UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

~~For the quarterly period endedSeptember 30, 2017~~

¨~~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_____________________________________~~


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

For the quarterly period ended September 30, 2019

OR

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


For the transition period from to
Commission File Number 000-13232
Juniata Valley Financial Corp.
(Exact name of registrant as specified in its charter)

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

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

(~~717) 436-8211~~
(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
N/A	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.

x[ X ] Yes¨ [ ] No

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files).

x[ X ] Yes¨ [ ] No

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


Large accelerated filer ¨[ ]	Accelerated filer x[ X ]
Non-accelerated filer¨ ~~(Do not check if a smaller reporting company)~~ [ ]	Smaller reporting company ¨[ X ]
	Emerging growth company ¨	[ ]

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

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

¨[ ] Yesx [ X ] No

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

~~Class~~
Class		Outstanding as of November ~~9, 2017~~8, 2019
Common Stock ($1.00 par value)		~~4,767,656~~ 5,107,637 shares

Table of Contents

TABLE OF CONTENTS


			PART I - FINANCIAL INFORMATION

Item 1.	Financial Statements

	Consolidated Statements of Financial ~~Conditionas~~Condition as of September 30, ~~2017~~2019 (Unaudited) and December 31, ~~2016~~2018	3

	Consolidated Statements of Income for the Three and ~~NineMonths~~Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018 (Unaudited)	4

	Consolidated Statements of Comprehensive Income for the Three and ~~NineMonths Ended September 30, 2017 and 2016 (Unaudited)~~	5

	~~Consolidated Statements of Stockholders’ Equityfor the~~ Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018 (Unaudited)	6 5

	Consolidated Statements of Stockholders’ Equity for the Three and Nine Months Ended September 30, 2019 and 2018 (Unaudited)	6

	Consolidated Statements of Cash Flows for the ~~NineMonths~~Nine Months Ended September 30, ~~2017~~2019 and ~~2016~~2018 (Unaudited)	7 8

	Notes to Consolidated Financial Statements (Unaudited)	8 10

Item 2.	Management’s Discussion and ~~Analysisof~~Analysis of Financial Condition and Results of Operations	37 44

Item 3.	~~Quantitative and Qualitative Disclosures about Market Risk~~ Not applicable.	47

Item 4.	Controls and Procedures	48 58

			PART II - OTHER INFORMATION

Item 1.	Legal Proceedings	49 59

Item 1A.	Risk Factors	49 59

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	49 59

Item 3.	Defaults upon Senior Securities	50 59

Item 4.	Mine Safety Disclosures	50 59

Item 5.	Other Information	50 60

Item 6.	Exhibits	50 60

	Signatures	51 61

Table of Contents

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Financial Condition


	(Unaudited)						(Unaudited)
(Dollars in thousands, except share data)	September 30,			December 31,			September 30, 2019		December 31, 2018
	2017			2016
ASSETS
Cash and due from banks	$	13,219		$	9,464		$	13,239	$	15,617
Interest bearing deposits with banks		133			95			64		110
Federal funds sold								—		729
Cash and cash equivalents		13,352			9,559			13,303		16,456

Interest bearing time deposits with banks		350			350			2,700		3,290
Securities available for sale		159,180			150,488
Restricted investment in Federal Home Loan Bank (FHLB) stock		3,616			3,610
Investment in unconsolidated subsidiary		4,820			4,703
Residential mortgage loans held for sale		117			-
Equity securities								1,115		1,118
Debt securities available for sale								200,294		141,953
Restricted investment in bank stock								3,079		2,441
Total loans		382,616			378,297			405,321		417,631
Less: Allowance for loan losses		(2,907	)		(2,723	)		(3,057)		(3,034)
Total loans, net of allowance for loan losses		379,709			375,574			402,264		414,597
Premises and equipment, net		6,695			6,857			8,487		8,744
Other real estate owned		576			638			—		744
Bank owned life insurance and annuities		14,898			14,631			16,195		15,938
Investment in low income housing partnership		5,319			3,812
Core deposit and other intangible		210			262
Investment in low income housing partnerships								4,096		4,545
Core deposit and other intangible assets								340		405
Goodwill		5,448			5,448			9,047		9,139
Mortgage servicing rights		223			205			185		200
Accrued interest receivable and other assets		5,409			4,217			6,002		5,666
Total assets	$	599,922		$	580,354		$	667,107	$	625,236

LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	109,880		$	104,006		$	135,024	$	126,057
Interest bearing		363,703			351,816			401,812		395,665
Total deposits		473,583			455,822			536,836		521,722

Securities sold under agreements to repurchase		5,207			4,496			3,981		2,911
Short-term borrowings		27,500			27,700			—		11,600
Long-term debt		25,000			25,000			45,000		15,000
Other interest bearing liabilities		1,566			1,545			1,576		1,596
Accrued interest payable and other liabilities		6,618			6,701			5,928		5,029
Total liabilities		539,474			521,264			593,321		557,858
Stockholders' Equity:
Stockholders’ Equity:
Preferred stock, no par value: Authorized - 500,000 shares, none issued		-			-			—		—
Common stock, par value $1.00 per share: Authorized 20,000,000 shares
Issued -
4,811,611 shares at September 30, 2017;
4,805,000 shares at December 31, 2016
Outstanding -
4,767,656 shares at September 30, 2017;
4,755,630 shares at December 31, 2016		4,811			4,805
Common stock, par value $1.00 per share: Authorized 20,000,000 shares Issued - 5,141,749 shares at September 30, 2019; 5,134,249 shares at December 31, 2018 Outstanding - 5,107,637 shares at September 30, 2019; 5,092,048 shares at December 31, 2018								5,142		5,134
Surplus		18,548			18,476			24,880		24,821
Retained earnings		40,759			39,945			43,593		42,525
Accumulated other comprehensive loss		(2,839	)		(3,209	)
Cost of common stock in Treasury:
43,955 shares at September 30, 2017;
49,370 shares at December 31, 2016		(831	)		(927	)
Total stockholders' equity		60,448			59,090
Total liabilities and stockholders' equity	$	599,922		$	580,354
Accumulated other comprehensive income (loss)								808		(4,299)
Cost of common stock in Treasury: 34,112 shares at September 30, 2019; 42,201 shares at December 31, 2018								(637)		(803)
Total stockholders’ equity								73,786		67,378
Total liabilities and stockholders’ equity							$	667,107	$	625,236

See Notes to Consolidated Financial Statements

Table of Contents

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Income (Unaudited)


	Three Months Ended				Nine Months Ended					Three Months Ended				Nine Months Ended
(Dollars in thousands, except share data)	September 30,				September 30,					September 30,				September 30,
	2017		2016		2017			2016		2019		2018		2019		2018
Interest income:																(adjusted)
Loans, including fees	$	4,607	$	4,356	$	13,491		$	13,155	$	5,157	$	5,230	$	16,023	$	14,822
Taxable securities		729		590		2,128			1,831		1,118		748		2,907		2,288
Tax-exempt securities		112		100		340			314		29		97		122		299
Other interest income		9		3		20			13		76		54		258		103
Total interest income		5,457		5,049		15,979			15,313		6,380		6,129		19,310		17,512
Interest expense:
Deposits		561		461		1,555			1,350		970		839		2,806		2,178
Securities sold under agreements to repurchase		8		1		17			3		9		17		30		49
Short-term borrowings		80		5		212			49		—		21		14		164
Long-term debt		95		87		274			241		286		62		612		215
Other interest bearing liabilities		8		7		23			22		11		11		33		28
Total interest expense		752		561		2,081			1,665		1,276		950		3,495		2,634
Net interest income		4,705		4,488		13,898			13,648		5,104		5,179		15,815		14,878
Provision for loan losses		149		132		389			366		(46)		32		(490)		231
Net interest income after provision for loan losses		4,556		4,356		13,509			13,282		5,150		5,147		16,305		14,647
Non-interest income:
Customer service fees		428		471		1,302			1,279		429		462		1,280		1,311
Debit card fee income		274		264		824			769		328		323		1,000		939
Earnings on bank-owned life insurance and annuities		93		107		269			284		82		99		222		266
Trust fees		97		84		324			315		104		91		294		316
Commissions from sales of non-deposit products		43		43		140			181		52		82		218		202
Income from unconsolidated subsidiary		49		61		154			163
Income/gain from unconsolidated subsidiary											—		—		—		296
Fees derived from loan activity		77		58		181			175		104		91		238		263
Mortgage banking income		83		41		170			106		16		17		52		53
Gain on sales and calls of securities		2		6		510			134
Gain on sales of loans		-		-		-			113
Gain on life insurance proceeds		-		364		-			364
Loss on sales and calls of securities											—		—		(56)		(15)
Change in value of equity securities											(19)		(4)		(4)		42
Other non-interest income		73		72		217			212		100		80		260		238
Total non-interest income		1,219		1,571		4,091			4,095		1,196		1,241		3,504		3,911
Non-interest expense:
Employee compensation expense		1,829		1,848		5,326			5,266		2,038		1,992		6,074		5,717
Employee benefits		567		564		1,802			1,699		1,492		848		3,090		1,935
Occupancy		291		278		878			847		309		306		979		918
Equipment		175		160		504			492		224		203		656		607
Data processing expense		440		493		1,318			1,358		556		498		1,545		1,402
Director compensation		60		59		183			176		51		50		156		157
Professional fees		148		130		431			405		210		140		772		494
Taxes, other than income		111		107		353			319		144		157		422		409
FDIC Insurance premiums		83		96		250			295		—		59		107		208
Loss (gain) on sales of other real estate owned		19		50		(26	)		56
Amortization of intangibles		17		26		52			86
Amortization of investment in low-income housing partnership		173		120		412			359
Gain on sales of other real estate owned											(222)		(52)		(208)		(62)
Amortization of intangible assets											21		23		65		54
Amortization of investment in low-income housing partnerships											200		200		600		600
Merger and acquisition expense		-		-		-			372		—		185		—		625
Other non-interest expense		529		399		1,457			1,226		333		423		1,227		1,279
Total non-interest expense		4,442		4,330		12,940			12,956		5,356		5,032		15,485		14,343
Income before income taxes		1,333		1,597		4,660			4,421		990		1,356		4,324		4,215
Income tax provision		127		150		701			567
Income tax benefit											(103)		(29)		(27)		(472)
Net income	$	1,206	$	1,447	$	3,959		$	3,854	$	1,093	$	1,385	$	4,351	$	4,687
Earnings per share
Basic	$	0.25	$	0.30	$	0.83		$	0.80	$	0.21	$	0.27	$	0.85	$	0.95
Diluted	$	0.25	$	0.30	$	0.83		$	0.80	$	0.21	$	0.27	$	0.85	$	0.94
Cash dividends declared per share	$	0.22	$	0.22	$	0.66		$	0.66
Weighted average basic shares outstanding		4,767,656		4,804,000		4,764,325			4,800,804
Weighted average diluted shares outstanding		4,778,950		4,805,177		4,772,935			4,801,521

See Notes to Consolidated Financial Statements

Table of Contents

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Comprehensive Income (Unaudited)


(Dollars in thousands)	Three Months Ended September 30,
	2019						2018
	Before Tax		Tax		Net of Tax		Before Tax		Tax		Net of Tax
	Amount		Effect		Amount		Amount		Effect		Amount
Net income	$	990	$	103	$	1,093	$	1,356	$	29	$	1,385
Other comprehensive income:
Available for sale securities:
Unrealized holding gains (losses) arising during the period		802		(168)		634		(645)		135		(510)
Pension net gain		(235)		49		(186)		(55)		12		(43)
Pension gain due to change in assumptions		—		—		—		1,010		(212)		798
Amortization of pension net actuarial loss (2) (3)		942		(198)		744		242		(51)		191
Other comprehensive income		1,509		(317)		1,192		552		(116)		436
Total comprehensive income	$	2,499	$	(214)	$	2,285	$	1,908	$	(87)	$	1,821

Three Months Ended September 30,
2017 2016
Before Net of Before Net of
(Dollars in thousands) Tax Tax Tax Tax Tax Tax
Amount Effect Amount Amount Effect Amount
Net income $ 1,333 $ (127 ) $ 1,206 $ 1,597 $ (150 ) $ 1,447
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains (losses) arising during the period (20 ) 7 (13 ) (267 ) 91 (176 )
Unrealized holding gains (losses) from unconsolidated subsidiary (3 ) - (3 ) (4 ) - (4 )
Less reclassification adjustment for gains included in net income (1) (3) (2 ) 1 (1 ) (6 ) 2 (4 )
Amortization of pension net actuarial cost (2) (3) 57 (20 ) 37 62 (21 ) 41
Other comprehensive income (loss) 32 (12 ) 20 (215 ) 72 (143 )
Total comprehensive income $ 1,365 $ (139 ) $ 1,226 $ 1,382 $ (78 ) $ 1,304

Nine Months Ended September 30,
2017 2016
Before Net of Before Net of
Tax Tax Tax Tax Tax Tax
Amount Effect Amount Amount Effect Amount
Net income $ 4,660 $ (701 ) $ 3,959 $ 4,421 $ (567 ) $ 3,854
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized holding gains arising during the period 882 (300 ) 582 2,083 (708 ) 1,375
Unrealized holding gains (losses) from unconsolidated subsidiary 12 - 12 (5 ) - (5 )
Less reclassification adjustment for gains included in net income (1) (3) (510 ) 174 (336 ) (134 ) 46 (88 )
Amortization of pension net actuarial cost (2) (3) 170 (58 ) 112 186 (63 ) 123
Other comprehensive income 554 (184 ) 370 2,130 (725 ) 1,405
Total comprehensive income $ 5,214 $ (885 ) $ 4,329 $ 6,551 $ (1,292 ) $ 5,259

~~See Notes to Consolidated Financial Statements~~


(Dollars in thousands)	Nine Months Ended September 30,
	2019						2018 (adjusted)
	Pre-Tax		Tax		Net-of-Tax		Pre-Tax		Tax		Net-of-Tax
	Amount		Effect		Amount		Amount		Effect		Amount
Net income	$	4,324	$	27	$	4,351	$	4,215	$	472	$	4,687
Other comprehensive income (loss):
Available for sale securities:
Unrealized holding gains (losses) arising during the period		4,317		(906)		3,411		(3,340)		701		(2,639)
Unrealized holding gain from unconsolidated subsidiary		—		—		—		5		—		5
Less reclassification adjustment for losses included in net income (1) (3)		56		(12)		44		15		(3)		12
Pension net loss (gain)		2,399		(504)		1,895		(55)		12		(43)
Pension (loss) gain due to change in assumptions		(1,478)		310		(1,168)		1,010		(212)		798
Amortization of pension net actuarial loss (2) (3)		1,276		(268)		1,008		323		(68)		255
Other comprehensive income (loss)		6,570		(1,380)		5,190		(2,042)		430		(1,612)
Total comprehensive income	$	10,894	$	(1,353)	$	9,541	$	2,173	$	902	$	3,075

(1)

Amounts are included in (loss) gain on sales and calls of securities on the ~~Consolidated Statements~~consolidated statements of ~~Income~~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~~consolidated statements of ~~Income~~income as a separate element within total non-interest expense.

(3)

Income tax amounts are included in the provision for income taxes on the ~~Consolidated Statements~~consolidated statements of ~~Income.~~

income.

See Notes to Consolidated Financial Statements

Table of Contents

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of ~~Stockholders'~~Stockholders’ Equity (Unaudited)

~~For the Nine Months Ended September 30, 2017~~


	Three Months Ended September 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, July 1, 2019	5,103,628	$	5,142	$	24,858	$	43,539	$	(301)	$	(712)	$	72,526
Net income							1,093						1,093
Other comprehensive income									1,192				1,192
Reclassification for ASU 2018-02							83		(83)				—
Cash dividends at $0.22 per share							(1,122)						(1,122)
Stock-based compensation					28								28
Treasury stock issued for stock plans	4,009				(6)						75		69
Balance, September 30, 2019	5,107,637	$	5,142	$	24,880	$	43,593	$	808	$	(637)	$	73,786


	Nine Months Ended September 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							4,351						4,351
Other comprehensive income									5,190				5,190
Reclassification for ASU 2018-02							83		(83)				—
Cash dividends at $0.66 per share							(3,366)						(3,366)
Stock-based compensation					75								75
Forfeiture of restricted stock	(800)												—
Treasury stock issued for stock plans	8,889				(8)						166		158
Common stock issued for stock plans	7,500		8		(8)								—
Balance, September 30, 2019	5,107,637	$	5,142	$	24,880	$	43,593	$	808	$	(637)	$	73,786

Number Accumulated
of Other Total
(Dollars in thousands, except share data) Shares Common Retained Comprehensive Treasury Stockholders'
Outstanding Stock Surplus Earnings Loss Stock Equity
Balance, January 1, 2017 4,755,630 $ 4,805 $ 18,476 $ 39,945 $ (3,209 ) $ (927 ) $ 59,090
Net income 3,959 3,959
Other comprehensive income 370 370
Cash dividends at $0.66 per share (3,145 ) (3,145 )
Stock-based compensation 54 54
Purchase of treasury stock (4,289 ) (86 ) (86 )
Treasury stock issued for stock plans 9,704 (10 ) 182 172
Common stock issued for stock plans 6,611 6 28 34
Balance, September 30, 2017 4,767,656 $ 4,811 $ 18,548 $ 40,759 $ (2,839 ) $ (831 ) $ 60,448

Table of Contents

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of ~~Stockholders'~~Stockholders’ Equity (Unaudited)

~~For the Nine Months Ended September 30, 2016~~


	Three Months Ended September 30, 2018
								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 July 1, 2018	5,093,536	$	5,134	$	24,779	$	42,164	$	(6,238)	$	(773)	$	65,066
Net income							1,385						1,385
Other comprehensive income									436				436
Cash dividends at $0.22 per share							(1,120)						(1,120)
Stock-based compensation					21								21
Balance, September 30, 2018	5,093,536	$	5,134	$	24,800	$	42,429	$	(5,802)	$	(773)	$	65,788


	Number										Accumulated									Nine Months Ended September 30, 2018
	of										Other						Total										Accumulated
(Dollars in thousands, except share data)	Shares			Common				Retained			Comprehensive			Treasury			Stockholders'			Number							Other				Total
	Outstanding			Stock		Surplus		Earnings			Loss			Stock			Equity			of Shares	Common				Retained		Comprehensive		Treasury		Stockholders’
Balance, January 1, 2016		4,798,086		$	4,798	$	18,352	$	39,015		$	(2,203	)	$	-		$	59,962
Net income									3,854									3,854
Other comprehensive income												1,405						1,405
																				Outstanding	Stock		Surplus		Earnings		Loss		Stock		Equity
Balance, January 1, 2018																				4,767,656	$	4,811	$	18,565	$	40,876	$	(4,034)	$	(831)	$	59,387
Net income (adjusted)																										4,687						4,687
Other comprehensive loss																												(1,612)				(1,612)
Reclassification for ASU 2016-01																										156		(156)				—
Cash dividends at $0.66 per share									(3,170	)								(3,170	)							(3,290)						(3,290)
Stock-based compensation							50											50						60								60
Purchase of treasury stock		(1,000	)												(18	)		(18	)	(1,928)										(40)		(40)
Treasury stock issued for stock plans																				5,170				(7)						98		91
Common stock issued for stock plans		6,914			7		57								-			64		7,354		8		34								42
Balance, September 30, 2016		4,804,000		$	4,805	$	18,459	$	39,699		$	(798	)	$	(18	)	$	62,147
Common stock issued for acquisition																				315,284		315		6,148								6,463
Balance, September 30, 2018																				5,093,536	$	5,134	$	24,800	$	42,429	$	(5,802)	$	(773)	$	65,788

See Notes to Consolidated Financial Statements

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Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows (Unaudited)


(Dollars in thousands)	Nine Months Ended September 30,
	2019		2018
Operating activities:			(adjusted)
Net income	$	4,351	$	4,687
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		(490)		231
Depreciation		598		604
Net amortization of securities premiums		578		412
Net amortization of loan origination fees		106		43
Deferred net loan origination costs		(340)		(348)
Amortization of core deposit intangible asset		65		54
Amortization of investment in low income housing partnership		600		600
Net amortization of purchase fair value adjustments		(158)		(58)
Net realized loss on sales and calls of available for sale securities		56		15
Change in value of equity securities		4		(42)
Net gain on sales of other real estate owned		(208)		(62)
Earnings on bank owned life insurance and annuities		(222)		(266)
Deferred income tax expense (benefit)		411		(113)
Equity loss in unconsolidated subsidiary, net of dividends of $0 and $75, respectively		—		194
Equity gain from acquisition of unconsolidated subsidiary		—		(415)
Stock-based compensation expense		75		60
Proceeds from mortgage loans sold to others		67		71
Mortgage banking income		(52)		(53)
Increase in accrued interest receivable and other assets		(1,541)		(1,364)
Increase (decrease) in accrued interest payable and other liabilities		2,589		(928)
Net cash provided by operating activities		6,489		3,322
Investing activities:
Purchases of:
Securities available for sale		(85,802)		(4,119)
FHLB stock		(638)		—
Premises and equipment		(348)		(252)
Bank owned life insurance and annuities		(35)		(35)
Proceeds from:
Sales of securities available for sale		11,107		4,285
Maturities of and principal repayments on securities available for sale		20,092		10,137
Redemption of FHLB stock		—		1,058
Sale of other real estate owned		952		296
Sale of fixed assets		7		—
Sale of other assets		—		22
Net cash received from acquisition		—		7,561
Investment in low income housing partnerships		(151)		(100)
Net decrease in interest bearing time deposits with banks		590		490
Net decrease (increase) in loans		13,212		(2,691)
Net cash (used in) provided by investing activities		(41,014)		16,652
Financing activities:
Net increase in deposits		15,110		16,071
Net decrease in short-term borrowings and securities sold under agreements to repurchase		(10,530)		(17,417)
Issuance of long-term debt		45,000		—
Repayment of long-term debt		(15,000)		(10,000)
Cash dividends		(3,366)		(3,290)
Purchase of treasury stock		—		(40)
Treasury stock issued for employee stock plans		158		91
Common stock issued for employee stock plans		—		42
Net cash provided by (used in) financing activities		31,372		(14,543)
Net (decrease) increase in cash and cash equivalents		(3,153)		5,431
Cash and cash equivalents at beginning of year		16,456		9,897
Cash and cash equivalents at end of period	$	13,303	$	15,328

(Dollars in thousands) Nine Months Ended September 30,
2017 2016
Operating activities:
Net income $ 3,959 $ 3,854
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses 389 366
Depreciation 487 447
Net amortization of securities premiums 490 556
Net amortization of loan origination fees 48 31
Deferred net loan origination costs (297 ) (94 )
Amortization of core deposit intangible 52 86
Amortization of investment in low income housing partnership 412 359
Net accretion (amortization) of purchase fair value adjustments 4 (7 )
Net realized gain on sales and calls of securities (510 ) (134 )
Net (gain) loss on sales and valuation of other real estate owned (26 ) 56
Earnings on bank owned life insurance and annuities (269 ) (284 )
Deferred income tax (credit) expense (34 ) 31
Equity in earnings of unconsolidated subsidiary, net of dividends of $49 and $42 (105 ) (121 )
Stock-based compensation expense 54 50
Gain from sale of student loans - (113 )
Mortgage loans originated for sale (3,527 ) (1,582 )
Proceeds from mortgage loans sold to others 3,563 1,822
Mortgage banking income (170 ) (106 )
Gain from life insurance proceeds - (364 )
(Increase) decrease in accrued interest receivable and other assets (1,360 ) 90
Increase (decrease) in accrued interest payable and other liabilities 146 (813 )
Net cash provided by operating activities 3,306 4,130
Investing activities:
Purchases of:
Securities available for sale (42,510 ) (36,505 )
Premises and equipment (324 ) (482 )
Bank owned life insurance and annuities (36 ) (50 )
Proceeds from:
Sales of securities available for sale 21,800 4,273
Maturities of and principal repayments on securities available for sale 12,407 36,190
(Purchase) redemption of FHLB stock (6 ) 636
Sale of student loans - 1,706
Life insurance claim - 1,016
Sale of other real estate owned 617 132
Sale of other assets 25 -
Investment in low income housing partnership (1,919 ) (314 )
Net increase in loans (4,809 ) (550 )
Net cash (used in) provided by investing activities (14,755 ) 6,052
Financing activities:
Net increase in deposits 17,756 6,199
Net increase (decrease) in short-term borrowings and securities sold under agreements to repurchase 511 (16,754 )
Issuance of long-term debt - 10,000
Repayment of long-term debt - (7,500 )
Cash dividends (3,145 ) (3,170 )
Purchase of treasury stock (86 ) (18 )
Common stock issued for employee stock plans 206 64
Net cash provided by (used in) financing activities 15,242 (11,179 )
Net increase (decrease) in cash and cash equivalents 3,793 (997 )
Cash and cash equivalents at beginning of year 9,559 10,458
Cash and cash equivalents at end of period $ 13,352 $ 9,461
Supplemental information:
Interest paid $ 2,051 $ 1,673
Income taxes paid 385 200
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate owned $ 529 $ 289
Transfer of loans to repossessed vehicles 5 20

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(Dollars in thousands)	Nine Months Ended September 30,
	2019		2018
Supplemental information:
Interest paid	$	3,329	$	2,619
Income tax paid		143		14
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate owned	$	—	$	67
Transfer of loans to repossessed vehicles		7		12
ROU assets obtained in exhange 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~~

1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES

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

On April 30, 2018, the Company, which previously owned 39.16% of Liverpool Community Bank (“Liverpool” or “LBC”), completed the acquisition of the remainder of Liverpool’s outstanding common stock. Liverpool was merged with and into the Bank. Refer to Note 3 for more information.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. ~~generally accepted accounting principles (“U.S. GAAP”)~~GAAP for complete consolidated financial statements. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts in the financial statements and accompanying notes. Actual results may differ from those estimates, and such differences could be material to the financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the three and nine ~~months period~~month periods ended September 30, ~~2017~~2019 are not necessarily indicative of the results for the year ending December 31, ~~2017.~~2019. For further information, refer to the consolidated financial statements and notes thereto included in Juniata Valley Financial Corp.’s Annual Report on Form ~~10-K~~10‑K (“Annual Report”) for the year ended December 31, ~~2016.~~

2018.

The Company has evaluated events and transactions occurring subsequent to the consolidated statement of financial condition date of September 30, ~~2017~~2019 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

Correction of Immaterial Errors

~~2. Recent~~The comparability of the results for the nine months ended September 30, 2019 and 2018 was impacted by an adjustment related to the Liverpool acquisition. The originally reported net income for the nine months ended September 30, 2018 was adjusted when an income tax credit of $406,000 was recorded in the first quarter of 2019, effective as of April 30, 2018. The adjustment removed the deferred tax liability related to Juniata’s previous 39.16% ownership in Liverpool upon its acquisition of Liverpool’s remaining shares on April 30, 2018, increasing the previously reported income tax benefit for the nine months ended September 30, 2018. Therefore, periods presented for the nine months ended September 30, 2018 in the Consolidated Statements of Income, Comprehensive Income, Stockholders’ Equity, Cash Flows, as well as earnings per share have been updated to reflect this adjustment.

The following table summarizes the adjustments related to the removal of the deferred tax liability.


(Dollars in thousands)	(Originally Reported)				(As Adjusted)
	Nine Months Ended				Nine Months Ended
	September 30, 2018		Adjustment		September 30, 2018
Income Tax Benefit	$	(66)	$	(406)	$	(472)
Net Income		4,281		406		4,687
Basic Earnings Per Share		0.86		0.09		0.95
Diluted Earnings Per Share		0.86		0.08		0.94

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Additionally, a reclassification of $83,000 between accumulated other comprehensive income (“AOCI”) and retained earnings on the Consolidated Statements of Financial Condition was processed in the third quarter of 2019. The reclassification was related to a portion of AOCI associated with the defined benefit plan that should have been reclassified to retained earnings upon the adoption of Accounting ~~Standards Updates (ASU)~~Standard Update (“ASU”) 2018-02 - Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income in December 2017.

~~Accounting Standards Update 2017-12, Targeted Improvements to Accounting~~

2. RECENT ACCOUNTING STANDARDS UPDATES

ASU 2017‑04, Simplifying the Test for ~~Hedging Activities~~Goodwill Impairment

Issued: January 2017

~~Issued:~~~~August 2017~~

Summary:ASU 2017-12 improves Topic 815 by simplifying and expanding the eligible hedging strategies for financial and nonfinancial risks by more closely aligning hedge accounting with a company’s risk management activities, and also simplifies its application through targeted improvements in key practice areas. This includes expanding the list of items eligible to be hedged and amending the methods used to measure the effectiveness of hedging relationships. In addition, the ASU prescribes how hedging results should be presented and requires incremental disclosures. These changes are intended to allow preparers more flexibility and to enhance the transparency of how hedging results are presented and disclosed. Further, the new standard provides partial relief on the timing of certain aspects of hedge documentation and2017‑04 eliminates the requirement ~~to recognize hedge ineffectiveness separately in earnings~~of Step 2 in the current ~~period.~~

~~Effective Date:~~~~The amendments are effective for public business~~guidance to calculate the implied fair value of goodwill to measure a goodwill impairment charge. Instead, entities ~~for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early application is permitted~~will record an impairment charge based on the excess of a reporting unit’s carrying amount over its fair value in ~~any interim period after issuance~~Step 1 of the ~~amendments for existing hedging relationships on the date of adoption. This Update will have no impact on the Company’s consolidated financial position and results of operations.~~

~~Accounting Standards Update 2017-09, Scope of Modification Accounting~~

~~Issued:May 2017~~current guidance.

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

The fair value of the modified award is the same as the fair value of the original award immediately before the modification. The standard indicates that if the modification does not affect any of the inputs to the valuation technique used to value the award, the entity is not required to estimate the value immediately before and after the modification.

~~The vesting conditions of the modified award are the same as the vesting conditions of the original award immediately before the modification.~~

~~The classification of the modified award as an equity instrument or a liability instrument is the same as the classification of the original award immediately before the modification.~~

Effective Date:The amendments are effective for all entities for fiscal years beginning after December 15, 2017, including interim periods within those years. This Update will have no impact on the Company’s consolidated financial position and results of operations.

~~Accounting Standards Update 2017-08, Premium Amortization on Purchased Callable Debt Securities~~

~~Issued:March 2017~~

~~Summary:~~ASU 2017-08 shortens the amortization period for premiums on purchased callable debt securities to the earliest call date, rather than amortizing over the full contractual term. The ASU does not change the accounting for securities held at a discount.

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

~~Accounting Standards Update 2017-07, Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost~~

~~Issued:March 2017~~

~~Summary:~~ASU ~~2017-07 requires that an employer disaggregate the service cost component from the other components of net benefit cost.~~

~~Effective Date:~~The amendments are effective for public business entities for fiscal years beginning after December 15, 2017. This Update will have no impact on the Company’s consolidated financial position and results of operations.

~~Accounting Standards Update 2017-04, Simplifying the Test for Goodwill Impairment~~

~~Issued:January 2017~~

~~Summary:~~~~ASU 2017-04 eliminates Step 2 of the goodwill impairment test.~~

~~Effective Date:~~The amendments are effective for public business entities for fiscal years beginning after December 15, 2019. This Update will have no impact on the Company’s consolidated financial position and results of operations.

~~Accounting Standards Update 2016-15, Classification of Certain Cash Receipts and Cash Payments~~

~~Issued:August 2016~~

~~Summary:~~~~ASU 2016-15 clarifies how certain cash receipts and cash payments are presented and classified in the statement of cash flows. The amendments are intended to reduce diversity in practice.~~

~~Effective Date:~~The amendments are effective for public business entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This Update will have no impact on the Company’s consolidated financial position and results of operations.

~~Accounting Standards Update 2016-13~~,2016‑13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments

Issued:June 2016

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

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

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

Effective Date: ~~The new standard is~~On October 16, 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, ~~2019, including interim periods within those fiscal years.~~2022. Since the Company is a smaller reporting company, the approved delay by the FASB is applicable. While the Company’s senior management is currently in the process of evaluating the impact of the amended guidance on its consolidated financial statements and disclosures, it ~~currently~~ expects the ~~ALLL~~allowance for loan and lease losses (“ALLL”) to increase upon adoption given that the allowance will be required to cover the full remaining expected life of the portfolio, rather than the incurred loss ~~model~~ under current U.S. GAAP. The extent of this increase is still being evaluated and will depend on economic conditions and the composition of the Company’s loan portfolio at the time of adoption. In preparation, the Company has ~~partnered~~taken steps to prepare for the implementation when it becomes effective by forming an internal taskforce, gathering pertinent data, participating in

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training courses, and partnering with a software provider ~~specializing~~that specializes in ALLL analysis, ~~and is~~as well as assessing the sufficiency of data currently available through its core database.

~~Accounting Standards Update 2016-02~~~~, Leases~~3. MERGER

~~Issued:~~~~February 2016~~

~~Summary:~~On April 30, 2018, the Company completed the acquisition of Liverpool Community Bank, a Pennsylvania state-chartered bank with one branch location in Liverpool, Perry County. Liverpool was merged with and into The new standard establishes a right-of-use (“ROU”) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

~~Effective Date:~~ The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginningJuniata Valley Bank. As of the ~~earliest comparative period presented~~merger date, Liverpool had assets of $45,360,000, loans of $32,091,000, and equity of $9,246,000.

Prior to the acquisition, Juniata owned 1,214, or 39.16%, of the 3,100 outstanding common shares of Liverpool. The merger was accounted for using the acquisition method of accounting, in ~~the financial statements,~~accordance with ~~certain practical expedients available. The Company has determined that~~ the provisions of ~~ASU 2016-02 will result~~ASC 805, Business Combinations. Juniata obtained control over Liverpool in ~~an increase~~a step acquisition by acquiring the previously unowned interest in ~~assets~~Liverpool. As such, Juniata was required to remeasure its previously held equity interest in Liverpool at its acquisition date fair value and recognize the ~~present value~~resulting gain in earnings. The purchase price for the step acquisition was calculated as the aggregate of the ~~lease obligations with a corresponding increase in liabilities; however,~~consideration transferred for the ~~Company does not expect this new standard to have a material impact on the Company’s financial position, results of operations or cash flows.~~

~~Accounting Standards Update 2016-01,~~~~Measurement of Financial Instruments~~

~~Issued:~~~~January 2016~~

~~Summary:~~ The amendments in this Update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change innewly acquired interest (Step Two 60.84% interest) and the fair value of Juniata’s previously held equity interest (Step One 39.16% interest) in Liverpool.

On April 30, 2018, Juniata’s Step One adjusted basis in Liverpool was $5,037,000, which included a ~~liability resulting~~$415,000 equity gain from ~~a change~~the acquisition, in addition to Juniata’s basis in Liverpool of $4,622,000 prior to the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition, the amendments in this Update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities.

~~Effective Date:~~ For public entities, the amendments in the Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company currently holds a small portfolio of equity investments for which the fair value fluctuates with market activity. Had ASU 2016-01 become effective on September 30, 2017, the cumulative effect adjustment to income before tax would have been $287,000 (see Note 6). The cumulative adjustment that will be recognized upon adoption of the amendments in this update in the first quarter of 2018 will be dependent upon the sizerecording of the equity ~~portfolio and the market values at that time.~~gain.

~~Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606)~~

~~Issued:May 2014~~

~~Summary:~~ The amendments in this Update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provisionLiverpool shareholders (other than Juniata, whose Liverpool common stock owned of ~~goods and ser~~vices. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps:record or beneficially was cancelled) received either: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

~~In August 2015, the FASB issuedAccounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date~~.ASU 2015-14 defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017. All other entities have an additional year. However, early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year.

Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the third alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application (e.g. January 1, 2018) and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. That is, prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP. Early adoption is prohibited under U.S. GAAP.

Because the amended guidance does not apply to revenue associated with financial instruments, including loans and securities that are accounted for under other U.S. GAAP, the Company’s preliminary analysis suggests that the adoption of this amended guidance is not expected to have a material impact on its consolidated financial statements, although the Company will be subject to expanded disclosure requirements upon adoption for which it is still evaluating, along with the preferred adoption method. The Company is assessing the affect the guidance will have on the recognition processes for wealth and asset management revenue, banking revenue and card and processing revenue. However, there are certain areas of the amended guidance, such as credit card interchange fees programs that are subject to interpretation. The Company is still in the process of analyzing these contracts and has not made a final conclusion regarding the applicability and related impact, if any, on the consolidated financial statements. Accordingly, the results of the Company’s materiality analysis, as well as its selected adoption method, may change as these conclusions are reached.

~~3. Merger~~

On November 30, 2015, Juniata consummated the merger with FNBPA Bancorp, Inc. (“FNBPA”), a Pennsylvania corporation. FNBPA merged with and into Juniata, with Juniata continuing as the surviving entity. Simultaneously with the consummation of the foregoing merger, First National Bank of Port Allegany (“FNB”), a national banking association and a wholly-owned subsidiary of FNBPA, merged with and into the Bank.

~~As part of this transaction, FNBPA shareholders received either 2.7813~~202.6286 shares of ~~Juniata’s~~ common stock of Juniata or ~~$50.34~~(ii) $4,050.00 in cash in exchange for each share of ~~FNBPA~~Liverpool common stock subject to the limitation that cash would be paid for no more than 20% and no less than 15% of Liverpool’s outstanding common stock. As a result, Juniata issued ~~607,815~~315,284 shares of common stock with an acquisition date fair value of approximately ~~$10,637,000,~~$6,463,000, based on Juniata’s closing stock price of ~~$17.50~~$20.50 on ~~November~~April 30, ~~2015,~~2018, and cash of ~~$2,208,000,~~$1,362,000, including cash in lieu of fractional ~~shares.~~shares, for a total Step Two purchase price consideration of $7,825,000. The ~~fair value~~total purchase price of ~~total~~the merger, including both the Step One adjusted basis and Step Two purchase price consideration, ~~paid~~ was ~~$12,845,000.~~

$12,862,000.

The assets and liabilities of ~~FNB and FNBPA~~Liverpool were recorded on the consolidated ~~balances~~balance sheet at their estimated fair value as of ~~November~~April 30, ~~2015,~~2018, and ~~their~~its results of operations have been included in the consolidated income statement since such date.

~~Included in the~~The purchase price ~~was~~included goodwill and a core deposit intangible of ~~$3,335,000~~$3,691,000 and ~~$343,000,~~$289,000, respectively. The core deposit intangible ~~will be~~is being amortized over a ten-year period using a sum of the year’s digits basis. The goodwill ~~will~~is not bebeing amortized but ~~will be measured~~is tested annually for impairment, or more frequently if circumstances require.

~~The allocation of the purchase price is as follows:~~

(Dollars in thousands)

Purchase price assigned to FNBPA common shares exchanged for 607,815 Juniata common shares $ 10,637
Purchase price assigned to FNBPA common shares exchanged for cash 2,208
Total purchase price 12,845
FNBPA net assets acquired:
Tangible common equity 9,854
Adjustments to reflect assets acquired and liabilities assumed at fair value:
Total fair value adjustments (523 )
Associated deferred income taxes 179
Fair value adjustment to net assets acquired, net of tax (344 )
Total FNBPA net assets acquired 9,510
Goodwill resulting from the merger $ 3,335

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

(Dollars in thousands)

Total purchase price $ 12,845

Net assets acquired
Cash and cash equivalents 3,452
Interest-bearing time deposits 350
Investment securities 35,458
Loans 47,055
Premises and equipment 419
Accrued interest receivable 550
Core deposit and other intangibles 343
Other real estate owned 114
Other assets 763
Deposits (77,665 )
Accrued interest payable (13 )
Other liabilities (1,316 )
9,510
Goodwill $ 3,335

~~As of November 30, 2015, the merger date, goodwill was recorded at $3,335,000. Accounting Standard Codification (“ASC”)~~ ASC 805 allows for adjustments to the estimated fair value of assets and liabilities, and the resulting goodwill for a period of up to one year after the merger date for new information that becomes available ~~that reflects~~reflecting circumstances at the merger date. During ~~2016, such information became available and~~the nine months ended September 30, 2019, Juniata recorded a ($92,000) adjustment to goodwill relating to the tax treatment of Liverpool’s acquired net operating loss resulting in goodwill related to the Liverpool acquisition of $3,599,000 as illustrated in the table below.

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Allocation of the purchase price was ~~adjusted by $67,000, to $3,402,000, to reflect adjustments to~~as follows:


(Dollars in thousands)	Recorded at				Recorded at
	April 30, 2018		Change		September 30, 2019
Step One Purchase Price Consideration
April 30, 2018 JUVF basis in LCB (before gain)	$	4,622	$	—	$	4,622
Increase in Step One basis from equity gain in acquisition		415		—		415
Total Step One adjusted basis		5,037		—		5,037

Step Two Purchase Price Consideration
Purchase price assigned to LCB common shares exchanged for 315,284 JUVF common shares	$	6,463	$	—	$	6,463
Purchase price assigned to LCB common shares exchanged for cash including cash in lieu of fractional shares		1,362		—		1,362
Total Step Two purchase price consideration		7,825		—		7,825
Total purchase price		12,862		—		12,862

LCB net assets acquired:
Tangible common equity		9,246		—		9,246
Adjustments to reflect assets acquired and liabilities assumed at fair value:
Total fair value adjustments		(95)		—		(95)
Associated deferred income taxes		20		92		112
Fair value adjustment to net assets acquired, net of tax		(75)		92		17
Total LCB net assets acquired		9,171		92		9,263
Goodwill resulting from the merger	$	3,691	$	(92)	$	3,599

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


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

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The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of ~~$47,797,000.~~$32,091,000. The table below illustrates the fair value adjustments made to the amortized cost basis of these loans receivable in order to present a fair value of the loans acquired.

(Dollars in thousands)

Gross amortized cost basis at November 30, 2015 $ 47,797
Market rate adjustment (110 )
Credit fair value adjustment on pools of homogeneous loans (73 )
Credit fair value adjustment on impaired loans (559 )
Fair value of purchased loans at November 30, 2015 $ 47,055


(Dollars in thousands)

Gross amortized cost basis at April 30, 2018	$	32,091
Market rate adjustment		272
Credit fair value adjustment on pools of homogeneous loans		(496)
Credit fair value adjustment on purchased credit impaired loans		(622)
Reversal of existing deferred fees and premiums		86
Fair value of purchased loans at April 30, 2018	$	31,331

The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. The credit adjustment made on pools of homogeneous loans represents the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on impaired loans is derived in accordance with ASC ~~310-30~~310‑30 and represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective loan.

~~The information about~~Summarized below is the acquired ~~FNBPA~~Liverpool purchased credit impaired loan portfolio as of ~~November~~April 30, ~~2015 is as follows:~~2018.


(Dollars in thousands)

Contractually required principal and interest at acquisition	$	2,488		$	2,022
Contractual cash flows not expected to be collected (nonaccretable discount)		(1,427	)		(1,273)
Expected cash flows at acquisition		1,061			749
Interest component of expected cash flows (accretable discount)		(157	)		(177)
Fair value of acquired loans	$	904		$	572

The following table presents unaudited pro forma information ~~in thousands,~~ as if the merger between Juniata and ~~FNBPA~~Liverpool had been completed on January 1, ~~2014.~~2017. The pro forma information does not necessarily reflect the results of operations that would have occurred had Juniata merged with ~~FNBPA~~Liverpool at the beginning of ~~2014.~~2017. Due to Juniata’s former 39.16% ownership in Liverpool, the income previously recorded in the three and nine months ended September 30, 2018 that was attributable to the partial ownership of Liverpool has been excluded, in addition to merger-related costs incurred in 2018 and the resulting tax impacts. Supplemental pro forma earnings for ~~2015~~the three months ended September 30, 2018 were adjusted to exclude ~~$1,637,000 of merger related costs (exclusive of~~$185,000 in merger-related expenses and the ~~corresponding~~resulting $39,000 tax ~~impact) incurred in 2015;~~benefit. Supplemental pro forma earnings for the ~~results for 2014~~nine months ended September 30, 2018 were adjusted to ~~include these charges.~~exclude $296,000 of income/gain from unconsolidated subsidiary, $625,000 in merger-related expenses, and the resulting tax benefit of $69,000, as well as the aforementioned $406,000 tax credit. A 21% tax rate was assumed. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors.

(Dollars in thousands, except per share data) Years Ended December 31,
2015 2014
Consolidated net interest income after loan loss provision $ 17,731 $ 17,089
Consolidated non-interest income 4,841 4,745
Consolidated non-interest expense 17,124 18,358
Consolidated net income 4,862 3,353
Consolidated net income per common share $ 1.01 $ 0.70


(Dollars in thousands; except share data)	Three Months Ended September 30, 2018		Nine Months Ended September 30, 2018
Net interest income after loan loss provision	$	5,147	$	15,596
Noninterest income		1,241		3,701
Noninterest expense		4,847		13,959
Net income available to common shareholders		1,531		5,179
Net income per common share		0.30		1.01

~~4. Accumulated other Comprehensive loss~~

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4. ACCUMULATED OTHER COMPREHENSIVE LOSS

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

(Dollars in thousands)
September 30, 2017 December 31, 2016
Unrealized losses on available for sale securities $ (609 ) $ (866 )
Unrecognized expense for defined benefit pension (2,230 ) (2,343 )
Accumulated other comprehensive loss $ (2,839 ) $ (3,209 )


(Dollars in thousands)
	September 30, 2019		December 31, 2018
Unrealized gains (losses) on available for sale securities	$	808	$	(2,647)
Defined benefit pension expense		—		(1,652)
Accumulated other comprehensive income (loss)	$	808	$	(4,299)

~~5. Earnings Per Share~~

5. EARNINGS PER SHARE

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

The comparability of the results for the nine months ended September 30, 2019 and 2018 was impacted by an adjustment related to the Liverpool acquisition on April 30, 2018 as previously mentioned in Note 1. The originally reported basic and diluted EPS for the nine months ended September 30, 2018 of $0.86 was increased to $0.95 and $0.94, respectively, reflecting the adjustment to earnings per share due to the recording of the $406,000 in additional net income as described in Note 1. The adjusted nine months ended September EPS calculation is illustrated below.

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


(Dollars in thousands, except earnings per share data)	Three Months Ended September 30,
	2019		2018
Net income	$	1,093	$	1,385
Weighted-average common shares outstanding		5,104		5,094
Basic earnings per share	$	0.21	$	0.27
Weighted-average common shares outstanding	$	5,104		5,094
Common stock equivalents due to effect of stock options		20		26
Total weighted-average common shares and equivalents		5,124		5,120
Diluted earnings per share	$	0.21	$	0.27

(Dollars in thousands, except earnings per share data)	Three Months Ended September 30,

(Dollars in thousands, except earnings per share)					Nine months ended September 30,
					2019		2018
	2017		2016				(adjusted)
Net income	$	1,206	$	1,447	$	4,351	$	4,687
Weighted-average common shares outstanding		4,768		4,804		5,101		4,952
Basic earnings per share	$	0.25	$	0.30	$	0.85	$	0.95

Weighted-average common shares outstanding		4,768		4,804		5,101		4,952
Common stock equivalents due to effect of stock options		11		1		20		21
Total weighted-average common shares and equivalents		4,779		4,805	$	5,121	$	4,973
Diluted earnings per share	$	0.25	$	0.30	$	0.85	$	0.94

Nine Months Ended September 30,
2017 2016
Net income $ 3,959 $ 3,854
Weighted-average common shares outstanding 4,764 4,801
Basic earnings per share $ 0.83 $ 0.80

Weighted-average common shares outstanding 4,764 4,801
Common stock equivalents due to effect of stock options 9 1
Total weighted-average common shares and equivalents 4,773 4,802
Diluted earnings per share $ 0.83 $ 0.80

~~6. Securities~~

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6. SECURITIES

Equity Securities

Equity securities owned by the Company consist of common stock of various financial services providers. Upon the adoption of ASU 2016‑01 on January 1, 2018, all of the Company’s equity securities were within the scope of ASC Topic 321, Investments – Equity Securities. Topic 321 requires all equity securities within its scope to be measured at fair value with changes in fair value recognized in net income. As of September 30, 2019, the Company had $1,115,000 in equity securities recorded at fair value and $1,118,000 in equity securities recorded at fair value at December 31, 2018. The Company recorded a net loss of $19,000 and $4,000 during the three and nine months ended September 30, 2019, respectively, and a net loss of $4,000 and a net gain of $42,000 during the three and nine months ended September 30, 2018, respectively, on the consolidated statements of income as a result of the change in fair value of the Company’s equity securities.

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

The Company’s available for sale investment portfolio includes primarily bonds issued by U.S. Government sponsored ~~agencies~~enterprises (approximately ~~22%~~12% of the investment portfolio), mortgage-backed securities issued by Government-sponsored ~~agencies~~entities and backed by residential mortgages (approximately ~~61%~~85%) and municipal bonds (approximately ~~16%~~3%) as of September 30, ~~2017.~~2019. Most of the municipal bonds are general obligation bonds with maturities or pre-refunding dates within 5 years. ~~The remaining 1%~~

Table of ~~the portfolio includes a group of equity investments in other financial institutions.~~Contents

The amortized cost and fair value of securities available for sale as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.

	September 30, 2017
(Dollars in thousands)					Gross		Gross			September 30, 2019
	Amortized		Fair		Unrealized		Unrealized							Gross		Gross
	Cost		Value		Gains		Losses			Amortized		Fair		Unrealized		Unrealized
Securities Available for Sale
Debt Securities Available for Sale										Cost		Value		Gains		Losses
Type and Maturity
Obligations of U.S. Government agencies and corporations
Obligations of U.S. Government sponsored enterprises
After one year but within five years	$	15,998	$	15,878	$	-	$	(120	)	$	21,998	$	21,963	$	1	$	(36)
After five years but within ten years		19,002		18,585		-		(417	)		2,000		2,001		1		—
		35,000		34,463		-		(537	)		23,998		23,964		2		(36)
Obligations of state and political subdivisions
Within one year		2,418		2,418		1		(1	)		1,325		1,331		6		—
After one year but within five years		12,659		12,781		123		(1	)		3,397		3,404		7		—
After five years but within ten years		10,783		10,746		46		(83	)		723		726		3		—
		25,860		25,945		170		(85	)		5,445		5,461		16		—

Mortgage-backed securities		98,251		97,485		96		(862	)		169,835		170,869		1,359		(325)
Equity securities		1,000		1,287		288		(1	)
Total	$	160,111	$	159,180	$	554	$	(1,485	)	$	199,278	$	200,294	$	1,377	$	(361)


(Dollars in thousands)	December 31, 2018
					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	$	20,998	$	20,355	$	—	$	(643)
After five years but within ten years		2,999		2,911		—		(88)
		23,997		23,266		—		(731)
Obligations of state and political subdivisions
Within one year		826		826		—		—
After one year but within five years		14,751		14,686		13		(78)
After five years but within ten years		2,779		2,669		—		(110)
		18,356		18,181		13		(188)
Mortgage-backed securities		102,957		100,506		172		(2,623)
Total	$	145,310	$	141,953	$	185	$	(3,542)

December 31, 2016
(Dollars in thousands) Gross Gross
Amortized Fair Unrealized Unrealized
Cost Value Gains Losses
Securities Available for Sale
Type and Maturity
Obligations of U.S. Government agencies and corporations
After one year but within five years $ 19,495 $ 19,331 $ 13 $ (177 )
After five years but within ten years 17,000 16,468 - (532 )
36,495 35,799 13 (709 )
Obligations of state and political subdivisions
Within one year 2,819 2,820 2 (1 )
After one year but within five years 13,268 13,240 39 (67 )
After five years but within ten years 10,923 10,599 16 (340 )
27,010 26,659 57 (408 )

Mortgage-backed securities 86,670 85,702 114 (1,082 )
Equity securities 1,615 2,328 713 -
Total $ 151,790 $ 150,488 $ 897 $ (2,199 )

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 ~~$49,050,000~~$60,844,000 and ~~$36,638,000~~$50,157,000 at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively.

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

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There were no securities sold or called during the three months ended September 30, 2019 or 2018. The following ~~chart~~table summarizes proceeds received from sales or calls of available for sale investment securities transactions and the resulting realized gains and ~~losses.~~losses during the nine months ended September 30, 2019 and 2018.

	Three Months Ended					Nine Months Ended
(Dollars in thousands)	September 30,					September 30,						Nine Months Ended
	2017			2016		2017			2016			September 30,
Gross proceeds from sales of securities	$	10,166		$	-	$	21,800		$	4,273
												2019		2018
Gross proceeds from sales and calls of securities												$	11,107	$	4,285
Securities available for sale:
Gross realized gains from sold and called securities	$	30		$	6	$	539		$	49		$	5	$	—
Gross realized losses from sold and called securities		(28	)		-		(32	)		(15	)		(61)		(15)
Gross gains from business combinations		-			-		3			100
Net losses from sales and calls of securities												$	(56)	$	(15)

~~ASC~~ Topic 320~~Investments – Debt and Equity Securities~~, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. ~~For debt securities, management~~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. For equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses in assessing potential other-than-temporary impairment. More specifically, factors considered to determine other-than-temporary impairment status for individual equity holdings include the length of time the stock has remained in an unrealized loss position, the percentage of unrealized loss compared to the carrying cost of the stock, dividend reduction or suspension, market analyst reviews and expectations, and other pertinent factors that would affect expectations for recovery or further decline.

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

The following ~~table shows~~tables show gross unrealized losses and fair ~~value,~~values of debt securities available for sale, aggregated by category and length of time ~~that~~the individual securities have been in a continuous unrealized loss position, at September 30, ~~2017~~2019 and December 31, ~~2016:~~2018:


	Unrealized Losses at September 30, 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	5	$	8,463	$	(36)	—	$	—	$	—	5	$	8,463	$	(36)
Obligations of state and political subdivisions	1		31		—	—		—		—	1		31		—
Mortgage-backed securities	4		10,594		(35)	17		25,266		(290)	21		35,860		(325)
Total temporarily impaired securities	10	$	19,088	$	(71)	17	$	25,266	$	(290)	27	$	44,354	$	(361)

Unrealized Losses at September 30, 2017
Less Than 12 Months 12 Months or More Total
(Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Obligations of U.S. Government agencies and corporations $ 27,680 $ (320 ) $ 6,782 $ (217 ) $ 34,462 $ (537 )
Obligations of state and political subdivisions 6,070 (67 ) 1,695 (18 ) 7,765 (85 )
Mortgage-backed securities 78,495 (862 ) - - 78,495 (862 )
Total debt securities 112,245 (1,249 ) 8,477 (235 ) 120,722 (1,484 )
Equity securities - - 4 (1 ) 4 (1 )
Total temporarily impaired securities $ 112,245 $ (1,249 ) $ 8,481 $ (236 ) $ 120,726 $ (1,485 )

Unrealized Losses at December 31, 2016
Less Than 12 Months 12 Months or More Total
(Dollars in thousands) Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
Obligations of U.S. Government agencies and corporations $ 32,783 $ (709 ) $ - $ - $ 32,783 $ (709 )
Obligations of state and political subdivisions 17,437 (406 ) 300 (2 ) 17,737 (408 )
Mortgage-backed securities 68,989 (1,082 ) - - 68,989 (1,082 )
Total temporarily impaired securities $ 119,209 $ (2,197 ) $ 300 $ (2 ) $ 119,509 $ (2,199 )

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	Unrealized Losses at December 31, 2018
	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	—	$	—	$	—	14	$	23,267	$	(731)	14	$	23,267	$	(731)
Obligations of state and political subdivisions	8		5,055		(10)	13		8,242		(178)	21		13,297		(188)
Mortgage-backed securities	3		6,726		(32)	43		77,170		(2,591)	46		83,896		(2,623)
Total temporarily impaired securities	11	$	11,781	$	(42)	70	$	108,679	$	(3,500)	81	$	120,460	$	(3,542)

At September 30, ~~2017, 20~~2019, five obligations of U.S. Government ~~agency and corporation securities~~sponsored enterprises had unrealized ~~losses that, in the aggregate, did not exceed 2.0% of amortized cost. Four~~losses. None of these securities have been in a continuous loss position for 12twelve months or more.

At September 30, ~~2017, 12 obligations~~2019, one obligation of state and political subdivisions had unrealized ~~losses that,~~losses. The security was not in ~~the aggregate, did not exceed 1.0% of amortized cost. Four~~a continuous loss position for twelve months or more.

At September 30, 2019, twenty-one mortgage-backed securities had an unrealized loss. Seventeen of these securities ~~has~~have been in a continuous loss position for 12twelve months or more.

At September 30, 2017, 37 mortgage-backed securities had an unrealized loss that did not exceed 1.0% of amortized cost. None of these securities has been in a continuous loss position for 12 months or more.

The mortgage-backed securities in the Company’s portfolio are government sponsored enterprise (GSE) pass-through instruments issued by the Federal National Mortgage Association (FNMA) or Federal Home Loan Mortgage Corporation (FHLMC), which guarantees the timely payment of principal on these investments.

The unrealized losses noted above are considered to be temporary impairments. The decline in the values of the debt securities is due only to interest rate fluctuations, rather than erosion of issuer credit quality. As a result, the payment of contractual cash flows, including principal repayment, is not at risk. Because the Company does not intend to sell the securities, does not believe the Company will be required to sell the securities before recovery and expects to recover the entire amortized cost basis, none of the debt securities are deemed to be other-than-temporarily ~~impaired.~~

Equity securities owned by the Company consist of common stock of various financial services providers and are evaluated quarterly for evidence of other-than-temporary impairment. There was one equity security that was in an unrealized loss position for 12 months or more as of September 30, 2017. Management has identified no other-than-temporary impairment as of, orimpaired for the periods ended September 30, ~~2017,~~2019, September 30, ~~2016~~2018 and December 31, 2016, respectively, in the equity portfolio. Management continues to track the performance of each stock owned to determine if it is prudent to recognize any other-than-temporary impairment charges. The Company has the ability and intent to hold its equity securities until recovery of unrealized losses.2018, respectively.

7.~~Loans and Related Allowance for Credit Losses~~

LOANS AND RELATED ALLOWANCE FOR CREDIT LOSSES

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

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

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is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, accruals are resumed on loans only when the obligation is brought fully current with respect to interest and principal, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

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

Loans Held for Sale

The Company has originated residential mortgage loans with the intent to sell. These individual loans are normally funded by the buyer immediately. The Company maintains servicing rights on these loans. Mortgage servicing rights are recognized as an asset upon the sale of a mortgage loan. A portion of the cost of the loan is allocated to the servicing right based upon 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. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Company’s analysis.

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

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

Commercial Real Estate Lending

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

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

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

Real Estate Construction Lending

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

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

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

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

Mortgage Lending

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

The Company offers fixed-rate and adjustable rate mortgage loans with 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 mortgage loans originate with a loan-to-value of 80% or less. Home equity installment loans are secured by the borrower’s primary residence with a maximum loan-to-value of 95% and a maximum term of 15 years. Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years.

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

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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.

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.

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The allowance for loan losses is maintained at a level considered adequate to offset probable incurred losses on the Company’s existing loans. The analysis of the allowance for loan losses relies heavily on changes in observable trends that may indicate potential credit weaknesses. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect a borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available. Based on management’s comprehensive analysis of the loan portfolio, management believes the level of the allowance for loan losses as of September 30, 2019 was adequate.

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

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

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

Acquired Loans

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

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Loans acquired through business combinations that meet the specific criteria of ASC 310-30 are individually evaluated each period to analyze expected cash flows. To the extent that the expected cash flows of a loan have decreased due to credit deterioration, an allowance is established. These loans are accounted for under the ASC 310-30, Loans and Debt Securities Acquired with Deteriorated Credit Quality. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition, is referred to as the nonaccretable discount. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require Juniata to evaluate the need for an additional allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount, which Juniata will then reclassify as an accretable discount that will be recognized into interest income over the remaining life of the loan.

Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30 are accounted for under ASC 310-20. These loans are initially recorded at fair value and include credit and interest rate marks associated with acquisition accounting adjustments. Purchase premiums or discounts are subsequently amortized as an adjustment to yield over the estimated contractual lives of the loans. There is no allowance for loan losses established at the acquisition date for acquired performing loans. An allowance for loan losses is recorded for any credit deterioration in these loans subsequent to acquisition.

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

Loan Portfolio Classification

The following table presents the loan portfolio by class at September 30, 2019 and December 31, 2018.


(Dollars in thousands)
	September 30, 2019		December 31, 2018
Commercial, financial and agricultural	$	48,278	$	46,563
Real estate - commercial		130,051		141,295
Real estate - construction		41,191		36,688
Real estate - mortgage		154,431		163,548
Obligations of states and political subdivisions		21,883		19,129
Personal		9,487		10,408
Total	$	405,321	$	417,631

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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 September 30, 2019 and December 31, 2018.


(Dollars in thousands)			Special
As of September 30, 2019	Pass		Mention		Substandard		Doubtful		Total
Commercial, financial and agricultural	$	42,927	$	3,450	$	1,901	$	—	$	48,278
Real estate - commercial		117,119		5,929		6,953		50		130,051
Real estate - construction		39,656		293		1,242		—		41,191
Real estate - mortgage		152,001		337		1,978		115		154,431
Obligations of states and political subdivisions		21,883		—		—		—		21,883
Personal		9,473		—		14		—		9,487
Total	$	383,059	$	10,009	$	12,088	$	165	$	405,321


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

The Company has certain loans in its portfolio that are considered to be impaired. It is the policy of the Company to recognize income on impaired loans that have been transferred to nonaccrual status on a cash basis, only to the extent that it exceeds 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 September 30, 2019 and December 31, 2018 totaled $421,000 and $94,000, respectively. Charge-offs will occur when a confirmed loss is identified. Professional appraisals of collateral, discounted for expected selling costs, appraisal age, economic conditions and other known factors are used to determine the charge-off amount.

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The following table summarizes information regarding impaired loans by portfolio class as of September 30, 2019 and December 31, 2018.


(Dollars in thousands)	As of September 30, 2019						As of December 31, 2018
	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	$	737	$	738	$	—	$	—	$	—	$	—
Real estate - commercial		1,222		1,318		—		909		1,303		—
Acquired with credit deterioration		376		400		—		544		592		—
Real estate – construction		—		1,055		—		27		1,123		—
Real estate - mortgage		1,296		1,994		—		1,180		1,912		—
Acquired with credit deterioration		749		873		—		971		1,061		—
Personal		14		14		—		17		17		—
Total:
Commercial, financial and agricultural	$	737	$	738	$	—	$	—	$	—	$	—
Real estate - commercial		1,222		1,318		—		909		1,303		—
Acquired with credit deterioration		376		400		—		544		592		—
Real estate - construction		—		1,055		—		27		1,123		—
Real estate – mortgage		1,296		1,994		—		1,180		1,912		—
Acquired with credit deterioration		749		873		—		971		1,061		—
Personal		14		14		—		17		17		—
	$	4,394	$	6,392	$	—	$	3,648	$	6,008	$	—

Average recorded investment of impaired loans and related interest income recognized for the three and nine months ended September 30, 2019 and 2018 are summarized in the tables below.


(Dollars in thousands)	Three Months Ended September 30, 2019						Three Months Ended September 30, 2018
	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	$	750	$	—	$	12	$	—	$	—	$	—
Real estate - commercial		1,232		5		16		912		—		—
Acquired with credit deterioration		381		—		—		521		—		—
Real estate - construction		—		—		—		1,990		4		14
Real estate - mortgage		1,284		4		12		1,095		—		—
Acquired with credit deterioration		763		—		—		17		—		—
Personal		14		—		—		—		—		—
Total:
Commercial, financial and agricultural	$	750	$	—	$	12	$	—	$	—	$	—
Real estate - commercial		1,232		5		16		912		—		—
Acquired with credit deterioration		381		—		—		521		—		—
Real estate - mortgage		1,284		4		12		1,095		—		—
Acquired with credit deterioration		763		—		—		17		—		—
Personal		14		—		—		—		—		—
	$	4,424	$	9	$	40	$	4,535	$	4	$	14

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(Dollars in thousands)	Nine Months Ended September 30, 2019						Nine Months Ended September 30, 2018
	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	$	369	$	22	$	12	$	234	$	—	$	—
Real estate - commercial		1,066		40		16		2,971		—		—
Acquired with credit deterioration		460		—		—		350		—		—
Real estate - construction		14		—		—		—		—		—
Real estate - mortgage		1,238		13		35		2,122		14		16
Acquired with credit deterioration		860		—		—		698		—		—
Personal		16		—		—		9		—		—
Total:
Commercial, financial and agricultural	$	369	$	22	$	12	$	234	$	—	$	—
Real estate - commercial		1,066		40		16		2,971		—		—
Acquired with credit deterioration		460		—		—		350		—		—
Real estate - construction		14		—		—		—		—		—
Real estate - mortgage		1,238		13		35		2,122		14		16
Acquired with credit deterioration		860		—		—		698		—		—
Personal		16		—		—		9		—		—
	$	4,023	$	75	$	63	$	6,384	$	14	$	16

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.

~~Loans Held for Sale~~

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

In a business combination, the Company may acquire loans which it intends to sell. These loans are assigned a fair value by obtaining actual bids on the loans and adjusting for contingencies in the bids. These loans are carried at lower of cost or market value until sold, adjusted periodically if conditions change before the subsequent sale. Adjustments to fair value and gains or losses recognized upon sale are included in gains on sales of loans which is a component of non-interest income.

~~Commercial, Financial and Agricultural Lending~~

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

~~Commercial Real Estate Lending~~

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

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

~~Real Estate Construction Lending~~

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

~~Mortgage Lending~~

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

~~Obligations of States and Political Subdivisions~~

~~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.~~

~~Allowance for Credit Losses~~

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

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

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

~~principal or interest has been in default for 120 days or more and for which no payment has been received during the previous four months;~~

~~all collateral securing the loan has been liquidated and a deficiency balance remains;~~

~~a bankruptcy notice is received for an unsecured loan;~~

~~a confirming loss event has occurred; or~~

~~the loan is deemed to be uncollectible for any other reason.~~

The allowance for loan losses is maintained at a level considered adequate to offset probable losses on the Company’s existing loans. The analysis of the allowance for loan losses relies heavily on changes in observable trends that may indicate potential credit weaknesses. Management’s periodic evaluation of the adequacy of the allowance is based on the Company’s past loan loss experience, known and inherent risks in the portfolio, adverse situations that may affect the borrower’s ability to repay, the estimated value of any underlying collateral, composition of the loan portfolio, current economic conditions and other relevant factors. This evaluation is inherently subjective as it requires material estimates that may be susceptible to significant revision as more information becomes available.

In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the level of the allowance for loan losses as of September 30, 2017 was adequate.

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

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

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

The component of the allowance for contingencies relates to other loans that have been segmented into risk rated categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated quarterly or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified as substandard have one or more well-defined weaknesses that jeopardize the liquidation of the debt. Substandard loans include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. Specific reserves may be established for larger, individual classified loans as a result of this evaluation, as discussed above. Remaining loans are categorized into large groups of smaller balance homogeneous loans and are collectively evaluated for impairment. This computation is generally based on historical loss experience adjusted for qualitative factors. The historical loss experience is averaged over a ten-year period for each of the portfolio segments. The ten-year timeframe was selected in order to capture activity over a wide range of economic conditions and has been consistently used by the Company for the past seven years. Qualitative risk factors are reviewed for relevancy each quarter and include:

~~National, regional and local economic and business conditions, as well as the condition of various market segments, including the underlying collateral for collateral dependent loans;~~

~~Nature and volume of the portfolio and terms of loans;~~

~~Experience, ability and depth of lending and credit management staff;~~

~~Volume and severity of past due, classified and nonaccrual loans, as well as other loan modifications;~~

~~Existence and effect of any concentrations of credit and changes in the level of such concentrations; and~~

~~Effect of external factors, including competition.~~

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

~~Acquired Loans~~

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

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

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

~~Loan Portfolio Classification~~

(Dollars in thousands) Special
Pass Mention Substandard Doubtful Total
As of September 30, 2017
Commercial, financial and agricultural $ 38,540 $ 8,387 $ 1,617 $ 7 $ 48,551
Real estate - commercial 102,322 24,585 6,014 1,419 134,340
Real estate - construction 22,033 2,674 3,438 - 28,145
Real estate - mortgage 140,281 3,617 3,072 813 147,783
Obligations of states and political subdivisions 12,863 999 - - 13,862
Personal 9,892 36 7 - 9,935
Total $ 325,931 $ 40,298 $ 14,148 $ 2,239 $ 382,616

(Dollars in thousands) Special
Pass Mention Substandard Doubtful Total
As of December 31, 2016
Commercial, financial and agricultural $ 34,510 $ 5,104 $ 1,213 $ - $ 40,827
Real estate - commercial 100,153 15,843 6,726 989 123,711
Real estate - construction 24,702 4,044 6,460 - 35,206
Real estate - mortgage 144,353 4,426 4,496 1,630 154,905
Obligations of states and political subdivisions 12,431 1,185 - - 13,616
Personal 9,970 52 10 - 10,032
Total $ 326,119 $ 30,654 $ 18,905 $ 2,619 $ 378,297

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

~~The following tables summarize information regarding impaired loans by portfolio class as of September 30, 2017 and December 31, 2016.~~

As of September 30, 2017 As of December 31, 2016
Unpaid Unpaid
(Dollars in thousands) Recorded Principal Related Recorded Principal Related
Investment Balance Allowance Investment Balance Allowance
Impaired loans
With no related allowance recorded:
Commercial, financial and agricultural $ 356 $ 364 $ - $ 436 $ 439 $ -
Real estate - commercial 5,842 6,830 - 5,499 6,475 -
Acquired with credit deterioration 199 253 - 641 730 -
Real estate - construction - - - 2,455 2,455 -
Real estate - mortgage 2,521 4,047 - 3,345 5,020 -
Acquired with credit deterioration 343 387 - 415 440 -

With an allowance recorded:
Real estate - mortgage $ - $ - $ - $ 712 712 56

Total:
Commercial, financial and agricultural $ 356 $ 364 $ - $ 436 $ 439 $ -
Real estate - commercial 5,842 6,830 - 5,499 6,475 -
Acquired with credit deterioration 199 253 - 641 730 -
Real estate - construction - - - 2,455 2,455 -
Real estate - mortgage 2,521 4,047 - 4,057 5,732 56
Acquired with credit deterioration 343 387 - 415 440 -
$ 9,261 $ 11,881 $ - $ 13,503 $ 16,271 $ 56

~~Average recorded investment of impaired loans and related interest income recognized for the three and nine months ended September 30, 2017 and 2016 are summarized in the tables below.~~

Three Months Ended September 30, 2017 Three Months Ended September 30, 2016
Average Interest Cash Basis Average Interest Cash Basis
(Dollars in thousands) Recorded Income Interest Recorded Income Interest
Investment Recognized Income Investment Recognized Income
Impaired loans
With no related allowance recorded:
Commercial, financial and agricultural $ 351 $ 5 $ - $ 479 $ 7 $ -
Real estate - commercial 5,336 81 - 5,972 84 -
Acquired with credit deterioration 204 - - 679 - -
Real estate - construction - - - 2,561 34 -
Real estate - mortgage 2,795 5 6 3,136 4 14
Acquired with credit deterioration 347 - - 482 - -
Personal - - - 1 - -

With an allowance recorded:
Commercial, financial and agricultural $ 8 $ - $ - $ - $ - $ -
Real estate - commercial 460 - - 50 - -
Real estate - mortgage - - - 826 - -

Total:
Commercial, financial and agricultural $ 359 $ 5 $ - $ 479 $ 7 $ -
Real estate - commercial 5,796 81 - 6,022 84 -
Acquired with credit deterioration 204 - - 679 - -
Real estate - construction - - - 2,561 34 -
Real estate - mortgage 2,795 5 6 3,962 4 14
Acquired with credit deterioration 347 - - 482 - -
Personal - - - 1 - -
$ 9,501 $ 91 $ 6 $ 14,186 $ 129 $ 14

Nine Months Ended September 30, 2017 Nine Months Ended September 30, 2016
Average Interest Cash Basis Average Interest Cash Basis
(Dollars in thousands) Recorded Income Interest Recorded Income Interest
Investment Recognized Income Investment Recognized Income
Impaired loans
With no related allowance recorded:
Commercial, financial and agricultural $ 396 $ 18 $ - $ 414 $ 23 $ -
Real estate - commercial 5,671 238 - 3,909 252 -
Acquired with credit deterioration 420 - - 742 - -
Real estate - construction 1,228 34 - 1,281 102 -
Real estate - mortgage 2,933 16 19 2,949 22 26
Acquired with credit deterioration 379 - - 526 - -

With an allowance recorded:
Real estate - commercial $ - $ - $ - $ 50 $ - $ -
Real estate - mortgage 356 - - 397 - -

Total:
Commercial, financial and agricultural $ 396 $ 18 $ - $ 414 $ 23 $ -
Real estate - commercial 5,671 238 - 3,959 252 -
Acquired with credit deterioration 420 - - 742 - -
Real estate - construction 1,228 34 - 1,281 102 -
Real estate - mortgage 3,289 16 19 3,346 22 26
Acquired with credit deterioration 379 - - 526 - -
$ 11,383 $ 306 $ 19 $ 10,268 $ 399 $ 26

type.

The following table presents nonaccrual loans by classes of the loan portfolio as of September 30, ~~2017~~2019 and December 31, ~~2016.~~2018.


(Dollars in thousands)
	September 30, 2019		December 31, 2018
Nonaccrual loans:
Commercial, financial and agricultural	$	737	$	—
Real estate - commercial		912		908
Real estate - construction		—		29
Real estate - mortgage		893		753
Personal		14		17
Total	$	2,556	$	1,707

(Dollars in thousands)
September 30, 2017 December 31, 2016
Nonaccrual loans:
Commercial, financial and agricultural $ 7 $ -
Real estate - commercial 1,419 1,016
Real estate - mortgage 2,203 3,717
Total $ 3,629 $ 4,733

Table of Contents

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 ~~table presents~~tables present the classes of the loan portfolio summarized by the past due status as of September 30, ~~2017~~2019 and December 31, ~~2016.~~2018.

Loans Past
Due Greater
30-59 60-89 Greater than 90
(Dollars in thousands) Days Past Days Past than 90 Total Past Total Days and
Due Due Days Due Current Loans Accruing
As of September 30, 2017
Commercial, financial and agricultural $ - $ - $ - $ - $ 48,551 $ 48,551 $ -
Real estate - commercial:
Real estate - commercial 22 - - 22 134,119 134,141 -
Acquired with credit deterioration 170 - 29 199 - 199 29
Real estate - construction - - - - 28,145 28,145 -
Real estate - mortgage:
Real estate - mortgage 653 31 221 905 146,535 147,440 221
Acquired with credit deterioration 112 - 13 125 218 343 13
Obligations of states and political - - - - -
subdivisions - - - 13,862 13,862 -
Personal 71 - - 71 9,864 9,935 -
Total $ 1,028 $ 31 $ 263 $ 1,322 $ 381,294 $ 382,616 $ 263

Loans Past
Due Greater
30-59 60-89 Greater than 90
(Dollars in thousands) Days Past Days Past than 90 Total Past Total Days and
Due Due Days Due Current Loans Accruing
As of December 31, 2016
Commercial, financial and agricultural $ 15 $ - $ 6 $ 21 $ 40,806 $ 40,827 $ 6
Real estate - commercial:
Real estate - commercial 55 - - 55 123,015 123,070 -
Acquired with credit deterioration - - 452 452 189 641 452
Real estate - construction 6 - 508 514 34,692 35,206 508
Real estate - mortgage:
Real estate - mortgage 1,097 57 40 1,194 153,296 154,490 40
Acquired with credit deterioration - - 138 138 277 415 138
Obligations of states and political
subdivisions - - - - 13,616 13,616 -
Personal 25 3 - 28 10,004 10,032 -
Total $ 1,198 $ 60 $ 1,144 $ 2,402 $ 375,895 $ 378,297 $ 1,144


													Loans
													Past Due
													Greater
(Dollars in thousands)							Greater						than 90
			30‑59 Days		60‑89 Days		than 90		Total Past				Days and
	Current		Past Due		Past Due		Days		Due		Total Loans		Accruing(1)
As of September 30, 2019
Commercial, financial and agricultural	$	48,275	$	3	$	—	$	—	$	3	$	48,278	$	—
Real estate - commercial		129,396		229		—		50		279		129,675		—
Real estate - construction		40,898		293		—		—		293		41,191		—
Real estate - mortgage		151,713		592		600		777		1,969		153,682		204
Obligations of states and political subdivisions		21,883		—		—		—		—		21,883		—
Personal		9,431		41		1		14		56		9,487		—
Subtotal		401,596		1,158		601		841		2,600		404,196		204
Loans acquired with credit deterioration
Real estate - commercial		376		—		—		—		—		376		—
Real estate - mortgage		536		209		—		4		213		749		4
Subtotal		912		209		—		4		213		1,125		4
	$	402,508	$	1,367	$	601	$	845	$	2,813	$	405,321	$	208


													Loans
													Past Due
													Greater
(Dollars in thousands)							Greater						than 90
			30‑59 Days		60‑89 Days		than 90		Total Past				Days and
	Current		Past Due		Past Due		Days		Due		Total Loans		Accruing(1)
As of December 31, 2018
Commercial, financial and agricultural	$	46,557	$	6	$	—	$	—	$	6	$	46,563	$	—
Real estate - commercial		139,890		—		—		1,214		1,214		141,104		306
Real estate - construction		36,627		32		—		29		61		36,688		—
Real estate - mortgage		161,651		824		561		175		1,560		163,211		23
Obligations of states and political subdivisions		19,129		—		—		—		—		19,129		—
Personal		10,352		24		15		17		56		10,408		—
Subtotal		414,206		886		576		1,435		2,897		417,103		329
Loans acquired with credit deterioration
Real estate - commercial		51		140		—		—		140		191		—
Real estate - mortgage		71		259		—		7		266		337		7
Subtotal		122		399		—		7		406		528		7
	$	414,328	$	1,285	$	576	$	1,442	$	3,303	$	417,631	$	336

(1)

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

Table of Contents

The following ~~table summarizes~~tables summarize information regarding troubled debt restructurings by loan portfolio class at September 30, ~~2017~~2019 and December 31, ~~2016.~~2018.


(Dollars in thousands)		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
	Contracts	Recorded Investment		Recorded Investment		Recorded Investment
As of September 30, 2019
Accruing troubled debt restructurings:
Real estate - commercial	1	$	306	$	326	$	314
Real estate - mortgage	7		488		516		406

Non-accruing troubled debt restructurings:
Real estate - mortgage	1		25		25		16
	9	$	819	$	867	$	736

Pre-Modification Post-Modification
(Dollars in thousands) Number of Outstanding Recorded Outstanding Recorded
Contracts Investment Investment Recorded Investment
As of September 30, 2017
Accruing troubled debt restructurings:
Real estate - mortgage 7   $ 369 $ 397 $ 321

Non-accruing troubled debt restructurings:
Real estate - mortgage 1   25 25 21
Commercial, financial, agricultural 1   19 20 7
9   $ 413 $ 442 $ 349

			Pre-Modification		Post-Modification
(Dollars in thousands)	Number of		Outstanding Recorded		Outstanding Recorded					Pre-Modification		Post-Modification
	Contracts		Investment		Investment		Recorded Investment		Number of	Outstanding		Outstanding
As of December 31, 2016
									Contracts	Recorded Investment		Recorded Investment		Recorded Investment
As of December 31, 2018
Accruing troubled debt restructurings:
Real estate - mortgage		7	$	369	$	397	$	340	8	$	522	$	550	$	428

Non-accruing troubled debt restructurings:
Real estate - mortgage		1		25		25		23	1		25		25		17
		8	$	394	$	422	$	363	9	$	547	$	575	$	445

The Company’s troubled debt restructurings are also impaired loans, which may result in a specific allocation and subsequent charge-off if appropriate. As of September 30, ~~2017,~~2019, there were no specific reserves carried for troubled debt restructured loans. One troubled debt restructured loan for $314,000 was in default within 12 months of restructure during the three and nine months ended September 30, 2019. There were ~~also~~ no ~~defaults of~~ troubled debt ~~restructurings that took place~~restructured loans in default within 12 months of restructure during the three or nine months ended September 30, ~~2017 or 2016 within 12 months of restructure.~~2018. On December 31, ~~2016,~~2018, there were no specific reserves carried for the troubled debt ~~restructured loans and no~~restructurings, nor any charge-offs ~~relating~~related to the troubled debt ~~restructurings.~~restructured loans. The amended terms of the restructured loans vary, ~~whereby~~and may include interest rates that have been reduced, principal payments that have been reduced or deferred for a period of time and/or maturity dates that have been extended.

There were no loan terms modified resulting in troubled debt restructuring during the three months ended September 30, ~~2017 or 2016.~~2019. The following ~~tables summarize~~table lists the two loans whose terms ~~have been~~were modified resulting in troubled debt restructurings during the nine months ended September 30, 2019.


(Dollars in thousands)		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
	Contracts	Recorded Investment		Recorded Investment		Recorded Investment
Nine months ended September 30, 2019
Accruing troubled debt restructurings:
Real estate - commercial	1	$	306	$	326	$	314
Real estate - mortgage	1		9		9		6
	2	$	315	$	335	$	320

Table of Contents

There were no loan terms modified resulting in troubled debt restructuring during the three months ended September 30, 2018. The following table lists the loan whose terms were modified resulting in a troubled debt restructuring during the nine month periods ~~ending~~ended September 30, ~~2017 and 2016.~~

Pre-Modification Post-Modification
(Dollars in thousands) Number of Outstanding Recorded Outstanding Recorded
Contracts Investment Investment Recorded Investment
Nine Months Ended September 30, 2017
Accruing troubled debt restructurings:
Commercial, financial, agricultural 1 $ 19 $ 20 $ 7
1 $ 19 $ 20 $ 7

Pre-Modification Post-Modification
(Dollars in thousands) Number of Outstanding Recorded Outstanding Recorded
Contracts Investment Investment Recorded Investment
Nine Months Ended September 30, 2016
Non-accruing troubled debt restructurings:
Real estate - mortgage 1 $ 25 $ 25 $ 24
1 $ 25 $ 25 $ 24

Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process at September 30, 2017 and December 31, 2016 totaled $1,167,000 and $1,778,000, respectively. 2018.


(Dollars in thousands)		Pre-Modification		Post-Modification
	Number of	Outstanding		Outstanding
	Contracts	Recorded Investment		Recorded Investment		Recorded Investment
Nine months ended September 30, 2018
Accruing troubled debt restructurings:
Real estate - mortgage	1	$	153	$	153	$	153
	1	$	153	$	153	$	153

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

~~As of, and~~ for the ~~periods~~three and nine months ended September 30, ~~2017~~2019 and 2018.

Obligations of
Commercial, states and
financial and Real estate - Real estate - Real estate - political
agricultural commercial construction mortgage subdivisions Personal Total
Allowance for loan losses:
Beginning balance, January 1, 2017 $ 318 $ 948 $ 231 $ 1,143 $ - $ 83 $ 2,723
Charge-offs (46 ) (70 ) - (120 ) - (24 ) (260 )
Recoveries 2 - - 45 - 8 55
Provisions 88 277 (29 ) 39 - 14 389
Ending balance, September 30, 2017 $ 362 $ 1,155 $ 202 $ 1,107 $ - $ 81 $ 2,907
individually evaluated for impairment - - - - - - -
collectively evaluated for impairment $ 362 $ 1,155 $ 202 $ 1,107 $ - $ 81 $ 2,907

Loans receivable:
Ending balance $ 48,551 $ 134,340 $ 28,145 $ 147,783 $ 13,862 $ 9,935 $ 382,616
individually evaluated for impairment 356 5,842 - 2,521 - - 8,719
acquired with credit deterioration - 199 - 343 - - 542
collectively evaluated for impairment $ 48,195 $ 128,299 $ 28,145 $ 144,919 $ 13,862 $ 9,935 $ 373,355


(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
September 30, 2019
Balance, beginning of period	$	274	$	1,038	$	588	$	22	$	1,019	$	74	$	3,015
Provision for loan losses		(8)		—		(37)		1		(6)		4		(46)
Charge-offs		(2)		—		—		—		—		(11)		(13)
Recoveries		—		—		94		—		2		5		101
Balance, end of period	$	264	$	1,038	$	645	$	23	$	1,015	$	72	$	3,057
September 30, 2018
Balance, beginning of period	$	348	$	1,062	$	327	$	—	$	1,261	$	60	$	3,058
Provision for loan losses		(56)		(3)		43		—		40		8		32
Charge-offs		—		(9)		—		—		(48)		(12)		(69)
Recoveries		3		—		—		—		7		7		17
Balance, end of period	$	295	$	1,050	$	370	$	—	$	1,260	$	63	$	3,038
Nine Months Ended
September 30, 2019
Balance, beginning of period	$	275	$	1,074	$	558	$	20	$	1,035	$	72	$	3,034
Provision for loan losses		(12)		(335)		(200)		3		22		32		(490)
Charge-offs		(2)		(15)		—		—		(49)		(48)		(114)
Recoveries		3		314		287		—		7		16		627
Balance, end of period	$	264	$	1,038	$	645	$	23	$	1,015	$	72	$	3,057
September 30, 2018
Balance, beginning of period	$	273	$	1,022	$	288	$	—	$	1,285	$	71	$	2,939
Provision for loan losses		13		83		82		—		39		14		231
Charge-offs		—		(60)		—		—		(76)		(35)		(171)
Recoveries		9		5		—		—		12		13		39
Balance, end of period	$	295	$	1,050	$	370	$	—	$	1,260	$	63	$	3,038

Table of ~~and~~Contents

The following table summarizes the ending loan balance individually evaluated for impairment based upon loan classification, as well as the ~~periods ended,~~related allowance for each at September 30, ~~2016~~2019 and December 31, 2018.

Obligations of
Commercial, states and
financial and Real estate - Real estate - Real estate - political
agricultural commercial construction mortgage subdivisions Personal Total
Allowance for loan losses:
Beginning balance, January 1, 2016 $ 264 $ 836 $ 191 $ 1,140 $ - $ 47 $ 2,478
Charge-offs (4 ) (146 ) - (28 ) - (20 ) (198 )
Recoveries - 24 - 1 - 17 42
Provisions 50 143 12 122 - 39 366
Ending balance, September 30, 2016 $ 310 $ 857 $ 203 $ 1,235 $ - $ 83 $ 2,688
individually evaluated for impairment - 50 - 94 - - 144
collectively evaluated for impairment $ 310 $ 807 $ 203 $ 1,141 $ - $ 83 $ 2,544

Loans receivable:
Ending balance $ 38,653 $ 124,586 $ 30,752 $ 159,522 $ 13,857 $ 9,909 $ 377,279
individually evaluated for impairment 353 6,067 2,561 4,056 - - 13,037
acquired with credit deterioration - 650 - 422 - - 1,072
collectively evaluated for impairment $ 38,300 $ 117,869 $ 28,191 $ 155,044 $ 13,857 $ 9,909 $ 363,170

~~As of December 31, 2016~~

Obligations of
Commercial, states and
(Dollars in thousands) financial and Real estate - Real estate - Real estate - political
agricultural commercial construction mortgage subdivisions Personal Total
Allowance for loan losses:
Beginning balance, January 1, 2016 $ 264 $ 836 $ 191 $ 1,140 $ - $ 47 $ 2,478
Charge-offs (4 ) (146 ) - (103 ) - (26 ) (279 )
Recoveries - 24 - 15 - 19 58
Provisions 58 234 40 91 - 43 466
Ending balance, December 31, 2016 $ 318 $ 948 $ 231 $ 1,143 $ - $ 83 $ 2,723
individually evaluated for impairment - - - 56 - - 56
collectively evaluated for impairment $ 318 $ 948 $ 231 $ 1,087 $ - $ 83 $ 2,667

Loans receivable:
Ending balance $ 40,827 $ 123,711 $ 35,206 $ 154,905 $ 13,616 $ 10,032 $ 378,297
individually evaluated for impairment 436 5,499 2,455 4,057 - - 12,447
acquired with credit deterioration - 641 - 415 - - 1,056
collectively evaluated for impairment $ 40,391 $ 117,571 $ 32,751 $ 150,433 $ 13,616 $ 10,032 $ 364,794


(Dollars in thousands)							Obligations
	Commercial,						of states
	financial and		Real estate-		Real estate-		and political		Real estate-
	agricultural		commercial		construction		subdivisions		mortgage		Personal		Total
September 30, 2019
Loans allocated by:
individually evaluated for impairment	$	737	$	1,222	$	—	$	—	$	1,296	$	14	$	3,269
acquired with credit deterioration		—		376		—		—		749		—		1,125
collectively evaluated for impairment		47,541		128,453		41,191		21,883		152,386		9,473		400,927
	$	48,278	$	130,051	$	41,191	$	21,883	$	154,431	$	9,487	$	405,321
Allowance for loan losses allocated by:
individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
acquired with credit deterioration		—		—		—		—		—		—		—
collectively evaluated for impairment		264		1,038		645		23		1,015		72		3,057
	$	264	$	1,038	$	645	$	23	$	1,015	$	72	$	3,057
December 31, 2018
Loans allocated by:
individually evaluated for impairment	$	—	$	909	$	27	$	—	$	1,180	$	17	$	2,133
acquired with credit deterioration		—		544		—		971		—		—		1,515
collectively evaluated for impairment		46,563		139,842		36,661		18,158		162,368		10,391		413,983
	$	46,563	$	141,295	$	36,688	$	19,129	$	163,548	$	10,408	$	417,631
Allowance for loan losses allocated by:
individually evaluated for impairment	$	—	$	—	$	—	$	—	$	—	$	—	$	—
acquired with credit deterioration		—		—		—		—		—		—		—
collectively evaluated for impairment		275		1,074		558		1,035		20		72		3,034
	$	275	$	1,074	$	558	$	1,035	$	20	$	72	$	3,034

~~8. Goodwill and other intangible assets~~

~~Branch Acquisition~~

8. GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill

On September 8, 2006, the Company acquired a branch office in Richfield, PA. Goodwill associated with this transaction is carried at $2,046,000. On November 30, 2015, the Company acquired FNBPA Bancorp, Inc. and as a result, carries goodwill of $3,402,000 relating to the acquisition. 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 September 30, ~~2017~~2019 and December 31, ~~2016~~2018 was ~~$2,046,000. Core deposit intangible of $431,000 was fully amortized as of September 30, 2016. The core deposit intangible was amortized over a ten-year period on a straight-line basis.~~$9,047,000 and $9,139,000, respectively. Goodwill is not amortized but is ~~measured~~tested annually for impairment or more frequently if certain events occur which might indicate goodwill has been impaired. ~~Core deposit amortization expense was $7,000 and $29,000 in the three and nine months ending September 30, 2016.~~ There was no impairment of goodwill during the three or nine month periods ended September 30, ~~2017~~2019 or ~~2016.~~2018.

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~~FNBPA Acquisition~~

Intangible Assets

On November 30, 2015, ~~the Company acquired FNBPA Bancorp, Inc. (“FNBPA”) and as~~ a ~~result, carries goodwill of $3,402,000 relating to the acquisition. Core~~core deposit intangible in the amount of $303,000 associated with the FNBPA Bancorp, Inc. acquisition was recorded and is being amortized over a ten-year period using a sum of the year’s digits basis. ~~Other intangible assets were identified and recorded as of November 30, 2015, in the amount of $40,000 and are being amortized on a straight-line basis over two years, through November 30, 2017.~~

Amortization expense recognized for the intangibles related to the FNBPA acquisition in the three and nine months ended September 30, ~~2017~~2019 was ~~$17,000~~$9,000 and ~~$52,000,~~$28,000, respectively. ~~The amortization~~

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 ~~during~~for the intangible related to the Liverpool Community Bank acquisition in the three and nine months ended September 30, ~~2016~~2019 was ~~$19,000~~$12,000 and ~~$57,000, respectively,~~$37,000, resepectively.

The following table shows the amortization schedule for ~~intangibles related to~~each of the ~~FNBPA acquisition.~~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, 2018		108		—
Amortization expense recorded in the twelve months
ended December 31, 2018		44		35
Unamortized balance as of December 31, 2018		151		254
Amortization expense recorded in the
nine months ended September 30, 2019		28		37
Unamortized balance as of September 30, 2019	$	123	$	217

Scheduled remaining amortization expense for years ended:
December 31, 2019	$	10	$	12
December 31, 2020		33		44
December 31, 2021		27		39
December 31, 2022		22		33
December 31, 2023		16		28
After December 31, 2023		15		61

FNBPA FNBPA Branch
Acquisition Acquisition Acquisition
Core Other Core
(Dollars in thousands) Deposit Intangible Deposit
Intangible Assets Intangible
Beginning Balance at Acquisition Date $ 303 $ 40 $ 431
Amortization expense recorded prior to January 1, 2016 4 2 402
Amortization expense recorded in the twelve months ended December 31, 2016 55 20 29
Unamortized balance as of December 31, 2016 244 18 $ -
Amortization expense recorded in the Nine Months Ended September 30, 2017 37 15
Unamortized balance as of September 30, 2017 $ 207 $ 3

Scheduled remaining amortization expense for years ended:
December 31, 2017 $ 12 $ 3
December 31, 2018 44 -
December 31, 2019 38 -
December 31, 2020 33 -
December 31, 2021 27 -
After December 31, 2021 53 -

9. ~~Investment in Unconsolidated Subsidiary~~

UNCONSOLIDATED SUBSIDIARY

The Company ~~owns~~no longer has an investment in an unconsolidated subsidiary following its acquisition of the remainder of the outstanding common stock of Liverpool on April 30, 2018. Prior to the acquisition, the Company owned 39.16% of the outstanding common stock of ~~Liverpool Community Bank (LCB), Liverpool, PA. This~~Liverpool. The investment iswas accounted for under the equity method of ~~accounting and is being carried at $4,820,000 as of September 30, 2017.~~accounting. The Company ~~increases~~increased its investment in LCB for its share of earnings and ~~decreases~~decreased its investment by any dividends received from LCB. The investment iswas evaluated quarterly for impairment. A loss in value of the investment which is determined to be other than a temporary decline would be recognized as a loss in the period in which such determination is made. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of LCB to sustain an earnings capacity that would justify the current carrying value of the investment. There was no impairment of ~~goodwill~~the investment relating to LCB ~~during~~prior to the ~~three or nine month periods ended~~acquisition on April 30, 2018.

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10. BORROWINGS

Borrowings consisted of the following as of September 30, ~~2017 or 2016.~~2019 and December 31, 2018.


(Dollars in thousands)	September 30,		December 31,
	2019		2018
Securities sold under agreements to repurchase	$	3,981	$	2,911
Overnight advances with FHLB		—		11,600
Long-term debt with FHLB		45,000		15,000
	$	48,981	$	29,511

~~10. Fair Value Measurement~~Long-term debt is comprised only of FHLB advances with an original maturity of one year or more. The following table summarizes the scheduled maturities of long-term debt as of September 30, 2019.


(Dollars in thousands)	Scheduled		Weighted Average
Year	Maturities		Interest Rate
2022	$	5,000	2.74	%
2023		5,000	2.79
2024		20,000	2.42
2025		15,000	2.41
	$	45,000	2.49	%

11. 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

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marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

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

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

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

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

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

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value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. ~~Equity securities classified as available for sale are reported at fair value using Level 1 and Level 2 inputs.~~

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

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

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

The following ~~table summarizes~~tables summarize financial assets and financial liabilities measured at fair value as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value. There were no transfers of assets between fair value Level 1 and Level 2 during the nine months ended September 30, ~~2017~~2019 or ~~2016.~~2018.


			(Level 1)		(Level 2)		(Level 3)				(Level 1)		(Level 2)		(Level 3)
			Quoted Prices in		Significant		Significant				Quoted Prices in		Significant		Significant
			Active Markets		Other		Other				Active Markets		Other		Other
(Dollars in thousands)	September 30,		for Identical		Observable		Unobservable		September 30,		for Identical		Observable		Unobservable
	2017		Assets		Inputs		Inputs		2019		Assets		Inputs		Inputs
Measured at fair value on a recurring basis:
Debt securities available-for-sale:
Obligations of U.S. Government agencies and corporations	$	34,463	$	-	$	34,463	$	-	$	23,964	$	—	$	23,964	$	—
Obligations of state and political subdivisions		25,945		-		25,945		-		5,461		—		5,461		—
Mortgage-backed securities		97,485		-		97,485		-		170,869		—		170,869		—
Equity securities available-for-sale		1,287		1,107		180		-
Equity securities										1,133		1,133		—		—
Mortgage servicing rights										185		—		—		185

Measured at fair value on a non-recurring basis:
Impaired loans	$	2,239	$	-	$	-	$	2,239	$	165	$	—	$	—	$	165
Other real estate owned		165		-		-		165
Mortgage servicing rights		223		-		-		223

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			(Level 1)		(Level 2)		(Level 3)
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
(Dollars in thousands)	December 31,		for Identical		Observable		Unobservable
	2018		Assets		Inputs		Inputs
Measured at fair value on a recurring basis:
Debt securities available-for-sale:
Obligations of U.S. Government agencies and corporations	$	23,266	$	—	$	23,266	$	—
Obligations of state and political subdivisions		18,181		—		18,181		—
Mortgage-backed securities		100,506		—		100,506		—
Equity securities		1,118		1,118		—		—
Mortgage servicing rights		200		—		—		200

Measured at fair value on a non-recurring basis:
Impaired loans	$	1,104	$	—	$	—	$	1,104
Other real estate owned		149		—		—		149

(Level 1) (Level 2) (Level 3)
Quoted Prices in Significant Significant
Active Markets Other Other
(Dollars in thousands) December 31, for Identical Observable Unobservable
2016 Assets Inputs Inputs
Measured at fair value on a recurring basis:
Debt securities available-for-sale:
Obligations of U.S. Government agencies and corporations $ 35,799 $ - $ 35,799 $ -
Obligations of state and political subdivisions 26,659 - 26,659 -
Mortgage-backed securities 85,702 - 85,702 -
Equity securities available-for-sale 2,328 2,148 180 -

Measured at fair value on a non-recurring basis:
Impaired loans $ 2,563 $ - $ - $ 2,563
Other real estate owned 358 - - 358
Mortgage servicing rights 205 - - 205

The following ~~table presents~~tables present additional quantitative information about assets measured at fair value ~~on a nonrecurring basis and~~ for which Level 3 inputs have been used to determine fair value:


(Dollars in thousands)
	Fair Value						Weighted
September 30, 2019	Estimate		Valuation Technique	Unobservable Input	Range		Average
Impaired loans	$	165	Appraisal of collateral (1)	Appraisal and liquidation adjustments (2)	7 - 20	%	9	%
Mortgage servicing rights		185	Multiple of annual servicing fee	Estimated pre-payment speed, based on rate and term	300 - 400	%	367	%


(Dollars in thousands)
September 30, 2017	Fair Value Estimate		Valuation Technique	Unobservable Input	Range	Weighted Average
									Fair Value						Weighted
December 31, 2018									Estimate		Valuation Technique	Unobservable Input	Range		Average
Impaired loans	$	2,239	Appraisal of collateral (1)	Appraisal and liquidation adjustments (2)	0% - 12%		7	%	$	1,104	Appraisal of collateral (1)	Appraisal and liquidation adjustments (2)	0% - 15	%	14	%
Other real estate owned		165	Appraisal of collateral (1)	Appraisal and liquidation adjustments (2)	13% - 72%		30	%		149	Appraisal of collateral (1)	Appraisal and liquidation adjustments (2)	2	%	2	%
Mortgage servicing rights		223	Multiple of annual servicing fee	Estimated pre-payment speed, based on rate and term	300% - 400%		369	%		200	Multiple of annual servicing fee	Estimated pre-payment speed, based on rate and term	300 - 400	%	369	%

(Dollars in thousands)
December 31, 2016 Fair Value
Estimate Valuation Technique Unobservable Input Range Weighted
Average
Impaired loans $ 2,563 Appraisal of collateral (1) Appraisal and liquidation adjustments (2) 7% - 58% 8.9 %
Other real estate owned 358 Appraisal of collateral (1) Appraisal and liquidation adjustments (2) 30 - 72% 46 %
Mortgage servicing rights 205 Multiple of annual servicing fee Estimated pre-payment speed, based on rate and term 300% - 400% 368 %

(1)

Fair value is generally determined through independent appraisals of the underlying collateral that generally include various Level 3 inputs which are not identifiable.

(2)

Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal.

Fair Value of Financial Instruments

Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, the fair value estimates reported herein are not necessarily indicative of the amounts the Company could have realized in sales transactions on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes

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of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different from the amounts reported at each quarter end.

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

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

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

~~Interest bearing time deposits with banks~~ ~~– The estimated fair value is determined by discounting the contractual future cash flows, using the rates currently offered for deposits of similar remaining maturities.~~

~~Loans~~– For variable-rate loans that reprice frequently and which entail no significant changes in credit risk, carrying values approximated fair value. Substantially all commercial loans and real estate mortgages are variable rate loans. The fair value of other loans (i.e. consumer loans and fixed-rate real estate mortgages) is estimated by calculating the present value of the cash flow difference between the current rate and the market rate, for the average maturity, discounted quarterly at the market rate.

~~Fixed rate time deposits~~ ~~– The estimated fair value is determined by discounting the contractual future cash flows, using the rates currently offered for deposits of similar remaining maturities.~~

~~Long-term debt and other interest-bearing liabilities~~ ~~– The fair value is estimated using discounted cash flow analysis, based on incremental borrowing rates for similar types of arrangements.~~

~~Commitments to extend credit and letters of credit~~ – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present credit-worthiness of the counterparties. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements.

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


	Financial Instruments
(Dollars in thousands)	September 30, 2019				December 31, 2018
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and due from banks	$	13,239	$	13,239	$	15,617	$	15,617
Interest bearing deposits with banks		64		64		110		110
Federal funds sold		—		—		729		729
Interest bearing time deposits with banks		2,700		2,700		3,290		3,290
Securities		201,409		201,409		141,953		141,953
Loans, net of allowance for loan losses		402,264		402,843		414,597		415,195
Accrued interest receivable		1,664		1,664		1,681		1,681

Financial liabilities:
Non-interest bearing deposits	$	135,024	$	135,024	$	126,057		126,057
Interest bearing deposits		401,812		404,910		395,665		395,226
Securities sold under agreements to repurchase		3,981		3,981		2,911		2,911
Short-term borrowings		—		—		11,600		11,600
Long-term debt		45,000		46,016		15,000		14,958
Other interest bearing liabilities		1,576		1,576		1,596		1,597
Accrued interest payable		455		455		289		289

Off-balance sheet financial instruments:
Commitments to extend credit	$	—	$	—	$	—	$	—
Letters of credit		—		—		—		—

Financial Instruments
September 30, 2017 December 31, 2016
(Dollars in thousands) Carrying Fair Carrying Fair
Value Value Value Value
Financial assets:
Cash and due from banks $ 13,219 $ 13,219 $ 9,464 $ 9,464
Interest bearing deposits with banks 133 133 95 95
Interest bearing time deposits with banks 350 350 350 350
Securities 159,180 159,180 150,488 150,488
Restricted investment in FHLB stock 3,616 3,616 3,610 3,610
Loans held for sale 117 117 - -
Loans, net of allowance for loan losses 379,709 374,642 375,574 366,660
Mortgage servicing rights 223 223 205 205
Accrued interest receivable 1,620 1,620 1,582 1,582

Financial liabilities:
Non-interest bearing deposits $ 109,880 $ 109,880 $ 104,006 $ 104,006
Interest bearing deposits 363,703 363,854 351,816 354,628
Securities sold under agreements to repurchase 5,207 5,207 4,496 4,496
Short-term borrowings 27,500 27,500 27,700 27,700
Long-term debt 25,000 24,965 25,000 24,963
Other interest bearing liabilities 1,566 1,568 1,545 1,549
Accrued interest payable 298 298 268 268

Off-balance sheet financial instruments:
Commitments to extend credit $ - $ - $ - $ -
Letters of credit - - - -

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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 September 30, ~~2017~~2019 and December 31, ~~2016. This table excludes~~2018. The tables exclude financial instruments for which the carrying amount approximates fair value.


					(Level 1)		(Level 2)		(Level 3)
					Quoted Prices in		Significant		Significant
(Dollars in thousands)					Active Markets		Other		Other
	Carrying				for Identical		Observable		Unobservable
	Amount		Fair Value		Assets or Liabilities		Inputs		Inputs
September 30, 2019
Financial instruments - Assets
Interest bearing time deposits with banks	$	2,700	$	2,700	$	—	$	2,700	$	—
Loans, net of allowance for loan losses		402,264		402,843		—		—		402,843
Financial instruments - Liabilities
Interest bearing deposits	$	401,812	$	404,910	$	—	$	404,910	$	—
Long-term debt		45,000		46,016		—		46,016		—
Other interest bearing liabilities		1,576		1,576		—		1,576		—

(Level 1) (Level 2) (Level 3)
Quoted Prices in Significant Significant
Active Markets Other Other
(Dollars in thousands) Carrying for Identical Observable Unobservable
Amount Fair Value Assets or Liabilities Inputs Inputs
September 30, 2017
Financial instruments - Assets
Interest bearing time deposits with banks $ 350 $ 350 $ - $ 350 $ -
Loans held for sale 117 117 - 117 -
Loans, net of allowance for loan losses 379,709 374,642 - - 374,642
Financial instruments - Liabilities
Interest bearing deposits $ 363,703 $ 363,854 $ - $ 363,854 $ -
Long-term debt 25,000 24,965 - 24,965 -
Other interest bearing liabilities 1,566 1,568 - 1,568 -

					(Level 1)		(Level 2)		(Level 3)
					Quoted Prices in		Significant		Significant						(Level 1)		(Level 2)		(Level 3)
					Active Markets		Other		Other						Quoted Prices in		Significant		Significant
(Dollars in thousands)	Carrying				for Identical		Observable		Unobservable						Active Markets		Other		Other
	Amount		Fair Value		Assets or Liabilities		Inputs		Inputs		Carrying				for Identical		Observable		Unobservable
December 31, 2016
											Amount		Fair Value		Assets or Liabilities		Inputs		Inputs
December 31, 2018
Financial instruments - Assets
Interest bearing time deposits with banks	$	350	$	350	$	-	$	350	$	-	$	3,290	$	3,290	$	—	$	3,290	$	—
Loans, net of allowance for loan losses		375,574		366,660		-		-		366,660		414,597		415,195		—		—		415,195
Financial instruments - Liabilities
Interest bearing deposits	$	351,816	$	354,628	$	-	$	354,628	$	-	$	395,665	$	395,226	$	—	$	395,226	$	—
Long-term debt		25,000		24,963		-		24,963		-		15,000		14,958		—		14,958		—
Other interest bearing liabilities		1,545		1,549		-		1,549		-		1,596		1,597		—		1,597		—

~~11. Defined Benefit Retirement Plan~~

12. DEFINED BENEFIT RETIREMENT PLAN

The Company ~~sponsors~~sponsored a defined benefit retirement plan, ~~[The~~The Juniata Valley Bank Retirement Plan (“JVB Plan”)], which ~~covers~~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 ~~are~~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~~Retirement Plan for the First National Bank of Port Allegany (“FNB Plan”)], which ~~covers~~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 ~~is now~~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.

In 2017, Juniata initiated a strategy to reduce the liability associated with its defined benefit pension plan. The first step of the initiative consisted of the purchase of a single premium group annuity for a group of Juniata’s retirees, transferring the associated pension liability to the issuer of the annuity. This step reduced Juniata’s overall pension liability by

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approximately 12%, which resulted in a pre-tax charge to earnings of $377,000 in the fourth quarter of 2017. This pre-tax charge represented an acceleration of pension expenses that would otherwise have impacted Juniata’s earnings in the future.

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

Juniata’s Board of Directors resolved to terminate the JVB Plan, ~~is to contribute annually no more than~~effective November 30, 2018. All participants were properly notified. During the ~~maximum amount that can be deducted~~second quarter of 2019, JVB Plan participants elected preferences for ~~federal income tax purposes. Contributions are intended~~receiving their vested benefit in the form of either lump sum payments or annuities. Those electing lump sums received payment in the second quarter, resulting in a pre-tax settlement charge of $278,000, which was included as a portion of the recognized net actuarial loss of $306,000 in the second quarter of 2019.

In the third quarter of 2019, annuities were purchased to provide ~~for~~vested benefits ~~attributed~~ to ~~service through December 31, 2012. The Company made no contributions during the nine months ended~~all remaining recipients, resulting in a pre-tax charge of $943,000. As of September 30, ~~2017~~2019, all obligations were satisfied and ~~is not required~~The JVB Plan was liquidated. Excess funds of $431,000 were transferred to ~~make a contribution in~~fund the ~~remainder of 2017; however, it is considering doing so.~~

company’s 401(k) Safe Harbor Plan.

Pension expense included the following components for the three and nine ~~month periods~~months ended September 30, ~~2017~~2019 and ~~2016, with~~2018:


	Three Months Ended				Nine Months Ended
(Dollars in thousands)	September 30,				September 30,
	2019		2018		2019		2018
Components of net periodic pension cost:
Interest cost	$	49	$	130	$	299	$	394
Expected return on plan assets		66		(172)		(182)		(556)
Recognized net actuarial loss		943		242		1,277		323
Net periodic pension cost		1,058		200		1,394		161
Total recognized in other comprehensive income		(1,863)		(242)		(2,197)		(323)
Total recognized in net periodic pension benefit and other comprehensive income	$	(805)	$	(42)	$	(803)	$	(162)

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Information pertaining to the ~~2016 year reclassified to include combined results for~~activity in the ~~JVB Plan and the former FNB Plan:~~defined benefit plan is as follows:

Three Months Ended Nine Months Ended
(Dollars in thousands) September 30, September 30,
2017 2016 2017 2016
Components of net periodic pension cost:
Interest cost $ 161 $ 167 $ 483 $ 501
Expected return on plan assets (202 ) (199 ) (605 ) (597 )
Recognized net actuarial loss 57 62 170 186
Net periodic pension cost $ 16 $ 30 $ 48 $ 90

Amortization of net actuarial loss recognized in other comprehensive income $ (57 ) $ (62 ) $ (170 ) $ (186 )

Total recognized in net periodic pension cost and other comprehensive income $ (41 ) $ (32 ) $ (122 ) $ (96 )


(Dollars in thousands)	Nine Months Ended
	September 30, 2019
Change in projected benefit obligation (PBO)
PBO at beginning of year	$	12,555
Interest cost		299
Change in assumptions		1,477
Actuarial loss		(1,326)
Group annuity purchase		(9,021)
Settlement payments		(3,569)
Benefits paid		(415)
PBO at end of period		—
Change in plan assets
Fair value of plan assets at beginning of year		12,182
Actual return on plan assets, net of expenses		1,254
Employer contribution		—
Group annuity purchase		(9,021)
Settlement payments		(3,569)
Benefits paid		(415)
Benefits transferred to 401(k) Plan		(431)
Fair value of plan assets at end of period		—
Funded status, included in other (liabilities) assets	$	—

Amounts recognized in accumulated comprehensive loss before income taxes consist of:
Unrecognized actual loss	$	—
Accumulated benefit obligation	$	—

~~12. Commitments, Contingent Liabilities and Guarantees~~

13. 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 September 30, ~~2017,~~2019, the Company had ~~$90,150,000~~$98,388,000 outstanding in loan commitments and other unused lines of credit extended to its customers as compared to ~~$59,984,000~~$87,223,000 at December 31, ~~2016.~~

2018.

The Company does not issue any guarantees that would require liability recognition or disclosure, other than its letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had outstanding ~~$2,097,000~~$2,537,000 and ~~$2,300,000~~$2,749,000 of financial and performance letters of credit commitments as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. Commercial letters of credit as of ~~both~~ September 30, ~~2017~~2019 and December 31, ~~2016~~2018 totaled ~~$12,650,000.~~$9,750,000 and $8,925,000, respectively. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The amount of the liability as of September 30, ~~2017~~2019 for payments under letters of credit issued was not material. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk.

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Additionally, the Company has ~~committed to fund and sell~~sold qualifying residential mortgage loans to the ~~Federal Home Loan Bank~~FHLB as part of ~~Pittsburgh~~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.

14. REVENUE RECOGNITION

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

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

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

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

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

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

Trust Fees – include asset management and estate fees. Asset management fees are generally based on a fee schedule, based upon the market value of the assets under management, and recognized monthly when the service obligation is completed. Asset management fees recognized during the three and nine month periods ended September 30, 2019 totaled $97,000 and $276,000, respectively. Asset management fees recognized during the three and nine month periods ended September 30, 2018 totaled $90,000 and $278,000, respectively. Fees for estate management services are based on a

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specified fee schedule and generally recognized as the following performance obligations are fulfilled: (i) 25% of total ~~amount~~estate fee recognized when all estate assets are collected and debts paid, (ii) 50% of ~~$10,000,000.~~the total fee is recognized when the inheritance tax return is filed, and (iii) remaining 25% is recognized when the first and final account is confirmed, settling the estate. Estate fees recognized during the three and nine month periods ended September 30, 2019 totaled $7,000 and $18,000, respectively. Estate fees recognized during the three and nine month periods ended September 30, 2018 totaled $1,000 and $38,000, respectively.

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

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

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

Contract Balances

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

Contract Acquisition Costs

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

15. LEASES

A lease is defined as a contract, or part of a contract, that conveys the right to control the use of identified property, plant or equipment for a period of time in exchange for consideration. On January 1, 2019, the Company adopted ASU 2016‑02, Leases (Topic 842), and all subsequent ASUs that modified Topic 842 using the optional transition method. The adoption of this standard resulted in the recording of a ROU asset and lease liability of $556,000 as of January 1, 2019 for the Company’s four operating lease obligations in which the Company is the lessee.

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

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The four operating leases, one of which is with a related party, are comprised of real estate property for branch and office space with terms extending through 2029. Operating leases were previously not recognized on the Company’s consolidated statements of condition, but with the adoption of Topic 842, operating lease agreements are recognized on the consolidated statements of condition as a ROU asset and a corresponding lease liability. As of September 30, ~~2017, $5,788,000 remained~~2019, the Company had operating lease ROU assets totaling $487,000 included in other assets and operating lease liabilities totaling $491,000 included in other liabilities.

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

Topic 842 requires the use of the rate implicit in the lease as the discount rate if that rate is readily determinable. As this rate is rarely determinable, the Company utilized its incremental borrowing rate at lease inception, which is the rate the Company would have incurred to borrow on ~~that commitment, $140,000~~a collateralized basis over a similar term at an amount equal to the lease payments in a similar economic environment. Because the four operating leases existed prior to the adoption of Topic 842 on January 1, 2019, the incremental borrowing rate for the remaining lease term at January 1, 2019 was used.

As of September 30, 2019, the weighted-average remaining operating lease term was 7.3 years, and the weighted-average discount rate was 5.20%.

The Company elected, for the real estate class of underlying assets which is currently its only class, not to separate lease and nonlease components and to account for them as a single lease component. The Company has ~~been committed~~one operating lease agreement containing a monthly ATM surcharge, which is combined with the property rental payment as a result of electing the practical expedient. The Company’s total operating lease cost for the three and nine months ended September 30, 2019 was $30,000 and $90,000, respectively. During the three and nine months ended September 30, 2019, total operating lease payments made to ~~borrowers.~~a related party totaled $5,000 and $18,000, respectively.

The future minimum payments for operating leases with initial or remaining terms of one year or more as of September 30, 2019 were as follows:


(Dollars in thousands)

Twelve Months Ended:
September 30, 2020	$	118
September 30, 2021		109
September 30, 2022		66
September 30, 2023		46
September 30, 2024		46
Thereafter		217
Total Future Minimum Lease Payments		602
Amounts Representing Interest		(111)
Present Value of Net Future Minimum Lease Payments	$	491

13~~. Subsequent Events~~

16. SUBSEQUENT EVENTS

On October ~~17, 2017,~~15, 2019, the Board of Directors declared a cash dividend of $0.22 per share to shareholders of record on November 15, ~~2017,~~2019, payable on ~~December 1, 2017.~~November 29, 2019.

~~On October 5, 2017, the Company purchased a group annuity to satisfy defined benefit obligations to a group of its retirees. The transaction resulted in settlement charges of $377,000.~~

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Item 2.~~Management’s Discussion and Analysis of Financial Condition and Results of Operations~~ 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~~10‑Q contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder) including statements ~~which~~that are not historical facts or that address trends or ~~management's~~management’s intentions, plans, beliefs, expectations or opinions. ~~Such~~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, ~~and may be affected by various factors~~many of which are outside of our control that ~~may~~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 ~~including,~~include, without limitation:

the impact of adverse changes in the economy and real estate markets, including protracted periods of low-growth and sluggish loan demand;

the effect of market interest rates ~~particularly following a period of low market interest rates~~ and ~~current market~~ uncertainties, and relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income;

the effect of competition on rates of deposit and loan growth and net interest margin;

increases in non-performing assets, which may result in increases in the allowance for credit losses, loan charge-offs and elevated collection and carrying costs related to such non-performing assets;

other income growth, including the impact of regulatory changes which have reduced debit card interchange revenue;

investment securities gains and losses, including other than temporary declines in the value of securities which may result in charges to earnings;

the effects of changes in the applicable federal income tax rate;

the level of other expenses, including salaries and employee benefit expenses;

the impact of increased regulatory scrutiny of the banking industry;

the impact of governmental monetary and fiscal policies, as well as legislative and regulatory changes;

the results of regulatory examination and supervision processes;

the failure of assumptions underlying the establishment of reserves for loan and lease losses, and estimations of collateral values and various financial assets and liabilities;

the increasing time and expense associated with regulatory compliance and risk management;

the ~~uncertainty~~ability to implement business strategies, including business acquisition activities and ~~lack of clear regulatory guidance associated with the delay in implementing many of the regulations mandated by the Dodd Frank Act;~~organic branch, product, and service expansion strategies;

capital and liquidity strategies, including the ~~expected~~ impact of the capital and liquidity requirements modified by the Basel III standards;

~~changes in the applicable federal income tax rate that could result in the reversal of net deferred tax assets and the reduction of current tax expense;~~

the effects of changes in accounting policies, standards, and interpretations on the presentation in the Company’s consolidated balance sheets and consolidated statements of income;

the Company’s failure to identify and to address cyber-security risks;

the Company’s ability to keep pace with technological changes;

the Company’s ability to attract and retain talented personnel;

the Company’s reliance on its subsidiary for substantially all of its revenues and its ability to pay dividends;

~~the effects~~

acts of ~~changes in relevant accounting principles and guidelines on the Company’s financial condition; and~~war or terrorism;

disruptions due to flooding, severe weather, or other natural disasters; and

failure of ~~third party~~third-party service providers to perform their contractual obligations.

~~The Company undertakes no obligation to publicly update or revise forward looking information, whether as a result~~

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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~~10‑K for the year ended December 31, ~~2016,~~2018, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto), and Item 1A of Part II of this Quarterly Report on Form ~~10-Q.~~10‑Q.

Critical Accounting Policies:

Disclosure of the Company’s significant accounting policies is included in the ~~notes to the consolidated financial statements of the~~ Company’s critical accounting policies in its Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2016.~~2018. Some of these policies require significant judgments, estimates, and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses, as well as management’s evaluation of the ~~investment~~available for sale debt securities portfolio for other-than-temporary impairment. ~~There have been no changes in critical accounting policies since December 31, 2016.~~

General:

The following discussion relates to the consolidated financial condition of the Company as of September 30, ~~2017, as~~2019, compared to December 31, ~~2016,~~2018, and the consolidated results of operations for the three and nine months ended September 30, ~~2017,~~2019, compared to the same periods in ~~2016.~~2018. This discussion should be read in conjunction with the interim consolidated financial statements and related notes included herein.

Overview:

Juniata Valley Financial Corp. is a Pennsylvania corporation organized in 1983 to be the holding company of The Juniata Valley Bank. The Bank is a state-chartered bank headquartered in Mifflintown, Pennsylvania. Juniata Valley Financial Corp. and its subsidiary bank derive substantially all of their income from banking and bank-related services, including interest earned on residential real estate, commercial mortgage, commercial and consumer loans, interest earned on investment securities and fee income from deposit services and other financial services to its ~~customers through 15 locations in Pennsylvania. The Company completed its acquisition~~customers. On April 30, 2018, Juniata acquired the remainder of ~~FNBPA Bancorp, Inc. (“FNBPA”) on November 30, 2015, at~~the outstanding common stock of the Liverpool Community Bank of which ~~time~~it previously owned 39.16%. As of the merger date, total assets increased by approximately ~~$92 million,~~$49,180,000, or ~~19%~~8%. Juniata ~~Valley Financial Corp. also owns 39.16%~~now operates a total of ~~Liverpool Community Bank (“LCB”), located~~16 locations in ~~Liverpool,~~ Pennsylvania. ~~The Company accounts for LCB as an unconsolidated subsidiary using the equity method of accounting.~~

Financial Condition:

Total assets as of September 30, ~~2017,~~2019, were ~~$599.9 million,~~$667,107,000, an increase of ~~$19.6 million,~~$41,871,000, or ~~3.4%~~6.7%, compared to December 31, ~~2016.~~2018, driven by a $30,000,000 leverage strategy executed during the second quarter of 2019. Comparing ~~the~~asset balances at September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, total debt securities available for sale increased by $58,341,000, while total loans declined by $12,310,000. Over the same period, deposits increased by ~~$17.8 million,~~$15,114,000, with ~~noninterest~~growth in both non-interest and interest bearing deposits, ~~increasing $5.9 million~~ and ~~interest-bearing deposits increasing $11.9 million. The Company’s investment portfolio~~total borrowings increased by ~~$8.7 million and total loans increased by $4.3 million during the nine months ended September 30, 2017.~~$19,470,000.

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The table below shows changes in deposit volumes by type of deposit between December 31, ~~2016~~2018 and September 30, ~~2017.~~2019.


(Dollars in thousands)	September 30,		December 31,		Change					September 30,		December 31,		Change
	2017		2016		$		%			2019		2018		$		%
Deposits:
Demand, non-interest bearing	$	109,880	$	104,006	$	5,874		5.6	%	$	135,024	$	126,057	$	8,967	7.1	%
Interest bearing demand and money market		122,833		118,429		4,405		3.7			155,392		147,413		7,979	5.4
Savings		99,414		95,449		3,965		4.2			96,691		99,236		(2,545)	(2.6)
Time deposits, $250,000 and more		7,559		5,773		1,786		30.9			7,176		8,368		(1,192)	(14.2)
Other time deposits		133,897		132,165		1,731		1.3			142,553		140,648		1,905	1.4
Total deposits	$	473,583	$	455,822	$	17,761		3.9	%	$	536,836	$	521,722	$	15,114	2.9	%

~~Overall,~~Total loans ~~increased $4.3 million,~~decreased $12,310,000, or ~~1.1%~~2.9%, between December 31, ~~2016~~2018 and September 30, ~~2017, as~~2019. As shown in the table below, ~~primarily due to increases~~the majority of the decline was in ~~commercial and~~ commercial real estate and residential mortgage loans, which was partially offset by ~~reductions~~increases in ~~residential~~ real estate construction loans and ~~construction~~obligations of states and political subdivisions, as well as commercial, financial and agricultural loans.

(Dollars in thousands) September 30, December 31, Change
2017 2016 $ %
Loans:
Commercial, financial and agricultural $ 48,551 $ 40,827 $ 7,724 18.9 %
Real estate - commercial 134,340 123,711 10,629 8.6
Real estate - construction 28,145 35,206 (7,061 ) (20.1 )
Real estate - mortgage 147,783 154,905 (7,122 ) (4.6 )
Obligations of states and political subdivisions 13,862 13,616 246 1.8
Personal 9,935 10,032 (97 ) (1.0 )
Total loans $ 382,616 $ 378,297 $ 4,319 1.1 %


(Dollars in thousands)	September 30,		December 31,		Change
	2019		2018		$		%
Loans:
Commercial, financial and agricultural	$	48,278	$	46,563	$	1,715	3.7	%
Real estate - commercial		130,051		141,295		(11,244)	(8.0)
Real estate - construction		41,191		36,688		4,503	12.3
Real estate - mortgage		154,431		163,548		(9,117)	(5.6)
Obligations of states and political subdivisions		21,883		19,129		2,754	14.4
Personal		9,487		10,408		(921)	(8.8)
Total loans	$	405,321	$	417,631	$	(12,310)	(2.9)	%

A summary of the activity in the allowance for loan losses for each of the nine month periods ended September 30, ~~2017~~2019 and ~~2016~~2018 is presented below.


(Dollars in thousands)	Periods Ended September 30,						Nine months ended September 30,
	2017			2016			2019			2018
Balance of allowance - January 1	$	2,723		$	2,478		$	3,034		$	2,939
Loans charged off		(260	)		(198	)		(114)			(102)
Recoveries of loans previously charged off		55			42			627			22
Net charge-offs		(205	)		(156	)
Net (recoveries) charge-offs								513			(80)
Provision for loan losses		389			366			(490)			199
Balance of allowance - end of period	$	2,907		$	2,688		$	3,057		$	3,058

Ratio of net charge-offs during period to average loans outstanding		0.05	%		0.04	%
Ratio of net (recoveries) charge-offs during period to average loans outstanding								(0.12)	%		0.02	%

As of September 30, ~~2017, 46~~2019, 33 loans (exclusive of loans acquired ~~from FNBPA~~ with existing credit deterioration), with aggregate outstanding balances of ~~$8,719,000~~$3,269,000 were individually evaluated for impairment. A collateral analysis was performed on each of these 4633 loans in order to establish a portion of the reserve needed to carry the impaired loans at fair value. There were no loans determined to have insufficient collateral, thus, the establishment of a specific reserve was not required for any of the impaired loans.

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As of September 30, ~~2017,~~2019, there ~~was $40,298,000~~were $10,009,000 in special mention loans compared to ~~$30,654,000~~$11,606,000 at December 31, ~~2016~~2018 and ~~$14,148,000~~$12,088,000 in substandard loans compared to ~~$18,905,000~~$12,389,000 at December 31, 2016. Causing some of the variance was a $2.5 million relationship that was upgraded from substandard classification at December 31, 2016 to special mention in 2017. Additionally, there were two relationships totaling $9.1 million that were downgraded to special mention classification in 2017.

2018.

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

The following is a summary of the Bank’s non-performing loans on September 30, ~~2017 as~~2019 compared to December 31, ~~2016.~~2018.


(Dollar amounts in thousands)	As of and for the			As of and for the			As of and for the			As of and for the
	nine months ended			year ended			nine months ended			year ended
	September 30, 2017			December 31, 2016			September 30, 2019			December 31, 2018
Non-performing loans
Non-accrual loans	$	3,608		$	4,733		$	2,540		$	1,707
Accruing loans past due 90 days or more, exclusive of loans acquired with credit deterioration		221			554			204			329
Non-accruing restructured loans in default		21			25
Restructured loans in default and non-accruing								16			39
Total	$	3,850		$	5,312		$	2,760		$	2,075

Average loans outstanding		385,623			379,177		$	411,621		$	409,362

Ratio of non-performing loans to average loans outstanding		1.00	%		1.40	%		0.67	%		0.51	%

Stockholders’ equity increased from December 31, ~~2016~~2018 to September 30, ~~2017~~2019 by ~~$1,358,000,~~$6,408,000, or ~~2.3%~~9.5%. The Company’s net income exceeded dividends paid by ~~$814,000.~~$985,000. The adjustment to accumulated other comprehensive loss relating to ~~record the amortization of the net actuarial loss of~~ the Company’s defined benefit ~~retirement~~pension plan increased the Company’s equity by ~~$112,000.~~$1,735,000. The change in net unrealized gains from ~~both~~ the change in market value of debt securities available for sale ~~and from the unconsolidated subsidiary~~ increased shareholders’ equity by ~~$258,000~~$3,455,000 when comparing September 30, ~~2017~~2019 to December 31, ~~2016.~~2018. Stock based compensation expense recorded pursuant to the Company’s Stock Option Plan added ~~$54,000~~$233,000 to stockholders’ equity during the nine month period, and payments for exercised stock options and the Employee Stock Purchase Plan added $172,000 and $34,000, respectively. Treasury stock purchases during the nine months ended September 30, 2017 decreased stockholders’ equity by $86,000.

period.

Subsequent to September 30, ~~2017,~~2019, the following ~~events~~event took place:

~~On October 5, 2017, the Company purchased a group annuity to satisfy defined benefit obligations to a group~~

Table of ~~its retirees. The transaction resulted in settlement charges of $377,000.~~Contents

Comparison of the Three Months Ended September 30, ~~2017~~2019 and ~~2016~~

2018

Operations Overview:

Net income for the third quarter of ~~2017~~2019 was ~~$1,206,000,~~$1,093,000, a decrease of ~~$241,000, or 16.7%,~~$292,000 when compared to the third quarter of ~~2016. The decrease was primarily due to the recognition of life insurance proceeds of $364,000 in the third quarter of 2016; no similar recognition occurred in the corresponding 2017 period.~~2018. Basic and diluted earnings per share were ~~$0.25~~$0.21 in the third quarter of ~~2017~~2019 compared to ~~$0.30~~basic and diluted earnings per share of $0.27 in the third quarter of ~~2016.~~ 2018. The comparability of the three months ended September 30, 2019 and 2018 was affected by a $406,000 adjustment posted as of April 30, 2018 in the first quarter of 2019. Due to this adjustment, average assets and average equity for the three months ended September 30, 2018 have been increased by $406,000 from the previously reported figures.

Annualized return on average equity for the three months ended September 30, 2019 was 6.00%, compared to the adjusted return on average equity of 8.54% for the same period in 2018; a decline from the previously reported 8.59%. For the three months ended September 30, annualized return on average assets was 0.66% in 2019, compared to 0.89% in 2018.

Presented below are selected key ratios for the two periods:


							Three Months Ended
	Three Months Ended						September 30,
	September 30,						2019		2018
	2017			2016					(adjusted)
Return on average assets (annualized)		0.81	%		1.02	%	0.66	%	0.89	%
Return on average equity (annualized)		8.00	%		9.35	%	6.00	%	8.54	%
Average equity to average assets		10.10	%		10.87	%	10.99	%	10.37	%

Non-interest income, excluding securities gains, as a percentage of average assets (annualized)		0.82	%		1.10	%

Non-interest income as a percentage of average assets (annualized)							0.72	%	0.79	%
Non-interest expense as a percentage of average assets (annualized)		2.97	%		3.04	%	3.23	%	3.22	%

The discussion that follows further explains changes in the components of net income when comparing the third quarter of ~~2017~~2019 with the third quarter of ~~2016.~~

2018.

Net Interest Income:

Net interest income, after the provision for loan losses, was ~~$4,705,000 for~~$5,150,000 during the three months ended September 30, 2019 when compared to $5,147,000 during the three months ended September 30, 2018. Total interest income increased by $251,000 during the third quarter of ~~2017, as~~2019 compared to ~~$4,488,000~~the same period in 2018, while total interest expense increased by $326,000. Offsetting the differential between total interest income and total interest expense, the loan loss provision decreased by $78,000 in the third quarter of 2019 in comparison to the same ~~quarter~~period in ~~2016.~~ 2018 primarily due to the net recoveries recorded during the 2019 period.

Overall, average earning assets increased ~~5.6%~~6.1%, while average interest bearing liabilities increased ~~7.0%~~5.5%. Net interest margin, on a fully tax equivalent basis, ~~declined 3 basis points~~decreased from 3.67% during the three months ended September 30, ~~2017~~2018 to 3.41% during the three months ended September 30, 2019.

Average loan balances decreased by $14,859,000, while interest on loans declined by $73,000 during for the third quarter of 2019 compared to the same period in ~~2016.~~

~~Average loan balances increased by $11,565,000, or 3.1%, and interest on loans was $251,000 higher in the third quarter of 2017 compared to the same period in 2016.~~2018. The ~~increase~~decline in the average volume of loans outstanding ~~and~~decreased interest income by $212,000, while the 1312 basis point increase in the weighted average yield on loans increased interest income by ~~approximately $144,000~~$139,000.

Table of Contents

The average balance of, and ~~$107,000, respectively.~~

~~Interest~~interest earned on, investment securities increased ~~$151,000~~$44,340,000 and $302,000, respectively, in the third quarter of ~~2017 as~~2019 compared to the third quarter of ~~2016.~~2018. The ~~overall pre-tax yield~~increase in average balance and interest income on ~~the~~ investment securities ~~portfolio increased~~ during the period ~~by 16 basis points, adding $67,000 to~~increased interest income ~~while~~by $267,000 and $35,000, respectively.

Average earning assets increased $34,872,000, to $608,746,000, due to a 29.6% increase in average investment securities. The yield on earning assets declined to 4.19% during the three months ended September 30, 2019 from 4.27% during the same period in 2018. The average balance of ~~investment securities increased by $17.8 million, adding $84,000 to interest income.~~

~~Total average earning assets during the third quarter of 2017 were $548.3 million, compared to $519.1 million during the third quarter of 2016, yielding 3.98% and 3.89%, respectively. Average~~ interest bearing liabilities increased over the period by ~~$27.6 million, while average non-interest bearing deposits increased by $1.6 million. The~~$23,677,000 compared to the same 2018 period. In addition, the cost to fund interest ~~earning~~bearing assets with interest bearing liabilities increased ~~by 15~~24 basis points, to ~~0.71%, in~~1.12% during the third quarter of ~~2017~~2019 compared to the same period in 2018. The yields on earning assets and cost of funds were affected by changes in the prime rate and the federal funds target rate between the third quarter of ~~2016.~~2018 and the third quarter of 2019.

~~Net~~

Table of Contents

The table below shows the net interest margin on a fully tax-equivalent basis for the ~~third quarter of 2017 was 3.56%, while it was 3.59% for the same period in 2016.~~

~~Average Balance Sheets and Net Interest Income Analysis~~

Three Months Ended Three Months Ended
(Dollars in thousands) September 30, 2017 September 30, 2016
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) $ 358,478 $ 4,381 4.89 % $ 348,305 $ 4,133 4.75 % $ 138 $ 110 $ 248
Tax-exempt loans 29,737 226 3.04 28,345 223 3.13 6 (3 ) 3
Total loans 388,215 4,607 4.75 376,650 4,356 4.62 144 107 251
Taxable investment securities 135,104 729 2.16 119,693 590 1.97 74 65 139
Tax-exempt investment securities 24,454 112 1.83 22,071 100 1.81 10 2 12
Total investment securities 159,558 841 2.11 141,764 690 1.95 84 67 151

Interest bearing deposits 530 9 6.79 657 3 1.82 (6 ) 12 6
Federal funds sold - - 65 - 0.61 - - -
Total interest earning assets 548,303 5,457 3.98 519,136 5,049 3.89 222 186 408

Other assets (7) 49,289 50,302
Total assets $ 597,592 $ 569,438

LIABILITIES AND STOCKHOLDERS' EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2) $ 126,149 114 0.36 $ 123,629 68 0.22 $ 1 $ 45 $ 46
Savings deposits 100,323 26 0.10 97,861 24 0.10 1 1 2
Time deposits 140,859 421 1.20 138,913 369 1.06 (2 ) 54 52
Short-term and long-term borrowings and other interest bearing liabilities 55,653 191 1.37 34,983 100 1.14 73 18 91
Total interest bearing liabilities 422,984 752 0.71 395,386 561 0.56 73 118 191

Non-interest bearing liabilities:
Demand deposits 107,494 105,847
Other 6,787 6,583
Stockholders' equity 60,327 61,622
Total liabilities and stockholders' equity $ 597,592 $ 569,438
Net interest income and net interest rate spread $ 4,705 3.27 % $ 4,488 3.33 % $ 149 $ 68 $ 217
Net interest margin on interest earning assets (3) 3.43 % 3.46 %
Net interest income and net interest margin-Tax equivalent basis (4) $ 4,879 3.56 % $ 4,654 3.59 %

~~Notes:~~

~~1) Average balances were calculated using a daily average.~~

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

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

4) Interest on obligations of states and municipalities is not subject to federal income tax. In order to make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 34%.

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

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

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

~~Provision for Loan Losses:~~

In the third quarter of 2017, the provision for loan losses was $149,000, as compared to a provision of $132,000 in the third quarter of 2016. Management regularly reviews the adequacy of the loan loss reserve and makes assessments as to specific loan impairment, historical charge-off expectations, general economic conditions in the Bank’s market area, specific loan quality and other factors. Factors affecting the provision for loan losses were the increased loan balances considered in the analysis and credit concentrations. 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 third quarter of 2017 was $1,219,000 compared to $1,571,000 in the third quarter of 2016, representing a decrease of $352,000, or 22.4%.~~

Most significantly impacting the comparative third quarter periods was $364,000 in life insurance proceeds recognized in 2016. Excluding securities gains and life insurance proceeds, non-interest income in the third quarters of 2017 and 2016 were $1,217,000 and $1,201,000, respectively, reflecting a 1.3% increase in the 2017 period.

The Company originates mortgages to sell on the secondary market, while retaining the servicing rights; the Company has built a servicing portfolio of approximately $23.4 million as of September 30, 2017. The mortgage servicing right asset, as of September 30, 2017, was $223,000. Mortgage banking income is made up of origination and servicing fees collected from the buyer, origination points collected from the borrower and an adjustment to the fair value of the mortgage servicing rights asset. In the third quarter of 2017, mortgage banking income was $83,000, an increase of $42,000, or 102.4%, from the third quarter of 2016, due to increased mortgage activity.

Customer service fees decreased $43,000, or 9.1%, in the third quarter of 2017, and bank-owned life insurance decreased by $14,000, or 13.1%, compared to the third quarter of 2016. Offsetting these declines were increases in fees derived from loan and trust activity, which grew 32.8% and 15.5%, respectively. Less significant changes in non-interest income categories included slight changes in debit card fee income, income from unconsolidated subsidiary, and other miscellaneous income.

As a percentage of average assets, annualized non-interest income, exclusive of net gains on the sale of securities, was 0.82% in the third quarter of 2017 as compared to 1.10% in the third quarter of 2016. Excluding proceeds from life insurance, the ratio for the third quarter of 2016 was 0.84%

~~Non-interest Expense:~~

Total non-interest expense for the third quarter of 2017 was $4,442,000 which was $112,000, or 2.6%, higher than the third quarter of 2016. The increase was primarily due to the addition of $53,000 in amortization expense in the third quarter of 2017 related to an increase in the investment in a low-income housing community project and an increase of $57,000 in consulting fees and other costs to maintain employee benefits. Foreclosure costs also increased in the three months ended September 30, ~~2017 over the comparable 2016 period by $16,000.~~

Noninterest expense decreases in the third quarter of 2017 were recorded in data processing expense, which was $53,000, or 10.8%, less than the third quarter of 2016, with the loss on the sales of foreclosed properties also decreasing by $31,000, or 62.0%, in the 2017 period in comparison to the 2016 period.

~~As a percentage of average assets, annualized non-interest expense was 2.97% in the third quarter of 2017 compared to 3.04% in the third quarter of 2016.~~

~~Provision for income taxes:~~

Income tax expense in the third quarter of 2017 was $127,000 as compared to the $150,000 recorded in the third quarter of 2016. The Company qualifies for a federal tax credit for a low-income housing project investment,2019 and the tax provisions for each period reflect the application of the tax credit. For the third quarter of 2017, the tax credit of $198,000 lowered the effective tax rate from 24.4% to 9.5%. In the third quarter of 2016, the tax credit of $143,000 lowered the effective tax rate from 18.3% to 9.4%.2018.

~~Comparison of the Nine Months Ended September 30, 2017 and 2016~~

~~Operations Overview:~~

Net income for the nine months ended September 30, 2017 was $3,959,000, an increase of $105,000, or 2.7%, compared to the nine months ended September 30, 2016. Basic and diluted earnings per share were $0.83 in the first nine months of 2017, representing an increase of 3.8% from the $0.80 per share earned in the first nine months of 2016. Annualized return on average equity for the first nine months in 2017 was 8.81%, compared to 8.38% for the same period in the prior year, an increase of 5.1%. For the nine months ended September 30, annualized return on average assets was 0.89% in both 2017 and 2016.

~~Presented below are selected key ratios for the two periods:~~

Nine Months Ended
September 30,
2017 2016
Return on average assets (annualized) 0.89 % 0.89 %
Return on average equity (annualized) 8.81 % 8.38 %
Average equity to average assets 10.11 % 10.67 %

Non-interest income, excluding securities gains, as a percentage of average assets (annualized) 0.81 % 0.92 %

Non-interest expense as a percentage of average assets (annualized) 2.91 % 3.01 %

~~The discussion that follows explains changes in the components of net income when comparing the first nine months of 2017 with the first nine months of 2016.~~

~~Net Interest Income:~~

Net interest income was $13,898,000 for the first nine months of 2017, as compared to $13,648,000 for the same period in 2016, an increase of $250,000, or 1.8%. Average earning assets increased by $18.9 million, or 3.6%, while average interest bearing liabilities increased by $16.3 million, or 4.0%. Net interest margin on a fully tax-equivalent basis declined 6 basis points during the nine months ended September 30, 2017 compared to the same period in 2016.

On average, loans outstanding increased by $7.8 million, or 2.1%. Interest on loans increased $336,000, or 2.6%, in the first nine months of 2017 compared to the same period in 2016. The higher volume and weighted average yield on loans increased interest income by $125,000 and $211,000, respectively..

Interest earned on investment securities increased $323,000 in the first nine months of 2017 compared to 2016, with average balances increasing $12.4 million during the period. The overall pre-tax yield on the investment securities portfolio increased during the period by 12 basis points.

Average interest-bearing liabilities increased by $16.3 million, while average noninterest bearing deposits increased $1.1 million during the nine months ended September 30, 2017. The cost of interest bearing liabilities rose 10 basis points as a result of increases in the federal funds borrowing rate in the current period.

Total average earning assets during the first nine months of 2017 were $545.0 million, compared to $526.0 million during the first nine months of 2016, yielding 3.91% in 2017 and 3.88% in the 2016 period. Interest bearing funding costs for earning assets were 0.66% and 0.56% for the first nine months of 2017 and 2016, respectively. Net interest margin on a fully tax-equivalent basis for the first nine months of 2017 was 3.53%. For the same period in 2016, the fully-tax equivalent net interest margin was 3.59%.

Average Balance Sheets and Net Interest Income Analysis


	Nine Months Ended							Nine Months Ended																Three Months Ended						Three Months Ended
(Dollars in thousands)	September 30, 2017							September 30, 2016																September 30, 2019						September 30, 2018
	Average				Yield/			Average				Yield/			Increase (Decrease) Due To (6)									Average				Yield/		Average				Yield/		Increase (Decrease) Due To (6)
	Balance (1)		Interest		Rate			Balance (1)		Interest		Rate			Volume			Rate			Total			Balance(1)		Interest		Rate		Balance(1)		Interest		Rate		Volume		Rate		Total
ASSETS
Interest earning assets:
Taxable loans (5)	$	354,753	$	12,798		4.81	%	$	347,183	$	12,479		4.79	%	$	133		$	186		$	319		$	370,154	$	4,851	5.24	%	$	389,693	$	4,990	5.12	%	$	(250)	$	111	$	(139)
Tax-exempt loans		30,870		693		2.99			30,671		676		2.94			(8	)		25			17			33,896		306	3.61			29,216		240	3.29			38		28		66
Total loans		385,623		13,491		4.66			377,854		13,155		4.64			125			211			336			404,050		5,157	5.11			418,909		5,230	4.99			(212)		139		(73)
Taxable investment securities		133,694		2,128		2.12			122,526		1,831		1.99			110			187			297			188,516		1,118	2.37			129,999		748	2.30			337		33		370
Tax-exempt investment securities		25,093		340		1.81			23,869		314		1.75			10			16			26			5,456		29	2.13			19,633		97	1.98			(70)		2		(68)
Total investment securities		158,787		2,468		2.07			146,395		2,145		1.95			120			203			323			193,972		1,147	2.37			149,632		845	2.26			267		35		302

Interest bearing deposits		556		20		4.80			884		10		1.51			(5	)		15			10			4,691		41	3.50			4,187		48	4.59			6		(13)		(7)
Federal funds sold		-		-					902		3		0.44			(1	)		(2	)		(3	)		6,033		35	2.32			1,146		6	2.09			26		3		29
Total interest earning assets		544,966		15,979		3.91			526,035		15,313		3.88			239			427			666			608,746		6,380	4.19			573,874		6,129	4.27			87		164		251

Other assets (7)		47,949							48,336																54,165						51,732
Total assets	$	592,915						$	574,371															$	662,911					$	625,606

LIABILITIES AND
STOCKHOLDERS' EQUITY
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2)	$	123,580		281		0.30		$	121,858		186		0.20		$	1		$	94		$	95		$	157,410		328	0.83		$	149,889		288	0.77		$	15	$	25	$	40
Savings deposits		99,502		74		0.10			97,415		78		0.11			1			(5	)		(4	)		98,453		25	0.10			104,342		26	0.10			(2)		1		(1)
Time deposits		139,343		1,200		1.15			139,966		1,086		1.04			(14	)		128			114			149,820		617	1.65			153,463		525	1.37			(13)		105		92
Short-term and long-term borrowings and other interest bearing liabilities		57,087		526		1.23			41,375		315		1.02			71			140			211			49,926		306	2.45			24,238		111	1.83			118		77		195
Total interest bearing liabilities		419,512		2,081		0.66			403,257		1,665		0.56			59			357			416			455,609		1,276	1.12			431,932		950	0.88			118		208		326

Non-interest bearing liabilities:
Demand deposits		107,136							106,042																128,379						122,328
Other		6,340							6,410																6,069						6,445
Stockholders' equity		59,927							61,305
Total liabilities and stockholders' equity	$	592,915						$	574,371
Stockholders’ equity																									72,854						64,901
Total liabilities and stockholders’ equity																								$	662,911					$	625,606
Net interest income and net interest rate spread			$	13,898		3.25	%			$	13,648		3.32	%	$	180		$	70		$	250				$	5,104	3.07	%			$	5,179	3.39	%	$	(31)	$	(44)	$	(75)
Net interest margin on interest earning assets (3)						3.40	%						3.46	%														3.35	%					3.61	%
Net interest income and net interest margin-Tax equivalent basis (4)			$	14,430		3.53	%			$	14,158		3.59	%
Net interest income and net interest margin - Tax equivalent basis (4)																										$	5,193	3.41	%			$	5,269	3.67	%

Notes:

Average balances were calculated using a daily average.

Includes interest-bearing demand and money market accounts.

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

~~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.~~

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

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.

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

Table of states and municipalities is not subject to federal income tax. In order to make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 34%.Contents

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

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

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

Provision for Loan Losses:

In the ~~first nine months~~third quarter of ~~2017,~~2019, a credit of $46,000 was recorded to the provision for loan losses, ~~was $389,000, as~~ compared to a provision expense of ~~$366,000~~$32,000 in the ~~first nine months~~third quarter of ~~2016.~~2018. Management regularly reviews the adequacy of the allowance for loan ~~loss reserve~~losses and makes assessments as to specific loan impairment, ~~historical~~ 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 nine months~~third quarter of ~~2017~~2019 was ~~$4,091,000, a decrease of $4,000, or 0.1%,~~$1,196,000 compared to ~~$4,095,000~~$1,241,000 in the ~~first nine months~~third quarter of ~~2016. Significantly impacting non-interest income comparisons between the two periods were securities gains~~2018, a decline of ~~$510,000 from an executed tax strategy during the first nine months of 2017 and gains on securities and loans of $134,000 and $113,000, respectively, during the same period in 2016. Also~~$45,000, or 3.6%.

Most significantly impacting the ~~nine~~comparative three month ~~comparison was a gain on life insurance proceeds~~periods were declines of ~~$364,000 recorded~~$33,000 in ~~the first nine months of 2016; no similar recognition occurred~~customer service fees, $30,000 in ~~the corresponding 2017 period. Excluding all gains, non-interest income in the first nine months of 2017 was $3,581,000, an increase over the same period in 2016 by $97,000, or 2.8%.~~

Mortgage banking income increased $64,000, or 60.4%, during the nine months ended September 30, 2017 compared to same period in 2016. Debit card fee income also increased over the same period in 2016, increasing $55,000, or 7.2%, during the first nine months of 2017 compared to the same period in 2016. Partially offsetting these increases were lower volumes ofcommissions from sales of non-deposit products ~~resulting~~and $15,000 in ~~a decline in commission income in~~the value of $41,000, or 22.7%, during the first nine months of 2017. Less significant changes in non-interest income categories included slight changes in customer service fees, earnings on bank-owned life insurance, trust fees, income from unconsolidated subsidiary, fees derived from loan activity, and other non-interest income, combining forequity securities. Partially offsetting these declines was an increase in ~~non-interest~~debit card fee income of ~~$19,000~~$42,000 recorded in ~~the first nine months of 2017 compared to the same time period in 2016.~~

other non-interest income.

As a percentage of average assets, annualized non-interest income ~~excluding all gains,~~ was ~~0.81%~~0.72% in the ~~first nine months~~third quarter of ~~2017 and 2016.~~

2019 compared to 0.79% in the third quarter of 2018.

Non-interest Expense:

~~Total non-interest~~Non-interest expense was ~~$12,940,000~~$5,356,000 for the ~~first nine~~three months ended September 30, 2019 compared to $5,032,000 for the same period in 2018, an increase of ~~2017, a $16,000, or 0.1%, decrease in comparison to the first nine months of 2016. Expenses of $372,000, related to the aforementioned FNBPA acquisition were recorded~~$324,000.

Non-interest expense increased in the ~~first nine months~~third quarter of 2016 while no such expenses were incurred in the 2017 period. Excluding the merger and acquisition expenses, non-interest expense for the first nine months of 2016 was $12,584,000, or 2.8%, less than the comparable period in 2017. The increase in non-interest expense in 2017 was partially attributable to an increase in employee benefit expense of $103,000 relating to an increase in medical insurance claims year-to-date in 20172019 compared to the same period in ~~2016, as well as~~2018, primarily driven by an increase of ~~$53,000~~$644,000 in ~~amortization~~employee benefits expense ~~from~~due to a $943,000 pre-tax settlement charge related to the ~~increased investment~~annuitization of defined benefit liabilities recorded in ~~a low-income housing community project. Other non-interest expense increased 18.8% during~~ the ~~nine~~three months ended September 30, ~~2017~~2019 compared to a $210,000 pre-tax charge related to a lump sum offering to terminated vested defined benefit participants recorded in the ~~same period in 2016. Contributing to~~three months ended September 30, 2018. Partially offsetting this increase was ~~an increase~~a decline in ~~electronic banking losses~~merger and acquisition expense of ~~$85,000 primarily due to fraudulent debit card transactions and increased consulting fees. Other significant variances~~$185,000, as no similar expenses were recorded in the ~~first nine months~~third quarter of ~~2017 versus~~2019, as well as a $170,000 decline in the ~~same period in 2016 included an increase in net gains~~gain on sales of ~~foreclosed properties of $82,000 and a $45,000 decrease in FDIC premiums~~other real estate owned due to ~~improved asset quality.~~

a gain of $222,000 recorded during the three months ended September 30, 2019, compared to a gain of $52,000 recorded in the comparative 2018 period.

As a percentage of average assets, annualized non-interest expense was ~~2.91%~~3.23% in the ~~first nine months~~third quarter of ~~2017~~2019 compared to ~~3.01%~~3.22% in the ~~first nine months~~third quarter of ~~2016.~~2018. Excluding ~~merger and acquisition expenses,~~pre-tax defined benefit settlement costs of $943,000, annualized non-interest expense as a percentage of average assets was ~~2.92%~~2.66% in the ~~first nine months~~third quarter of ~~2016.~~

2019. Excluding pre-tax defined benefit settlement costs of $210,000 and merger and acquisition expense of $185,000, annualized non-interest expense as a percentage of averages assets was 2.96% in the third quarter of 2018.

Provision for income taxes:

~~Income~~An income tax ~~expense in the first nine months~~benefit of ~~2017~~$103,000 was ~~$701,000 as compared to the $567,000~~ recorded in the ~~first nine months~~third quarter of ~~2016.~~2019 compared to a tax benefit of $29,000 recorded in the third quarter of 2018 due to lower taxable income in the 2019 period. The Company qualifies for a federal tax credit for ~~its~~a low-income housing project investment, and the tax provisions for each period reflect the application of the tax credit. ~~The~~For the third quarters of 2019 and 2018, the tax ~~credit recorded in each of the first nine months periods of 2017~~credits were $226,000 and ~~2016 was $484,000 and $429,000,~~$225,000, respectively, offsetting ~~$1,185,000~~$123,000 and $196,000 in ~~regular~~ tax expense in the ~~2017 period~~2019 and ~~$996,000 of regular tax expense in the 2016 period.~~2018 periods, respectively. For the ~~first nine months~~third quarter of ~~2017,~~2019, the tax credit lowered the effective tax rate from ~~25.4%~~12.4% to ~~15.0% as~~(10.4)% compared to the same period in ~~2016, in which~~2018, when the tax credit lowered the effective tax rate from ~~22.5%~~14.5% to ~~12.8%~~(2.1)%.

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Comparison of the Nine Months Ended September 30, 2019 and 2018

Operations Overview:

The comparability of the results of operations for the nine months ended September 30, 2019 was impacted by the acquisition of Liverpool Community Bank on April 30, 2018. The previously reported net income and earnings per share, basic and diluted, for the nine months ended September 30, 2018 of $4,281,000 and $0.86 were subsequently adjusted to net income of $4,687,000 and earnings per share, basic and diluted of $0.95 and $0.94, respectively, due to a credit to the income tax provision of $406,000 recorded in the first quarter of 2019, effective as of April 30, 2018. The adjustment removed a deferred tax liability related to Juniata’s previous 39.16% ownership in Liverpool upon its acquisition of Liverpool’s remaining shares on April 30, 2018.

Net income for the first nine months of 2019 was $4,351,000, a decrease of $292,000 when compared to adjusted net income for first nine months of 2018, while basic and diluted earnings per share were $0.85 during the first nine months of 2019 compared to the adjusted basic and diluted earnings per share of $0.95 and $0.94, respectively, during the comparable 2018 period. Due to the $406,000 adjustment noted above, average assets and average equity for the nine months ended September 30, 2018 increased by $229,000, to $613,653,000 and $61,752,000, respectively. Annualized return on average equity for the nine months ended September 30, 2019 was 8.30%, compared to 10.12% for the same period in 2018. For the nine months ended September 30, annualized return on average assets was 0.90% in 2019, compared to 1.02% in 2018.

Presented below are selected key ratios for the two periods:


	Nine Months Ended
	September 30,
	2019		2018
			(adjusted)
Return on average assets (annualized)	0.90	%	1.02	%
Return on average equity (annualized)	8.30	%	10.12	%
Average equity to average assets	10.90	%	10.06	%
Non-interest income as a percentage of average assets (annualized)	0.73	%	0.85	%
Non-interest expense as a percentage of average assets (annualized)	3.22	%	3.12	%

The discussion that follows further explains changes in the components of net income when comparing the first nine months of 2019 to the first nine months of 2018.

Net Interest Income:

Net interest income increased $937,000, or 6.3%, during the nine months ended September 30, 2019 over the comparable 2018 period. The increase in net interest income was partially attributable to an increase of $1,820,000 in loan and investment security interest income, which was partially offset by a $1,025,000 increase in interest expense on deposits and long-term debt over the same period.

Average earning assets increased by $25,638,000, to $589,443,000, during the nine months ended September 30, 2019 over the comparable period in 2018, primarily due to a $30,000,000 balance sheet leverage strategy executed in the second quarter of 2019. Over the same comparable periods, average interest bearing liabilities increased by $14,686,000, or 3.5%. Both the yields on earning assets and interest bearing liabilities increased by 23 basis points to 4.37% and 1.06%, respectively, during the first nine months of 2019 compared to the same 2018 period. The yields on earning assets and cost of funds were affected by changes in the prime rate and the federal funds target rate between the first nine months of 2018 and 2019.

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Average loan balances and interest on loans increased by $4,962,000 and $1,201,000, respectively, for the first nine months of 2019 compared to the same period in 2018. The increase in the average volume of loans outstanding and the 33 basis point increase in the weighted average yield on loans increased interest income by approximately $114,000 and $1,087,000, respectively.

Average balances on investment securities and interest earned on investment securities increased $11,710,000 and $442,000, respectively, in the first nine months of 2019 compared to the first nine months of 2018. The increase in the average volume of investment securities and the overall pre-tax yield of 19 basis points on the investment securities portfolio added $232,000 and $210,000, respectively, to interest income.

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The table below shows the net interest margin on a fully tax-equivalent basis for the nine months ended September 30, 2019 and 2018.

Average Balance Sheets and Net Interest Income Analysis


	Nine Months Ended						Nine Months Ended
(Dollars in thousands)	September 30, 2019						September 30, 2018
	Average				Yield/		Average				Yield/		Increase (Decrease) Due To (6)
	Balance(1)		Interest		Rate		Balance(1)		Interest		Rate		Volume		Rate		Total
ASSETS
Interest earning assets:
Taxable loans (5)	$	377,568	$	15,092	5.33	%	$	377,875	$	14,134	4.99	%	$	(12)	$	970	$	958
Tax-exempt loans		34,053		931	3.65			28,784		688	3.19			126		117		243
Total loans		411,621		16,023	5.19			406,659		14,822	4.86			114		1,087		1,201
Taxable investment securities		157,568		2,907	2.46			133,291		2,288	2.29			417		202		619
Tax-exempt investment securities		7,750		122	2.10			20,317		299	1.96			(185)		8		(177)
Total investment securities		165,318		3,029	2.44			153,608		2,587	2.25			232		210		442

Interest bearing deposits		8,008		180	3.00			2,605		90	4.61			187		(97)		90
Federal funds sold		4,496		78	2.31			933		13	1.86			50		15		65
Total interest earning assets		589,443		19,310	4.37			563,805		17,512	4.14			583		1,215		1,798

Other assets (7)		51,933						49,848
Total assets	$	641,376					$	613,653

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2)	$	152,979		988	0.86		$	138,965		666	0.64		$	67	$	255	$	322
Savings deposits		99,167		74	0.10			102,625		76	0.10			(3)		1		(2)
Time deposits		149,421		1,744	1.56			147,700		1,436	1.30			17		291		308
Short-term and long-term borrowings and other interest bearing liabilities		38,596		689	2.38			36,187		456	1.68			30		203		233
Total interest bearing liabilities		440,163		3,495	1.06			425,477		2,634	0.83			111		750		861

Non-interest bearing liabilities:
Demand deposits		125,643						119,956
Other		5,660						6,468
Stockholders’ equity		69,910						61,752
Total liabilities and stockholders’ equity	$	641,376					$	613,653
Net interest income and net interest rate spread			$	15,815	3.31	%			$	14,878	3.31	%	$	472	$	465	$	937
Net interest margin on interest earning assets (3)					3.58	%					3.52	%
Net interest income and net interest margin - Tax equivalent basis (4)			$	16,095	3.64	%			$	15,140	3.58	%

Notes:

Average balances were calculated using a daily average.

Includes interest-bearing demand and money market accounts.

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

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

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

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.

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

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Provision for Loan Losses:

In the first nine months of 2019, the provision for loan losses was a credit of $490,000, compared to a provision expense of $231,000 in the first nine months of 2018 primarily due to significant recoveries during 2019 on two loans previously charged off in 2012. 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 nine months of 2019 was $3,504,000 compared to $3,911,000 in the first nine months of 2018, a decline of $407,000.

Most significantly impacting the comparative nine month periods was a decline in income/gain from unconsolidated subsidiary of $296,000, which included a $215,000 gain from the adjustment to the carrying value of Juniata’s previous 39.16% ownership in Liverpool prior to its 100% acquisition. The equity method of accounting for the Liverpool investment was discontinued with the acquisition by Juniata of the remaining outstanding Liverpool shares in April 2018. Since then, all income and expense items from the newly acquired Liverpool office have been included as part of Juniata’s operations in the appropriate line items in the financial statements. Also contributing to the decline in non-interest income was a net loss on sales and calls of securities driven by the strategic repositioning of the investment portfolio in 2019, as well as declines in the value of equity securities and customer service fees. Partially offsetting these declines during the period was an increase of $61,000, or 6.5%, in debit card fee income.

As a percentage of average assets, annualized non-interest income was 0.73% in the first nine months of 2019 compared to 0.85% in the first nine months of 2018.

Non-interest Expense:

Non-interest expense was $15,485,000 for the nine months ended September 30, 2019 compared to $14,343,000 for the same period in 2018, an increase of $1,142,000.

Non-interest expense increased in the first nine months of 2019 compared to the same period in 2018, driven by Juniata’s growth resulting from the Liverpool acquisition; specifically, Juniata experienced increases in employee compensation and benefits, occupancy, equipment, data processing, and professional fees, in addition to expenses associate with the liquidation of the defined benefit plan. Employee benefits expense increased by $1,155,000 in the first nine months of 2019 due to $1,221,000 in pre-tax defined benefit settlement charges recorded during the 2019 period compared to $210,000 in pre-tax defined benefit settlement charges recorded in the corresponding 2018 period. Employee compensation increased $357,000, predominantly due to the addition of the LCB staff and the annual salary increase from the employee incentive program. Occupancy and equipment expenses, and data processing expense increased by $110,000 and $143,000, respectively, in the 2019 period compared to the 2018 period primarily due to the acquisition of Liverpool. In addition, professional fees increased by $278,000 during the nine months ended September 30, 2019 compared to the comparable 2018 period. Partially offsetting these increases was a decline in merger and acquisition expense of $625,000 as no similar expenses were recorded in the 2019 period, an increase in the net gain on sales of other real estate owned of $146,000 and a decline of $101,000 in FDIC insurance premiums due the application of small bank assessment credits.

As a percentage of average assets, annualized non-interest expense was 3.22% in the first nine months of 2019 compared to 3.12% in the first nine months of 2018. Excluding pre-tax defined benefit settlement costs of $1,221,000, annualized non-interest expense as a percentage of average assets was 2.97% in the nine months ended September 30, 2019. Excluding pre-tax defined benefit settlement costs of $210,000 and merger and acquisition expense of $625,000, annualized non-interest expense as a percentage of averages assets was 2.93% in the nine months ended September 30, 2018.

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Provision for income taxes:

An income tax benefit of $27,000 was recorded in the first nine months of 2019 compared to a tax benefit of $472,000 recorded in the first nine months of 2018. The tax benefit in 2018 includes the effect of the elimination of the previously mentioned deferred tax liability of $406,000. 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 nine months of 2019 and 2018, the tax credits were $679,000 and $676,000, respectively, offsetting $652,000 in tax expense recorded during the nine months ended September 30, 2019 and $204,000 in tax expense recorded in the comparable 2018 period. The tax credit lowered the effective tax rate from 15.1% to (0.6)% during the first nine months of 2019 compared to the same period in 2018, when the tax credit lowered the effective tax rate from 4.8% to (11.2)%.

Liquidity:

The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs of the Company and to take advantage of income producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of the Company to maintain a high level of liquidity in all economic environments. Principal sources of asset liquidity are provided by loans and securities maturing in one year or less, and other short-term investments, such as federal funds sold and cash and due from banks. Liability liquidity, which is more difficult to measure, can be met by attracting deposits and maintaining the core deposit base. The Company is a member of the Federal Home Loan Bank of Pittsburgh for the purpose of providing short-term liquidity when other sources are unable to fill these needs. During the ~~first~~ nine months ~~of 2017,~~ended September 30, 2019, overnight borrowings from the Federal Home Loan Bank averaged ~~$26,067,000.~~$652,000. As of September 30, ~~2017,~~2019, the Company had no short-term borrowings, ~~and~~but had $45,000,000 in long-term debt with the Federal Home Loan Bank, ~~of $27,500,000~~ and ~~$25,000,000, respectively, and had~~a remaining unused borrowing capacity with the Federal Home Loan Bank of ~~$110.6 million.~~

$136,254,000.

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~~Company’s liquidity is capable of providing the funds needed to meet operational cash needs.

Off-Balance Sheet Arrangements:

The Company’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk, credit risk, and interest rate risk. These commitments consist mainly of loans approved but not yet funded, unused lines of credit and outstanding letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. The Company had ~~$2,097,000~~$2,537,000 and ~~$2,300,000~~$2,749,000 of financial and performance letters of credit commitments outstanding as of September 30, ~~2017~~2019 and December 31, ~~2016,~~2018, respectively. Commercial letters of credit as of September 30, ~~2017~~2019 and December 31, ~~2016~~2018 totaled ~~$12,650,000.~~$9,750,000 and $8,925,000, respectively. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, ~~2017~~2019 for payments under letters of credit issued was not material. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk.

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Additionally, the Company has ~~committed to fund and sell~~sold qualifying residential mortgage loans to the ~~Federal Home Loan Bank~~FHLB as part of ~~Pittsburgh~~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 ~~total amount~~terms of ~~$10,000,000. As of September 30, 2017, $5,788,000 remained~~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 ~~delivered on that commitment, $140,000 of which has been committed to borrowers.~~

The Company is expected to act as a source of financial strength to its unconsolidated subsidiary (LCB). The Company believes that commitment is not reasonably likely to have a material effect on its liquidityterminated by either the FHLB or the ~~availability of capital resources.~~

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. ~~See Item 3 for a description of the complete simulation process and results.~~

Capital Adequacy:

Bank regulatory authorities in the United States issue risk-based capital standards. These capital standards relate a banking company’s capital to the risk profile of its assets and provide the basis by which all banking companies and banks are evaluated in terms of capital adequacy. Effective January 1, 2015, the risk-based capital rules were modified subject to a transition period for several aspects of the final rules, including the new minimum capital ratio requirements, the capital conservation buffer and the regulatory capital adjustments and deductions. The new framework is commonly called “BASEL III”. The final rules revised federal regulatory agencies’ risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them consistent with the Basel III framework. The final rules apply to all depository institutions, top-tier bank holding companies with total consolidated assets of ~~$500 million~~$3.0 billion or more, and top-tier savings and loan holding companies (“banking organizations”). Among other things, the rules established a ~~new~~ common equity tier 1 (CET1) minimum capital requirement (4.5% of risk-weighted assets) and a higher minimum tier 1 capital requirement (from 4.0% to 6.0% of risk-weighted assets), and assign higher risk weightings (150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities that finance the acquisition, development or construction of real property. The new minimum regulatory capital requirements established by BASEL III were fully phased in on January 1, 2019.

As fully phased in, Basel III requires financial institutions to maintain: (a) a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%); (b) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum tier 1 capital ratio of 8.5% upon full implementation); (c) a minimum ratio of total (that is, tier 1 plus tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation)); 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 ~~proposed~~ 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”.

~~According to~~ of 2.5% above the rules, CET1 is comprised of common stock plus related surplus, net of treasury stock and other contra-equity components, retained earnings and accumulated other comprehensive income. However, certain banking institutions, including the Bank, were permitted to make a one-time election to opt out of the requirement to include most components of AOCIminimum standards stated in ~~CET1. This opt-out option was available only until March 31, 2015. The Bank elected to opt-out.~~

(a) - (c) above.

At September 30, ~~2017,~~2019, the Bank exceeded the fully phased in regulatory requirements to be considered a "well capitalized" financial institution under ~~the new rules.~~Basel III. The Bank’s CET1 and Tier 1 Capital ratio was ~~12.44%~~15.13%, its Total Capital ratio was ~~13.20%~~15.87% and its Tier 1 leverage was ~~8.34%~~9.57%. On a consolidated basis, the Company’s CET1 and Tier 1 Capital ratio was ~~14.16%~~15.49%, and Total Capital ratio and Tier 1 leverage ratio was ~~14.93%~~16.23% and ~~9.51%~~9.79%, respectively.

~~Item 3. Quantitative and Qualitative Disclosures About Market Risk~~

~~Market risk is~~ Thus, the exposure to economic loss that arises from changes in the values of certain financial instruments. The types of market risk exposures generally faced by financial institutions include equity market price risk, interest rate risk, foreign currency risk and commodity price risk. Due to the nature of its operations, only equity market price risk and interest rate risk are significant to the Company.

Equity market price risk is the risk that changes in the values of equity investments could have a material impact on the financial position or results of operations of the Company. The Company’s equity investments consist of common stocks of publicly traded financial institutions.

There can be volatility in the values of financial institution stocks, but the primary objective of the portfolio is to achieve value appreciation in the long term while earning consistently attractive after-tax yields from dividends. The carrying value of the financial institutions stocks accounted for 0.2% of the Company’s total assets as of September 30, 2017. Management performs an impairment analysis on the entire investment portfolio, including the financial institutions stocks, on a quarterly basis. For the nine months ended September 30, 2017, no “other-than-temporary” impairment was identified. There is no assurance that declines in market values of the common stock portfolio in the future will not result in “other-than-temporary” impairment charges, depending upon facts and circumstances present.

The equity investments in the Company’s portfolio had a cost basis of approximately $1,000,000 and a fair value of $1,287,000 at September 30, 2017. Net unrealized gains in this portfolio were approximately $287,000 at September 30, 2017.

In addition to its equity portfolio, the Company’s investment management and trust services revenue could be impacted by fluctuations in the securities markets. A portion of the Company’s trust revenue is based on the value of the underlying investment portfolios. If securities values decline, the Company’s trust revenue could be negatively impacted.

Interest rate risk creates exposure in two primary areas. First, changes in rates have an impact on the Company’s liquidity position and could affect its ability to meet obligations and continue to grow. Second, movements in interest rates can create fluctuations in the Company’s net interest income and changes in the economic value of equity.

The primary objective of the Company’s asset-liability management process is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure profitability. A simulation analysis is used to assess earnings and capital at risk from movements in interest rates. The model considers three major factors: (1) volume differences; (2) repricing differences; and (3) timing in its income simulation. As of the most recent model run, data was disseminated into appropriate repricing buckets, based upon the static position at that time. The interest-earning assets and interest-bearing liabilities were assigned a multiplier to simulate how much that particular balance sheet item would re-price when interest rates change. Finally, the estimated timing effect of rate changes is applied,Company and the ~~net interest income effect is determined on a static basis (as if no other factors were present). As~~Bank also maintain capital sufficient to cover the ~~table below indicates, based upon rate shock simulations on a static basis over a one-year period, the net effect~~additional 2.5% capital conservation buffer.

Table of an immediate 100, 200, 300 and 400 basis point rate increase would change net interest income by ($63,000), ($322,000), ($969,000) and ($2,092,000), respectively. The net effect of an immediate 100, 200, 300, and 400 basis point rate decline would change net interest income by ($277), ($121), ($225), and ($348), respectively. The existence of rate floors on variable rate loans aid in mitigating against large fluctuations in the change in net interest income in a decreasing rate environment.Contents

Effect of Interest Rate Risk on Net Interest Income
(Dollars in thousands)
Change in Interest Rates (Basis Points) Total Change in Net Interest Income

400 $ (2,092 )
300 (969 )
200 (322 )
100 (63 )
0 -
(100) (277 )
(200) (121 )
(300) (225 )
(400) (348 )

The Company’s rate risk policies provide for maximum limits on net interest income that can be at risk for 100 through 400 basis point changes in interest rates. The net interest income at risk position remained within the guidelines established by the Company’s asset/liability policy.

~~No material change has been noted in the Bank’s equity value at risk. Please refer to the Annual Report on Form 10-K as of December 31, 2016 for further discussion of this topic.~~

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of September 30, ~~2017,~~2019, the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined by the Securities Exchange Act of 1934 (“Exchange Act”), Rule ~~13a-15(e)~~13a‑15(e). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Company reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.

Based upon that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were not effective as of September 30, 2019 due to a material weakness in the ~~end~~Company’s internal control over financial reporting.

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

The material weakness, previously described in the Company’s Annual Report on Form 10-K for the period ~~covered~~ended December 31, 2018, relates to management not designing and maintaining controls over the annual review process for evaluating risk ratings on commercial loans. Management is in the process of remediating this material weakness by ~~this quarterly report.~~expanding and formally documenting policies and procedures pertaining to the ongoing process for evaluating risk ratings on commercial loans and officially testing the key controls.

~~It should be noted that any system~~As described in the Company’s 2018 Annual Report on Form 10-K at December 31, 2018, a material weakness existed relating to management not designing and maintaining controls over the accounting for income taxes. As of ~~controls, however well designed and~~June 30, 2019, the Company implemented an additional control, ensuring unusual, complex, non-recurring tax items are reviewed by independent tax experts. The control has not 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~~as no such tax items have occurred 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.

2019.

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)~~13a‑14(a) and Rule ~~15d-14(a)~~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 September 30, ~~2017,~~2019, that has materially affected, or is reasonably likely to materially affect, the internal controls over financial reporting.

Table of Contents

PART II - OTHER INFORMATION

~~Item 1.~~

~~LEGAL PROCEEDINGS~~

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~~

Item 1A. RISK FACTORS

There have been no material changes to the risk factors that were disclosed in the Company’s Annual Report on Form ~~10-K~~10‑K for the year ended December 31, ~~2016.~~2018.

~~Item 2.~~

~~UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS~~

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

The Company has an active share repurchase program in place, tofor which there is no expiration date. As of November ~~9, 2017,~~8, 2019, the number of shares that may yet be purchased under the program was ~~173,990.~~169,774. Transactions pursuant to the repurchase program in the three month period ended September 30, ~~2017~~2019 are shown below.


								Total Number of
								Shares Purchased as				Maximum Number of
		Total Number			Average		~~Average~~			Part of Publicly				Shares that May Yet Be
		of Shares					Price Paid				Announced Plans or				Purchased Under the
Period	Purchased	~~Purchased~~				per Share			Programs	~~Programs~~			Plans or Programs (1)

July 1-31, ~~2017~~2019	—		- $	—		$ —	-				-				~~173,990~~	169,774
August 1-31, ~~2017~~2019	—		-	—		—	-				-				~~173,990~~	169,774
September 1-30, ~~2017~~2019	—		-	—		—	-				-				~~173,990~~	169,774

Totals	—		-			—					-				~~173,990~~	169,774

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

Certain regulatory restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. At September 30, ~~2017, $33,771,000~~2019, $35,468,000 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~~

Item 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable

~~Item 4.~~

~~MINE SAFETY DISCLOSURES~~

Item 4. MINE SAFETY DISCLOSURES

Not applicable

~~Item 5.~~

~~OTHER INFORMATION~~

Table of Contents

Item 5. OTHER INFORMATION

None

Item 6. EXHIBITS

~~Item 6.~~

~~EXHIBITS~~


		3.1 - Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit ~~3 (I)~~3(i) to the Company’s ~~Form 8-K~~ 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 ~~3.2 to the Company’s report on Form 8-K filed with the SEC on December 21, 2007)~~

	~~3.3 - Bylaw Amendment – (incorporated by reference~~3.4 to the Company’s Current Report on Form ~~8-K~~8‑K filed with the SEC on February ~~28, 2012)~~27, 2019)

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

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

	32.1 - Section 1350 Certification of President and Chief Executive Officer

	32.2 - Section 1350 Certification of Chief Financial Officer

	101.LAB - XBRL Taxonomy Extension Label Linkbase

	101.PRE - XBRL Taxonomy Extension Presentation Linkbase

	101.INS - XBRL Instance Document

	101.SCH - XBRL Taxonomy Extension Schema

	101.CAL - XBRL Taxonomy Extension Calculation Linkbase

	101.DEF - XBRL Taxonomy Extension Definition Linkbase

Table of Contents

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)~~

	(Registrant)
~~Date:~~	~~11-09-2017~~		~~By:~~
Date:	November 8, 2019	By:	/s/ Marcie A. Barber
				Marcie A. Barber, President
				Chief Executive Officer
				(Principal Executive Officer)

Date:	~~11-09-2017~~November 8, 2019	By:	~~By:~~	/s/ JoAnn N. McMinn
				JoAnn N. McMinn
				Chief Financial Officer
				(Principal Accounting Officer and
				Principal Financial Officer)