first six months of 2020 compared to basic and diluted earnings per share of $0.64 during the comparable 2019 period. Annualized return on average equity for the six months ended June 30, 2020 was 6.98%, compared to 9.52% for the same period in 2019. For the six months ended June 30, annualized return on average assets was 0.76% in 2020, compared to 1.03% in 2019.

Presented below are selected key ratios for the two periods:

Six Months Ended

June 30, 

    

2020

    

2019

    

Return on average assets (annualized)

 

0.76

%  

1.03

%

Return on average equity (annualized)

 

6.98

%  

9.52

%

Average equity to average assets

10.84

%  

10.85

%

Non-interest income, excluding gain/loss on sales and calls of securities and change in value of equity securities, as a percentage of average assets (annualized)

 

0.61

%  

0.75

%

Non-interest expense as a percentage of average assets (annualized)

 

2.74

%  

3.21

%

The discussion that follows further explains changes in the components of net income when comparing the first six months of 2020 to the first six months of 2019.

Net Interest Income:

Net interest income decreased by $592,000, or 5.5%, during the six months ended June 30, 2020 when compared to the six months ended June 30, 2019. The decrease in net interest income was mainly attributable to a decline of $1,207,000 in loan interest and fee income, which was partially offset by a $641,000 increase in interest income on taxable securities and a decrease of $276,000 in interest expense on deposits over the same period.

Overall, average earning assets increased 10.7%, while average interest bearing liabilities increased 7.7% during the six months ended June 30, 2020 compared to the same period in 2019. Over the same period, net interest margin, on a fully tax equivalent basis, decreased from 3.76% during the six months ended June 30, 2019 to 3.20% during the six months ended June 30, 2020.

Average loan balances and interest on loans decreased by $13,063,000 and $1,207,000, respectively, for the first six months of 2020 compared to the same period in 2019. While PPP loan origination activity was significant in the second

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quarter, it was offset by paydowns and light demand for non-PPP loans. The decline in the average volume of loans outstanding and the 43 basis point decrease in the weighted average yield on loans decreased interest income by approximately $302,000 and $905,000, respectively.

Interest earned on investment securities increased $611,000 in the first six months of 2020 compared to the first six months of 2019, as did the average balance of investment securities, which increased by $71,352,000 during the period. The increase in the average balance increased interest income by $907,000, while the decrease in the overall pre-tax yield of 26 basis points on the investment securities portfolio resulted in a decrease of interest income of $296,000.

Average earning assets increased $61,995,000 to $641,627,000, primarily due to the 47.3% increase in average investment securities. The yield on earning assets decreased to 3.81% during the six months ended June 30, 2020 from 4.46% in the same period in 2019. The average balance of interest bearing liabilities increased over the period by $33,500,000 to $465,812,000, compared to the same 2019 period. In addition, the cost to fund interest bearing assets with interest bearing liabilities decreased 13 basis points, to 0.90%, during the first six months of 2020 compared to the same period in 2019. The yields on earning assets and cost of funds were affected by the 225 basis point decline in the prime rate and the federal funds target range between the first half of 2019 and 2020.

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The table below shows the net interest margin on a fully tax-equivalent basis for the six months ended June 30, 2020 and 2019.

Average Balance Sheets and Net Interest Income Analysis

Six Months Ended

Six Months Ended

2020 compared to 2019

(Dollars in thousands)

June 30, 2020

June 30, 2019

Increase (Decrease) Due To (6)

Average

Yield/

Average

Yield/

    

Balance(1)

    

Interest

    

Rate

    

Balance(1)

    

Interest

    

Rate

    

Volume

    

Rate

    

Total

ASSETS

  

  

  

  

  

  

  

  

  

Interest earning assets:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

Taxable loans (5)

$

373,742

$

9,207

 

4.93

%  

$

381,336

$

10,255

 

5.38

%  

$

(204)

$

(844)

 

$

(1,048)

Tax-exempt loans

 

28,664

 

452

 

3.17

 

34,133

 

611

 

3.58

 

(98)

 

(61)

 

 

(159)

Total loans

 

402,406

 

9,659

 

4.80

 

415,469

 

10,866

 

5.23

 

(302)

 

(905)

 

 

(1,207)

Taxable investment securities

 

216,687

 

2,430

 

2.24

 

141,894

 

1,789

 

2.52

 

943

 

(302)

 

 

641

Tax-exempt investment securities

 

5,418

 

63

 

2.33

 

8,859

 

93

 

2.10

 

(36)

 

6

 

 

(30)

Total investment securities

 

222,105

 

2,493

 

2.24

 

150,753

 

1,882

 

2.50

 

907

 

(296)

 

 

611

Interest bearing deposits

 

10,973

 

52

 

0.94

 

9,695

 

139

 

2.87

 

18

 

(105)

 

 

(87)

Federal funds sold

 

6,143

 

13

 

0.44

 

3,715

 

43

 

2.31

 

28

 

(58)

 

 

(30)

Total interest earning assets

 

641,627

 

12,217

 

3.81

 

579,632

 

12,930

 

4.46

 

651

 

(1,364)

 

 

(713)

Other assets (7)

 

56,588

 

  

 

  

 

50,799

 

  

 

  

 

 

  

 

 

  

Total assets

$

698,215

 

  

 

  

$

630,431

 

  

 

  

 

  

 

  

 

 

  

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

  

Interest bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

  

Interest bearing demand deposits (2)

$

156,463

 

243

 

0.31

$

150,727

660

 

0.88

$

25

$

(442)

 

$

(417)

Savings deposits

 

103,028

 

40

 

0.08

 

99,530

49

 

0.10

 

2

 

(11)

 

 

(9)

Time deposits

 

151,766

 

1,277

 

1.68

 

149,218

1,127

 

1.51

 

19

 

131

 

 

150

Short-term and long-term borrowings and other interest bearing liabilities

 

54,555

 

538

 

1.97

 

32,837

383

 

2.33

 

253

 

(98)

 

 

155

Total interest bearing liabilities

 

465,812

 

2,098

 

0.90

 

432,312

 

2,219

 

1.03

 

299

 

(420)

 

 

(121)

Non-interest bearing liabilities:

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

  

 

 

  

Demand deposits

 

147,500

 

  

 

  

 

124,252

 

  

 

  

 

 

  

 

 

  

Other

 

9,202

 

  

 

  

 

5,454

 

  

 

  

 

 

  

 

 

  

Stockholders’ equity

 

75,701

 

  

 

  

 

68,413

 

  

 

  

 

 

  

 

 

  

Total liabilities and stockholders’ equity

$

698,215

 

  

 

  

$

630,431

 

  

 

  

 

  

 

 

  

Net interest income and net interest rate spread

 

  

$

10,119

 

2.91

%  

 

  

$

10,711

 

3.43

%  

$

352

$

(944)

 

$

(592)

Net interest margin on interest earning assets (3)

 

  

 

  

 

3.15

%  

 

  

 

  

 

3.70

%  

 

  

 

 

 

Net interest income and net interest margin - Tax equivalent basis (4)

 

  

$

10,256

 

3.20

%  

 

  

$

10,898

 

3.76

%  

 

  

Notes:

1)Average balances were calculated using a daily average.
2)Includes interest-bearing demand and money market accounts.
3)Net margin on interest earning assets is net interest income divided by average interest earning assets.
4)Interest on obligations of states and municipalities is not subject to federal income tax. To make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 21%.
5)Non-accruing loans are included in the above table until they are charged off.
6)The change in interest due to rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
7)Includes gross unrealized gains (losses) on securities available for sale.

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Provision for Loan Losses:

In the first six months of 2020, the provision for loan losses was $552,000, compared to a credit of $444,000 in the first six months of 2019 which included the effect of net recoveries of $425,000 during the 2019 period. Included in this amount was a recovery of $307,000 from the payoff of a loan previously classified as doubtful in April 2019. The increased provision in 2020 was caused by the change in the economic environment resulting from the COVID-19 pandemic, and as a result, Juniata increased the qualitative risk factors for all loan segments in the loan portfolio in its allowance for loan loss analysis as of June 30, 2020. Management regularly reviews the adequacy of the allowance for loan losses and makes assessments as to specific loan impairment, charge-off expectations, general economic conditions in the Bank’s market area, specific loan quality and other factors. See the earlier discussion in the Financial Condition section explaining the information used to determine the provision.

Non-interest Income:

Non-interest income in the first six months of 2020 was $2,551,000 compared to $2,308,000 in the first six months of 2019, an increase of $243,000, or 10.5%.

Most significantly impacting the comparative six month periods was a $562,000 gain on the sales and calls of securities recorded during the first six months of 2020 compared to a $56,000 loss on the sales and calls of securities during the first six months of 2019. The recorded net gain in 2020 was due to the execution of a balance sheet strategy that produced securities gains of $549,000 which offset a $524,000 prepayment penalty on the extinguishment of long-term debt. Partially offsetting the increase in non-interest income was the $154,000 decline in the fair value of equity securities during the first six months of 2020 compared to a $15,000 increase during the comparable 2019 period. Further, customer service fees, primarily NSF fees, were $160,000 less in the 2020 period compared to the same period in the prior year, reflecting decreased consumer spending during the COVID-19 pandemic.

As a percentage of average assets, annualized non-interest income was 0.73% in both the first six months of 2020 and 2019. As a percentage of average assets, annualized non-interest income, exclusive of net gains/losses on the sales of securities, was 0.61% in the first six months of 2020 compared to 0.75% in the first six months of 2019.

Non-interest Expense:

Non-interest expense was $9,577,000 for the six months ended June 30, 2020 compared to $10,129,000 for the same period in 2019, a decrease of $552,000.

Non-interest expense declined in the first six months of 2020 compared to the same period in 2019 primarily due to Juniata’s $706,000 decline in employee compensation and benefits due to furloughed staff resulting from the COVID-19 pandemic, lower medical claims expense, as well as the elimination of pension-related expenses in 2020 compared to the $278,000 pre-tax pension settlement charge recorded during the 2019 period. Also contributing to the decline in non-interest expense were lower occupancy and professional fees, which declined by $85,000 and $198,000, respectively, during the first six months of 2020 compared to the first six months of 2019. Partially offsetting these declines was a $524,000 prepayment penalty on the long-term debt extinguishment recorded during the first six months of 2020, while no similar expense recorded during the comparable 2019 period.

As a percentage of average assets, annualized non-interest expense was 2.74% in the first half months of 2020 compared to 3.21% in the first half of 2019. Excluding the long-term debt prepayment penalty recorded during the six months ended June 30, 2020 and the pension settlement charge recorded during the six months ended June 30, 2019, annualized non-interest expense was 2.59% through the first half of 2020 versus 3.13% through the first half of 2019.

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Provision for income taxes:

An income tax benefit of $102,000 was recorded in the first six months of 2020 compared to a provision of $76,000 recorded in the first six months of 2019, primarily due to lower taxable income in the 2020 period. Additionally, the Company was able to take advantage of a provision in the CARES Act, allowing carryback of net operating losses (“NOLs”) from a prior period. In 2018, the Company acquired Liverpool Community Bank. Liverpool filed a 2018 income tax return for the period prior to the acquisition. An NOL was recognized on that short-period tax return. Under the CARES Act, the NOL is now able to be carried back to years in which the statutory tax rate was 34%, as opposed to the current 21%. The reversal of a portion of the deferred tax asset carried for this NOL, at an amount in excess of its carrying amount, was recorded as a $57,000 credit to income tax expense.

The Company qualifies for a federal tax credit for a low-income housing project investment, and the tax provisions for each period reflected the application of the tax credit. For the first six months of 2020 and 2019, the tax credits were $451,000 and $453,000, respectively, offsetting $349,000 in tax expense recorded during the six months ended June 30, 2020 and $529,000 in tax expense recorded in the comparable 2019 period. The tax credit lowered the effective tax rate from 13.9% to (0.40)% during the first six months of 2020 compared to the same period in 2019, when the tax credit lowered the effective tax rate from 15.9% to 2.3%.

Liquidity:

The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs of the Company and to take advantage of income producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of the Company to maintain a high level of liquidity in all economic environments. Principal sources of asset liquidity are provided by loans and securities maturing in one year or less, and other short-term investments, such as federal funds sold and cash and due from banks. Liability liquidity, which is more difficult to measure, can be met by attracting deposits and maintaining the core deposit base. The Company is a member of the Federal Home Loan Bank of Pittsburgh for the purpose of providing short-term liquidity to supplement other liquidity sources. During the six months ended June 30, 2020, overnight borrowings from the Federal Home Loan Bank averaged $737,000. As of June 30, 2020, the Company had $20,000,000 in short-term borrowings and $35,000,000 in long-term debt with the Federal Home Loan Bank, with a remaining unused borrowing capacity with the Federal Home Loan Bank of $113,182,000.

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

In view of the sources previously mentioned, management believes that the Company’s liquidity is capable of providing the funds needed to meet operational cash needs, including those arising from funding of PPP loans. The Company was approved to borrow from the Federal Reserve Bank’s PPPLF and, as of June 30, 2020, had borrowed $31,298,000 from the facility.

Off-Balance Sheet Arrangements:

The Company’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk, credit risk, and interest rate risk. These commitments consist mainly of loans approved but not yet funded, unused lines of credit and outstanding letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had $2,632,000 and $2,624,000 of financial and

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performance letters of credit commitments outstanding as of June 30, 2020 and December 31, 2019, respectively. Commercial letters of credit as of June 30, 2020 and December 31, 2019 totaled $7,975,000 and $7,725,000, respectively. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of June 30, 2020 for payments under letters of credit issued was not material. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk.

Additionally, the Company has sold qualifying residential mortgage loans to the FHLB as part of its Mortgage Partnership Finance Program (“Program”). Under the terms of the Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan sold under the Program is “credit enhanced” such that the individual loan’s rating is raised to “BBB”, as determined by the FHLB. The Program can be terminated by either the FHLB or the Company, without cause. The FHLB has no obligation to commit to purchase any mortgage through, or from, the Company.

Interest Rate Sensitivity:

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

Capital Adequacy:

Bank regulatory authorities in the United States issue risk-based capital standards. These capital standards relate a banking company’s capital to the risk profile of its assets and provide the basis by which all banking companies and banks are evaluated in terms of capital adequacy.

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

The CARES Act allows banking organizations to apply a zero percent risk weight to PPP covered loans for risk-based capital requirement purposes. In addition, because of the non-recourse nature of the Federal Reserve's extension of credit to the banking organization, the banking organization is not exposed to credit or market risk from the pledged PPP covered loans. Therefore, pledged PPP covered loans are excluded from a banking organization's regulatory capital calculation.

In September 2019, the FDIC finalized a rule to simplify the capital calculation for qualifying community banking organizations (i.e., the community bank leverage ratio (“CBLR framework”)), as required by the Economic Growth, Regulatory Relief and Consumer Protection Act. The CBLR framework is designed to reduce burden by removing the requirements for calculating and reporting risk-based capital ratios for qualifying community banking organizations that opt into the framework. The Bank qualified and opted into the CBLR framework, effective January 1, 2020.

Section 4012 of the CARES Act requires regulatory agencies to temporarily lower the CBLR eligibility requirement from 9.00% to 8.00% through the end of 2020. The associated regulatory interim final rule modified the CBLR framework allowing banks with a leverage ratio of 8.00% or greater to elect to use the CBLR framework. The interim final rule gradually increases the requirement back to 9.00% on January 1, 2022, requiring a ratio of 8.5% for the year beginning

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January 1, 2021. The interim final rule also provides a two-quarter grace period for qualifying banks whose leverage ratio falls no more than 1.00% below the required ratio for that reporting quarter. The Bank’s Tier One leverage ratio was 8.87% on June 30, 2020; therefore, the Bank met the well-capitalized ratio classification of the current CBLR framework and was not required to report or calculate risk-based capital.  

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of June 30, 2020, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined by the Securities Exchange Act of 1934 (“Exchange Act”), Rule 13a-15(e). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were 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 by Rule 13a-14(a) and Rule 15d-14(a) of the Exchange Act. This portion of the Company’s quarterly report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Changes in Internal Control Over Financial Reporting

There were no significant changes in the Company’s internal control over financial reporting during the fiscal quarter ended June 30, 2020, that has materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting.

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PART II - OTHER INFORMATION

Item 1.         LEGAL PROCEEDINGS

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

Item 1A.      RISK FACTORS

The outbreak of the COVID-19 pandemic has and may continue to adversely affect the Company’s business, results of operations and financial conditions for an indefinite period.

Beginning in the first quarter of 2020, the COVID-19 pandemic has caused disruption in economic and social activity, both globally and in the United States. The spread of COVID-19, and the related government actions to mandate or encourage temporary closures of businesses, quarantines, social distancing and "stay at home" orders, have caused severe disruptions in the U.S. economy, which has and will likely continue to, in turn, disrupt the business, activities, and operations of the Company’s customers, as well as the Company’s own business and operations.

The national public health crisis arising from the COVID-19 pandemic (and public expectations about it), combined with certain pre-existing factors, including, but not limited to, international trade disputes, inflation risks, and oil price volatility, could further destabilize the financial markets and the economies of the geographic markets in which the Company operates. The resulting impacts of the pandemic on consumers, including the sudden, significant increase in the unemployment rate, is causing changes in consumer and business spending, borrowing needs and saving habits, which affect the demand for loans and other products and services the Company offers, as well as the creditworthiness of current and prospective borrowers. The significant decrease in commercial activity and disruptions in supply chains associated with the pandemic, both nationally and in the Company’s markets, may continue to cause customers, vendors, and counterparties to be unable to meet existing payment or other obligations to the Company.  

The Company’s business is dependent upon the willingness and ability of its customers to conduct banking and other financial transactions. The Company expects the pandemic to limit, at least for a period of time, customer demand for many banking products and services. Many companies and residents in the Company’s market areas were subject to mandatory "non-essential business" shutdowns and stay at home orders, which reduced banking activity across the Company’s market areas. In response to these mandates, the Company temporarily limited most locations to drive-up and ATM services, with lobby access available by appointment only, reduced hours of operation at some locations, temporarily closed some locations and encouraged the Company’s customers to use electronic banking platforms. The Company recently reopened most of its lobbies with limited hours. The Company has and may continue to offer payment deferrals, forbearances, fee waivers, and other forms of assistance to commercial, small business and consumer customers. In addition, the use of quarantines and social distancing methods to curtail the spread of COVID-19 - whether mandated by governmental authorities or recommended as a public health practice - may adversely affect the Company’s operations as key personnel, employees and customers avoid physical interaction. The continued spread of COVID-19 (or an outbreak of a similar highly contagious disease) could also negatively impact the business and operations of third-party service providers who perform critical services for the Company’s business. It is not yet fully known what impact these operational changes may have on the Company’s financial performance.

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There continue to be broad concerns related to the potential effects of the COVID-19 pandemic. Even though the government mandated stay at home orders have expired in the Company’s footprint, the aftereffects of the pandemic may continue to have an adverse effect on, among other things, (i) the Company’s ability to attract customer deposits, (ii) the ability of the Company’s borrowers to satisfy their obligations to us, (iii) the demand for the Company’s loans or the Company’s other products and services and/or (iv) unemployment rates, financial markets, real estate markets or economic growth.

The outbreak of COVID-19 has significantly affected the financial markets and has resulted in several responses by the U.S. government, including a reduction in interest rates by the FOMC in the first quarter of 2020. These reductions in interest rates, especially if prolonged, could adversely affect the Company’s net interest income, margins and profitability.

The COVID-19 pandemic and its impact on the economy heightens the risk associated with many of the risk factors described in the Company’s previous reports filed with the Securities and Exchange Commission, including those related to economic conditions in the Company’s markets areas, interest rates, loan losses, the Company’s reliance on its executives and third party service providers and impairments of goodwill and intangible assets. For example, borrower loan defaults that adversely affect the Company’s earnings correlate with deteriorating economic conditions, which, in turn, may impact borrowers’ creditworthiness. If the Company’s borrowers are unable to meet their payment obligations, the Company will be required to increase its allowance for loan losses through provisions for credit losses. In addition, loan programs adopted by the federal government, such as the Paycheck Protection Program and the Main Street Lending Program, while intended to lessen the impact of the pandemic on businesses, may result in a decreased demand for the Company’s loan products.

The impact of the pandemic on the Company’s financial results is evolving and uncertain. The decline in economic activity occurring due to the COVID-19 pandemic and the actions by the FOMC with respect to interest rates is likely to affect the Company’s net interest income, non-interest income and credit-related losses for an uncertain period. The Company believes that it may experience a material adverse effect in the Company’s business, results of operations and financial condition as a result of the COVID-19 pandemic for an indefinite period.

There have been no other material changes to the risk factors that were disclosed in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019.

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

On March 25, 2020, Juniata’s Board of Directors approved a written trading plan (the “10b5-1 Plan”) under Rule 10b5-1 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to facilitate the repurchase of shares of the Juniata’s common stock through May 5, 2020. The Company designated up to 100,000 shares for repurchase under the 10b5-1 Plan. The 10b5-1 Plan replaced the prior repurchase program. Under a share repurchase program previously approved by the Board of Directors, Juniata was authorized to periodically repurchase shares of its common stock. As of August 10, 2020, 121,266 shares remained available to purchase. Transactions pursuant to the repurchase program in the three month period ended June 30, 2020 are shown below.

    

    

    

Total Number of

    

Shares Purchased as

Maximum Number of

Total Number

Average

Part of Publicly

Shares that May Yet Be

of Shares

Price Paid

Announced Plans or

Purchased Under the

Period

Purchased

per Share

Programs

Plans or Programs (1)

April 1-30, 2020

 

6,300

$

16.30

 

6,300

126,566

May 1-31, 2020

 

126,566

June 1-30, 2020

 

5,300

17.05

5,300

121,266

Totals

 

11,600

 

  

 

11,600

 

121,266

A 10b-5 plan expired during the second quarter of 2020. The Company has no stock repurchase plan or program that it has determined to terminate prior to expiration or under which it does not intend to make further purchases.

Certain regulatory restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. At June 30, 2020, $35,980,000 of undistributed earnings of the Bank, included in the consolidated stockholders’ equity, was available for distribution to the Company as dividends without prior regulatory approval, subject to regulatory capital requirements.

Item 3.         DEFAULTS UPON SENIOR SECURITIES

Not applicable

Item 4.         MINE SAFETY DISCLOSURES

Not applicable

Item 5.         OTHER INFORMATION

None

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Item 6.        EXHIBITS

3.1

Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 3(i) to the Company’s Current Report on Form 8-K filed with the SEC on November 12, 2015)

3.2

Amended and Restated Bylaws (incorporated by reference to Exhibit 3.4 to the Company’s Current Report on Form 8-K filed with the SEC on February 27, 2019)

31.1

Rule 13a – 14(a)/15d – 14(a) Certification of President and Chief Executive Officer

31.2

Rule 13a – 14(a)/15d – 14(a) Certification of Chief Financial Officer

32.1

Section 1350 Certification of President and Chief Executive Officer

32.2

Section 1350 Certification of Chief Financial Officer

101.INS

XBRL Instance Document – the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH

Inline XBRL Taxonomy Extension Schema

101.CAL

Inline XBRL Taxonomy Extension Calculation Linkbase

101.LAB

Inline XBRL Taxonomy Extension Label Linkbase

101.PRE

101.PRE – Inline XBRL Taxonomy Extension Presentation Linkbase

101.DEF

Inline XBRL Taxonomy Extension Definition Linkbase

104

Cover Page Interactive Data File – the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

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

Juniata Valley Financial Corp.

(Registrant)

Date:

AUGUST 10, 2020

By:

/s/ Marcie A. Barber

Marcie A. Barber, President

Chief Executive Officer

(Principal Executive Officer)

Date:

August 10, 2020

By:

/s/ JoAnn N. McMinn

JoAnn N. McMinn

Chief Financial Officer

(Principal Accounting Officer and

Principal Financial Officer)

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