JUNIATA VALLEY FINANCIAL CORP - FORM 10-K - EX-13.1 - EXHIBIT 13.1

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10-K - FORM 10-K - JUNIATA VALLEY FINANCIAL CORP	c14046e10vk.htm
EX-32.2 - EXHIBIT 32.2 - JUNIATA VALLEY FINANCIAL CORP	c14046exv32w2.htm
EX-31.1 - EXHIBIT 31.1 - JUNIATA VALLEY FINANCIAL CORP	c14046exv31w1.htm
EX-32.1 - EXHIBIT 32.1 - JUNIATA VALLEY FINANCIAL CORP	c14046exv32w1.htm
EX-23.1 - EXHIBIT 23.1 - JUNIATA VALLEY FINANCIAL CORP	c14046exv23w1.htm
EX-21.1 - EXHIBIT 21.1 - JUNIATA VALLEY FINANCIAL CORP	c14046exv21w1.htm
EX-31.2 - EXHIBIT 31.2 - JUNIATA VALLEY FINANCIAL CORP	c14046exv31w2.htm
EX-10.7 - EXHIBIT 10.7 - JUNIATA VALLEY FINANCIAL CORP	c14046exv10w7.htm

Exhibit 13.1

Five-Year Financial Summary — Selected Financial Data


	2010			2009			2008			2007			2006
	(In thousands of dollars, except share and per share data)
BALANCE SHEET INFORMATION
at December 31
Assets	$	435,753		$	442,109		$	428,084		$	420,146		$	415,931
Deposits		376,790			377,397			357,031			359,457			355,169
Loans, net of allowance for loan losses		295,278			308,911			312,522			295,678			303,246
Investments		83,356			80,973			71,843			73,676			65,619
Intangible assets		254			299			344			389			434
Goodwill		2,046			2,046			2,046			2,046			2,046
Short-term borrowings		3,314			3,207			10,579			5,431			6,112
Long-term debt		—			5,000			5,000			—			—
Stockholders’ equity		49,976			50,603			48,485			48,572			47,786
Number of shares outstanding		4,257,765			4,337,587			4,341,055			4,409,445			4,457,934

Average for the year
Assets		439,130			435,285			428,744			424,847			414,048
Stockholders’ equity		50,654			49,514			48,674			47,635			47,503
Weighted average shares outstanding		4,297,443			4,341,097			4,376,077			4,434,859			4,480,245

INCOME STATEMENT INFORMATION
Years Ended December 31
Total interest income	$	21,574		$	23,268		$	25,230		$	26,723		$	24,663
Total interest expense		5,502			7,279			9,057			11,060			10,111


Net interest income		16,072			15,989			16,173			15,663			14,552
Provision for loan losses		741			627			421			120			54
Other income		3,934			4,171			4,037			4,199			3,830
Other expenses		12,720			12,619			12,008			12,209			11,245


Income before income taxes		6,545			6,914			7,781			7,533			7,083
Federal income tax expense		1,630			1,808			2,057			2,099			2,081


Net income	$	4,915		$	5,106		$	5,724		$	5,434		$	5,002


PER SHARE DATA
Earnings per share — basic	$	1.14		$	1.18		$	1.31		$	1.23		$	1.12
Earnings per share — diluted		1.14			1.18			1.31			1.22			1.11
Cash dividends		0.82			0.78			0.74			0.95			0.66
Book value		11.74			11.67			11.17			11.02			10.72

FINANCIAL RATIOS
Return on average assets		1.12	%		1.17	%		1.34	%		1.28	%		1.21	%
Return on average equity		9.70			10.31			11.76			11.41			10.53
Dividend payout		71.72			66.31			56.62			77.48			59.12
Average equity to average assets		11.54			11.38			11.35			11.21			11.47
Loans to deposits (year end)		78.37			81.85			87.53			82.26			85.38

MANAGEMENT’S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

This discussion concerns Juniata Valley Financial Corp. (“Company” or “Juniata”) and its wholly owned subsidiary, The Juniata Valley Bank (“Bank”). The overview is intended to provide a context for the following Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this annual report. We have attempted to identify the most important matters on which our management focuses in evaluating our financial condition and operating performance and the short-term and long-term opportunities, challenges and risks (including material trends and uncertainties) which we face. We also discuss the actions we are taking to address these opportunities, challenges and risks. The Overview is not intended as a summary of, or a substitute for review of, Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD LOOKING STATEMENTS

The information contained in this Annual Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder) including, without limitation, statements as to future loan and deposit volumes, the allowance and provision for possible loan losses, future interest rates and their effect on the Company’s financial condition or results of operations, the classification of the Company’s investment portfolio and other statements which are not historical facts or as to trends or management’s intentions, plans, beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements including, without limitation, the effect of economic conditions and related uncertainties, the effect of interest rates on the Company, federal and state government regulation and competition. Certain of these risks, uncertainties and other factors are discussed in this Annual Report or in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto).

Nature of Operations

Juniata is a bank holding company that delivers financial services within its market, primarily central Pennsylvania. The Company owns one bank, the Bank, which provides retail and commercial banking services through 12 offices in Juniata, Mifflin, Perry, Huntingdon and Centre counties. Additionally, Juniata owns 39.16% of The First National Bank of Liverpool, carried as an unconsolidated subsidiary and accounted for under the equity method of accounting.

The Bank provides a full range of consumer and commercial services. Consumer services include Internet and telephone banking, an automated teller machine network, personal checking accounts, interest checking accounts, savings accounts, insured money market accounts, debit cards, fixed and variable rate certificates of deposit, club accounts, secured and unsecured installment loans, construction and mortgage loans, safe deposit facilities, credit lines with overdraft checking protection, individual retirement accounts, health savings accounts, on-line bill payment and other on-line services. Commercial banking services include small and high-volume business checking accounts, on-line account management services, ACH origination, payroll direct deposit, commercial lines and letters of credit, commercial term and demand loans and repurchase agreements. The Bank also provides a variety of trust, asset management and estate services. The Bank offers annuities, mutual funds, stock and bond brokerage services and long-term care insurance products through an arrangement with a broker-dealer and insurance brokers. Management believes the Company has a relatively stable deposit base with no major seasonal depositor or group of depositors. Most of the Company’s commercial customers are small and mid-sized businesses in central Pennsylvania.

Economic and Industry-Wide Factors Relevant to Juniata

As a financial services organization, Juniata’s core business is most influenced by the movement of interest rates. Lending and investing is done daily, using funding from deposits and borrowings, resulting in net interest income, the most significant portion of operating results. Through the use of asset/liability management tools, the Company continually evaluates the effects that possible changes in interest rates could have on operating results and balance sheet growth. Using this information, along with analysis of competitive factors, management designs and prices its products and services.

General economic conditions are relevant to Juniata’s business. In addition, economic factors impact customers’ need for financing, thus affecting loan growth. Additionally, changes in the economy can directly impact the credit strength of existing and potential borrowers.

Focus of Management

The management of Juniata believes that it is important to know who and what we are in order to be successful. We must be aligned in our efforts to achieve goals. We’ve identified the four characteristics that define the Company and the personnel that support it. We are Committed, Capable, Caring and Connected. Management seeks to be the preeminent financial institution in its market area and measures its success by five key elements.

Shareholder Satisfaction

Above all else, management is committed to maximizing the value of our shareholders’ investment, through both stock value appreciation and dividend returns. Remaining connected to our communities will allow us to identify the financial needs of our market and to deliver those products and services capably. In doing so, we will profitably grow the balance sheet and enhance core earnings, while maintaining capital and liquidity levels well exceeding all regulatory guidelines.

Customer Relationships

We are committed to maximizing customer satisfaction. We are sensitive to the expanding array of financial services and financial service providers available to our customers, both locally and globally. We are committed to fostering a complete customer relationship by helping clients identify their current and future financial needs and offering practical and affordable solutions to both. As our customers’ lifestyles change, the channels through which we deliver our services must change as well. One element of the Company’s strategic plan is to provide connection through every means available, wherever we are needed: stand-alone branch, in-store boutique, ATM or via on-line and mobile banking anywhere internet or cell phone signals can be received.

Balance Sheet Growth

We are capable of profitable balance sheet growth. The industry has fallen prey to the mistaken belief that rapid growth is a substitute for careful fiscal and strategic management. It is our goal to continue quality growth despite intense competition by paying careful attention to the needs of our customers. We will continue to maintain the high credit standards that may have resulted in negative growth in 2010, knowing that lending under the right circumstances is the proper way to maintain soundness and profitability. We believe we consistently pay fair market rates on all deposits, and have invested wisely and conservatively in compliance with self-imposed standards, minimizing risk of asset impairment. We aspire to increase our market share within the current communities that we serve, and to expand in contiguous areas through acquisition and investment. As part of our strategic plan for growth, we continue to actively seek opportunities for acquisitions of branches or stakes in other financial institutions, similar to those that have occurred in recent years.

Operating Results

We are capable of producing profitability ratios that exceed those of many of our peers. Recognizing that net interest margins have narrowed for banks in general and that they may not return to the ranges experienced in the past, we also focus on the importance of providing fee-generating services in which customers find value. Offering a broad array of services prevents us from becoming too reliant on one form of revenue. It has also been our philosophy to spend conservatively and to implement operating efficiencies where possible to keep noninterest expense from escalating in areas that can be controlled. In 2010, we made a comprehensive upgrade to virtually every aspect of our data processing core system. The success of this major undertaking required the commitment of every employee in the organization. The changes placed more data in the hands of our front line and back room support personnel to more effectively service our customers, streamlined many formerly burdensome activities and added new technology that reduces paper production and physical storage space and makes us more capable. On-line banking was further enhanced by making on-line statements an option for our customers. We were able to achieve our goal of adding efficiencies and services without adding costs. We have again achieved impressive performance ratios exceeding most of our peers in many, maintaining our status as a high-performing financial institution.

Connection to the Community

We are active corporate citizens of the communities we serve. Although the world of banking has transitioned to global availability through electronics, we believe that our community banking philosophy is still valid. Despite technological advances, banking is still a personal business, particularly in the rural areas we serve. We believe that our customers shop for services and value a relationship with an institution involved in the same community, with the same interests in its prosperity. We have a foundation and a history in each of the communities we serve. Management takes an active role in local business and industry development organizations to help attract and retain commerce in our market area. We provide businesses, large and small, with financial tools and financing needed to grow and prosper. We have always been committed to responsible lending practices. We invest locally by including local municipal bonds in our investment portfolio and participating in funding for such projects as low income and elderly housing. We support charitable programs that benefit the local communities, not only with monetary contributions, but also through the personal involvement of our caring employees.

Juniata’s Opportunities

Soundness and stability

Our balance sheet is strong. We enjoy strong capital and liquidity ratios. We did not seek a capital infusion from the U.S. Treasury through its Troubled Assets Relief Program (“TARP”) and consider ourselves to have an advantage over banks that applied for and accepted those funds. Because we did not need the aid offered by our government, we do not have the cost and burden of compliance with the guidelines associated with acceptance of this form of capital, as is the case with some of our counterparts. Because the U.S. Treasury is not one of our stockholders, the possibility of political intervention in the management of our business is less likely. Our business model includes a plan for growth without sacrificing profitability or integrity. We believe an opportunity exists for banks such as ours to offer the trusted, personal service of a locally managed institution that has roots in the community reaching back more than 140 years.

Expansion of customer base

Through market analysis, we believe that there are opportunities to expand our sales efforts in order to increase deposit market share in rural central Pennsylvania. Our strategic focus is based on leveraging our collective knowledge of the Company’s primary and contiguous markets to identify lending or fee-based opportunities consistent with our risk parameters and profitability targets. We continue to develop our sales team through mentoring and by making employee education paramount. We will capitalize on back-room efficiencies created through the implementation of new processes. We understand the changes taking place in a world where convenience and mobility are priorities in deciding with whom one will do business. We have positioned ourselves to increase market share by offering full featured mobile banking that will be appealing to an increasing number of customers now and in the future.

Delivery system enhancements

We seek to continually enhance our customer delivery system, both through technology and physical facilities. We actively seek opportunities to expand our branch network through acquisitions. To cater to our customers’ needs and to increase operational efficiency we upgraded our core processing system in 2010. This technology upgrade involved significant changes in how we deliver support to our front line and our back-room operation. Our objective was to enhance both the customers’ and our employees’ experience through process simplification and operating efficiencies. We believe that it is imperative that our customers have convenient and easy access to personal financial services that match their particular lifestyle, whether it is through electronic or personal delivery. It is with this in mind that we have announced our entrance into the mobile banking arena beginning in the first quarter of 2011.

Juniata’s Challenges

Economic recession

We are experiencing a serious sustained recession, the duration of which remains unknown. Unemployment has risen, home values have declined, earnings rates on investments are historically low and government actions to intervene in the markets continue to result in large increases in the national debt. All these factors are affecting the behavior of consumers and businesses and the way in which money is spent, saved, borrowed and invested.

Competition

Each year, competition becomes more fierce and global in nature. To meet this challenge, we attempt to stay in close contact with our customers, monitoring their satisfaction with our services through surveys, personal visits and networking in the communities we serve. We strive to meet or exceed our customers’ expectations and deliver consistent high-quality service. We believe that our customers have become acutely aware of the value of local service, and we strive to maintain their confidence.

Rate environment

We intend to continue making what we believe to be rational pricing decisions for loans, deposits and non-deposit products. This strategy can be difficult to maintain, as many of our peers appear to continue pricing for growth, rather than long-term profitability and stability. We believe that a strategy of “growth for the sake of growth” results in lower profitability, and such actions by large groups of banks have had an adverse impact on the entire financial services industry. We intend to maintain our core pricing principles, which we believe protect and preserve our future as a sound community financial services provider, proven by results.

Regulated Company

The Company is subject to banking regulation, as well as regulation by the Securities and Exchange Commission (“SEC”) and, as such, must comply with many laws, including the USA Patriot Act, the Sarbanes-Oxley Act of 2002 and the new Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Management has established a Disclosure Committee for Financial Reporting, an internal group at Juniata that seeks to ensure that current and potential investors in the Company receive full and complete information concerning our financial condition. Juniata has incurred direct and indirect costs associated with compliance with the SEC’s filing and reporting requirements imposed on public companies by Sarbanes-Oxley, as well as adherence to new and existing banking regulations and stronger corporate governance requirements. Regulatory burdens continue to increase as evidenced by the provisions in the Dodd-Frank Act that impact the Company in the areas of corporate governance, capital requirements and restrictions on fees that may be charged to consumers.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

The Company’s consolidated financial statements are prepared based upon the application of U.S. generally accepted accounting principles (“GAAP”), the most significant of which are described in Note 1 to our consolidated financial statements — Summary of Significant Accounting Policies. Certain of these policies require numerous estimates and economic assumptions, based upon information available as of the date of the consolidated financial statements. As such, over time, they may prove inaccurate or vary and may significantly affect the Company’s reported results and financial position in future periods. The accounting policy for establishing the allowance for loan losses relies to a greater extent on the use of estimates than other areas and, as such, has a greater possibility of producing results that could be different than originally reported. Changes in underlying factors, assumptions or estimates in the allowance for loan losses could have a material impact on the Company’s future financial condition and results of operations.

The section of this Annual Report to Shareholders entitled “Allowance for Loan Losses” provides management’s analysis of the Company’s allowance for loan losses and related provision expense. The allowance for loan losses is maintained at a level believed adequate by management to absorb probable losses in the loan portfolio. Management’s determination of the adequacy of the allowance for loan losses is based upon an evaluation of individual credits in the loan portfolio, historical loan loss experience, current economic conditions and other relevant factors. This determination is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change.

Considerations used by management to determine other-than-temporary impairment status of individual holdings within the investment portfolio are based partially upon estimations of fair value and potential for recovery. As market conditions and perception can unpredictably affect the value of individual investments in the future, these determinations could have a material impact on the Company’s future financial condition and results in operations.

RESULTS OF OPERATIONS

2010
Financial Performance Overview

Net income for Juniata in 2010 was $4,915,000, representing a 3.7% decrease as compared to net income for 2009. Earnings per share on a fully diluted basis decreased from $1.18 in 2009 to $1.14 in 2010. The net interest margin, on a fully tax-equivalent basis, increased by one basis point, from 4.23% in 2009 to 4.24%, in 2010. The ratio of noninterest income (excluding gains on sales of securities and securities impairment charges) to average assets was decreased by 11 basis points, while the ratio of noninterest expense to average assets remained unchanged at 2.90%. Five-year historical ratios are presented below.


	2010			2009			2008			2007			2006

Return on average assets		1.12	%		1.17	%		1.34	%		1.28	%		1.21	%
Return on average equity		9.70			10.31			11.76			11.41			10.53
Yield on earning assets		5.42			5.88			6.48			6.88			6.43
Cost to fund earning assets		1.38			1.84			2.33			2.85			2.63
Net interest margin (fully tax equivalent)		4.24			4.23			4.34			4.17			3.91
Noninterest income (excluding gains on sales or calls of securities and securities impairment charges) to average assets		0.90			1.01			1.06			0.99			0.88
Noninterest expense to average assets		2.90			2.90			2.80			2.87			2.72
Net noninterest expense to average assets		2.00			1.89			1.74			1.88			1.84

While most of the key ratios presented above declined in 2010 as compared to 2009, we note that these results should be considered in context with what is a “new” normal in the financial services industry, at least during the recent economic climate. Therefore, it is important to understand the degree of change and how it compares to similar companies in our competitive market. We chose a group of six local competitors as a peer group to compare total stock return (see Form 10-K) and the analysis below compares our financial performance to the peer group’s financial performance for the nine months ended September 30, 2010, the most recent year-to-date period that is publicly available. As noted below, Juniata’s return on average assets and net interest margin significantly exceeded the averages of the peer group.


	For the nine months ended September 30, 2010
							Net Interest
	ROA			ROE			Margin
Juniata Valley Financial Corp		1.10	%		9.50	%		4.22	%
Peer Group Average		0.89	%		9.93	%		3.48	%

Juniata strives to attain consistently high earnings levels each year by protecting the core (repeatable) earnings base through conservative growth strategies that minimize stockholder and balance-sheet risk, while serving its rural Pennsylvania customer base. This approach has helped achieve solid performances year after year. The Company considers the ROA ratio to be a key indicator of its success and constantly scrutinizes the broad categories of the income statement that impact this profitability indicator. Summarized below are the components of net income (in thousands of dollars) and the contribution of each to ROA for 2010 and 2009.


	2010						2009
				% of Average						% of Average
				Assets						Assets
Net interest income	$	16,072			3.66	%	$	15,989			3.67	%
Provision for loan losses		(741	)		(0.17	)		(627	)		(0.14	)

Trust fees		378			0.09			361			0.08
Deposit service fees		1,428			0.33			1,673			0.38
BOLI		510			0.12			444			0.10
Commissions from sales of non-deposit products		358			0.08			446			0.10
Income from unconsolidated subsidiary		250			0.06			217			0.05
Other fees		940			0.21			935			0.21
Insurance-related income		—			0.00			323			0.07
Security gains and impairment charges		(9	)		(0.00	)		(209	)		(0.05	)
Gains (losses) on sale of other assets		79			0.02			(19	)		(0.00	)

Total noninterest income		3,934			0.90			4,171			0.96

Employee expense		(6,617	)		(1.51	)		(6,625	)		(1.52	)
Occupancy and equipment		(1,504	)		(0.34	)		(1,552	)		(0.36	)
Data processing expense		(1,397	)		(0.32	)		(1,325	)		(0.30	)
Director compensation		(335	)		(0.08	)		(416	)		(0.10	)
Professional fees		(515	)		(0.12	)		(392	)		(0.09	)
Taxes, other than income		(469	)		(0.11	)		(476	)		(0.11	)
FDIC insurance premiums		(534	)		(0.12	)		(634	)		(0.15	)
Intangible amortization		(45	)		(0.01	)		(45	)		(0.01	)
Other noninterest expense		(1,304	)		(0.30	)		(1,154	)		(0.27	)

Total noninterest expense		(12,720	)		(2.90	)		(12,619	)		(2.90	)

Income tax expense		(1,630	)		(0.37	)		(1,808	)		(0.42	)

Net income	$	4,915			1.12	%	$	5,106			1.17	%


Average assets	$	439,130					$	435,285

Net Interest Income

Net interest income is the amount by which interest income on earning assets exceeds interest expense on interest bearing liabilities. Net interest income is the most significant component of revenue, comprising approximately 80% of total revenues (the total of net interest income and noninterest income, exclusive of security gains and impairment charges) for 2010. Interest spread measures the absolute difference between average rates earned and average rates paid. Because some interest earning assets are tax-exempt, an adjustment is made for analytical purposes to place all assets on a fully tax-equivalent basis. Net interest margin is the percentage of net return on average earning assets on a fully tax-equivalent basis and provides a measure of comparability of a financial institution’s performance.

Both net interest income and net interest margin are impacted by interest rate changes, changes in the relationships between various rates and changes in the composition of the average balance sheet. Additionally, product pricing, product mix and customer preferences dictate the composition of the balance sheet and the resulting net interest income. Table 1 shows average asset and liability balances, average interest rates and interest income and expense for the years 2010, 2009 and 2008. Table 2 further shows changes attributable to the volume and rate components of net interest income.

Table 1
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
(Dollars in thousands)


	Years Ended December 31,
	2010								2009								2008
	Average					Yield/			Average					Yield/			Average					Yield/
	Balance (1)			Interest		Rate			Balance (1)			Interest		Rate			Balance (1)			Interest		Rate
ASSETS
Interest earning assets:
Taxable loans (5)	$	292,748		$	19,003		6.49	%	$	300,913		$	20,429		6.79	%	$	298,947		$	21,774		7.28	%
Tax-exempt loans		14,480			534		3.69			9,900			358		3.62			8,659			326		3.76

Total loans (8)		307,228			19,537		6.36			310,813			20,787		6.69			307,606			22,100		7.18

Taxable investment securities		44,456			973		2.19			39,571			1,163		2.94			38,646			1,666		4.31
Tax-exempt investment securities		33,558			1,016		3.03			34,793			1,152		3.31			31,999			1,082		3.38

Total investment securities		78,014			1,989		2.55			74,364			2,315		3.11			70,645			2,748		3.89

Interest bearing deposits		3,596			38		1.06			4,402			158		3.59			6,389			258		4.04
Federal funds sold		9,166			10		0.11			6,422			8		0.12			4,846			124		2.56

Total interest earning assets		398,004			21,574		5.42			396,001			23,268		5.88			389,486			25,230		6.48

Non-interest earning assets:
Cash and due from banks		10,109								9,791								10,167
Allowance for loan losses		(2,799	)							(2,524	)							(2,391	)
Premises and equipment		6,981								7,148								5,968
Other assets (7)		26,835								24,869								25,514

Total assets	$	439,130							$	435,285							$	428,744


LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2)	$	75,991			347		0.46		$	68,847			309		0.45		$	72,051			541		0.75
Savings deposits		46,833			230		0.49			40,705			212		0.52			37,248			362		0.97
Time deposits		197,182			4,810		2.44			209,779			6,595		3.14			204,809			7,992		3.90
Other, including short-term borrowings, long-term debt and other interest bearing liabilities		7,914			115		1.45			8,679			163		1.88			10,253			162		1.58

Total interest bearing liabilities		327,920			5,502		1.68			328,010			7,279		2.22			324,361			9,057		2.79


Non-interest bearing liabilities:
Demand deposits		55,656								51,337								49,137
Other		4,900								6,424								6,572
Stockholders’ equity		50,654								49,514								48,674

Total liabilities and stockholders’ equity	$	439,130							$	435,285							$	428,744


Net interest income				$	16,072							$	15,989							$	16,173

Net margin on interest earning assets (3)							4.04	%							4.04	%							4.15	%

Net interest income and margin - Tax equivalent basis (4)				$	16,870		4.24	%				$	16,767		4.23	%				$	16,898		4.34	%

Notes:


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

(2)		Includes Super Now 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%.

Table 2
RATE — VOLUME ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands)


	2010 Compared to 2009									2009 Compared to 2008
	Increase (Decrease) Due To (6)									Increase (Decrease) Due To (6)
	Volume			Rate			Total			Volume			Rate			Total
ASSETS
Interest earning assets:
Taxable loans (5)	$	(542	)	$	(884	)	$	(1,426	)	$	141		$	(1,486	)	$	(1,345	)
Tax-exempt loans		169			7			176			45			(13	)		32

Total loans		(373	)		(877	)		(1,250	)		186			(1,499	)		(1,313	)

Taxable investment securities		132			(322	)		(190	)		39			(542	)		(503	)
Tax-exempt investment securities		(40	)		(96	)		(136	)		92			(22	)		70

Total investment securities		92			(418	)		(326	)		131			(564	)		(433	)

Interest bearing deposits		(25	)		(95	)		(120	)		(73	)		(27	)		(100	)
Federal funds sold		3			(1	)		2			30			(146	)		(116	)

Total interest earning assets		(303	)		(1,391	)		(1,694	)		274			(2,236	)		(1,962	)

LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2)		31			7			38			(23	)		(209	)		(232	)
Savings deposits		31			(13	)		18			31			(181	)		(150	)
Time deposits		(379	)		(1,406	)		(1,785	)		190			(1,587	)		(1,397	)
Other, including short-term borrowings, long-term debt and other interest bearing liabilities		(13	)		(35	)		(48	)		(27	)		28			1

Total interest bearing liabilities		(330	)		(1,447	)		(1,777	)		171			(1,949	)		(1,778	)


Net interest income	$	27		$	56		$	83		$	103		$	(287	)	$	(184	)


(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 on securities available for sale: $1,429 in 2010, $1,118 in 2009 and $436 in 2008.

(8)		Interest income includes loan fees of $223, $202 and $347, in 2010, 2009 and 2008, respectively.

On average, total loans outstanding in 2010 decreased from 2009 by 1.2%, to $307,228,000. Average yields on loans decreased by 33 basis points in 2010 when compared to 2009. As shown in the preceding Rate — Volume Analysis of Net Interest Income Table 2, the decrease in yield reduced interest income by approximately $877,000, and the decrease in volume further reduced interest income by $373,000, resulting in an aggregate decrease in interest recorded on loans of $1,250,000. While the prime rate remained unchanged at 3.25% throughout 2009 and 2010, adjustable rate mortgages scheduled to reprice during 2010 that had not already reached a floor, did so at rates below their previous rates, effectively decreasing the overall yield to the Bank. Likewise, new and refinanced loans at lower rates during 2010 also contributed to the decrease in overall yield.

During 2010, 62% of the investment portfolio, or $49,754,000, matured or was prepaid. All proceeds from these events and other funds available through deposit growth, a total of $53,198,000, were reinvested in the investment portfolio in the lower rate environment, which explains the decrease in overall yield of the investment securities by 56 basis points. Yields on the investment securities portfolio decreased to 2.55% in 2010, as compared to 3.11% in 2009. Yield declines decreased net interest income by $418,000 when compared to 2009. Average balances of investment securities increased by $3,650,000, and this volume increase accounted for a $92,000 increase in interest income as compared to 2009.

In total, yield on earning assets in 2010 was 5.42% as compared to 5.88% in 2009, a decrease of 46 basis points. On a fully tax equivalent basis, yield on earning assets decreased from 6.07% in 2009 to 5.62% in 2010.

Average interest bearing liabilities decreased by $90,000 in 2010 as compared to 2009. Within the categories of interest bearing liabilities, deposits increased on average by $675,000, and borrowings decreased by $765,000 on average. While interest-bearing deposits increased in total, there was a shift in types of interest-bearing deposits. During 2010, time deposit balances decreased on average by $12,597,000 while interest-bearing demand and savings accounts increased on average by $13,272,000. Changes in these balances reduced interest expense by $330,000 in 2010 as compared to 2009, while decreases in interest rates further reduced interest expense by $1,447,000. Noninterest bearing liabilities used to fund earning assets included demand deposits, which increased $4,319,000 on average. The percentage of interest earning assets funded by noninterest bearing liabilities was approximately 17.6% in 2010 versus 17.3% in 2009. The total cost to fund earning assets (computed by dividing the total interest expense by the total average earning assets) in 2010 was 1.38%, as compared to 1.84% in 2009.

Net interest income was $16,072,000 for 2010, an increase of $83,000 when compared to 2009, with $56,000 due to rate differences and $27,000 attributed to volume changes.

Provision for Loan Losses

Juniata’s provision for loan losses is determined as a result of an analysis of the adequacy level of the allowance for loan losses. In order to closely reflect the potential losses within the current loan portfolio based upon current information known, the Company carries no unsupported allowance. An analysis was performed following the process described in “Application of Critical Accounting Policies” earlier in this discussion, and it was determined that a provision of $741,000 was appropriate for 2010, an increase of $114,000 when compared to 2009 when the total loan loss provision was $627,000. In 2010, the provision exceeded net charge-offs by $105,000. The recession caused a number of our borrowers to develop financial problems that have resulted in a higher loan loss provision and an increase in net charge-offs. See the discussion on Loans and Allowance for Loan Losses in the section below titled “Financial Condition”.

Noninterest Income

The Company remains committed to providing comprehensive services and products to meet the current and future financial needs of our customers. We believe that our responsiveness to customers’ needs surpasses that of our competitors and we measure our success by the customer acceptance of fee-based services. We provide alternative investment opportunities through an arrangement with a broker dealer and have integrated the delivery of non—traditional products with our Trust and Wealth Management Division. This arrangement enables us to meet the investment needs of a varied customer base and to better identify our clients’ needs for traditional trust services.

Fee-generated noninterest revenues consist of customer service fees derived from deposit accounts, trust relationships and sales of non-deposit products. In 2010, revenues from these services totaled $2,164,000, representing a decrease of $316,000, or 12.7%, from 2009 revenues. Customer service fees derived from deposit accounts were $245,000 less in 2010 than in 2009. The decrease was a result of a reduction in overdraft and non-sufficient fund charges to customers. Total fees for trust services increased by $17,000, or 4.7%, as fees from estate settlements increased by $23,000 in 2010 as compared to 2009, and non-estate fees decreased by $6,000. Variance in fees from estate settlements occurs because estate settlements occur sporadically and are not necessarily consistent year to year. Non-estate fees are repeatable revenues that generally increase and decrease in relation to movements in interest rates as market values of trust assets under management increase and as new relationships are established. Similarly, sales of non-deposit products declined in 2010 due to continued investor concerns during the economic downturn, resulting in an $88,000 reduction in related fee income.

The Company owns 39.16% of the stock of The First National Bank of Liverpool (“FNBL”) and accounts for its ownership through the equity method. As such, 39.16% of the income of FNBL is recorded by Juniata as noninterest income. As a result of this investment, $250,000 was recorded as income in 2010, compared to $217,000 in 2009. Earnings on bank-owned life insurance and annuities increased in 2010 by $66,000, or 14.9%, when compared to the previous year, following a restructuring and diversification of policy carriers.

In 2010, net gains from the sale of investment securities were $31,000, an increase of $14,000 in comparison to 2009. Management considers multiple factors when selling investment securities; therefore, income from this activity can fluctuate from year to year, and may not be consistent in the future. Juniata generally only sells equity securities that have appreciated in value since their purchase or when an equity security is in danger of impairment or is considered to be other-than-temporarily impaired. Equity securities are considered for sale primarily when there is market appreciation available or when there is no longer a business reason to hold the stock. A loss is recognized on debt and equity securities if permanent or other-than-temporary impairment is deemed to have occurred. In 2010, we recorded an impairment charge of $40,000 relating to investments in the common stock of certain financial services companies. In 2009, we recorded an impairment charge of $226,000.

As a percentage of average assets, non-interest income (excluding securities gains and impairment charges) was 0.90% in 2010 as compared to 1.01% in 2009.

Noninterest Expense

Management strives to control noninterest expense where possible in order to achieve maximum operating results.

In 2010, total non-interest expense increased by $101,000, or 0.8%, when compared to 2009. One item impacted comparability in the non-interest expense category, increasing non-interest expense in the 2009 period. In 2009’s second quarter, banks were charged a special assessment by the FDIC, which was intended to replenish the Bank Insurance Fund. In Juniata’s case, the assessment resulted in non-interest expense of $194,000. Offsetting the positive variance between years for the special assessment is the negative variance resulting from the significant increase in regular, recurring FDIC deposit insurance premiums. The normal deposit insurance premium expense (exclusive of the special premium) for the year 2009 was $440,000 as compared to $534,000 in 2010, representing an increase of $94,000, or 21.4%. Director compensation costs were $81,000, or 19.4%, lower in 2010 as compared to 2009, as a result of retirements of board and advisory board members. Professional fees increased by $123,000 in 2010 over 2009 due to the increased use of various consultants during 2010. Other noninterest expense categories that increased in 2010 included delinquent and foreclosed loan costs, provision for unfunded commitments, charitable donations and supply expense, which in the aggregate exceeded 2009 by $140,000.

As a percentage of average assets, noninterest expense was 2.90% in both 2010 and in 2009.

Income Taxes

Income tax expense for 2010 amounted to $1,630,000 compared to $1,808,000 in 2009. The effective tax rate was 24.9% in 2010 versus 26.1% in 2009, due to Juniata’s tax favored income being higher in 2010 as compared to 2009. Average tax-exempt investments and loans as a percentage of average assets were 10.9%, 10.3% and 9.5% in 2010, 2009 and 2008, respectively. Tax-exempt income as a percentage of income before tax was 23.7%, 21.0% and 18.1% in 2010, 2009 and 2008, respectively. See Note 14 of Notes to Consolidated Financial Statements for further information on income taxes.

Net Income

For comparative purposes, the following table sets forth earnings, in thousands of dollars, and selected earnings ratios for the past three years.


	2010			2009			2008
Net income	$	4,915		$	5,106		$	5,724
Return on average assets		1.12	%		1.17	%		1.34	%
Return on average equity		9.70	%		10.31	%		11.76	%

Outlook for 2011

While many changes have occurred within banking since 2008, interest rates have not been among those changes. Since December of 2008, the national prime rate has remained at 3.25% and the federal funds rate has remained at exceptionally historically low level. This period is the longest period of unchanged rates in recent history. Still, we expect, and are prepared for the interest rate environment to remain relatively unchanged again throughout 2011. But, because experience also tells us that rate movement can occur quickly and significantly, we are managing our interest sensitive assets and liabilities with an understanding of the rate risk involved with rapidly rising rates. Our net interest margin remains a primary component of profitability; however we will seek to increase our focus on fee services and attempt to regain income lost to consumer regulation in order to augment revenues. We will maintain the conservative lending and investing philosophies and responsible deposit pricing that have resulted in our strong net interest margin and solid balance sheet.

Paramount also to our success is the satisfaction level of our customers, clients and employees. Following 2010, a year in which we implemented a major upgrade to our core processing system, 2011 promises more significant announcements in the area of technology. Taking the step beyond on-line banking, we are entering the mobile banking arena beginning in the first quarter of 2011. We believe that it is imperative that our customers have convenient and easy access to personal financial services that complement their changing lifestyles, whether through electronic or personal delivery. Convenience and mobility have become priorities for a large segment of the population in deciding with whom one will do business, and thus we have made one of our priorities to offer full-featured mobile banking to that segment.

Additionally, in 2011, our business development plan continues to expand and will include more horizontal integration, extending the opportunities for cross selling across departmental lines. We strive to be the financial services provider of choice to those within our market area.

We do not take our historical success for granted. Management is aware of the challenges facing us in the coming year. We are positioned to reward our stockholders with a good return on their investment in our Company while maintaining strong capital and liquidity levels, and intend to remain in that position. The confidence of our stockholders and the trust of our community are vital to our ongoing success.

2009
Financial Performance Overview

Net income for Juniata in 2009 was $5,106,000, representing a 10.8% decrease as compared to net income for 2008. Earnings per share on a fully diluted basis decreased from $1.31 in 2008 to $1.18 in 2009. The net interest margin, on a fully tax-equivalent basis, decreased by 11 basis points, from 4.34% in 2008 to 4.23%, in 2009. The ratio of noninterest income (excluding gains on sales or calls of securities and securities impairment charges) to average assets decreased by 5 basis points, and the ratio of noninterest expense to average assets increased by 10 basis points.

Summarized below are the components of net income (in thousands of dollars) and the contribution of each to ROA for 2009 and 2008.


	2009						2008
				% of Average						% of Average
				Assets						Assets
Net interest income	$	15,989			3.67	%	$	16,173			3.77	%
Provision for loan losses		(627	)		(0.14	)		(421	)		(0.10	)

Trust fees		361			0.08			389			0.09
Deposit service fees		1,673			0.38			1,660			0.39
BOLI		444			0.10			486			0.11
Commissions from sales of non-deposit products		446			0.10			704			0.16
Income from unconsolidated subsidiary		217			0.05			207			0.05
Other fees		935			0.21			875			0.20
Insurance-related income		323			0.07			179			0.04
Security gains and impairment charges		(209	)		(0.05	)		(521	)		(0.12	)
Gains (losses) on sale of other assets		(19	)		(0.00	)		58			0.01

Total noninterest income		4,171			0.96			4,037			0.94

Employee expense		(6,625	)		(1.52	)		(6,451	)		(1.50	)
Occupancy and equipment		(1,552	)		(0.36	)		(1,638	)		(0.38	)
Data processing expense		(1,325	)		(0.30	)		(1,375	)		(0.32	)
Director compensation		(416	)		(0.10	)		(417	)		(0.10	)
Professional fees		(392	)		(0.09	)		(379	)		(0.09	)
Taxes, other than income		(476	)		(0.11	)		(500	)		(0.12	)
FDIC insurance premiums		(634	)		(0.15	)		(59	)		(0.01	)
Intangible amortization		(45	)		(0.01	)		(45	)		(0.01	)
Other noninterest expense		(1,154	)		(0.27	)		(1,144	)		(0.27	)

Total noninterest expense		(12,619	)		(2.90	)		(12,008	)		(2.80	)

Income tax expense		(1,808	)		(0.42	)		(2,057	)		(0.48	)

Net income	$	5,106			1.17	%	$	5,724			1.34	%


Average assets	$	435,285					$	428,744

Net Interest Income

On average, total loans outstanding in 2009 increased from 2008 by 1.0%, to $310,813,000. Average yields on loans decreased by 49 basis points in 2009 when compared to 2008. As shown in the preceding Rate — Volume Analysis of Net Interest Income Table 2, the decrease in yield reduced interest income by approximately $1,499,000, and the increase in volume added $186,000, resulting in an aggregate decrease in interest recorded on loans of $1,313,000. The yield decrease was largely due to the difference in market rates between the two years. The prime rate decreased from January 1, 2008 to December 31, 2008 by 400 basis points, from 7.25% to 3.25%, and remained at 3.25% for the entire year in 2009. On average, the prime rate was 5.21% during 2008 and 3.25% during 2009.

During 2009, 67% of the investment portfolio, or $42,912,000, matured or was prepaid. All proceeds from these events and other funds available through deposit growth, a total of $56,245,000, was reinvested in the investment portfolio in the lower rate environment, which explains the decrease in overall yield of the investment securities by 78 basis points. Yields on the investment securities portfolio decreased to 3.11% in 2009, as compared to 3.89% in 2008. Yield declines accounted for a $564,000 decrease in interest income when compared to 2008. Average balances of investment securities increased by $3,719,000, and this volume increase accounted for a $131,000 increase in interest income as compared to 2008.

In total, yield on earning assets in 2009 was 5.88% as compared to 6.48% in 2008, a decrease of 60 basis points. On a fully tax equivalent basis, yield decreased from 6.67% in 2008 to 6.07% in 2009.

Average interest bearing liabilities increased by $3,649,000, or 1.1%, in 2009 as compared to 2008. Within the categories of interest bearing liabilities, deposits increased on average by $5,223,000, and borrowings decreased by $1,574,000 on average. Changes in these balances resulted in $171,000 in additional interest expense in 2009 as compared to 2008, while decreases in interest rates accounted for $1,949,000 in reduced interest expense. Noninterest bearing liabilities used to fund earning assets included demand deposits, which increased $2,200,000 on average. The percentage of interest earning assets funded by noninterest bearing liabilities was approximately 17.3% in 2009 versus 16.7% in 2008. The total cost to fund earning assets (computed by dividing the total interest expense by the total average earning assets) in 2009 was 1.84%, as compared to 2.33% in 2008.

Net interest income was $15,989,000 for 2009, a decrease of $184,000 when compared to 2008. The overall decrease in net interest income was the net result of a decrease due to rate changes of $287,000, partially offset by the increase due to volume changes of $103,000.

Provision for Loan Losses

An analysis was performed following the process described in “Application of Critical Accounting Policies” earlier in this discussion, and it was determined that a provision of $627,000 was appropriate for 2009, an increase of $206,000 when compared to 2008 when the total loan loss provision was $421,000. In 2009, the provision exceeded net charge-offs by $109,000. Net charge-offs were significantly higher in 2009 than in the four immediately preceding years, reflecting an increase in the levels of non-performing loans.

Noninterest Income

In 2009, revenues derived from deposit accounts, trust relationships and sales of non-deposit products totaled $2,480,000, representing a decrease of $273,000, or 9.9%, from 2008 revenues. Customer service fees derived from deposit accounts were similar to those in 2008, varying by only $13,000 in the aggregate; these fees accounted for approximately 67% of all fee-generated noninterest revenues. Total fees for trust services decreased by $28,000, or 7.2%, as fees from estate settlements decreased by $6,000 in 2009 as compared to 2008, and non-estate fees decreased by $22,000. Variance in fees from estate settlements occurs because estate settlements occur sporadically and are not necessarily consistent year to year. Non-estate fees are repeatable revenues that generally increase and decrease in relation to movements in interest rates as market values of trust assets under management increase and as new relationships are established. Similarly, sales of non-deposit products declined in 2009 due to investor concerns during the economic downturn, resulting in a $258,000 reduction in related fee income.

As a result of the Company’s investment in FNBL, $217,000 was recorded as income in 2009, compared to $207,000 in 2008. Earnings on bank-owned life insurance and annuities decreased in 2009 by $42,000, or 8.6%, when compared to the previous year, as a result of lower earnings rates.

Beyond the noninterest income sources discussed in the preceding paragraphs, other sources of noninterest revenues were recorded in both years, some of which impact comparability between the two periods. For example, in 2009, non-interest income included $323,000 that represents deferred fees earned on the sale of credit life insurance while, in 2008, the Company received proceeds from a claim on a life insurance policy in excess of the cash surrender value recorded, resulting in a gain of $179,000. Gains from the sale of property formerly used as branch locations occurred in both years and yielded gains of $14,000 and $58,000, respectively, in 2009 and 2008. Offsetting the $14,000 gain in 2009 was a $33,000 loss from the disposal of properties held as other real estate.

In 2009, net gains from the sale of investment securities were $17,000, a decrease of $16,000 in comparison to 2008. In 2009, an other-than-temporary impairment charge of $226,000 relating to investments in the common stock of certain financial services companies was recorded. In 2008, we recorded an impairment charge of $554,000.

As a percentage of average assets, non-interest income (excluding securities gains and impairment charges) was 1.01% in 2009 as compared to 1.06% in 2008.

Noninterest Expense

In 2009, total non-interest expense increased by $611,000, or 5.1%, when compared to 2008. Two items impacted comparability in the non-interest expense category, one decreasing non-interest expense in the 2008 period and the other increasing non-interest expense in the 2009 period. In 2008, certain unvested benefits were forfeited, resulting in an adjustment to the accrued liability for post-retirement benefits, and a decrease in employee benefits expense, of $106,000. In 2009’s second quarter, banks were charged a special assessment by the FDIC, which is intended to replenish the Bank Insurance Fund. In Juniata’s case, the assessment resulted in non-interest expense of $194,000. These two items resulted in a $300,000 increase in non-interest expense from 2008 to 2009. The remaining variance was primarily due to the significant increase in regular, recurring FDIC deposit insurance premiums. The normal deposit insurance premium expense (exclusive of the special premium) for the year 2009 was $381,000 higher than the premium expense in the year 2008. Excluding the adjustment for post-retirement benefits and the total impact of FDIC deposit insurance premiums and assessments, non-interest expense was $70,000 less in 2009 year than in 2008.

As a percentage of average assets, noninterest expense was 2.90% in 2009 as compared to 2.80% in 2008, an increase of 10 basis points. The increased FDIC assessments added 14 basis points to the 2009 ratio.

Income Taxes

Income tax expense for 2009 amounted to $1,808,000 compared to $2,057,000 in 2008. The effective tax rate was 26.1% in 2009 versus 26.4% in 2008, due to Juniata’s tax favored income being higher in 2009 as compared to 2008. Average tax-exempt investments and loans as a percentage of average assets were 10.3%, 9.5% and 7.0% in 2009, 2008 and 2007, respectively. Tax-exempt income as a percentage of income before tax was 21.0%, 18.1% and 14.2% in 2009, 2008 and 2007, respectively. See Note 14 of Notes to Consolidated Financial Statements for further information on income taxes.

Net Income

For comparative purposes, the following table sets forth earnings, in thousands of dollars, and selected earnings ratios for the past three years.


	2009			2008			2007
Net income	$	5,106		$	5,724		$	5,434
Return on average assets		1.17	%		1.34	%		1.28	%
Return on average equity		10.31	%		11.76	%		11.41	%

FINANCIAL CONDITION

Balance Sheet Summary

Juniata functions as a financial intermediary and, as such, its financial condition is best analyzed in terms of changes in its uses and sources of funds, and is most meaningful when analyzed in terms of changes in daily average balances. The table below sets forth average daily balances for the last three years and the dollar change and percentage change for the past two years.

Table 3
Changes in Uses and Sources of Funds
(Dollars in thousands)


	2010									2009									2008
	Average			Increase(Decrease)						Average			Increase(Decrease)						Average
	Balance			Amount			%			Balance			Amount			%			Balance
Funding Uses:
Loans:
Commercial	$	81,172		$	(4,573	)		(5.3	%)	$	85,745		$	4,454			5.5	%	$	81,291
Tax-exempt loans		14,480			4,580			46.3			9,900			1,241			14.3			8,659
Mortgage		152,963			3,383			2.3			149,580			5,552			3.9			144,028
Consumer, including Home Equity		58,613			(6,975	)		(10.6	)		65,588			(8,040	)		(10.9	)		73,628
Securities		44,456			4,885			12.3			39,571			925			2.4			38,646
Tax-exempt securities		33,558			(1,235	)		(3.5	)		34,793			2,794			8.7			31,999
Interest bearing deposits		3,596			(806	)		(18.3	)		4,402			(1,987	)		(31.1	)		6,389
Federal funds sold		9,166			2,744			42.7			6,422			1,576			32.5			4,846

Total interest earning assets		398,004			2,003			0.5			396,001			6,515			1.7			389,486
Investment in unconsolidated subsidiary		3,443			185			5.7			3,258			181			5.9			3,077
Bank-owned life insurance and annuities		12,997			182			1.4			12,815			373			3.0			12,442
Goodwill and intangible assets		2,324			(45	)		(1.9	)		2,369			(45	)		(1.9	)		2,414
Other non-interest earning assets		23,732			1,484			6.7			22,248			(1,032	)		(4.4	)		23,280
Unrealized gains on securities		1,429			311			27.8			1,118			682			156.4			436
Less: Allowance for loan losses		(2,799	)		(275	)		(10.9	)		(2,524	)		(133	)		(5.6	)		(2,391	)


Total uses	$	439,130		$	3,845			0.9	%	$	435,285		$	6,541			1.5	%	$	428,744


Funding Sources:
Interest bearing demand deposits	$	75,991		$	7,144			10.4	%	$	68,847		$	(3,204	)		(4.4	%)	$	72,051
Savings deposits		46,833			6,128			15.1			40,705			3,457			9.3			37,248
Time deposits under $100,000		158,951			(10,460	)		(6.2	)		169,411			3,132			1.9			166,279
Time deposits over $100,000		38,257			(2,111	)		(5.2	)		40,368			1,838			4.8			38,530
Repurchase agreements		3,051			682			28.8			2,369			(2,999	)		(55.9	)		5,368
Short-term borrowings		155			(45	)		(22.5	)		200			(2,179	)		(91.6	)		2,379
Long-term debt		3,548			(1,452	)		(29.0	)		5,000			3,552			245.3			1,448
Other interest bearing liabilities		1,160			50			4.5			1,110			52			4.9			1,058

Total interest bearing liabilities		327,946			(64	)		(0.0	)		328,010			3,649			1.1			324,361
Demand deposits		55,656			4,319			8.4			51,337			2,200			4.5			49,137
Other liabilities		4,874			(1,550	)		(24.1	)		6,424			(148	)		(2.3	)		6,572
Stockholders’ equity		50,654			1,140			2.3			49,514			840			1.7			48,674


Total sources	$	439,130		$	3,845			0.9	%	$	435,285		$	6,541			1.5	%	$	428,744

Overall, total assets increased by $3,845,000, or 0.9%, on average, for the year 2010 compared to 2009, following an increase of $6,541,000, or 1.5%, in 2009 over average assets in 2008. The ratio of average earning assets to total assets was 91% in each of the last two years, while the ratio of average interest-bearing liabilities to total assets was 75% in both 2010 and 2009. Although Juniata’s investment in its unconsolidated subsidiary and its bank owned life insurance and annuities are not classified as interest-earning assets, income is derived directly from those assets. These instruments have represented 3.7% of total average assets in both 2010 and 2009. More detailed discussion of Juniata’s earning assets and interest bearing liabilities will follow in sections titled “Loans”, “Investments”, “Deposits” and “Market/Interest Rate Risk”.

Loans

Loans outstanding at the end of each year consisted of the following (in thousands):


	December 31,
	2010			2009			2008			2007			2006
Commercial, financial and agricultural	$	32,841		$	33,783		$	38,755		$	28,842		$	23,341
Real estate — commercial		44,185			39,299			32,171			29,021			29,492
Real estate — construction		11,028			24,578			22,144			27,223			29,489
Real estate — mortgage		142,608			135,854			140,016			127,324			132,572
Home equity		46,352			52,957			61,094			63,960			67,842
Obligations of states and political subdivisions		10,960			13,553			7,177			6,593			5,129
Personal		10,155			11,670			13,920			15,319			18,545
Unearned interest		(27	)		(64	)		(145	)		(282	)		(592	)

Total	$	298,102		$	311,630		$	315,132		$	298,000		$	305,818

From year-end 2009 to year-end 2010, total loans outstanding, net of unearned interest, decreased by $13,528,000, following a decrease of $3,502,000 in 2009 when compared to year-end 2008. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years.


	2010			2009			2008
Beginning balance	$	311,630		$	315,132		$	298,000

New loans, net of repayments		(12,063	)		(2,049	)		17,595
Loans charged off		(654	)		(529	)		(156	)
Loans transferred to other real estate owned and other adjustments to carrying value		(811	)		(924	)		(307	)

Net change		(13,528	)		(3,502	)		17,132


Ending balance	$	298,102		$	311,630		$	315,132

The loan portfolio was comprised of approximately 67% consumer loans and 33% commercial loans (including construction) on December 31, 2010 as compared to 64% consumer loans and 36% commercial loans on December 31, 2009. Management believes that diversification in the loan portfolio is important and performs a loan concentration analysis on a quarterly basis. The highest loan concentration by activity type was commercial acquisition, development and construction (ADC) loans, followed by commercial real estate loans, each accounting for less than 5.8% of the loan portfolio. Additionally, there are no concentrations that exceed 25% of capital, and management believes that these small concentrations pose no significant risk. See Note 5 of Notes to Consolidated Financial Statements.

As can be seen in Table 3, the primary source of growth of the loan portfolio came from mortgage and tax-exempt commercial loans, which increased on average by 4.7% in 2010 as compared to 2009. Consumer loans, primarily home equity loans, decreased on average as consumer loan demand lessened. Commercial loans on average decreased as well, by 5.3%, during 2010 as compared to the prior year. Although Juniata is willing, able and continues to lend to qualifying businesses and individuals, management believes that the recessionary climate impeded loan growth in 2010, and was the primary reason for increases in non-performing loans. Management further believes that we may continue to experience low growth and sustain current levels of non-performing loans into 2011, if unemployment remains elevated. During 2010 a dedicated credit administration division was established within the Company, in response to the need for heightened credit review, both in the loan origination process and in the ongoing risk assessment process. With stringent credit standards in place, our business model closely aligns lenders and community office managers’ efforts to effectively develop referrals and existing customer relationships. Continued emphasis will be placed on responsiveness and personal attention given to customers, which we believe differentiates the Bank from its competition. Nearly all commercial loans and most residential mortgage loans are either variable or adjustable rate loans, while other consumer loans generally have fixed rates for the duration of the loan. Juniata’s lending strategy stresses quality growth, diversified by product. A standardized credit policy is in place throughout the Company, and the credit committee of the Board of Directors reviews and approves all loan requests for amounts that exceed management’s approval levels. The Company makes credit judgments based on a customer’s existing debt obligations, collateral, ability to pay and general economic trends. See Note 1 of Notes to Consolidated Financial Statements.

Juniata strives to offer fair, competitive rates and to provide optimal service in order to attract loan growth. Emphasis will continue to be placed upon attracting the entire customer relationship of our borrowers.

The loan portfolio carries the potential risk of past due, non-performing or, ultimately, charged-off loans. The Bank attempts to manage this risk through credit approval standards and aggressive monitoring and collection efforts. Where prudent, the Bank secures commercial loans with collateral consisting of real and/or tangible personal property.

The allowance for loan losses has been established in order to absorb probable losses on existing loans. An annual provision or credit is charged to earnings to maintain the allowance at adequate levels. Charge-offs and recoveries are recorded as adjustments to the allowance. The allowance for loan losses at December 31, 2010 was 0.95% of total loans, net of unearned interest, as compared to 0.87% of total loans, net of unearned interest, at the end of 2009. The allowance increased $105,000 when compared to December 31, 2009. Net charge-offs for 2010 and 2009 were 0.21% and 0.17% of average loans, respectively.

At December 31, 2010, non-performing loans (as defined in Table 4 below), as a percentage of the allowance for loan losses, were 246.8% as compared to 147.0% at December 31, 2009. Non-performing loans were 2.34% of loans as of December 31, 2010, and 1.28% of loans as of December 31, 2009. Management believes that the increase in nonperforming loans in 2010 is directly related to economic conditions leading to an increased number of borrowers being unable to repay debt according to terms of the agreements. Of the $6,971,000 of non-performing loans at December 31, 2010, $6,895,000, or 99%, was collateralized with real estate and $76,000 with other assets.

Table 4
Non-Performing Loans


	December 31,
	2010		2009		2008		2007		2006
	(In thousands)
Nonaccrual loans	$	5,964	$	2,629	$	1,255	$	—	$	1,240
Accruing loans past due 90 days or more		1,007		1,369		664		837		214
Restructured loans		—		—		—		—		—

Total non-performing loans	$	6,971	$	3,998	$	1,919	$	837	$	1,454

Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is 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 they are (1) guaranteed or well secured and (2) there is an effective means of collection. When a loan is placed on non-accrual status, all unpaid interest credited to income in the current year is reversed against current period income and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, accruals are resumed on loans only when the obligation is brought fully current with respect to interest and principal, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The Company’s nonaccrual and charge-off policies are the same, regardless of loan type. During 2010, gross interest income that would have been recorded if loans in nonaccrual status had been current was $418,000, of which $138,000 was collected and included in net income.

Allowance for Loan Losses

The amount of allowance for loan losses is determined through a critical quantitative and qualitative analysis performed by management that includes significant assumptions and estimates. It is maintained at a level deemed sufficient to absorb probable estimated losses within the loan portfolio, and supported by detailed documentation. Critical to this analysis is any change in observable trends that may be occurring, to assess potential credit weaknesses.

Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio. The Bank’s methodology for maintaining the allowance is highly structured and contains two components; a component for loans that are deemed to be impaired and a component for contingencies.

Component for impaired loans:

As of December 31, 2010, 20 loans, with aggregate outstanding balances of $7,743,000, were evaluated for impairment. A collateral analysis was performed on each of these 20 loans in order to establish a portion of the reserve needed to carry impaired loans at no higher than fair value. As a result, six loans were determined to have insufficient collateral and specific reserves were established for each of the six impaired loans, totaling $570,000. The six loans requiring fair value adjustment comprise one single loan relationship.

Component for contingencies:

A contingency is an existing condition, or set of circumstances, involving uncertainty as to possible gain or loss to the Company that will ultimately be resolved when one or more future events occur or fail to occur. These conditions may be considered in relation to individual loans or in relation to groups of similar types of loans. If the conditions are met, a provision is made even though the particular loans that are uncollectible may not be identifiable.

Initially, the loan portfolio is segmented into pools of loans with similar characteristics. In our portfolio, pools are established based upon the application system through which they are maintained: Commercial/Business, Mortgage and Installment Loans. Loss rates for each of these portfolio segments are developed and applied to groups of homogeneous loans within the segments. Individual loans that have been risk-rated as special mention and above are reviewed individually for determination of the need for specific provision based upon unique and identifiable circumstances. If an individual loan (not considered to be a “large impaired loan”) is assigned a specific provision, that loan balance is excluded from the computation of the general provision for contingencies. Also excluded from the contingency provision calculation are loans identified as “large impaired loans”.

Contingency allowance evaluation consists of several key elements:

•

Historical trends: Historical net charge-offs are computed as a percentage of average loans, by loan type. This percentage is applied to the ending period balance of the loan type to determine the amount to be included in the allowance to cover charge-off probability. This factor is computed on an annual basis, by major type of loan. It is a ten year average of actual losses as a percentage of outstanding loan balances within the groupings of homogeneous loans. This timeframe is used in order to include periods of economic downturns and upturns;

•

Individual loan performance: Management identifies a list of loans which are individually assigned a risk rating grade because the loan has not performed according to payment terms and there is reason to believe that repayment of the loan principal, in whole or part, is unlikely. The specific portion of the allowance for these loans is the total amount of potential losses for these individual loans which has not previously been charged off;

•

General economic environment: Current economic indicators are reviewed to assess the level of change in risk in the loan portfolio due to possible changes in our customers’ ability to repay debt. These indicators generally include:

•

State and National unemployment rates, as well as local counties;

•

Management’s knowledge of the local economy, i.e. businesses moving in or closing down.

•

Management’s knowledge of other local events that could have an impact on our borrowers’ ability to pay.

Generally, the local unemployment rate consistently slightly exceeds the national and state statistics. Additionally, some of the larger employers in the local market area are experiencing some financial stress that has resulted in loss of jobs in recent years. Fuel cost escalation has put profit pressure on trucking firms, and increased cost of employer-provided medical insurance has added to the profit pressures of employers in general. Because of the extended recessionary climate, and the related increase in non-performing loans, management increased the factor used to compute the reserve for economic environment in the fourth quarter of 2009 and maintained that factor through 2010.

•

Other relevant factors: Certain specific risks inherent in the loan portfolio are identified and examined to determine if an additional allowance is warranted and, if so, management assigns a percentage to the loan category. Such factors consist of:

•

Credit concentration: Juniata’s loans are classified in pre-defined groups. Any group’s total that exceeds 25% of the Bank’s total capital is considered to be a credit concentration and as such, is determined to have an additional level of associated risk. Any group that exceeds 15% of capital may be assigned a factor, based upon management’s assessment;

•

Changes in loan volumes;

•

Changes in experience, ability and depth of management; and

•

External influences, such as competition, legal and regulatory requirements.

Determination of the allowance for loan losses is subjective in nature and requires management to periodically reassess the validity of its assumptions. Differences between net charge-offs and estimated losses are assessed such that management can modify its evaluation model on a timely basis to ensure that adequate provision has been made for risk in the total loan portfolio.

A summary of the transactions in the allowance for loan losses for the last five years (in thousands) is shown below. At $636,000, the level of net charge-offs in 2010 was the highest in the five year period presented. The increase in non-performing loans indicated the need for a provision for loan losses in 2010 at a level of $741,000, an 18% increase over the provision recorded in 2009.


	Years Ended December 31,
	2010			2009			2008			2007			2006
Balance of allowance — beginning of period	$	2,719		$	2,610		$	2,322		$	2,572		$	2,763
Loans charged off:
Commercial, financial and agricultural		134			47			43			291			159
Real estate — commercial		—			32			36			—			—
Real estate — mortgage		482			343			15			66			19
Personal		38			107			62			61			129

Total charge-offs		654			529			156			418			307

Recoveries of loans previously charged off:
Commercial, financial and agricultural		—			—			5			8			5
Real estate — mortgage		—			—			5			8			—
Personal		18			11			13			32			25

Total recoveries		18			11			23			48			30


Net charge-offs		636			518			133			370			277
Provision for loan losses		741			627			421			120			54
Branch acquisition loan loss reserve														32

Balance of allowance — end of period	$	2,824		$	2,719		$	2,610		$	2,322		$	2,572


Ratio of net charge-offs during period to average loans outstanding		0.21	%		0.17	%		0.04	%		0.12	%		0.09	%

The following tables show how the allowance for loan losses is allocated among the various types of outstanding loans and the percent of loans by type to total loans.


	Allocation of the Allowance for Loan Losses (in thousands)
	2010		2009		2008		2007		2006
Commercial	$	1,026	$	993	$	707	$	660	$	864
Real estate		1,336		1,146		1,202		933		1,011
Consumer		462		580		701		729		697
Unallocated		—		—		—		—		—

Total allowance for loan losses	$	2,824	$	2,719	$	2,610	$	2,322	$	2,572


	Percent of Loan Type to Total Loans
	2010			2009			2008			2007			2006
Commercial (non-real estate)		14.7	%		15.2	%		14.6	%		11.9	%		9.3	%
Real estate		81.9	%		81.1	%		81.0	%		83.0	%		84.6	%
Consumer		3.4	%		3.7	%		4.4	%		5.1	%		6.1	%

		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Investments

Total investments, defined to include all interest earning assets except loans (i.e. investment securities available for sale (at market value), federal funds sold, interest bearing deposits, Federal Home Loan Bank stock and other interest-earning assets), totaled $95,874,000 on December 31, 2010, representing an increase of $13,619,000 when compared to year-end 2009. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years.


	2010			2009			2008

Beginning balance	$	82,255		$	72,036		$	81,946
Purchases of investment securities		53,198			56,245			36,063
Sales and maturities of investment securities		(49,754	)		(42,895	)		(38,996	)
Impairment charge		(40	)		(226	)		(554	)
Adjustment in market value of AFS securities		(544	)		131			878
Amortization/Accretion		(293	)		(220	)		(126	)
Federal Home Loan Bank stock, net change		(109	)		—			1,102
Federal funds sold, net change		11,100			1,200			(7,500	)
Interest bearing deposits with others, net change		61			(4,016	)		(777	)

Net change		13,619			10,219			(9,910	)


Ending balance	$	95,874		$	82,255		$	72,036

On average, investments increased by $5,899,000, or 6.8%, during 2010, following an increase of $3,990,000, or 4.8%, during 2009. The increase in both years was due to deposit growth outpacing loan growth with the excess funding invested in short-term debt securities.

The investment area is managed according to internally established guidelines and quality standards. Juniata segregates its investment securities portfolio into two classifications: those held to maturity and those available for sale. Juniata classifies all new marketable investment securities as available for sale, and currently holds no securities in the held to maturity classification. At December 31, 2010, the market value of the entire securities portfolio was greater than amortized cost by $597,000 as compared to December 31, 2009, when market value was greater than amortized cost by $1,172,000. The weighted average maturity of the investment portfolio was 2 years and 10 months as of both December 31, 2010 and December 31, 2009. The weighted average maturity has remained short in order to achieve a desired level of liquidity. Table 5, “Maturity Distribution”, in this Management’s Discussion and Analysis of Financial Condition shows the remaining maturity or earliest possible repricing for investment securities. The following table sets forth the maturities of securities (in thousands) and the weighted average yields of such securities by contractual maturities or call dates. Yields on obligations of states and public subdivisions are presented on a tax-equivalent basis.


	December 31, 2010					December 31, 2009					December 31, 2008
			Weighted					Weighted					Weighted
Securities	Fair		Average			Fair		Average			Fair		Average
Type and maturity	Value		Yield			Value		Yield			Value		Yield
U.S. Treasury securities and obligations of U.S. Government agencies and corporations
Within one year	$	—				$	—				$	21,851		3.92	%
After one year but within five years		34,783		1.68	%		32,620		2.31	%		3,117		4.68	%
After five years but within ten years		2,913		1.72	%		933		1.99	%		—

		37,696		1.68	%		33,553		2.30	%		24,968		4.01	%

Obligations of state and political subdivisions
Within one year		12,390		4.21	%		6,863		3.06	%		9,727		4.98	%
After one year but within five years		24,877		3.57	%		32,972		3.12	%		24,735		4.72	%
After five years but within ten years		1,626		4.04	%		562		3.23	%		1,053		5.23	%

		38,893		3.79	%		40,397		3.11	%		35,515		4.81	%

Corporate Notes and Other
After one year but within five years		1,028		4.00	%		1,026		4.00	%		957		4.00	%

		1,028		4.00	%		1,026		4.00	%		957		4.00	%

Mortgage-backed securities
Within one year		—		—			—		—			210		4.58	%
After five years but within ten years		1,345		5.51	%		1,515		5.43	%		1,657		5.48	%

		1,345		5.51	%		1,515		5.43	%		1,867		5.38	%

Equity securities		961					865					1,014

	$	79,923				$	77,356				$	64,321

Bank Owned Life Insurance and Annuities

The Company periodically insures the lives of certain bank officers in order to provide split-dollar life insurance benefits to some key officers and to offset the cost of providing post-retirement benefits through non-qualified plans. Some annuities are also owned to provide cash streams that match certain post-retirement liabilities. During 2008, a claim was submitted on one of the life insurance policies that resulted in the receipt of $437,000, of which $258,000 represented recorded cash surrender value. See Note 7 of Notes to Consolidated Financial Statements. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years.


	2010			2009			2008
Beginning balance	$	13,066		$	12,582		$	12,344
Bank-owned life insurance		531			530			282
Annuities		(29	)		(46	)		(44	)

Net change		502			484			238


Ending balance	$	13,568		$	13,066		$	12,582

Investment in Unconsolidated Subsidiary

The Company owns 39.16% of the outstanding common stock of The First National Bank of Liverpool (FNBL), Liverpool, PA. This investment is accounted for under the equity method of accounting, and was carried at $3,550,000 as of December 31, 2010, of which $2,541,000 represents the underlying equity in net assets of FNBL. The difference between the investment carrying amount and the amount of the underlying equity, $1,009,000, is considered to be goodwill and is evaluated quarterly for impairment. Any loss in value of the investment that is other than a temporary decline would be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of FNBL to sustain an earnings capacity that would justify the carrying amount of the investment. The carrying amount at December 31, 2010 represented an increase of $212,000 when compared to December 31, 2009. In connection with this investment, two representatives of Juniata serve on the Board of Directors of FNBL.

Goodwill and Intangible Assets

In 2006, the Company acquired a branch office in Richfield, PA. Completing this purchase was in line with a strategic goal of the Company to expand its base into contiguous market areas within rural Pennsylvania. Included in the purchase price of the branch was goodwill of $2,046,000. Additionally, core deposit intangible was acquired and had carrying values of $254,000 and $299,000, as of December 31, 2010 and December 31, 2009, respectively. The core deposit intangible is being amortized over a ten-year period on a straight-line basis. Goodwill is not being amortized, but is measured annually for impairment.

Deferred Taxes

The Company accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry-forwards, if applicable. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. Management has determined that there was no need for a valuation allowance for deferred taxes as of December 31, 2010 and 2009. As of December 31, 2010 and 2009, the Company recorded a net deferred tax asset of $1,292,000 and $1,060,000, respectively, which was carried as a non-interest earning asset. The decrease of $232,000 was primarily the result of the reduction of the gross unrealized gains in the investment portfolio, reducing the deferred tax asset by $195,000. The remainder of the difference was due to the various other changes in gross temporary tax differences. See Note 14 of Notes to Consolidated Financial Statements.

Other Non-Interest Earning Assets

Other non-interest earning assets on average increased $1,484,000, or 6.7%, in 2010, after a decrease of $1,032,000, or 4.4%, in 2009. The following table summarizes the components of the non-interest earning asset category, and how the ending balances (in thousands) changed annually in each of the last three years.


	2010			2009			2008
Beginning balance	$	32,194		$	25,378		$	24,771
Cash and due from banks		(5,855	)		6,349			10
Premises and equipment, net		189			(496	)		102
Other real estate owned		(64	)		171			(6	)
Other receivables and prepaid expenses		(1,281	)		792			501

Net change		(7,011	)		6,816			607


Ending balance	$	25,183		$	32,194		$	25,378

Deposits

For the year 2010, total deposits decreased $607,000. From year-end 2008 to year-end 2009, total deposits increased by $20,366,000. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years.


	2010			2009			2008
Beginning balance	$	377,397		$	357,031		$	359,457

Demand deposits		5,666			830			5,445
Interest bearing demand deposits		5,612			13,667			(12,722	)
Savings deposits		4,576			5,422			3,237
Time deposits, $100,000 and greater		(4,354	)		(606	)		2,751
Time deposits, other		(12,107	)		1,053			(1,137	)

Net change		(607	)		20,366			(2,426	)


Ending balance	$	376,790		$	377,397		$	357,031

The following table shows (in thousands of dollars) the comparison of average core deposits and average time deposits as a percentage of total deposits for each of the last three years.


	2010								2009								2008
	Average		Increase(Decrease)						Average		Increase(Decrease)						Average
	Balance		Amount			%			Balance		Amount			%			Balance
Indexed money market deposits	$	29,137	$	6,700			29.9	%	$	22,437	$	(4,957	)		(18.1	)%	$	27,394
Interest bearing demand deposits		46,854		444			1.0			46,410		1,753			3.9			44,657
Savings deposits		46,833		6,128			15.1			40,705		3,457			9.3			37,248
Demand deposits		55,656		4,319			8.4			51,337		2,200			4.5			49,137

Total core (transaction) accounts		178,480		17,591			10.9			160,889		2,453			1.5			158,436

Time deposits, $100,000 and greater		38,257		(2,111	)		(5.2	)		40,368		1,838			4.8			38,530
Time deposits, other		158,951		(10,460	)		(6.2	)		169,411		3,132			1.9			166,279

Total time deposits		197,208		(12,571	)		(6.0	)		209,779		4,970			2.4			204,809


Total deposits	$	375,688	$	5,020			1.4	%	$	370,668	$	7,423			2.0	%	$	363,245

Average deposits increased $5,020,000, or 1.4%, to $375,688,000 in 2010 following an increase in 2009 of $7,423,000, or 2.0%, to $370,668,000. In the latter part of 2008, consumer confidence in banks in general declined, as concerns about a deepening recession and bank failures heightened. Although our Company’s lending practices, deposit-gathering strategies and business models for growth bear little resemblance to those banks that failed or sought help from the government, we believe that the media’s negative portrayal of all banks created some fear that deposits were not safe in any bank. In response to this concern, FDIC insurance protection was increased for all banks temporarily, and Juniata opted to purchase the higher level of protection for our customers for as long as it is available. It is obvious that customers continue to value the safety of insured deposits and, we believe, the local familiarity that the Bank continues to offer; these factors appear to be primary considerations for the majority of our customers. Responding to the increased level of FDIC insurance and the soundness and stability of our Company, all types of deposits, except indexed money market accounts, increased on average in 2009, by $12,380,000, or 3.7%, despite the reduction in general deposit rates that began when the Prime Rate and Federal Funds Rate dropped to 3.25% and 0 — 25 basis points, respectively, in December 2008. During 2009 and 2010, prime and fed funds rates remained unchanged. In 2010, our interest-bearing depositors tended to prefer shorter term, more liquid types of deposits, as we saw a decline of $12,571,000 on average in time deposits and a $13,272,000 increase in interest-bearing core transaction accounts. At the same time, average balances of non-interest bearing demand deposits grew by 8.4%, or $4,319,000.

In 2009 and 2010, the federal funds target rate remained unchanged, at between zero and 0.25%. Not only did many of our time depositors shift some of their funds to more liquid transaction accounts during 2010, we also saw more time deposit customers opt for longer-term certificates of deposit contracts, presumably to commit to longer terms in order to increase their yield. Of the $204,065,000 in time deposits at December 31, 2009, 66% were scheduled to mature within one year. As of December 31, 2010, 47% of the $187,604,000 of time deposits were scheduled to mature within one year.

The consumer continues to have a need for transaction accounts, and the Bank is continuing to focus on that need in order to build deposit relationships. Our products are geared toward low-cost convenience and ease for the customer. The Company’s strategy is to aggressively seek to grow customer relationships by staying in touch with changing needs and new methods of connectivity, resulting in attracting more of the deposit (and loan) market share.

Traditional banks such as ours have competition in the marketplace from many sources that directly compete with traditional banking products. In keeping with our desire to provide our customers a full array of financial services, we supplement the services traditionally offered by our Trust Department by staffing our community offices with wealth management consultants that are licensed and trained to sell variable and fixed rate annuities, mutual funds, stock brokerage services and long-term care insurance. Although the sale of these products can reduce the Bank’s deposit levels, these products offer solutions for our customers that traditional bank products cannot and allow us to more completely service our community. Fee income from the sale of non-deposit products (primarily annuities and mutual funds) was $358,000 and $446,000 in 2010 and 2009, respectively, representing approximately 6% and 7%, respectively, of total pre-tax income.

Other Interest Bearing Liabilities

Because Juniata funds primarily with local deposits, high levels of debt are not necessary, as can be seen in the table below. Occasionally, there is a need for short term, overnight borrowings that are temporary in nature, and there are instances where long-term debt may be used in matched-funding arrangements for particular loans. Juniata’s average balances for all borrowings decreased in each of the past two years and as of December 31, 2010, total borrowings were $4,514,000.

Changes in Borrowings
(Dollars in thousands)


	2010								2009								2008
	Average		Increase(Decrease)						Average		Increase(Decrease)						Average
	Balance		Amount			%			Balance		Amount			%			Balance
Repurchase agreements	$	3,051	$	682			28.8	%	$	2,369	$	(2,999	)		(55.9	)%	$	5,368
Short-term borrowings		155		(45	)		(22.5	)		200		(2,179	)		(91.6	)		2,379
Long-term debt		3,548		(1,452	)		(29.0	)		5,000		3,552			245.3			1,448
Other interest bearing liabilities		1,160		50			4.5			1,110		52			4.9			1,058

	$	7,914	$	(765	)		(8.8	)%	$	8,679	$	(1,574	)		(15.4	)%	$	10,253

Pension Plans

Through its noncontributory pension plan, the Company provides pension benefits to substantially all of its employees that were employed as of December 31, 2007. Benefits are provided based upon an employee’s years of service and compensation. ASC Topic 715 gives guidance on the allowable pension expense that is recognized in any given year. Management must make subjective assumptions relating to amounts and rates that are inherently uncertain. Please refer to Note 19 of Notes to Consolidated Financial Statements.

Stockholders’ Equity

Total stockholders’ equity decreased by $627,000 in 2009, or 1.2%, while net income decreased by 3.7%. The decrease in stockholders’ equity resulted primarily from the repurchase of stock into treasury, the reduction in the level of unrealized security gains and the increase in unamortized expense related to the defined benefit retirement plan, aggregating a reduction of $2,075,000. These reductions were partially offset by adding $1,390,000 in undistributed earnings. The following table summarizes how the components of equity (in thousands) changed annually in each of the last three years.


	2010			2009			2008
Beginning balance	$	50,603		$	48,485		$	48,572
Net income		4,915			5,106			5,724
Dividends		(3,525	)		(3,386	)		(3,241	)
Stock-based compensation		58			40			40
Repurchase of stock, net of re-issuance		(1,415	)		(84	)		(1,440	)
Net change in unrealized security gains		(377	)		69			563
Defined benefit retirement plan adjustments net of tax		(283	)		373			(1,253	)
Effect of implementation of ASC Topic 715		—			—			(480	)

Net change		(627	)		2,118			(87	)


Ending balance	$	49,976		$	50,603		$	48,485

On average, stockholders’ equity in 2010 was $50,654,000, as compared to $49,514,000 in 2009. At December 31, 2010, Juniata held 488,061 shares of stock in treasury at a cost of $9,527,000 as compared to 408,239 in 2009 at a cost of $8,131,000. These increases are a result of the stock repurchase program in effect (see Note 15 of Notes to Consolidated Financial Statements). Although management’s goal was to increase return on average equity, it became more important to maintain high levels of liquidity and capital adequacy. Return on average equity decreased to 9.70% in 2010 from 10.31% in 2009.

The Company periodically repurchases shares of its common stock under the share repurchase program approved by the Board of Directors. In September of 2008, the Board of Directors authorized the repurchase of an additional 200,000 shares of its common stock through its share repurchase program. The program will remain authorized until all approved shares are repurchased, unless terminated by the Board of Directors. Repurchases have typically been through open market transactions and have complied with all regulatory restrictions on the timing and amount of such repurchases. Shares repurchased have been added to treasury stock and accounted for at cost. These shares may be periodically reissued for stock option exercises, employee stock purchase plan purchases and to fulfill dividend reinvestment program needs. During 2010, 83,900 shares were repurchased in conjunction with the current program. Remaining shares authorized for repurchase were 122,036 as of December 31, 2010.

In 2010, Juniata increased its regular dividend by 5.1%, to $0.82 per common share. Per share common regular dividends in prior years were $0.78 and $0.74 in 2009 and 2008, respectively. (See Note 15 of Notes to Consolidated Financial Statements regarding restrictions on dividends from the Bank to the Company.) In January 2011, the Board of Directors declared a dividend of $0.21 per share for the first quarter of 2011 to stockholders of record on February 15, 2011, payable on March 1, 2011.

Juniata’s book value per share at December 31, 2010 was $11.74, as compared to $11.67 and $11.17 at December 31, 2009 and 2008, respectively. Juniata’s average equity to assets ratio for 2010, 2009 and 2008 was 11.54%, 11.38% and 11.35%, respectively. Refer also to the Capital Risk section in the Asset / Liability management discussion that follows.

Asset / Liability Management Objectives

Management believes that optimal performance is achieved by maintaining overall risks at a low level. Therefore, the objective of asset/liability management is to control risk and produce consistent, high quality earnings independent of changing interest rates. The Company has identified five major risk areas discussed below:

	•		Liquidity Risk

	•		Capital Risk

	•		Market / Interest Rate Risk

	•		Investment Portfolio Risk

	•		Economic Risk

Liquidity Risk

Through liquidity risk management, we seek to maintain our ability to readily meet commitments to fund loans, purchase assets and other securities and repay deposits and other liabilities. This area also includes the ability to manage unplanned changes in funding sources and recognize and address changes in market conditions that affect the quality of liquid assets. Juniata has developed a methodology for assessing its liquidity risk through an analysis of its primary and total liquidity sources. Three types of liquidity sources are (1) asset liquidity, (2) liability liquidity and (3) off-balance sheet liquidity.

Asset liquidity refers to assets that we are quickly able to convert into cash, consisting of cash, federal funds sold and securities. Short-term liquid assets generally consist of federal funds sold and securities maturing over the next twelve months. The quality of our short-term liquidity is very good: as federal funds are unimpaired by market risk and as bonds approach maturity, their value moves closer to par value. Liquid assets tend to reduce earnings when there is not an immediate use for such funds, since normally these assets generate income at a lower rate than loans or other longer-term investments.

Liability liquidity refers to funding obtained through deposits. The largest challenge associated with liability liquidity is cost. Juniata’s ability to attract deposits depends primarily on several factors, including sales effort, competitive interest rates and other conditions that help maintain consumer confidence in the stability of the financial institution. Large certificates of deposit, public funds and brokered deposits are all acceptable means of generating and providing funding. If the cost is favorable or fits the overall cost structure of the Bank, then these sources have many benefits. They are readily available, come in large block size, have investor-defined maturities and are generally low maintenance.

Off-balance sheet liquidity is closely tied to liability liquidity. Sources of off-balance sheet liquidity include Federal Home Loan Bank borrowings, repurchase agreements and federal funds lines with correspondent banks. These sources provide immediate liquidity to the Bank. They are available to be deployed when a need arises. These instruments also come in large block sizes, have investor-defined maturities and generally require low maintenance.

“Available liquidity” encompasses all three sources of liquidity when determining liquidity adequacy. It results from the Bank’s access to short-term funding sources for immediate needs and long-term funding sources when the need is determined to be permanent. Management uses both on-balance sheet liquidity and off-balance sheet liquidity to manage its liquidity position. The Company’s liquidity strategy is to maintain an adequate volume of high quality liquid instruments to facilitate customer liquidity demands. Management also maintains sufficient capital, which provides access to the liability and off-balance sheet sides of the balance sheet for funding. An active knowledge of debt funding sources is important to liquidity adequacy.

Contingency funding management involves maintaining contingent sources of immediate liquidity. Management believes that it must consider an array of available sources in terms of volume, maturity, cash flows and pricing. To meet demands in the normal course of business or for contingency, secondary sources of funding such as public funds deposits, collateralized loans, sales of investment securities or sales of loan receivables are considered.

It is the Company’s policy to maintain both a primary liquidity ratio and a total liquidity ratio of at least 10% of total assets. The primary liquidity ratio equals liquid assets divided by total assets, where liquid assets equal the sum of cash and due from banks, federal funds sold, interest-bearing deposits with other banks and available for sale securities. Total liquidity is comprised of all components noted in primary liquidity plus securities classified as held-to-maturity, if any. If either of these liquidity ratios falls below 10%, it is the Company’s policy to increase liquidity in a timely manner to achieve the required ratio.

It is the Company’s policy to maintain available liquidity at a minimum of 15% of total assets and contingency liquidity at a minimum of 20% of total assets.

Juniata is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh, which provides short-term liquidity. The Bank uses this vehicle to satisfy temporary funding needs throughout the year. The Company had no overnight advances on December 31, 2010 or on December 31, 2009.

The Bank’s maximum borrowing capacity with the FHLB is $163,767,000, with no balance outstanding as of December 31, 2010. In order to borrow an amount in excess of $29,011,000, the FHLB would require the Bank to purchase additional FHLB Stock. The FHLB is a source of both short-term and long-term funding. The Bank must maintain sufficient qualifying collateral, as defined, to secure all outstanding advances.

The Bank was party to an agreement with the FHLB for long-term debt through their Convertible Select Loan product. The principal amount of the loan was $5,000,000 and had a two-year term, maturing on September 17, 2010. The interest rate of 2.75% was fixed for the first year. The loan, at the option of the FHLB, became convertible to an adjustable-rate loan or a fixed rate loan, beginning on September 17, 2009 and quarterly thereafter. The debt was used by the Bank to match-fund a specific commercial loan with similar balance and term.

Juniata needs liquid resources available to fulfill contractual obligations that require future cash payments. The table below summarizes significant obligations to third parties, by type, that are fixed and determined at December 31, 2010.

Presented below are the significant contractual obligations of the Company as of December 31, 2010 (in thousands of dollars). Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

Contractual Obligations


					Payments Due by Period
							One to		Three to		More than
	Note				One Year		Three		Five		Five
	Reference		Total		or Less		Years		Years		Years
Certificates of deposits		11	$	187,604	$	87,523	$	47,172	$	52,909	$	—
Federal Funds borrowed and security repurchase agreements		12		3,314		3,314		—		—		—
Operating lease obligations		13		241		97		78		44		22
Other long-term liabilities 3rd party data processor contract		22		3,960		528		1,056		1,056		1,320
Supplemental retirement and deferred compensation		19		3,861		445		789		589		2,038

			$	198,980	$	91,907	$	49,095	$	54,598	$	3,380

The schedule of contractual obligations (above) excludes expected defined benefit retirement payments that will be paid from the plan assets, as referenced in Note 19 of Notes to Consolidated Financial Statements.

Capital Risk

The Company maintains sufficient core capital to protect depositors and stockholders and to take advantage of business opportunities while ensuring that it has resources to absorb the risks inherent in the business. Federal banking regulators have established capital adequacy requirements for banks and bank holding companies based on risk factors, which require more capital backing for assets with higher potential credit risk than assets with lower credit risk. All banks and bank holding companies are required to have a minimum of 4% of risk adjusted assets in Tier I capital and 8% of risk adjusted assets in Total capital (Tier I and Tier II capital). As of December 31, 2010 and 2009, Juniata’s Tier I capital ratio was 18.29% and 17.52%, respectively, and its Total capital ratio was 19.35% and 18.49%, respectively. Additionally, banking organizations must maintain a minimum Tier I capital to total average asset (leverage) ratio of 3%. This 3% leverage ratio is a minimum for the top-rated banking organizations without any supervisory, financial or operational weaknesses or deficiencies. Other banking organizations are required to maintain leverage capital ratios 100 to 200 basis points above the minimum depending on their financial condition. At December 31, 2010 and 2009, Juniata’s leverage ratio was 11.25% and 11.33%, respectively, with a required leverage ratio of 4% (see Note 15 of Notes to the Consolidated Financial Statements).

Market / Interest Rate Risk

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

Declines and volatility in the values of financial institution stocks have significantly reduced the likelihood of realizing significant gains in the near-term. Although the Company has realized occasional gains from this portfolio in the past, the primary objective of the portfolio is to achieve value appreciation in the long term while earning consistent attractive after-tax yields from dividends. The carrying value of the financial institutions stocks accounted for 0.2% of the Company’s total assets as of December 31, 2010. Management performs an impairment analysis on the entire investment portfolio, including the financial institutions stocks on a quarterly basis. During 2010, “other-than-temporary” impairment was identified and recorded on one stock. There is no assurance that further declines in market values of the common stock portfolio in the future will not result in “other-than-temporary” impairment charges, depending upon facts and circumstances present.

The equity investments in the Corporation’s portfolio had an adjusted cost basis of approximately $935,000 and a fair value of $961,000 at December 31, 2010. Net unrealized gains in this portfolio were $26,000 at December 31, 2010.

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 of (1) volume differences, (2) repricing differences, and (3) timing in its income simulation. As of the most recent model run, data was disseminated into appropriate repricing buckets, based upon the static position at that time. The interest-earning assets and interest-bearing liabilities were assigned a multiplier to simulate how much that particular balance sheet item would re-price when interest rates change. Finally, the estimated timing effect of rate changes is applied, and the net interest income effect is determined on a static basis (as if no other factors were present). As the table below indicates, based upon rate shock simulations on a static basis, the Company’s balance sheet is relatively rate-neutral as rates would change downward. Each 100 basis point increase results in approximately $93,000 decline in net interest income in the static environment. This negative effect of rising rates is offset to a large degree by the positive effect of imbedded options that include loans floating above their floors and likely internal deposit pricing strategies. After applying the effects of options, over a one-year period, the net effect of an immediate 100, 200, 300 and 400 basis point rate increase would change net interest income by $(41,000), $4,000, $78,000 and $152,000, respectively. Rate shock modeling was done for a declining rate of 25 basis points only, as the federal funds target rate currently is between zero and 0.25%. As the table below indicates, the net effect of interest rate risk on net interest income is neutral in a rising rate environment. Juniata’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.

Effect of Interest Rate Risk on Net Interest Income
(Dollars in thousands)


	Change in Net			Change in Net
Change in	Interest Income			Interest Income			Total Change in
Interest Rates	Due to Interest			Due to Imbedded			Net Interest
(Basis Points)	Rate Risk (Static)			Options			Income

400	$	(375	)	$	527		$	152
300		(281	)		359			78
200		(187	)		191			4
100		(93	)		52			(41	)
0		—			—			—
-25		23			(36	)		(13	)

The net interest income at risk position remained within the guidelines established by the Company’s asset/liability policy.

Table 5, presented below, illustrates the maturity distribution of the Company’s interest-sensitive assets and liabilities as of December 31, 2010. Earliest re-pricing opportunities for variable and adjustable rate products and scheduled maturities for fixed rate products have been placed in the appropriate column to compute the cumulative sensitivity ratio (ratio of interest-earning assets to interest-bearing liabilities). Securities with call features are treated as though the call date is the maturity date. Through one year, the cumulative sensitivity ratio is 1.03, indicating a well-matched balance sheet, with a minor amount of risk when measured on a static basis.

Table 5
MATURITY DISTRIBUTION
AS OF DECEMBER 31, 2010
(Dollars in thousands)
Remaining Maturity / Earliest Possible Repricing


			Over Three			Over Six		Over One
	Three		Months But			Months But		Year But			Over
	Months		Within Six			Within One		Within Five			Five
	or Less		Months			Year		Years			Years		Total
Interest Earning Assets
Interest bearing deposits	$	218	$	—		$	498	$	847		$	—	$	1,563
Federal funds sold		12,300		—			—		—			—		12,300
Investment securities:
Debt securities — taxable		3,009		1,503			4,172		32,932			3,997		45,613
Debt securities — tax-exempt		—		2,277			10,961		18,225			541		32,004
Mortgage-backed securities		—		—			—		1,345			—		1,345
Stocks		—		—			—		—			961		961
Loans:
Commercial, financial, and agricultural		18,515		21			464		8,930			4,911		32,841
Real estate — construction		3,262		228			1,476		2,301			3,761		11,028
Other loans		45,891		9,916			27,302		41,583			129,541		254,233


Total Interest Earning Assets		83,195		13,945			44,873		106,163			143,712		391,888

Interest Bearing Liabilities
Demand deposits		33,094		814			3,255		11,393			32,822		81,378
Savings deposits		2,569		3,041			3,239		6,596			31,667		47,112
Certificates of deposit over $100,000		4,587		3,737			6,362		19,413			—		34,099
Time deposits		24,403		20,274			28,160		80,668			—		153,505
Securities sold under agreements to repurchase		3,314		—			—		—			—		3,314
Other interest bearing liabilities		1,200		—			—		—			—		1,200


Total Interest Bearing Liabilities		69,167		27,866			41,016		118,070			64,489		320,608


Gap	$	14,028	$	(13,921	)	$	3,857	$	(11,907	)	$	79,223	$	71,280


Cumulative Gap	$	14,028	$	107		$	3,964	$	(7,943	)	$	71,280


Cumulative sensitivity ratio		1.20		1.00			1.03		0.97			1.22

Commercial, financial and agricultural loans maturing after one year with:
Fixed interest rates								$	8,741		$	4,910	$	13,651
Variable interest rates									177			753		930

Total								$	8,918		$	5,663	$	14,581

Investment Portfolio Risk

Management considers its investment portfolio risk as the amount of appreciation or depreciation the investment portfolio will sustain when interest rates change. The securities portfolio will decline in value when interest rates rise and increase in value when interest rates decline. Securities with long maturities, excessive optionality (as a result of call features) and unusual indexes tend to produce the most market risk during interest rate movements. Rate shocks of minus 100 and plus 100, 200 and 300 basis points were applied to the securities portfolio to determine how Tier 1 capital would be affected if the securities portfolio had to be liquidated and all gains and losses were recognized. The test revealed that, as of December 31, 2011, the risk-based capital ratio would remain adequate under these scenarios.

Economic Risk

Economic risk is the risk that the long-term or underlying value of the Company will change if interest rates change. Economic value of equity (EVE) represents the present value of the balance sheet without regard to business continuity. Economic value of equity methodology requires us to calculate the present value of all interest bearing instruments. Generally banks are exposed to rising interest rates on an economic value of equity basis because of the inherent mismatch between longer duration assets compared to shorter duration liabilities. A plus 200 basis point shock was applied, resulting in a minimal change to EVE, indicating a stable value.

Off-Balance Sheet Arrangements

The Company has numerous off-balance sheet loan obligations that exist in order to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit and letters of credit. Because many commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These instruments involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the consolidated financial statements. The Company does not expect that these commitments will have an adverse effect on its liquidity position.

Exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making these commitments as it does for on-balance sheet instruments.

The Company had outstanding loan origination commitments aggregating $23,623,000 and $31,587,000 at December 31, 2010 and 2009, respectively. In addition, the Company had $13,843,000 and $15,002,000 outstanding in unused lines of credit commitments extended to its customers at December 31, 2010 and 2009, respectively.

Letters of credit are instruments issued by the Company that guarantee the beneficiary payment by the Bank in the event of default by the Company’s customer in the non-performance of an obligation or service. Most letters of credit are extended for one-year periods. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary. The amount of the liability as of December 31, 2010 and 2009 for guarantees under letters of credit issued is not material.

The maximum undiscounted exposure related to these commitments at December 31, 2010 was $845,000, and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $1,001,000.

In 2009, the Company executed an agreement to obtain technology outsourcing services through an outside service bureau, and those services began in June 2010. The agreement provides for termination fees if the Company cancels the services prior to the end of the 8-year commitment period. The termination fee would be an amount equal to one hundred percent of the estimated remaining value of the terminated services if terminated in the first contract year, ninety percent of the estimated remaining value of the terminated services if terminated in the second contract year, eighty percent and seventy percent of the remaining value of the terminated services if terminated in the third and fourth contract years, respectively, and sixty percent of the remaining value of the terminated services if terminated in contract years five through eight. Termination fees are estimated to be approximately $3,960,000 at December 31, 2010.

The Company has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.

Effects of Inflation

The performance of a bank is affected more by changes in interest rates than by inflation; therefore, the effect of inflation is normally not as significant as it is on other businesses and industries. During periods of high inflation, the money supply usually increases and banks normally experience above average growth in assets, loans and deposits. A bank’s operating expenses may increase during inflationary times as the price of goods and services increase.

A bank’s performance is also affected during recessionary periods. In times of recession, a bank usually experiences a tightening on its earning assets and on its profits. A recession is usually an indicator of higher unemployment rates, which could mean an increase in the number of nonperforming loans because of continued layoffs and other deterioration of consumers’ financial condition.

Report on Management’s Assessment of Internal Control over Financial Reporting

The management of the Company is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2010, an evaluation was performed under the supervision and with the participation of Management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, management concluded that disclosure controls and procedures as of December 31, 2010 were effective in ensuring material information required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized and reported on a timely basis. Additionally, there were no changes in the Company’s internal control over financial reporting.

Management’s responsibilities related to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal control over financial reporting that are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States of America. As disclosed in the Report on Management’s Assessment of Internal Control Over Financial Reporting, Management assessed the Company’s system of internal control over financial reporting as of December 31, 2010, in relation to criteria for effective internal control over financial reporting as described in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, Management believes that, as of December 31, 2010, its system of internal control over financial reporting met those criteria and is effective.

The independent registered public accounting firm that audited the consolidated financial statements included in the annual report has issued an attestation report on the registrant’s internal control over financial reporting.

Marcie A. Barber, President and Chief Executive Officer

JoAnn N. McMinn, Chief Financial Officer

Report of Independent Registered Public Accounting Firm on Effectiveness of Internal Control over
Financial Reporting

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Juniata Valley Financial Corp.
Mifflintown, Pennsylvania

We have audited Juniata Valley Financial Corp. and its wholly-owned subsidiary’s The Juniata Valley Bank, (the “Company”) internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Report on Management’s Assessment of Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the consolidated financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company, maintained, in all material respects, effective internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Juniata Valley Financial Corp. and its wholly-owned subsidiary, The Juniata Valley Bank as of December 31, 2010 and 2009 and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2010, and our report dated March 15, 2011 expressed an unqualified opinion.

ParenteBeard LLC
Lancaster, Pennsylvania
March 15, 2011

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Juniata Valley Financial Corp.
Mifflintown, Pennsylvania

We have audited the accompanying consolidated statements of financial condition of Juniata Valley Financial Corp. and its wholly-owned subsidiary, The Juniata Valley Bank, (the “Company”) as of December 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Juniata Valley Financial Corp. and its wholly-owned subsidiary, The Juniata Valley Bank, as of December 31, 2010 and 2009 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2010 in conformity with accounting principles generally accepted in the United States of America.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 15, 2011 expressed an unqualified opinion.

ParenteBeard LLC
Lancaster, Pennsylvania
March 15, 2011

Juniata Valley Financial Corp. and Subsidiary
Consolidated Statements of Financial Condition
(in thousands, except share data)


	December 31,			December 31,
	2010			2009
ASSETS
Cash and due from banks	$	12,758		$	18,613
Interest bearing deposits with banks		218			82
Federal funds sold		12,300			1,200

Cash and cash equivalents		25,276			19,895

Interest bearing time deposits with banks		1,345			1,420
Securities available for sale		79,923			77,356
Restricted investment in Federal Home Loan Bank (FHLB) stock		2,088			2,197
Investment in unconsolidated subsidiary		3,550			3,338

Total loans, net of unearned interest		298,102			311,630
Less: Allowance for loan losses		(2,824	)		(2,719	)

Total loans, net of allowance for loan losses		295,278			308,911
Premises and equipment, net		7,067			6,878
Other real estate owned		412			476
Bank owned life insurance and annuities		13,568			13,066
Core deposit intangible		254			299
Goodwill		2,046			2,046
Accrued interest receivable and other assets		4,946			6,227

Total assets	$	435,753		$	442,109

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	60,696		$	55,030
Interest bearing		316,094			322,367

Total deposits		376,790			377,397

Securities sold under agreements to repurchase		3,314			3,207
Long-term debt		—			5,000
Other interest bearing liabilities		1,200			1,146
Accrued interest payable and other liabilities		4,473			4,756

Total liabilities		385,777			391,506
Stockholders’ Equity:
Preferred stock, no par value:
Authorized - 500,000 shares, none issued		—			—
Common stock, par value $1.00 per share:
Authorized - 20,000,000 shares
Issued - 4,745,826 shares
Outstanding -
4,257,765 shares at December 31, 2010;
4,337,587 shares at December 31, 2009		4,746			4,746
Surplus		18,354			18,315
Retained earnings		37,868			36,478
Accumulated other comprehensive loss		(1,465	)		(805	)
Cost of common stock in Treasury:
488,061 shares at December 31, 2010;
408,239 shares at December 31, 2009		(9,527	)		(8,131	)

Total stockholders’ equity		49,976			50,603

Total liabilities and stockholders’ equity	$	435,753		$	442,109

See Notes to Consolidated Financial Statements

Juniata Valley Financial Corp. and Subsidiary
Consolidated Statements of Income
(in thousands, except share data)


	Years Ended December 31,
	2010			2009			2008
Interest income:
Loans, including fees	$	19,537		$	20,787		$	22,100
Taxable securities		973			1,163			1,666
Tax-exempt securities		1,016			1,152			1,082
Other interest income		48			166			382

Total interest income		21,574			23,268			25,230

Interest expense:
Deposits		5,387			7,116			8,895
Securities sold under agreements to repurchase		3			2			69
Short-term borrowings		1			1			21
Long-term debt		99			140			41
Other interest bearing liabilities		12			20			31

Total interest expense		5,502			7,279			9,057

Net interest income		16,072			15,989			16,173
Provision for loan losses		741			627			421

Net interest income after provision for loan losses		15,331			15,362			15,752

Noninterest income:
Trust fees		378			361			389
Customer service fees		1,428			1,673			1,660
Earnings on bank owned life insurance and annuities		510			444			486
Commissions from sales of non-deposit products		358			446			704
Income from unconsolidated subsidiary		250			217			207
Securities impairment charge		(40	)		(226	)		(554	)
Gain on sales or calls of securities		31			17			33
Gain (Loss) on sales of other assets		79			(19	)		58
Gain on life insurance proceeds		—			—			179
Prior period income from insurance sales		—			323			—
Other noninterest income		940			935			875

Total noninterest income		3,934			4,171			4,037

Noninterest expense:
Employee compensation expense		5,052			4,958			5,078
Employee benefits		1,565			1,667			1,373
Occupancy		939			940			928
Equipment		565			612			710
Data processing expense		1,397			1,325			1,375
Director compensation		335			416			417
Professional fees		515			392			379
Taxes, other than income		469			476			500
FDIC Insurance premiums		534			634			59
Intangible amortization		45			45			45
Other noninterest expense		1,304			1,154			1,144

Total noninterest expense		12,720			12,619			12,008

Income before income taxes		6,545			6,914			7,781
Provision for income taxes		1,630			1,808			2,057


Net income	$	4,915		$	5,106		$	5,724

Earnings per share
Basic	$	1.14		$	1.18		$	1.31
Diluted	$	1.14		$	1.18		$	1.31
Cash dividends declared per share	$	0.82		$	0.78		$	0.74
Weighted average basic shares outstanding		4,297,443			4,341,097			4,376,077
Weighted average diluted shares outstanding		4,300,966			4,345,236			4,385,612

See Notes to Consolidated Financial Statements

Juniata Valley Financial Corp. and Subsidiary
Consolidated Statements of Stockholders’ Equity
(in thousands, except share data)


	Years Ended December 31, 2010, 2009 and 2008
	Number											Accumulated
	of											Other						Total
	Shares			Common					Retained			Comprehensive			Treasury			Stockholders’
	Outstanding			Stock		Surplus			Earnings			Loss			Stock			Equity

Balance at December 31, 2007		4,409,445		$	4,746	$	18,297		$	32,755		$	(557	)	$	(6,669	)	$	48,572
Comprehensive income:
Net income										5,724									5,724
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects													563						563
Defined benefit retirement plan adjustments, net of tax effects													(1,253	)					(1,253	)

Total comprehensive income																			5,034
Implementation of ASC Topic 715										(480	)								(480	)
Cash dividends at $0.74 per share										(3,241	)								(3,241	)
Stock-based compensation expense							40												40
Purchase of treasury stock, at cost		(72,955	)													(1,518	)		(1,518	)
Treasury stock issued for stock option and stock purchase plans		4,565					(13	)								91			78

Balance at December 31, 2008		4,341,055			4,746		18,324			34,758			(1,247	)		(8,096	)		48,485
Comprehensive income:
Net income										5,106									5,106
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects													69						69
Defined benefit retirement plan adjustments, net of tax effects													373						373

Total comprehensive income																			5,548
Cash dividends at $0.78 per share										(3,386	)								(3,386	)
Stock-based compensation expense							40												40
Purchase of treasury stock, at cost		(12,600	)													(217	)		(217	)
Treasury stock issued for stock option and stock purchase plans		9,132					(49	)								182			133

Balance at December 31, 2009		4,337,587			4,746		18,315			36,478			(805	)		(8,131	)		50,603
Comprehensive income:
Net income										4,915									4,915
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects													(377	)					(377	)
Defined benefit retirement plan adjustments, net of tax effects													(283	)					(283	)

Total comprehensive income																			4,255
Cash dividends at $0.82 per share										(3,525	)								(3,525	)
Stock-based compensation expense							58												58
Purchase of treasury stock, at cost		(83,900	)													(1,476	)		(1,476	)
Treasury stock issued for stock option and stock purchase plans		4,078					(19	)								80			61

Balance at December 31, 2010		4,257,765		$	4,746	$	18,354		$	37,868		$	(1,465	)	$	(9,527	)	$	49,976

See Notes to Consolidated Financial Statements

Juniata Valley Financial Corp. and Subsidiary
Consolidated Statements of Cash Flows
(in thousands)


	Years Ended December 31,
	2010			2009			2008
Operating activities:
Net income	$	4,915		$	5,106		$	5,724
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		741			627			421
Depreciation		565			587			691
Net amortization of securities premiums		293			220			126
Net amortization of loan origination costs		28			45			25
Amortization of core deposit intangible		45			45			45
Securities impairment charge		40			226			554
Net realized gains on sales or calls of securities		(31	)		(17	)		(33	)
Net losses (gains) on sales of other assets		(79	)		19			(58	)
Earnings on bank owned life insurance and annuities		(510	)		(444	)		(486	)
Bank owned life insurance proceeds in excess of cash surrender value		—			—			(179	)
Deferred income tax expense		163			223			609
Equity in earnings of unconsolidated subsidiary, net of dividends of $40, $46 and $0		(210	)		(171	)		(207	)
Stock-based compensation expense		58			40			40
Decrease (increase) in accrued interest receivable and other assets		1,064			(927	)		(962	)
Decrease in accrued interest payable and other liabilities		(208	)		(869	)		(2,066	)

Net cash provided by operating activities		6,874			4,710			4,244
Investing activities:
Purchases of:
Securities available for sale		(53,198	)		(56,245	)		(36,063	)
FHLB stock		—			—			(1,419	)
Premises and equipment		(754	)		(128	)		(838	)
Bank owned life insurance and annuities		(70	)		(120	)		(94	)
Proceeds from:
Sales of securities available for sale		—			5,004			9
Maturities of and principal repayments on:
Securities available for sale		49,754			37,908			38,987
Redemption of FHLB stock		109			—			317
Bank owned life insurance and annuities		57			68			511
Sale of other real estate owned		911			603			311
Sale of property owned for investment and other assets		—			160			322
Net decrease in interest bearing time deposits		75			3,905			200
Net decrease (increase) in loans receivable		12,063			2,049			(17,595	)

Net cash provided by (used in) investing activities		8,947			(6,796	)		(15,352	)
Financing activities:
Net (decrease) increase in deposits		(607	)		20,366			(2,426	)
Net increase (decrease) in short-term borrowings and securities
sold under agreements to repurchase		107			(7,372	)		5,148
Issuance of long-term debt					—			5,000
Repayment of long-term debt		(5,000	)		—			—
Cash dividends		(3,525	)		(3,386	)		(3,241	)
Purchase of treasury stock		(1,476	)		(217	)		(1,518	)
Treasury stock issued for employee stock plans		61			133			78

Net cash (used in) provided by financing activities		(10,440	)		9,524			3,041

Net increase (decrease) in cash and cash equivalents		5,381			7,438			(8,067	)
Cash and cash equivalents at beginning of year		19,895			12,457			20,524

Cash and cash equivalents at end of year	$	25,276		$	19,895		$	12,457

Supplemental information:
Interest paid	$	5,684		$	7,399		$	9,255
Income taxes paid		1,305			1,340			2,100
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate owned	$	758		$	814		$	305
Transfer of loans to other assets owned		1			74			—
Transfer of fixed asset to other assets		—			—			45

See Notes to Consolidated Financial Statements

JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2010, 2009 AND 2008

Nature Of Operations

Juniata Valley Financial Corp. (“Juniata” or the “Company”) is a bank holding company operating in central Pennsylvania, for the purpose of delivering financial services within its local market. Through its wholly-owned banking subsidiary, The Juniata Valley Bank (the “Bank”), Juniata provides retail and commercial banking and other financial services through 12 branch locations located in Juniata, Mifflin, Perry and Huntingdon counties. Additionally, in Mifflin and Centre counties, the Company maintains two offices for loan production and alternative investment sales. Each of the Company’s lines of business are part of the same reporting segment, whose operating results are regularly reviewed and managed by a centralized executive management group. The Bank provides a full range of banking services including on-line banking, an automatic teller machine network, checking accounts, NOW accounts, savings accounts, money market accounts, fixed rate certificates of deposit, club accounts, secured and unsecured commercial and consumer loans, construction and mortgage loans, safe deposit facilities, credit loans with overdraft checking protection and student loans. The Bank also provides a variety of trust services. The Company has a contractual arrangement with a broker-dealer to allow the offering of annuities, mutual funds, stock and bond brokerage services and long-term care insurance to its local market. Most of the Company’s commercial customers are small and mid-sized businesses operating in the Bank’s local service area. The Bank operates under a state bank charter and is subject to regulation by the Pennsylvania Department of Banking and the Federal Deposit Insurance Corporation. The bank holding company (parent company) is subject to regulation of the Federal Reserve Bank of Philadelphia.

1. Summary of Significant Accounting Policies

The accounting policies of Juniata Valley Financial Corp. and its wholly owned subsidiary conform to U.S. generally accepted accounting principles (“GAAP”) and to general financial services industry practices. A summary of the more significant accounting policies applied in the preparation of the accompanying consolidated financial statements follows.

Principles of consolidation

The consolidated financial statements include the accounts of Juniata Valley Financial Corp. and its wholly owned subsidiary, The Juniata Valley Bank. All significant intercompany transactions and balances have been eliminated.

Use of estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to significant change in the near term relate to the determination of the allowance for loan losses, the valuation of deferred tax assets, core deposit intangible and goodwill valuation, determination of the pension asset position, determination of other-than-temporary impairment on securities and the potential impairment of restricted stock.

Significant group concentrations of credit risk

Most of the Company’s activities are with customers located within the Juniata Valley region. Note 4 discusses the types of securities in which the Company invests. Note 5 discusses the types of lending in which the Company engages.

As of December 31, 2010, there were no concentrations of credit to any particular industry equaling 25% or more of total capital. The Bank’s business activities are geographically concentrated in the counties of Juniata, Mifflin, Perry, Huntingdon, Centre, Franklin and Snyder, Pennsylvania. The Bank has a diversified loan portfolio; however, a substantial portion of its debtors’ ability to honor their obligations is dependent upon the economy in central Pennsylvania.

Cash and cash equivalents

For purposes of reporting cash flows, cash and cash equivalents include cash on hand, amounts due from banks, interest bearing demand deposits with banks and federal funds sold. Generally, federal funds are sold for one-day periods.

Interest bearing time deposits with banks

Interest-bearing time deposits with banks consist of certificates of deposits in other banks with maturities within one year to three years.

Securities

Securities classified as available for sale, which include marketable investment securities, are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of comprehensive income, until realized. 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. Investment securities for which management has the positive intent and ability to hold the security to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions are classified as held to maturity and are stated at cost, adjusted for amortization of premium and accretion of discount computed by the interest method over their contractual lives. Interest and dividends on investment securities available for sale and held to maturity 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 policy requires quarterly reviews of impaired securities. This review includes analyzing the length of time and the extent to which the fair value has been less than cost and the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer. In addition, for debt securities, the Company considers (a) whether management has the intent to sell the security, (b) it is more likely than not that we will be required to sell the security prior to its anticipated recovery and (c) whether management expects to recover the entire amortized cost basis. For equity securities, management considers the intent and ability to hold securities until recovery of unrealized losses. Declines in fair value of impaired securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses.

Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date.

Restricted Investment in Federal Home Loan Bank Stock

The Bank owns restricted stock investments in the Federal Home Loan Bank. Federal law requires a member institution of the Federal Home Loan Bank to hold stock according to a predetermined formula. The stock is carried at cost. In December 2008, the FHLB of Pittsburgh notified member banks that it was suspending dividend payments and the repurchase of capital stock. However, in 2010, the FHLB of Pittsburgh repurchased portions of excess capital stock held by member banks of the FHLB.

Management evaluates the restricted stock for impairment on an annual basis. Management’s determination of whether these investments are impaired is based on their assessment of the ultimate recoverability of their cost rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of their cost is influenced by criteria such as (1) the significance of the decline in net assets of the FHLB as compared to the capital stock amount for the FHLB and the length of time this situation has persisted, (2) commitments by the FHLB to make payments required by law or regulation and the level of such payments in relation to the operating performance of the FHLB, and (3) the impact of legislative and regulatory changes on institutions and, accordingly, on the customer base of the FHLB.

Management believes no impairment charge was necessary related to the FHLB restricted stock during 2010, 2009 or 2008.

Loans

Loans that management 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, unearned income and the allowance for loan losses. 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. These broad categories are further disaggregated into classes of loans used for analysis and reporting. Classes consist of (1) commercial, financial and agricultural, (2) commercial real estate, (3) real estate construction, (4) residential mortgage loans, (5) home equity loans, (6) obligations of states and political subdivisions and (7) personal loans.

The Company’s intent is to hold loans in the portfolio until maturity. At the time the Company’s intent is no longer to hold loans to maturity based on asset/liability management practices, the Company transfers loans from 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 transfer are recorded as a charge to Other Non-Interest Expense. Gains or losses recognized upon sale are recorded as Other Non-Interest Income/Expense.

Loan origination fees and costs

Loan origination fees and related direct origination costs for a given loan are deferred and amortized over the life of the loan on a level-yield basis as an adjustment to interest income over the contractual life of the loan. As of December 31, 2010 and 2009, the amount of net unamortized origination fees carried as an adjustment to outstanding loan balances is $30,000 and $66,000, respectively.

Allowance for loan losses

The allowance for loan losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet 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 balance sheet. 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. The loan loss provision for federal income tax purposes is based on current income tax regulations, which allow for deductions equal to net charge-offs.

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

(1)

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,

(2)

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

(3)

a bankruptcy notice is received for an unsecured loan, or

(4)

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. Critical to this analysis is any change in observable trends that may be occurring, to assess potential credit weaknesses. Management’s periodic evaluation of the adequacy of the allowance is based on the Bank’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.

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

A large commercial loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. (A “large” loan (or group of like-loans within one relationship) is defined as a commercial/business loan, with an aggregate outstanding balance in excess of $150,000, or any other loan that management deems of similar characteristics inherent to the deficiencies of an impaired large loan by definition.) 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 for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable 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 securied 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 original appraisal and the condition of the property. Appraised values are 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 agings or 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 Bank generally does not separately identify individual consumer and residential 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 such borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a temporary reduction in interest rate 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 period of time after modification. Loans classified as troubled debt restructurings are designated as impaired.

The component for contingency 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 substandard have a well-defined weakness or weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current sound 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 or 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. 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. These qualitative risk factors 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 and 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.

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.

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 or does not exceed the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and may be renewed annually.

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, etc.

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 loans generally present a higher level of risk than other types of loans due primarily to the effect of general 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 loan portfolio is secured primarily by residential housing, raw land, and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to-value ratios of up to 80% of the appraised value of the property and are typically secured by personal guarantees of the borrowers.

As economic conditions change, the Company reduces its exposure in real estate segments 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 other types of loans due primarily to the effect of general 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, etc. 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 other types of loans due primarily to the effect of general economic conditions.

Residential Mortgage Lending - One- to four-family residential mortgage loan originations are generated by the Company’s marketing efforts, its present customers, walk-in customers and referrals. These loans originate primarily within the Company’s market area or with customers primarily from the market area.

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

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. Properties securing real estate loans made by the Company are appraised by independent fee appraisers. The Company generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Company does not engage in sub-prime residential mortgage originations.

Residential mortgage loans generally present a lower level of risk than other types of consumer loans because they are secured by the borrower’s primary residence.

Home Equity Installment and Line of Credit Lending - The Company originates home equity installment loans and home equity lines of credit primarily within the Company’s market area or with customers primarily from the market area.

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.

In underwriting home equity lines of credit, a thorough analysis of the borrower’s willingness and financial ability to repay the loan as agreed is performed. The ability to repay shall be 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.

Home equity loans generally present a lower level of risk than other types of consumer loans because they are secured by the borrower’s primary residence.

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, mobile homes 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 shall be 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.

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 based on their judgements 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 current level of the allowance for loan losses to be adequate.

Other real estate owned

Assets acquired in settlement of mortgage loan indebtedness are recorded as other real estate owned (OREO) at fair value less estimated costs to sell. Costs to maintain the assets and subsequent gains and losses attributable to their disposal are included in other income and other expenses as realized. No depreciation or amortization expense is recognized. At December 31, 2010 and 2009, the carrying value of other real estate owned was $412,000 and $476,000, respectively.

Business combinations

Business combinations are accounted for under the acquisition method of accounting. Under the aquisition method, assets and liabilities of the business acquired are recorded at their estimated fair values as of the date of the acquisition with any excess of the cost of the acquisition over the fair value of the net tangible and intangible assets acquired recorded as goodwill. Results of operations of the acquired business are included in the consolidated statement of income from the date of acquisition.

Goodwill and other intangible assets

Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Other intangible assets represent purchased assets that also lack physical substance but can be separately distinguished from goodwill because of contractual or other legal rights or because the asset is capable of being sold or exchanged either on its own or in combination with a related contract, asset or liability. It is the Company’s policy that goodwill be tested at least annually for impairment.

Intangible assets with finite lives include core deposits. Core deposit intangible assets are subject to impairment testing whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Core deposit intangibles are amortized over a period of time that represents their expected life using a method of amortization that reflects the pattern of economic benefit.

Premises and equipment and depreciation

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally using the straight-line method over the estimated useful lives of the related assets, which range from 3 to 10 years for furniture and equipment and 25 to 50 years for buildings. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized.

Trust assets and revenues

Assets held in a fiduciary capacity are not assets of the Bank or the Bank’s Trust Department and are, therefore, not included in the consolidated financial statements. Trust revenues are recorded on the accrual basis.

Bank owned life insurance and annuities

The cash surrender value of bank owned life insurance and annuities is carried as an asset, and changes in cash surrender value are recorded as non-interest income.

GAAP requires split-dollar life insurance arrangements to have a liability recognized related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement, and a liability for the future death benefit. The accrued benefit liability was $661,000 and $622,000 as of December 31, 2010 and 2009, respectively. The impact to pre-tax earnings for the full years of 2010, 2009 and 2008 was a decrease of $39,000, $69,000 and $74,000, respectively.

Income taxes

Juniata Valley Financial Corp. and its subsidiary file a consolidated federal income tax return. The provision for income taxes is based upon the results of operations, adjusted principally for tax-exempt income and earnings from bank owned life insurance. Certain items of income or expense are reported in different periods for financial reporting and tax return purposes. The tax effects of these temporary differences are recognized currently in the deferred income tax provision or benefit.

Deferred income tax assets and liabilities are determined using the liability (or balance sheet) method. Deferred tax assets or liabilities are computed based on the difference between the financial statement and income tax bases of assets and liabilities using the applicable enacted marginal tax rate. Deferred income tax expenses or benefits are based on the changes in the deferred tax asset or liability from period to period.

Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Deferred tax assets and liabilities are adjusted through the provision for income taxes for the effects of changes in tax laws and rates on the date of enactment.

Advertising

The Company follows the policy of charging costs of advertising to expense as incurred. Advertising expenses were $127,000, $125,000 and $156,000 in 2010, 2009 and 2008, respectively.

Off-balance sheet financial instruments

In the ordinary course of business, the Bank has entered into off-balance sheet financial instruments consisting of commitments to extend credit and letters of credit. Such financial instruments are recorded on the consolidated balance sheet when they are funded.

Transfer of financial assets

Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when (1) the assets have been isolated from the Company, (2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and (3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

Stock-based compensation

The Company recognized $58,000, $40,000 and $40,000 of expense for the years ended December 31, 2010, 2009 and 2008, respectively, for stock-based compensation. The stock-based compensation expense amounts were derived using the Black-Scholes option-pricing model. The following weighted average assumptions were used to value options granted in prior periods presented. There were no new options granted in 2010.


	2009			2008
Expected life of options	7 years			7 years
Risk-free interest rate		2.93	%		3.08	%
Expected volatility		21.77	%		19.47	%
Expected dividend yield		3.68	%		3.20	%

The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options, which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management’s opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.

Segment reporting

The Company acts as an independent community financial services provider, and offers traditional banking and related financial services to individual, business and government customers. Through its branch and automated teller machine network, the Company offers a full array of commercial and retail financial services, including the taking of time, savings and demand deposits; the making of commercial, consumer and mortgage loans, trust services and the providing of other financial services.

Management does not separately allocate expenses, including the cost of funding loan demand, between the commercial, retail and trust operations of the Company. As such, discrete financial information is not available and segment reporting would not be meaningful.

Subsequent events

The Company has evaluated events and transactions occurring subsequent to the balance sheet date of December 31, 2010, for items that should potentially be recognized or disclosed in the consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

2. Recent Accounting Standard Updates (ASU)

ASU 2011-01

The amendments in this ASU temporarily delay the effective date of the disclosures about troubled debt restructurings in ASU 2010-20 for public entities. Under the existing effective date in ASU 2010-20, public-entity creditors would have provided disclosures about troubled debt restructurings for periods beginning on or after December 15, 2010. The delay is intended to allow the Board time to complete its deliberations on what constitutes a troubled debt restructuring. The effective date of the new disclosures about troubled debt restructurings for public entities and the guidance for determining what constitutes a troubled debt restructuring will then be coordinated. Currently, that guidance is anticipated to be effective for interim and annual periods ending after June 15, 2011.

The deferral in this amendment was effective upon issuance. This guidance will not have an impact on the Company’s financial position or results of operations.

ASU 2010-29

The objective of this ASU is to address diversity in practice about the interpretation of the pro forma revenue and earnings disclosure requirements for business combinations.

Paragraph 805-10-50-2(h) requires a public entity to disclose pro forma information for business combinations that occurred in the current reporting period. The disclosures include pro forma revenue and earnings of the combined entity for the current reporting period as though the acquisition date for all business combinations that occurred during the year had been as of the beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should be reported as though the acquisition date for all business combinations that occurred during the current year had been as of the beginning of the comparable prior annual reporting period.

In practice, some preparers have presented the pro forma information in their comparative financial statements as if the business combination that occurred in the current reporting period had occurred as of the beginning of each of the current and prior annual reporting periods. Other preparers have disclosed the pro forma information as if the business combination occurred at the beginning of the prior annual reporting period only, and carried forward the related adjustments, if applicable, through the current reporting period.

The amendments in this ASU specify that if a public entity presents comparative financial statements, the entity should disclose revenue and earnings of the combined entity as though the business combination(s) that occurred during the current year had occurred as of the beginning of the comparable prior annual reporting period only.

The amendments in this ASU also expand the supplemental pro forma disclosures under ASC Topic 805 to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings.

The amendments in this ASU are effective prospectively for business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. Early adoption is permitted. This guidance will not have an impact on the Company’s financial position or results of operations.

ASU 2010-28

The amendments in this ASU modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples in paragraph 350-20-35-30, which requires that goodwill of a reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

These amendments eliminate an entity’s ability to assert that a reporting unit is not required to perform Step 2 because the carrying amount of the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairments may be reported sooner than under current practice.

For public entities, the amendments in this ASU are effective for fiscal years, and interim periods within those years, beginning after December 15, 2010. Early adoption is not permitted. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities may early adopt the amendments using the effective date for public entities.

Upon adoption of the amendments, an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of the amendments should be included in earnings as required by Section 350-20-35. This guidance will not have an impact on the Company’s financial position or results of operations.

ASU 2010-20

ASU 2010-20, Receivables (Topic 310): Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, will help investors assess the credit risk of a company’s receivables portfolio and the adequacy of its allowance for credit losses held against the portfolios by expanding credit risk disclosures.

This ASU requires more information about the credit quality of financing receivables in the disclosures to financial statements, such as aging information and credit quality indicators. Both new and existing disclosures must be disaggregated by portfolio segment or class. The disaggregation of information is based on how a company develops its allowance for credit losses and how it manages its credit exposure.

The amendments in this Update apply to all public and nonpublic entities with financing receivables. Financing receivables include loans and trade accounts receivable. However, short-term trade accounts receivable, receivables measured at fair value or lower of cost or fair value, and debt securities are exempt from these disclosure amendments.

The effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Company adopted the required provisions of ASU 2010-20, with no significant impact on its financial condition or results of operations.

ASU 2010-18

ASU 2010-18, Receivables (Topic 310): Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset, codifies the consensus reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 do not result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be required to consider whether the pool of assets in which the loan is included is impaired if expected cash flows for the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for within pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.

ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or after July 15, 2010. Early application is permitted. Upon initial adoption of ASU 2010-18, an entity may make a one-time election to terminate accounting for loans as a pool under Subtopic 310-30. This election may be applied on a pool-by-pool basis and does not preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The adoption of this standard did not have a significant impact on the Company’s financial condition or results of operations.

ASU 2010-13

The FASB issued ASU 2010-13, Compensation—Stock Compensation (Topic 718): Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades. The ASU codifies the consensus reached in Emerging Issues Task Force (EITF) Issue No. 09-J. The amendments to the codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the entity’s equity shares trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.

The amendments in the ASU are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. Earlier adoption is permitted. The amendments are to be applied by recording a cumulative-effect adjustment to beginning retained earnings. The amendments will not have an impact on the Company’s financial position or results of operations.

ASU 2010-09

The Financial Accounting Standards Board (FASB) has issued Accounting Standards Update (ASU) 2010-09, Subsequent Events (Topic 855): Amendments to Certain Recognition and Disclosure Requirements. The amendments in the ASU remove the requirement for a Securities Exchange Commission (SEC) filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature.

In addition, the amendments in the ASU require an entity that is a conduit bond obligor for conduit debt securities that are traded in a public market to evaluate subsequent events through the date of issuance of its financial statements and must disclose such date.

All of the amendments in the ASU were effective upon issuance (February 24, 2010) except for the use of the issued date for conduit debt obligors. That amendment was effective for interim or annual periods ending after June 15, 2010.

This guidance did not have an impact on the Company’s financial position or results of operations.

3. Restrictions on Cash and Due From Banks

The Company’s banking subsidiary is required to maintain cash reserve balances with the Federal Reserve Bank. The total required reserve balances were $1,059,000 and $1,061,000 as of December 31, 2010 and 2009, respectively.

4. Securities

The amortized cost and fair value of securities as of December 31, 2010 and 2009, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.


	December 31, 2010
					Gross		Gross
Securities Available for Sale	Amortized		Fair		Unrealized		Unrealized
Type and maturity	Cost		Value		Gains		Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations
After one year but within five years	$	34,607	$	34,783	$	348	$	(172	)
After five years but within ten years		3,000		2,913		—		(87	)

		37,607		37,696		348		(259	)
Obligations of state and political subdivisions
Within one year		12,219		12,390		175		(4	)
After one year but within five years		24,493		24,877		488		(104	)
After five years but within ten years		1,826		1,626		—		(200	)

		38,538		38,893		663		(308	)
Corporate notes
After one year but within five years		1,000		1,028		28		—

		1,000		1,028		28		—

Mortgage-backed securities		1,246		1,345		99
Equity securities		935		961		106		(80	)

Total	$	79,326	$	79,923	$	1,244	$	(647	)


	December 31, 2009
					Gross		Gross
Securities Available for Sale	Amortized		Fair		Unrealized		Unrealized
Type and maturity	Cost		Value		Gains		Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations
After one year but within five years	$	32,503	$	32,620	$	194	$	(77	)
After five years but within ten years		940		933		—		(7	)

		33,443		33,553		194		(84	)
Obligations of state and political subdivisions
Within one year		6,775		6,863		88		—
After one year but within five years		32,022		32,972		958		(8	)
After five years but within ten years		544		562		18		—

		39,341		40,397		1,064		(8	)
Corporate notes
After one year but within five years		1,000		1,026		26		—

		1,000		1,026		26		—

Mortgage-backed securities		1,425		1,515		90		—
Equity securities		975		865		58		(168	)

Total	$	76,184	$	77,356	$	1,432	$	(260	)

Certain obligations of the U.S. Government and state and political subdivisions are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The fair value of the pledged assets was $31,951,000 $30,403,000 and $34,301,000 at December 31, 2010, 2009 and 2008, respectively.

In addition to cash received from the scheduled maturities of securities, some investment securities available for sale are sold at current market values during the course of normal operations. Following is a summary of proceeds received from all investment securities transactions, and the resulting realized gains and losses (in thousands):


	Years Ended December 31,
	2010		2009			2008
Gross proceeds from sales of securities	$	—	$	5,004		$	9
Securities available for sale:
Gross realized gains	$	31	$	22		$	—
Gross realized losses		—		(5	)		(8	)
Gross gains from business combinations		—		—			41

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


	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations	$	17,859	$	(259	)	$	—	$	—		$	17,859	$	(259	)
Obligations of state and political subdivisions		9,719		(304	)		881		(4	)		10,600		(308	)

Debt securities		27,578		(563	)		881		(4	)		28,459		(567	)

Equity securities		389		(5	)		270		(75	)		659		(80	)


Total temporarily impaired securities	$	27,967	$	(568	)	$	1,151	$	(79	)	$	29,118	$	(647	)

The unrealized losses noted above are considered to be temporary impairments. Decline in the value of the debt securities is due only to interest rate fluctuations, rather than erosion of quality. As a result, the payment of contractual cash flows, including principal repayment, is not at risk. As management does not intend to sell the securities, does not believe the 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. There are 2 debt securities that have had unrealized losses for more than 12 months.

Equity securities owned by the Company consist of common stock of various financial services providers (“Bank stocks”) that have traditionally been high-performing stocks. During 2008 and 2009, market values of most of the Bank stocks materially declined. This trend stabilized somewhat in 2010. As part of the quarterly analysis performed to assess impairment of its investment portfolio, management determined that some of the unrealized losses in the Bank stock portfolio were “other than temporary”. Considerations used to determine other-than-temporary impairment status to individual holdings include the length of time the stock has remained in an unrealized loss position, and 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 news that would affect expectations for recovery or further decline. There were six equity securities that comprise a group of securities with unrealized losses for 12 months or more at December 31, 2010 carrying a total gross unrealized loss of $75,000. In the aggregate, the unrealized loss on this group of securities decreased by $70,000 from December 31, 2009 to December 31, 2010, indicating improvement. As part of the quarterly analysis as of September 30, 2010, there was one security identified that had sustained unrealized losses in excess of 50%, with no prospects or signs of improvement. Therefore, management determined that the unrealized loss in this one investment was “other than temporary” and recorded a charge to earnings of $40,000 at that time. Of the six equity securities that have sustained unrealized losses for more than 12 months, five have increased in fair value during 2010, indicating the possibility of full recovery and therefore are deemed to be temporarily impaired. The remaining stock that has experienced sustained unrealized losses has declined to approximately 76% of its cost as of December 31, 2010. Management tracks this local company’s performance quite closely. Its stock is very thinly traded and we believe the price reductions are a reflection of general economic concerns, as no dividend reductions have been made, the company’s capital is sufficient and it’s performance continues to be stable, with a reported return on average equity of 10.31% for 2010. Therefore, because management has the ability and intent to hold this equity security until recovery of unrealized losses, it has not been deemed to be other-than-temporarily impaired as of December 31, 2010. In 2009 and 2008, a total of $226,000 and $554,000, respectively, was recorded as an other-than-temporary impairment charge on three and eight of the 17 Bank stocks held.

We understand that stocks can be cyclical and will experience some down periods. Historically, bank stocks have sustained cyclical losses, followed by periods of substantial gains. When market values of the Bank stocks recover, accounting standards do not allow reversal of the other-than-temporary impairment charge until the security is sold, at which time any proceeds above the carrying value will be recognized as gains on the sale of investment securities.

There are 39 debt securities that had unrealized losses for less than 12 months. These securities have maturity dates ranging from September 2011 to September 2020. These securities represent approximately 35.9% of the total debt securities’ amortized cost as of December 31, 2010.

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


	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations	$	10,897	$	(84	)	$	—	$	—		$	10,897	$	(84	)
Obligations of state and political subdivisions		2,532		(8	)		—		—			2,532		(8	)

Debt securities		13,429		(92	)		—		—			13,429		(92	)

Equity securities		140		(23	)		496		(145	)		636		(168	)


Total temporarily impaired securities	$	13,569	$	(115	)	$	496	$	(145	)	$	14,065	$	(260	)

5. Loans and Related Allowance for Loan Losses

Loans outstanding at the end of each year consisted of the following (in thousands):


	December 31,
	2010			2009
Commercial, financial and agricultural	$	32,841		$	33,783
Real estate — commercial		44,185			39,299
Real estate — construction		11,028			24,578
Real estate — mortgage		142,608			135,854
Home equity		46,352			52,957
Obligations of states and political subdivisions		10,960			13,553
Personal		10,155			11,670
Unearned interest		(27	)		(64	)

Total	$	298,102		$	311,630

The following table presents 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 December 31, 2010 (in thousands):


			Special
	Pass		Mention		Substandard		Doubtful		Total

Commercial financial and agricultural	$	24,594	$	6,387	$	1,554	$	306	$	32,841
Real estate — commercial		33,437		6,059		4,089		600		44,185
Real estate — construction		11,028		—		—		—		11,028
Real estate — mortgage		127,944		8,069		5,180		1,415		142,608
Home equity		45,228		431		666		—		46,325
Obligations of states and political subdivisions		10,960		—		—		—		10,960
Personal		10,034		117		4		—		10,155

Total	$	263,225	$	21,063	$	11,493	$	2,321	$	298,102

The recorded investment in non-performing loans as of each year end follows (in thousands):


	December 31,
	2010		2009
Nonaccrual loans	$	5,964	$	2,629
Accruing loans past due 90 days or more		1,007		1,369
Restructured loans		—		—

Total non-performing loans	$	6,971	$	3,998

Interest income not recorded on nonaccrual loans was $281,000, $143,000 and $94,000 in 2010, 2009 and 2008, respectively. The aggregate amount of demand deposits that have been reclassified as loan balances at December 31, 2010 and 2009 are $42,000 and $28,000, respectively.

To provide for the risk of loss inherent in the process of extending credit, the Bank maintains an allowance for loan losses and for lending-related commitments.

A summary of the transactions in the allowance for loan losses for the last three years (in thousands) is shown below. Net charge-offs in 2010 and 2009 were significantly higher than in 2008. The increase in non-performing loans indicated the need for a provision for loan losses in 2010 at a level of $741,000, 18% higher than the provision deemed necessary in 2009.


	Years Ended December 31,
	2010			2009			2008
Balance of allowance — beginning of period	$	2,719		$	2,610		$	2,322
Loans charged off:
Commercial, financial and agricultural		134			47			43
Real estate — commercial		—			32			36
Real estate — mortgage		482			343			15
Personal		38			107			62

Total charge-offs		654			529			156

Recoveries of loans previously charged off:
Commercial, financial and agricultural		—			—			5
Real estate — mortgage		—			—			5
Personal		18			11			13

Total recoveries		18			11			23


Net charge-offs		636			518			133
Provision for loan losses		741			627			421

Balance of allowance — end of period	$	2,824		$	2,719		$	2,610


Ratio of net charge-offs during period to average loans outstanding		0.21	%		0.17	%		0.04	%

The Bank 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. Following is a summary of impaired loan data as of the date of each balance sheet presented (in thousands).


	December 31,
	2010		2009
Impaired loans:
Recorded investment at period end	$	7,743	$	8,245
Impaired loan balance for which:
There is a related allowance		2,137		1,445
There is no related allowance		5,606		6,800
Related allowance on impaired loans		570		278


	Years Ended December 31,
	2010		2009		2008
Average recorded investment in impaired loans	$	7,994	$	5,865	$	1,640
Interest income recognized (on a cash basis)		276		611		82

The following table summarizes information in regards to impaired loans by loan portfolio class as of December 31, 2010 (in thousands):


			Unpaid				Average		Interest
	Recorded		Principal		Related		Recorded		Income
	Investment		Balance		Allowance		Investment		Recognized
With no related allowance recorded:
Real estate — commercial	$	5,606	$	5,606	$	—	$	6,203	$	260

With an allowance recorded:
Real estate — commercial		2,137		2,137		570		1,791		16

Total:

Real estate — commercial	$	7,743	$	7,743	$	570	$	7,994	$	276

The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2010 (in thousands):


Nonaccrual loans	December 31, 2010

Commercial financial and agricultural	$	784
Real estate — commercial		240
Real estate — construction		850
Real estate — mortgage		3,564
Home equity		524
Obligations of states and political subdivisions		—
Personal		2

Total	$	5,964

The performance and credit quality of the loan porfolio is also monitored by the analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2010 in thousands):


													Loans Past
													Due greater
	30-59 Days		60-89 Days		Greater than		Total Past				Total		than 90 Days
	Past Due		Past Due		90 Days		Due		Current		Loans		And Accruing

Commercial financial and agricultural	$	159	$	352	$	878	$	1,389	$	31,452	$	32,841	$	113
Real estate — commercial		1,106		547		404		2,057		42,128		44,185		164
Real estate — construction		—		270		850		1,120		9,908		11,028		—
Real estate — mortgage		260		4,769		3,431		8,460		134,148		142,608		555
Home equity		737		318		466		1,521		44,804		46,325		167
Obligations of states and political subdivisions		243		—		—		243		10,717		10,960		—
Personal		110		15		10		135		10,020		10,155		8

Total	$	2,615	$	6,271	$	6,039	$	14,925	$	283,177	$	298,102	$	1,007

The following table summarizes the primary segments of the allowance for loan losses, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of December 31, 2010 (in thousands):


											Obligations of
	Commercial,										states and
	financial and		Real estate-		Real estate-		Real estate-				political
	agricultural		commercial		construction		mortgage		Home equity		subdivisions		Personal		Total
Allowance for loan losses:
Ending balance	$	283	$	875	$	93	$	1,098	$	391	$	—	$	84	$	2,824

Ending balance: individually evaluated for impairment	$	—	$	570	$	—	$	—	$	—	$	—	$	—	$	570
Ending balance: collectively evaluted for impairment	$	283	$	305	$	93	$	1,098	$	391	$	—	$	84	$	2,254

Loans, net of unearned interest:
Ending balance	$	32,841	$	44,185	$	11,028	$	142,608	$	46,325	$	10,960	$	10,155	$	298,102

Ending balance: individually evaluted for impairment	$	—	$	7,743	$	—	$	—	$	—	$	—	$	—	$	7,743
Ending balance: collectively evaluated for impairment	$	32,841	$	36,442	$	11,028	$	142,608	$	46,325	$	10,960	$	10,155	$	290,359

The allowance for loan losses is based on estimates, and actual losses will vary from current estimates. Management believes that the granularity of the homogeneous pools and the related historical loss ratios and other qualitative factors, as well as the consistency in the application of assumptions, result in an allowance that is representative of the risk found in the components of the portfolio at any given date.

6. Pledged Loans

The Bank must maintain sufficient qualifying collateral with the Federal Home Loan Bank (FHLB), in order to secure all loans and credit products. Therefore, a Master Collateral Agreement has been entered into which pledges all mortgage related assets as collateral for future borrowings. Mortgage related assets could include loans or investments. As of December 31, 2010, the amount of loans included in qualifying collateral was $269,876,000, for a collateral value of $163,767,000.

7. Bank Owned Life Insurance and Annuities

The Company holds bank-owned life insurance (BOLI), deferred annuities and payout annuities with a combined cash value of $13,568,000 and $13,066,000 at December 31, 2010 and 2009, respectively. As annuitants retire, the deferred annuities may be converted to payout annuities to create payment streams that match certain post-retirement liabilities. The cash surrender value on the BOLI and annuities increased by $502,000, $484,000 and $238,000 in 2010, 2009 and 2008, respectively, from earnings recorded as non-interest income and from premium payments, net of cash payments received. The contracts are owned by the Bank in various insurance companies. The crediting rate on the policies varies annually based on the insurance companies’ investment portfolio returns in their general fund and market conditions. Changes in cash value of BOLI and annuities in 2010 and 2009 are shown below (in thousands):


	Life		Deferred		Payout
	Insurance		Annuities		Annuities			Total
Balance as of December 31, 2008	$	12,161	$	250	$	171		$	12,582

Earnings		424		11		(3	)		432
Premiums on existing policies		106		14		—			120
Annuity payments received		—		—		(68	)		(68	)

Balance as of December 31, 2009		12,691		275		100			13,066

Earnings		475		11		3			489
Premiums on existing policies		56		14		(57	)		13
Annuity payments received									—

Balance as of December 31, 2010	$	13,222	$	300	$	46		$	13,568

GAAP requires split-dollar life insurance arrangements to have a liability recognized related to the postretirement benefits covered by an endorsement split-dollar life insurance arrangement, and a liability for the future death benefit. The Company recorded a cumulative effect adjustment to the balance of retained earnings of $480,000 as of January 1, 2008. The impact to pre-tax earnings for the full years of 2010, 2009 and 2008 was a decrease of $39,000, $69,000 and $74,000, respectively.

8. Premises And Equipment

Premises and equipment consist of the following (in thousands):


	December 31,
	2010			2009
Land	$	864		$	864
Buildings and improvements		8,416			8,393
Furniture, computer software and equipment		4,121			5,117

		13,401			14,374
Less: accumulated depreciation		(6,334	)		(7,496	)

	$	7,067		$	6,878

Depreciation expense on premises and equipment charged to operations was $565,000 in 2010, $587,000 in 2009 and $691,000 in 2008.

9. Acquisition

On September 8, 2006, the Company completed its acquisition of a branch office in Richfield, PA. The acquisition included real estate, deposits and loans. The assets and liabilities of the acquired branch office were recorded on the consolidated balance sheet at their estimated fair values as of September 8, 2006, and its results of operations have been included in the consolidated statements of income since such date.

Included in the purchase price of the branch was goodwill and core deposit intangible of $2,046,000 and $449,000, respectively. The core deposit intangible is being amortized over a ten-year period on a straight line basis. The goodwill is not amortized, but is measured annually for impairment. Core deposit intangible amortization expense of $45,000 was recorded in each of the years 2010, 2009 and 2008. Intangible amortization expense projected for the succeeding five years beginning in 2011 is estimated to be $45,000 per year through 2014 and $29,000 for 2015.

10. Investment in Unconsolidated Subsidiary

On September 1, 2006, the Company invested in The First National Bank of Liverpool (FNBL), Liverpool, PA, by purchasing 39.16% of its outstanding common stock. This investment is accounted for under the equity method of accounting. The investment is being carried at $3,550,000 as of December 31, 2010, of which $2,541,000 represents the underlying equity in net assets of FNBL. The difference between the investment carrying amount and the amount of the underlying equity, $1,009,000, is considered to be goodwill and is evaluated quarterly for impairment. A loss in value of the investment which is other than a temporary decline will be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of FNBL to sustain an earnings capacity which would justify the carrying amount of the investment.

11. Deposits

Deposits consist of the following (in thousands):


	December 31,
	2010		2009
Demand, non-interest bearing	$	60,696	$	55,030
NOW and Money Market		81,378		75,766
Savings		47,112		42,536
Time deposits, $100,000 or more		34,099		38,453
Other time deposits		153,505		165,612

	$	376,790	$	377,397

Aggregate amount of scheduled maturities of time deposits as of December 31, 2010 include the following (in thousands):


	Time Deposits
Maturing in:	$100,000 or more		Other
2011	$	14,686	$	72,837
2012		4,634		23,771
2013		2,675		16,092
2014		3,062		14,178
2015		9,042		26,627

	$	34,099	$	153,505

12. Borrowings

Borrowings consist of the following (dollars in thousands):


	December 31, 2010					December 31, 2009					December 31, 2008					For the year 2010
																		Weighted
	Outstanding					Outstanding					Outstanding					Average		Average
	Balance		Rate			Balance		Rate			Balance		Rate			Balance		Rate
Securities sold under agreements to repurchase	$	3,314		0.10	%	$	3,207		0.10	%	$	1,944		0.10	%	$	3,050		0.10	%

Short-term borrowings — Federal Home Loan Bank overnight advances		—					—					8,635		0.59	%		155		0.67	%

Long-term debt — Note payable to Federal Home Loan Bank		—					5,000		2.75	%		5,000		2.75	%		3,548		2.75	%

	$	3,314		0.10	%	$	8,207		1.71	%	$	15,579		1.22	%	$	6,753		1.51	%

The maximum balance of short-term borrowings on any one day during 2010 was $6,310,000.

The Bank has repurchase agreements with several of its depositors, under which customers’ funds are invested daily into an interest bearing account. These funds are carried by the Company as short-term debt. It is the Company’s policy to have repurchase agreements collateralized 100% by U.S. Government securities. As of December 31, 2010, the securities that serve as collateral for securities sold under agreements to repurchase had a fair value of $6,706,000. The interest rate paid on these funds is variable and subject to change daily.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank of Pittsburgh (“FHLB”) is $163,767,000, with no balance outstanding as of December 31, 2010. In order to borrow an amount in excess of $29,011,000, the FHLB would require the Bank to purchase additional FHLB Stock. The FHLB is a source of both short-term and long-term funding. The Bank must maintain sufficient qualifying collateral, as defined, to secure all outstanding advances.

The Bank has entered into an agreement under which it can borrow up to $20,000,000 from the FHLB in their Open RepoPlus product. There was an outstanding balance of $8,635,000 as of December 31, 2008. There were no borrowings under this agreement as of December 31, 2009 or December 31, 2010. There is no expiration date on the current agreement.

13. Operating Lease Obligations

The Company has entered into a number of arrangements that are classified as operating leases. The operating leases are for several branch and office locations. The majority of the branch and office location leases are renewable at the Company’s option. Future minimum lease commitments are based on current rental payments. Rental expense charged to operations, including license fees for branch offices, was $116,000, $105,000 and $104,000 in 2010, 2009 and 2008, respectively.

The following is a summary of future minimum rental payments for the next five years required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 2010 (in thousands):


Years ending December 31,
2011	$	97
2012		58
2013		20
2014		22
2015		22
2016 and beyond		22

Total minimum payments required	$	241

14. Income Taxes

The components of income tax expense for the three years ended December 31 were (in thousands):


	2010		2009		2008
Current tax expense	$	1,467	$	1,585	$	1,448
Deferred tax expense		163		223		609

Total tax expense	$	1,630	$	1,808	$	2,057

Income tax expense related to realized securities gains was $11,000 in 2010, $6,000 in 2009 and $11,000 in 2008.

A reconciliation of the statutory income tax expense computed at 34% to the income tax expense included in the consolidated statements of income follows (dollars in thousands):


	Years Ended December 31,
	2010			2009			2008
Income before income taxes	$	6,545		$	6,914		$	7,781
Effective tax rate		34.0	%		34.0	%		34.0	%

Federal tax at statutory rate		2,225			2,351			2,646
Tax-exempt interest		(473	)		(439	)		(398	)
Net earnings on BOLI		(148	)		(121	)		(130	)
Life insurance proceeds		—			—			(61	)
Dividend from unconsolidated subsidiary		(11	)		(13	)		—
Stock-based compensation		19			14			14
Other permanent differences		18			16			(14	)

Total tax expense	$	1,630		$	1,808		$	2,057

Effective tax rate		24.9	%		26.1	%		26.4	%

Deductible temporary differences and taxable temporary differences gave rise to a net deferred tax asset for the Company as of December 31, 2010 and 2009. The components giving rise to the net deferred tax asset are detailed below (in thousands):


	December 31,
	2010			2009
Deferred Tax Assets
Allowance for loan losses	$	823		$	787
Deferred directors’ compensation		616			654
Employee and director benefits		634			668
Unrealized loss from securities impairment		221			208
Other		144			102

Total deferred tax assets		2,438			2,419

Deferred Tax Liabilities
Depreciation		(191	)		(207	)
Equity income from unconsolidated subsidiary		(249	)		(178	)
Qualified pension asset		(73	)		(122	)
Loan origination costs		(158	)		(147	)
Prepaid expense		(35	)		(114	)
Unrealized gains on securities available for sale		(203	)		(398	)
Annuity earnings		(36	)		(39	)
Goodwill		(201	)		(154	)

Total deferred tax liabilities		(1,146	)		(1,359	)


Net deferred tax asset included in other assets	$	1,292		$	1,060

The Company has concluded that the deferred tax assets are realizable (on a more likely than not basis) through the combination of future reversals of existing taxable temporary differences, certain tax planning strategies and expected future taxable income.

It is the Company’s policy to recognize interest and penalties on unrecognized tax benefits in income tax expense in the Consolidated Statements of Income. No significant income tax uncertainties were identified as a result of the Company’s evaluation of its income tax position. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the years ended December 31, 2010, 2009 and 2008. Years that remain open for potential review by the Internal Revenue Service are 2007 through 2009.

15. Stockholders’ Equity and Regulatory Matters

The Company is authorized to issue 500,000 shares of preferred stock with no par value. The Board has the ability to fix the voting, dividend, redemption and other rights of the preferred stock, which can be issued in one or more series. No shares of preferred stock have been issued.

In August 2000, the Board of Directors adopted a Shareholder Rights Plan and declared a dividend distribution of one right to purchase a share of the Company’s common stock at $11.93 for each share issued and outstanding, upon the occurrence of certain events, as defined in the plan. This plan expired on August 31, 2010. The rights were not considered potential common shares for earnings per share purposes because there was no indication that any event would occur which would cause them to become exercisable.

The Company has a dividend reinvestment and stock purchase plan. Under this plan, additional shares of Juniata Valley Financial Corp. stock may be purchased at the prevailing market prices with reinvested dividends and voluntary cash payments, within limits. To the extent that shares are not available in the open market, the Company has reserved common stock to be issued under the plan. As of October 2005, any adjustment in capitalization of the Company resulted in a proportionate adjustment to the reserve for this plan. At December 31, 2010, 141,887 shares were available for issuance under the Dividend Reinvestment Plan.

The Company periodically repurchases shares of its common stock under the share repurchase program approved by the Board of Directors. Repurchases have typically been through open market transactions and have complied with all regulatory restrictions on the timing and amount of such repurchases. Shares repurchased have been added to treasury stock and accounted for at cost. These shares may be reissued for stock option exercises, employee stock purchase plan purchases and to fulfill dividend reinvestment program needs. During 2008, 2009 and 2010, 72,955, 12,600 and 83,900 shares, respectively, were repurchased in conjunction with this program. Remaining shares authorized in the program were 122,036 as of December 31, 2010.

The Company and the Bank are subject to risk-based capital standards by which all bank holding companies and banks are evaluated in terms of capital adequacy. These regulatory capital requirements are administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of the Company’s and the Bank’s assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Company’s and Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors.

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to each maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and Tier I capital (as defined in the regulations) to average assets (as defined in the regulations). Management believes, as of December 31, 2010 and 2009, that the Company and the Bank met all capital adequacy requirements to which they were subject.

As of December 31, 2010, the most recent notification from the regulatory banking agencies categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. To the knowledge of management, there are no conditions or events since these notifications that have changed the Bank’s category.

The table below provides a comparison of the Company’s and the Bank’s risk-based capital ratios and leverage ratios to the minimum regulatory requirements for the periods indicated (dollars in thousands).

Juniata Valley Financial Corp. (Consolidated)


						Minimum Requirement
						For Capital
	Actual					Adequacy Purposes
	Amount		Ratio			Amount		Ratio
As of December 31, 2010:
Total Capital	$	51,977		19.35	%	$	21,492		8.00	%
(to Risk Weighted Assets)
Tier 1 Capital		49,141		18.29	%		10,746		4.00	%
(to Risk Weighted Assets)
Tier 1 Capital		49,141		11.25	%		17,473		4.00	%
(to Average Assets)

As of December 31, 2009:
Total Capital	$	51,773		18.49	%	$	22,396		8.00	%
(to Risk Weighted Assets)
Tier 1 Capital		49,054		17.52	%		11,198		4.00	%
(to Risk Weighted Assets)
Tier 1 Capital		49,054		11.33	%		17,318		4.00	%
(to Average Assets)

The Juniata Valley Bank


											Minimum Regulatory
											Requirements to be
						Minimum Requirement					“Well Capitalized”
						For Capital					under Prompt
	Actual					Adequacy Purposes					Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2010:
Total Capital	$	46,196		17.46	%	$	21,171		8.00	%	$	26,464		10.00	%
(to Risk Weighted Assets)
Tier 1 Capital		43,354		16.38	%		10,586		4.00	%		15,878		6.00	%
(to Risk Weighted Assets)
Tier 1 Capital		43,354		10.19	%		17,016		4.00	%		21,270		5.00	%
(to Average Assets)

As of December 31, 2009:
Total Capital	$	45,675		16.54	%	$	22,086		8.00	%	$	27,608		10.00	%
(to Risk Weighted Assets)
Tier 1 Capital		42,956		15.56	%		11,043		4.00	%		16,565		6.00	%
(to Risk Weighted Assets)
Tier 1 Capital		42,956		10.01	%		17,168		4.00	%		21,460		5.00	%
(to Average Assets)

Certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. At December 31, 2010, $37,868,000 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 above.

16. Calculation Of Earnings Per Share

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


	Years Ended December 31,
	2010		2009		2008
	(Amounts, except earnings per share, in thousands)

Net income	$	4,915	$	5,106	$	5,724

Weighted-average common shares outstanding		4,297		4,341		4,376


Basic earnings per share	$	1.14	$	1.18	$	1.31


Weighted-average common shares outstanding		4,297		4,341		4,376

Common stock equivalents due to effect of stock options		4		4		10


Total weighted-average common shares and equivalents		4,301		4,345		4,386


Diluted earnings per share	$	1.14	$	1.18	$	1.31


Anti-dilutive stock options outstanding		70		73		33

17. Comprehensive Income

GAAP requires that recognized revenue, expenses, gains and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities, are reported as a separate component of the equity section of the consolidated balance sheet, such items, along with net income, are components of comprehensive income. Components of comprehensive income consist of the following (in thousands):


	Year ended December 31, 2010
	Before			Tax (Expense)
	Tax			or			Net-of-Tax
	Amount			Benefit			Amount
Net income	$	6,545		$	(1,630	)	$	4,915
Other comprehensive income (loss):
Unrealized losses on available for sale securities :

Unrealized holding losses arising during the period		(584	)		199			(385	)

Unrealized holding gains from unconsolidated subsidiary		2			—			2
Less reclassification adjustment for:
gains included in net income		(31	)		11			(20	)
securities impairment charge		40			(14	)		26
Unrecognized pension net gain		71			(24	)		47
Unrecognized pension cost due to change in assumptions		(625	)		212			(413	)
Amortization of pension prior service cost		(2	)		1			(1	)
Amortization of pension net actuarial loss		127			(43	)		84

Other comprehensive loss		(1,002	)		342			(660	)

Total comprehensive income	$	5,543		$	(1,288	)	$	4,255


	Year ended December 31, 2009
	Before			Tax (Expense)
	Tax			or			Net-of-Tax
	Amount			Benefit			Amount
Net income	$	6,914		$	(1,808	)	$	5,106
Other comprehensive income (loss):
Unrealized losses on available for sale securities :

Unrealized holding losses arising during the period		(79	)		27			(52	)

Unrealized holding losses from unconsolidated subsidiary		(17	)		—			(17	)
Less reclassification adjustment for:
gains included in net income		(17	)		6			(11	)
securities impairment charge		226			(77	)		149
Unrecognized pension net gain		413			(140	)		273
Unrecognized pension cost due to change in assumptions		(7	)		2			(5	)
Amortization of pension prior service cost		(2	)		1			(1	)
Amortization of pension net actuarial loss		161			(55	)		106

Other comprehensive income		678			(236	)		442

Total comprehensive income	$	7,592		$	(2,044	)	$	5,548


	Year ended December 31, 2008
	Before			Tax (Expense)
	Tax			or			Net-of-Tax
	Amount			Benefit			Amount
Net income	$	7,781		$	(2,057	)	$	5,724
Other comprehensive income (loss):
Unrealized gains on available for sale securities :

Unrealized holding gains arising during the period		324			(110	)		214

Unrealized holding gains from unconsolidated subsidiary		5			—			5
Less reclassification adjustment for:
gains included in net income		(33	)		11			(22	)
securities impairment charge		554			(188	)		366
Unrecognized pension net loss		(1,894	)		644			(1,250	)
Unrecognized pension cost due to change in assumptions		(42	)		14			(28	)
Amortization of pension prior service cost		(2	)		1			(1	)
Amortization of pension net actuarial loss		38			(12	)		26

Other comprehensive loss		(1,050	)		360			(690	)

Total comprehensive income	$	6,731		$	(1,697	)	$	5,034

Components of accumulated other comprehensive loss, net of tax as of December 31 of each of the last three years consist of the following (in thousands):


	12/31/2010			12/31/2009			12/31/2008
Unrealized gains on available for sale securities	$	399		$	776		$	707
Unrecognized expense for defined benefit pension		(1,864	)		(1,581	)		(1,954	)

Accumulated other comprehensive loss	$	(1,465	)	$	(805	)	$	(1,247	)

18. Fair Value Measurements

ASC Topic 820, Fair Value Measurements and Disclosures, provides guidance for defining 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 to be adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact.

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

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

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

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. These valuation methodologies were applied to all of the Company’s financial assets and financial liabilities carried at fair value effective January 1, 2008.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the 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.

Securities Available for Sale. Debt securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurement from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Equity securities classified as available for sale are reported at fair value using Level 1 inputs.

Impaired Loans. Certain impaired loans are reported on a non-recurring basis at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.

Other Real Estate Owned. Assets included in other real estate owned are reported at fair value on a non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of similar properties in the proximate vicinity.

The following table summarizes financial assets and financial liabilities measured at fair value as of December 31, 2010 and December 31, 2009, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands).


			(Level 1)		(Level 2)		(Level 3)
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
	December 31,		for Identical		Observable		Unobservable
	2010		Assets		Inputs		Inputs
Measured at fair value on a recurring basis:
Debt securities available-for-sale:
U.S. Treasury securities and obligations of U.S. Government agencies and corporations	$	37,696	$	—	$	37,696	$	—
Obligations of state and political subdivisions		38,893		—		38,893		—
Corporate notes		1,028		—		1,028		—
Mortgage-backed securities		1,345		—		1,345		—
Equity securities available-for-sale		961		961		—		—

Measured at fair value on a non-recurring basis:
Impaired loans		1,567		—		—		1,567
Other real estate owned		412		—		—		412


			(Level 1)		(Level 2)		(Level 3)
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
	December 31,		for Identical		Observable		Unobservable
	2009		Assets		Inputs		Inputs
Measured at fair value on a recurring basis:
Debt securities available-for-sale:
U.S. Treasury securities and obligations of U.S. Government agencies and corporations	$	33,553	$	—	$	33,553	$	—
Obligations of state and political subdivisions		40,397		—		40,397		—
Corporate notes		1,026		—		1,026		—
Mortgage-backed securities		1,515		—		1,515		—
Equity securities available-for-sale		865		865		—		—

Measured at fair value on a non-recurring basis:
Impaired loans		1,167		—		—		1,167
Other real estate owned		476		—		—		476

Certain non-financial assets and non-financial liabilities measured at fair value on a recurring basis include reporting units measured at fair value in the first step of a goodwill impairment test. Certain non-financial assets measured at fair value on a non-recurring basis include non-financial assets and non-financial liabilities measured at fair value in the second step of a goodwill impairment test, as well as intangible assets and other non-financial long-lived assets measured at fair value for impairment assessment. These were not significant at December 31, 2010 and 2009.

Fair Value of Financial Instruments

The estimated fair values of the Company’s financial instruments are as follows (in thousands):

Financial Instruments
(in thousands)


	December 31, 2010				December 31, 2009
	Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value
Financial assets:
Cash and due from banks	$	12,758	$	12,758	$	18,613	$	18,613
Interest bearing deposits with banks		218		218		82		82
Federal funds sold		12,300		12,300		1,200		1,200
Interest bearing time deposits with banks		1,345		1,360		1,420		1,447
Securities		79,923		79,923		77,356		77,356
Restricted investment in FHLB stock		2,088		2,088		2,197		2,197
Total loans, net of unearned interest		298,102		312,621		311,630		324,061
Accrued interest receivable		1,763		1,763		2,284		2,284

Financial liabilities:
Non-interest bearing deposits		60,696		60,696		55,030		55,030
Interest bearing deposits		316,094		323,003		322,367		327,724
Securities sold under agreements to repurchase		3,314		3,314		3,207		3,207
Long-term debt		—		—		5,000		5,077
Other interest bearing liabilities		1,200		1,202		1,146		1,148
Accrued interest payable		499		499		681		681

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

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

The information presented above 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 describes the estimated fair value of the Company’s financial instruments as well as the significant methods and assumptions used to determine these estimated fair values.

Carrying values approximate fair value for cash and due from banks, interest-bearing demand deposits with other banks, federal funds sold, restricted stock in the Federal Home Loan Bank, interest receivable, non-interest bearing demand deposits, securities sold under agreements to repurchase, and interest payable.

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

Securities Available for Sale - Debt securities classified as available for sale are reported at fair value utilizing Level 2 inputs. For these securities, the Company obtains fair value measurement from an independent pricing service. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, the U.S. Treasury yield curve, live trading levels, trade execution data, market consensus prepayment speeds, credit information and the bond’s terms and conditions, among other things. Equity securities classified as available for sale are reported at fair value using Level 1 inputs.

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

Impaired Loans — Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from the collateral. Collateral values are estimated using Level 3 inputs based on customized discounting criteria.

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

Long-term debt and other interest bearing liabilities — The fair values of long-term debt are estimated using discounted cash flow analysis, based on incremental borrowing rates for similar types of borrowing arrangements.

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

19. Employee Benefit Plans

Stock Compensation Plan

The 2000 Incentive Stock Option Plan (“the Plan”) expired in May 2010 and as of December 31, 2010, had not yet been replaced with a new plan. Under the provisions of the Plan, while active, options could be granted to officers and key employees of the Company. The Plan provided that the option price per share was not to be less than the fair market value of the stock on the day the option was granted, but in no event less than the par value of such stock. Options granted under the Plan are exercisable no earlier than one year after the grant and expire ten years after the date of the grant.

The Plan was administered by a committee of the Board of Directors, whose members were not eligible to receive options under the Plan. The Committee determined, among other things, which officers and key employees received options, the number of shares to be subject to each option, the option price and the duration of the option. Options vest over three to five years and are exercisable at the grant price, which is at least the fair market value of the stock on the grant date. All options previously granted under the Plan are scheduled to expire through October 20, 2019. The aggregate number of shares that could have been issued upon the exercise of options under the Plan was 440,000 shares, and due to the expiration of the Plan, no shares were available for grant as of December 31, 2010. The Plan’s options outstanding at December 31, 2010 have exercise prices between $14.10 and $24.00, with a weighted average exercise price of $18.83 and a weighted average remaining contractual life of 3.8 years.

As of December 31, 2010, there was $41,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized through 2014.

Cash received from option exercises under the Plan for the years ended December 31, 2010, 2009 and 2008 was $28,000, $95,000, and $36,000, respectively.

A summary of the status of the Plan as of December 31, 2010, 2009 and 2008, and changes during the years ending on those dates is presented below:


	2010					2009					2008
				Weighted					Weighted					Weighted
				Average					Average					Average
				Exercise					Exercise					Exercise
	Shares			Price		Shares			Price		Shares			Price
Outstanding at beginning of year		97,473		$	18.71		85,985		$	18.73		79,512		$	18.31
Granted		—			—		19,864			17.22		13,317			21.10
Exercised		(1,960	)		14.18		(6,698	)		14.14		(2,477	)		14.72
Forfeited		(2,560	)		18.15		(1,678	)		20.02		(4,367	)		20.59

Outstanding at end of year		92,953		$	18.83		97,473		$	18.71		85,985		$	18.73


Options exercisable at year-end		78,402					61,254		$	18.62		58,187		$	17.69

Weighted-average fair value of of options granted during the year	$	—				$	2.75				$	3.37

Intrinsic value of options exercised during the year	$	5,918				$	15,792				$	15,598

The following table summarizes characteristics of stock options as of December 31, 2010:


			Outstanding						Exercisable
					Contractual		Average				Average
	Exercise				Average Life		Exercise				Exercise
Grant Date	Price		Shares		(Years)		Price		Shares		Price
11/20/2001	$	14.10		4,026		0.39	$	14.10		4,026	$	14.10
11/19/2002		14.25		8,728		1.46		14.25		8,728		14.25
11/18/2003		15.13		9,920		1.87		15.13		9,920		15.13
11/15/2004		20.25		7,832		2.16		20.25		7,832		20.25
10/18/2005		24.00		9,150		2.61		24.00		9,150		24.00
10/17/2006		21.00		9,716		3.33		21.00		8,971		21.00
10/16/2007		20.05		12,960		4.17		20.05		10,981		20.05
10/21/2008		21.10		12,705		5.74		21.10		9,462		21.10
10/20/2009		17.22		17,916		6.68		17.22		9,332		17.22

The Board of Directors is considering a new stock option plan, with essentially the same structure as the former Plan. The new plan, if approved by the Board, will be subject to approval by shareholders at the Company’s Annual Meeting on May 17, 2011.

Defined Benefit Retirement Plan

The Company sponsors a defined benefit retirement plan which covered substantially all of its employees through December 31, 2007. As of January 1, 2008, the 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 remain eligible will continue to accrue benefits until retirement. The benefits are based on years of service and the employees’ compensation. The Company’s funding policy is to contribute annually no more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The Company does not expect to contribute to the defined benefit plan in 2011.

Management expects that approximately $240,000 will be recorded as net periodic expense in 2011 for the defined benefit plan, which includes 2011’s service cost and expected amortization out of accumulated other comprehensive income in 2011. The following table sets forth by level, within the fair value hierarchy, debt and equity instruments included in the defined benefit retirement’s plan assets at fair value as of December 31, 2010 and December 31, 2009 (in thousands). Assets included in the plan that are not valued in the hierarchy table consist of cash and cash equivalents, totaling $739,000 and $1,289,000, at December 31, 2010 and 2009, respectively.


			(Level 1)		(Level 2)		(Level 3)
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
	December 31,		for Identical		Observable		Unobservable
	2010		Assets		Inputs		Inputs
Measured at fair value on a recurring basis:
U.S. Government and agency securities	$	473	$	—	$	473	$	—
Corporate bonds and notes		2,890		—		2,890		—
Mutual funds
Value funds		852		852		—		—
Blend funds		605		605		—		—
Growth funds		2,463		2,463		—		—
Common stocks		4		4		—		—
Money market funds		1,199		1,199		—		—

	$	8,486	$	5,123	$	3,363	$	—


			(Level 1)		(Level 2)		(Level 3)
			Quoted Prices in		Significant		Significant
			Active Markets		Other		Other
	December 31,		for Identical		Observable		Unobservable
	2009		Assets		Inputs		Inputs
Measured at fair value on a recurring basis:
U.S. Government and agency securities	$	127	$	—	$	127	$	—
Corporate bonds and notes		2,957		—		2,957		—
Mutual funds
Value funds		626		626		—		—
Blend funds		388		388		—		—
Growth funds		1,520		1,520		—		—
Common stocks		4		4		—		—
Money market funds		1,450		1,450		—		—

	$	7,072	$	3,988	$	3,084	$	—

The measurement date for the defined benefit plan is December 31. Information pertaining to the activity in the defined benefit plan is as follows (in thousands):


	Years ended December 31,
	2010			2009
Change in projected benefit obligation (PBO)

PBO at beginning of year	$	8,002		$	7,585
Service cost		186			187
Interest cost		473			449
Change in assumptions		626			—
Actuarial loss		85			104
Benefits paid		(363	)		(323	)


PBO at end of year	$	9,009		$	8,002


Change in plan assets

Fair value of plan assets at beginning of year	$	8,361		$	6,715
Actual return on plan assets, net of expenses		727			969
Employer contribution		500			1,000
Benefits paid		(363	)		(323	)


Fair value of plan assets at end of year	$	9,225		$	8,361


Reconciliation of funded status to net amount recognized Overfunded status	$	216		$	359


Accumulated benefit obligation	$	7,550		$	6,731

Pension expense included the following components for the years ended December 31 (in thousands):


	2010			2009			2008

Service cost during the year	$	186		$	187		$	179
Interest cost on projected benefit obligation		473			449			441
Expected return on plan assets		(570	)		(459	)		(425	)
Net amortization		(2	)		(2	)		(2	)
Recognized net actuarial loss		127			161			39


Net periodic benefit cost	$	214		$	336		$	232

Assumptions used to determine benefit obligations were:


	2010			2009			2008
Discount rate		5.50	%		6.00	%		6.00	%
Rate of compensation increase		4.00			4.00			4.00

Assumptions used to determine the net periodic benefit cost were:


	2010			2009			2008
Discount rate		6.00	%		6.00	%		6.00	%
Expected long-term return on plan assets		7.00			7.00			7.00
Rate of compensation increase		4.00			4.00			4.00

The investment strategy and investment policy for the retirement plan is to target the plan assets to contain 50% equity and 50% fixed income securities. The asset allocation as of December 31, 2010 is approximately 50% fixed income securities, 43% equities and 7% cash equivalents.

Future expected benefit payments (in thousands):


	2011		2012		2013		2014		2015		2016-2020

Estimated future benefit payments	$	419	$	427	$	431	$	443	$	460	$	2,678

Defined Contribution Plan

The Company has a Defined Contribution Plan under which employees, through payroll deductions, are able to defer portions of their compensation. The plan was established in 1994 and, until 2008, the Company had made no contribution to the plan in any form. During 2007, the plan was amended so that, effective January 1, 2008, the Company makes an annual non-elective fully vested contribution equal to 3% of compensation to each eligible participant. As of December 31, 2010, a liability of $161,000 was recorded to satisfy this obligation, and will be credited to employees’ accounts by March 31, 2011. Expense incurred under this plan was $153,000, $165,000 and $154,000 in 2010, 2009 and 2008, respectively.

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan under which employees, through payroll deductions, are able to purchase shares of stock annually. The option price of the stock purchases is between 95% and 100% of the fair market value of the stock on the offering termination date as determined annually by the Board of Directors. The maximum number of shares which employees may purchase under the Plan is 250,000; however, the annual issuance of shares may not exceed 5,000 shares plus any unissued shares from prior offerings. There were 2,118 shares issued in 2010, 2,434 shares issued in 2009 and 2,088 shares issued in 2008 under this plan. At December 31, 2010, there were 195,522 shares reserved for issuance under the Employee Stock Purchase Plan.

Supplemental Retirement Plans

The Company has non-qualified supplemental retirement plans for directors and key employees. At December 31, 2010 and 2009, the present value of the future liability was $808,000 and $932,000, respectively. For the years ended December 31, 2010, 2009 and 2008, $93,000, $104,000 and $64,000, respectively, was charged to expense in connection with these plans. The Company offsets the cost of these plans through the purchase of bank-owned life insurance and annuities. See Note 7.

Deferred Compensation Plans

The Company has entered into deferred compensation agreements with certain directors to provide each director an additional retirement benefit, or to provide their beneficiary a benefit, in the event of pre-retirement death. At December 31, 2010 and 2009, the present value of the future liability was $1,811,000 and $1,923,000, respectively. For the years ended December 31, 2010, 2009 and 2008, $90,000, $106,000 and $124,000, respectively, was charged to expense in connection with these plans. The Company offsets the cost of these plans through the purchase of bank-owned life insurance. See Note 7.

Salary Continuation Plans

The Company has non-qualified salary continuation plans for key employees. At December 31, 2010 and 2009, the present value of the future liability was $1,058,000 and $1,031,000, respectively. For the years ended December 31, 2010, 2009 and 2008, $96,000, $104,000 and $13,000, respectively, was charged to expense in connection with these plans. The Company offsets the cost of these plans through the purchase of bank-owned life insurance. See Note 7.

20. Financial Instruments With Off-Balance Sheet Risk

The Company is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers. These financial instruments may include commitments to extend credit and letters of credit. These instruments involve, to varying degrees, elements of credit risk that are not recognized in the consolidated financial statements.

Exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and letters of credit is represented by the contractual amount of those instruments. The Bank uses the same credit policies in making these commitments and conditional obligations as it does for on-balance sheet instruments. The Company controls the credit risk of its financial instruments through credit approvals, limits and monitoring procedures; however, it does not generally require collateral for such financial instruments since there is no principal credit risk.

A summary of the Company’s financial instrument commitments is as follows (in thousands):


	December 31,
	2010		2009
Commitments to grant loans	$	23,623	$	31,587
Unfunded commitments under lines of credit		13,843		15,002
Outstanding letters of credit		845		974

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since portions of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bank evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained by the Bank upon extension of credit is based on management’s credit evaluation of the counter-party. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment.

Outstanding letters of credit are instruments issued by the Bank that guarantee the beneficiary payment by the Bank in the event of default by the Bank’s customer in the non-performance of an obligation or service. Most letters of credit are extended for one year periods. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral supporting those commitments for which collateral is deemed necessary. The amount of the liability as of December 31, 2010 and 2009 for guarantees under letters of credit issued is not material.

The maximum undiscounted exposure related to these guarantees at December 31, 2010 was $845,000, and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $1,001,000.

21. Related-Party Transactions

The Bank has granted loans to certain of its executive officers, directors and their related interests. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons and, in the opinion of management, do not involve more than normal risk of collection. The aggregate dollar amount of these loans was $2,839,000 and $2,036,000 at December 31, 2010 and 2009, respectively. One officer that was included in the group in 2009, with an outstanding loan balance of $85,000 on December 31, 2009, is no longer employed by the Bank. During 2010, $1,891,000 of new loans were made and repayments totaled $1,003,000. None of these loans were past due, in non-accrual status or restructured at December 31, 2010.

22. Commitments And Contingent Liabilities

The Company, from time to time, may be a defendant in legal proceedings relating to the conduct of its banking business. Most of such legal proceedings are a normal part of the banking business and, in management’s opinion, the consolidated financial condition and results of operations of the Company would not be materially affected by the outcome of such legal proceedings.

23. Subsequent Events

In January 2011, the Board of Directors declared a dividend of $0.21 per share for the first quarter of 2011 to shareholders of record on February 15, payable on March 1, 2011.

24. Juniata Valley Financial Corp. (Parent Company Only)

Financial information:

CONDENSED BALANCE SHEETS
(in thousands)


	December 31,
	2010		2009
ASSETS:
Cash and cash equivalents	$	54	$	451
Interest bearing deposits with banks		—		75
Investment in bank subsidiary		44,175		44,554
Investment in unconsolidated subsidiary		3,550		3,338
Investment securities available for sale		2,145		2,097
Other assets		63		113

TOTAL ASSETS	$	49,987	$	50,628


LIABILITIES:
Accounts payable and other liabilities	$	11	$	25

STOCKHOLDERS’ EQUITY		49,976		50,603

TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	49,987	$	50,628

CONDENSED STATEMENTS OF INCOME
(in thousands)


	Years Ended December 31,
	2010			2009			2008
INCOME:
Interest on deposits with banks	$	—		$	8		$	10
Interest and dividends on investment securities available for sale		40			48			103
Dividends from bank subsidiary		4,519			3,765			2,611
Income from unconsolidated subsidiary		250			217			207
Securities impairment charge		(40	)		(153	)		(554	)
Gain (Loss) on the sale of investment securities		—			(5	)		5

TOTAL INCOME		4,769			3,880			2,382
EXPENSE:
Non-interest expense		119			102			111

TOTAL EXPENSE		119			102			111

INCOME BEFORE INCOME TAXES (BENEFIT) AND EQUITY
IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY		4,650			3,778			2,271
Income tax expense (benefit)		21			(22	)		(131	)

		4,629			3,800			2,402
Undistributed net income of subsidiary		286			1,306			3,322

NET INCOME	$	4,915		$	5,106		$	5,724

CONDENSED
STATEMENTS OF CASH FLOWS
(in thousands)


	Years Ended December 31,
	2010			2009			2008
Cash flows from operating activities:
Net income	$	4,915		$	5,106		$	5,724
Adjustments to reconcile net income to net cash provided by operating activities:
Undistributed net income of subsidiary		(286	)		(1,306	)		(3,322	)
Net amortization of securities premiums		2			2			3
Realized losses (gains) on sales of investment securities		—			5			(5	)
Securities impairment charges		40			153			554
Income from unconsolidated subsidiary, net of dividends of $40, $46 and $0		(210	)		(171	)		(207	)
(Increase) decrease in interest and other assets		(1	)		5			73
Increase (decrease) in taxes payable		22			(29	)		(9	)
(Decrease) increase in accounts payable and other liabilities		(14	)		25			(6	)


Net cash provided by operating activities		4,468			3,790			2,805

Cash flows from investing activities:
Purchases of available for sale securities		—			(1,492	)		(720	)
Proceeds from the sale of available for sale securities		—			4			5
Proceeds from the maturity and principal repayments of available for sale investment securities		—			1,345			2,350
Proceeds from the maturity of interest bearing time deposits		75			80			200

Net cash provided by (used in) investing activities		75			(63	)		1,835

Cash flows from financing activities:
Cash dividends		(3,525	)		(3,386	)		(3,241	)
Purchase of treasury stock		(1,476	)		(217	)		(1,518	)
Treasury stock issued for dividend reinvestment and employee stock purchase plan		61			133			78

Net cash used in financing activities		(4,940	)		(3,470	)		(4,681	)


Net (decrease) increase in cash and cash equivalents		(397	)		257			(41	)
Cash and cash equivalents at beginning of year		451			194			235

Cash and cash equivalents at end of year	$	54		$	451		$	194

25. Quarterly Results Of Operations (Unaudited)

The unaudited quarterly results of operations for the years ended December 31, 2010 and 2009 follow (in thousands, except per-share data):


	2010 Quarter ended
	March 31		June 30		September 30			December 31
Total interest income	$	5,554	$	5,436	$	5,339		$	5,245
Total interest expense		1,558		1,387		1,320			1,237

Net interest income		3,996		4,049		4,019			4,008
Provision for loan losses		285		282		70			104
Gains from the sale of assets		11		22		34			43
Securities impairment charge		—		—		(40	)		—
Other income		1,012		1,002		942			908
Other expense		3,145		3,299		3,158			3,118

Income before income taxes		1,589		1,492		1,727			1,737
Income tax expense		401		354		442			433

Net income	$	1,188	$	1,138	$	1,285		$	1,304

Per-share data:
Basic earnings	$	.27	$	.26	$	.30		$	.31
Diluted earnings		.27		.26		.30			.31
Cash dividends		.20		.20		.21			.21


	2009 Quarter ended
	March 31		June 30			September 30			December 31
Total interest income	$	5,936	$	5,915		$	5,747		$	5,670
Total interest expense		1,919		1,862			1,812			1,686

Net interest income		4,017		4,053			3,935			3,984
Provision for loan losses		135		77			165			250
Gains (losses) from the sale of assets		6		27			(33	)		(2	)
Securities impairment charge		—		(226	)		—			—
Other income		1,236		1,108			985			1,070
Other expense		3,191		3,315			3,004			3,109

Income before income taxes		1,933		1,570			1,718			1,693
Income tax expense		523		405			430			450

Net income	$	1,410	$	1,165		$	1,288		$	1,243

Per-share data:
Basic earnings	$	.32	$	.27		$	.30		$	.29
Diluted earnings		.32		.27			.30			.29
Cash dividends		.19		.19			.20			.20

Common Stock Market Prices and Dividends

The common stock of Juniata Valley Financial Corp. is quoted under the symbol “JUVF.OB” on the over-the-counter (“OTC”) Electronic Bulletin Board, a regulated electronic quotation service made available through, and governed by, the NASDAQ system. As of December 31, 2010, the number of stockholders of record of the Company’s common stock was 1,787.

Prices presented below are bid prices between broker-dealers, which do not include retail mark-ups or markdowns or any commission to the broker-dealer. The published bid prices do not necessarily reflect prices in actual transactions.


	2010
					Dividends
Quarter Ended	High		Low		Declared
March 31	$	17.95	$	16.90	$	0.20
June 30		18.00		16.25		0.20
September 30		17.50		17.00		0.21
December 31		18.00		16.55		0.21


	2009
					Dividends
Quarter Ended	High		Low		Declared
March 31	$	19.00	$	16.00	$	0.19
June 30		18.50		16.00		0.19
September 30		18.00		16.80		0.20
December 31		17.95		17.10		0.20

As stated in “Note 15 — Stockholders’ Equity and Regulatory Matters” in the Notes to Consolidated Financial Statements, the Company is subject to various regulatory capital requirements that limit the amount of capital available for dividends. While the Company expects to continue its policy of regular dividend payments, no assurance of future dividend payments can be given. Future dividend payments will depend upon maintenance of a strong financial condition, future earnings, capital and regulatory requirements, future prospects, business conditions and other factors deemed relevant by the Board of Directors.

For further information on stock quotes, please contact any licensed broker-dealer, some of which make a market in Juniata Valley Financial Corp. stock.

Corporate Information

Corporate Headquarters
Juniata Valley Financial Corp.
Bridge and Main Streets
P.O. Box 66
Mifflintown, PA 17059
(717) 436-8211
JVBonline.com

Investor Information
JoAnn N. McMinn,
Senior Vice President and Chief Financial Officer
P.O. Box 66
Mifflintown, PA 17059
JoAnn.McMinn@JVBonline.com

Information Availability

Information about the Company’s financial performance may be found at www.JVBonline.com, following the “Investor Information” link.

All reports filed electronically by Juniata Valley Financial Corp. with the United States Securities and Exchange Commission (SEC), including the Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on Form 8-K, as well as any amendments to those reports, are also accessible at no cost on the SEC’s web site at www.SEC.gov.

Additionally, a copy of the Company’s Annual Report to the SEC on Form 10-K for the year ended December 31, 2010 will be supplied without charge (except for exhibits) upon written request. Please direct all inquiries to Ms. JoAnn McMinn, as detailed above.

Pursuant to Part 350 of FDIC’s Annual Disclosure Regulation, Juniata Valley Financial Corp. will make available to you upon request, financial information about The Juniata Valley Bank. Please contact:

Ms. Danyelle Pannebaker
The Juniata Valley Bank
P.O. Box 66
Mifflintown, PA 17059

Investment Considerations

In analyzing whether to make, or to continue, an investment in Juniata Valley Financial Corp., investors should consider, among other factors, the information contained in this Annual Report and certain investment considerations and other information more fully described in our Annual Report on Form 10-K for the year ended December 31, 2010, a copy of which can be obtained as described above.

Registrar and Transfer Agent

Registrar and Transfer Company
10 Commerce Drive
Cranford, New Jersey 07016-3572
Telephone: (800) 368-5948
Website: www.RTCo.com
Email: info@RTCo.com

Stockholders of record may access their accounts via the Internet to review account holdings and transaction history through Registrar and Transfer Company’s website: www.RTCo.com.

Information regarding the Company’s Dividend Reinvestment and Stock Purchase Plan, including a Prospectus, may be obtained by contacting Registrar and Transfer Company, through the means listed above.

The Company offers a dividend direct deposit option whereby shareholders of record may have their dividends deposited directly into the bank account of their choice on the dividend payment date. Please contact Registrar and Transfer Company for further information and to register for this service.

Annual Meeting of Shareholders

The Annual Meeting of Shareholders of Juniata Valley Financial Corp. will be held at 10:30 a.m., on Tuesday, May 17, 2011 at the Quality Inn Suites, 13015 Ferguson Valley Road, Burnham, Pennsylvania.

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