UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

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

Commission File Number 000-13232

Juniata Valley Financial Corp.

(Exact name of registrant as specified in its charter)

Pennsylvania		23-2235254
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)
Bridge and Main Streets, Mifflintown, Pennsylvania		17059
(Address of principal executive offices)		(Zip Code)

(717) 436-8211

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. þ Yes o No

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). þ Yes o No

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

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o (Do not check if a smaller reporting company)		Smaller reporting company o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). o Yes þ No

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

Class		Outstanding as of November 9, 2011
Common Stock ($1.00 par value)		4,236,168 shares

 

 

TABLE OF CONTENTS

PART I — FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Statements of Financial Condition as of September 30, 2011 and December 31, 2010 (Unaudited)			3
Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2011 and 2010 (Unaudited)			4
Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)			5
Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2011 and 2010 (Unaudited)			6
Notes to Consolidated Financial Statements (Unaudited)			7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			26
Item 3. Quantitative and Qualitative Disclosures about Market Risk			34
Item 4. Controls and Procedures			35
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			36
Item 1A. Risk Factors			36
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			36
Item 3. Defaults upon Senior Securities			36
Item 4. (Removed and Reserved)			36
Item 5. Other Information			36
Item 6. Exhibits			37
Signatures			37
Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements

Juniata Valley Financial Corp. and Subsidiary

(Unaudited, in thousands, except share data)

		September 30,				December 31,
		2011				2010
ASSETS
Cash and due from banks		$	10,254			$	12,758
Interest bearing deposits with banks			1,116				218
Federal funds sold			6,500				12,300
Cash and cash equivalents			17,870				25,276
Interest bearing time deposits with banks			1,096				1,345
Securities available for sale			112,355				79,923
Restricted investment in Federal Home Loan Bank (FHLB) stock			1,790				2,088
Investment in unconsolidated subsidiary			3,734				3,550
Total loans, net of unearned interest			292,353				298,102
Less: Allowance for loan losses			(2,907	)			(2,824	)
Total loans, net of allowance for loan losses			289,446				295,278
Premises and equipment, net			6,788				7,067
Other real estate owned			212				412
Bank owned life insurance and annuities			13,962				13,568
Core deposit intangible			220				254
Goodwill			2,046				2,046
Accrued interest receivable and other assets			5,321				4,946
Total assets		$	454,840			$	435,753
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing		$	64,006			$	60,696
Interest bearing			331,105				316,094
Total deposits			395,111				376,790
Securities sold under agreements to repurchase			3,057				3,314
Other interest bearing liabilities			1,222				1,200
Accrued interest payable and other liabilities			4,551				4,473
Total liabilities			403,941				385,777
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 —
4,236,168 shares at September 30, 2011;
4,257,765 shares at December 31, 2010			4,746				4,746
Surplus			18,363				18,354
Retained earnings			38,696				37,868
Accumulated other comprehensive loss			(1,018	)			(1,465	)
Cost of common stock in Treasury:
509,658 shares at September 30, 2011;
488,061 shares at December 31, 2010			(9,888	)			(9,527	)
Total stockholders’ equity			50,899				49,976
Total liabilities and stockholders’ equity		$	454,840			$	435,753

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

(Unaudited)

(in thousands, except share data)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Interest income:
Loans, including fees		$	4,401			$	4,824			$	13,477			$	14,756
Taxable securities			328				257				894				753
Tax-exempt securities			222				245				689				784
Federal funds sold			1				3				5				7
Other interest income			8				10				23				29
Total interest income			4,960				5,339				15,088				16,329
Interest expense:
Deposits			1,162				1,288				3,528				4,154
Securities sold under agreements to repurchase			1				1				2				2
Short-term borrowings			—				—				—				1
Long-term debt			—				29				—				99
Other interest bearing liabilities			6				2				20				9
Total interest expense			1,169				1,320				3,550				4,265
Net interest income			3,791				4,019				11,538				12,064
Provision for loan losses			60				70				264				637
Net interest income after provision for loan losses			3,731				3,949				11,274				11,427
Noninterest income:
Trust fees			109				90				316				300
Customer service fees			354				335				1,015				1,104
Earnings on bank-owned life insurance and annuities			123				133				366				393
Commissions from sales of non-deposit products			53				80				221				301
Income from unconsolidated subsidiary			66				60				197				179
Securities impairment charge			—				(40	)			—				(40	)
Gain on sales or calls of securities			—				4				6				31
Gain on sales of other real estate owned			14				30				28				36
Other noninterest income			300				244				895				679
Total noninterest income			1,019				936				3,044				2,983
Noninterest expense:
Employee compensation expense			1,318				1,232				3,910				3,826
Employee benefits			334				363				1,158				1,182
Occupancy			236				243				731				692
Equipment			138				148				439				403
Data processing expense			336				366				995				1,077
Director compensation			74				88				221				261
Professional fees			111				128				341				357
Taxes, other than income			123				124				374				379
FDIC Insurance premiums			73				138				291				435
Amortization of intangibles			12				11				34				34
Other noninterest expense			368				317				1,106				956
Total noninterest expense			3,123				3,158				9,600				9,602
Income before income taxes			1,627				1,727				4,718				4,808
Provision for income taxes			413				442				1,174				1,197
Net income		$	1,214			$	1,285			$	3,544			$	3,611
Earnings per share
Basic		$	0.29			$	0.30			$	0.84			$	0.84
Diluted		$	0.29			$	0.30			$	0.83			$	0.84
Cash dividends declared per share		$	0.22			$	0.21			$	0.64			$	0.61
Weighted average basic shares outstanding			4,236,168				4,283,024				4,243,273				4,307,417
Weighted average diluted shares outstanding			4,239,872				4,286,350				4,246,533				4,310,989

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

(Unaudited)

(in thousands, except share data)

Nine Months Ended September 30, 2011
		Number																Accumulated
		of																Other								Total
		Shares				Common								Retained				Comprehensive				Treasury				Stockholders’
		Outstanding				Stock				Surplus				Earnings				Loss				Stock				Equity
Balance at January 1, 2011			4,257,765			$	4,746			$	18,354			$	37,868			$	(1,465	)		$	(9,527	)		$	49,976
Comprehensive income:
Net income															3,544												3,544
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects																			369								369
Defined benefit retirement plan adjustments, net of tax effects																			78								78
Total comprehensive income																											3,991
Cash dividends at $0.64 per share															(2,716	)											(2,716	)
Stock-based compensation activity											19																19
Purchase of treasury stock			(24,500	)																			(417	)			(417	)
Treasury stock issued for stock option and stock purchase plans			2,903								(10	)											56				46
Balance at September 30, 2011			4,236,168			$	4,746			$	18,363			$	38,696			$	(1,018	)		$	(9,888	)		$	50,899

Nine Months Ended September 30, 2010
		Number																Accumulated
		of																Other								Total
		Shares				Common								Retained				Comprehensive				Treasury				Stockholders’
		Outstanding				Stock				Surplus				Earnings				Loss				Stock				Equity
Balance at January 1, 2010			4,337,587			$	4,746			$	18,315			$	36,478			$	(805	)		$	(8,131	)		$	50,603
Comprehensive income:
Net income															3,611												3,611
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects																			178								178
Defined benefit retirement plan adjustments, net of tax effects																			63								63
Total comprehensive income																											3,852
Cash dividends at $0.61 per share															(2,627	)											(2,627	)
Stock-based compensation activity											36																36
Purchase of treasury stock, at cost			(66,400	)																			(1,171	)			(1,171	)
Treasury stock issued for stock option and stock purchase plans			4,078								(19	)											80				61
Balance at September 30, 2010			4,275,265			$	4,746			$	18,332			$	37,462			$	(564	)		$	(9,222	)		$	50,754

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

(Unaudited)

(in thousands)

		Nine Months Ended September 30,
		2011				2010
Operating activities:
Net income		$	3,544			$	3,611
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses			264				637
Depreciation			447				406
Net amortization of securities premiums			271				216
Amortization of core deposit intangible			34				34
Net amortization of loan origination costs			33				17
Deferral of net loan costs			8				35
Securities impairment charge			—				40
Net realized gains on sales or calls of securities			(6	)			(31	)
Gains on sales of other real estate owned			(28	)			(36	)
Earnings on bank owned life insurance and annuities			(366	)			(393	)
Deferred income tax expense			45				15
Equity in earnings of unconsolidated subsidiary, net of dividends of $19 and $28			(178	)			(151	)
Stock-based compensation expense			19				36
Decrease (increase) in accrued interest receivable and other assets			(538	)			559
Increase (decrease) in accrued interest payable and other liabilities			118				(74	)
Net cash provided by operating activities			3,667				4,921
Investing activities:
Purchases of:
Securities available for sale			(76,365	)			(39,157	)
Premises and equipment			(168	)			(704	)
Bank owned life insurance and annuities			(66	)			(66	)
Proceeds from:
Maturities and calls of and principal repayments on securities available for sale			44,218				37,636
Redemption of FHLB stock			298				—
Bank owned life insurance and annuities			20				50
Sale of other real estate owned			479				747
Sale of other assets			9				11
Net decrease in interest-bearing time deposits			249				75
Net decrease in loans receivable			5,276				6,043
Net cash provided by (used in) investing activities			(26,050	)			4,635
Financing activities:
Net increase (decrease) in deposits			18,321				(4,849	)
Net decrease in securities sold under agreements to repurchase			(257	)			(332	)
Repayment of long-term debt			—				(5,000	)
Cash dividends			(2,716	)			(2,627	)
Purchase of treasury stock			(417	)			(1,171	)
Treasury stock issued for employee stock plans			46				61
Net cash provided by (used in) financing activities			14,977				(13,918	)
Net decrease in cash and cash equivalents			(7,406	)			(4,362	)
Cash and cash equivalents at beginning of period			25,276				19,895
Cash and cash equivalents at end of period		$	17,870			$	15,533
Supplemental information:
Interest paid		$	3,512			$	4,358
Income taxes paid		$	1,075			$	1,145
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate owned		$	251			$	730
Transfer of loans to repossessed assets		$	9			$	—

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

NOTE 1 — Basis of Presentation and Accounting Policies

The financial information includes the accounts of Juniata Valley Financial Corp. (the “Corporation”) and its wholly owned subsidiary, The Juniata Valley Bank (the “Bank”). All significant intercompany accounts and transactions have been eliminated.

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. For comparative purposes, whenever necessary, the 2010 balances have been reclassified to conform to the 2011 presentation. Such reclassifications, if any, had no impact on net income. Operating results for the three and nine-month periods ended September 30, 2011, are not necessarily indicative of the results for the year ended December 31, 2011. For further information, refer to the consolidated financial statements and footnotes thereto included in Juniata Valley Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, 2010.

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of September 30, 2011 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

NOTE 2 — Recent Accounting Pronouncements

ASU 2011-08

In September, 2011, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2011-08, Testing Goodwill for Impairment. The purpose of this ASU is to simplify how entities test goodwill for impairment by adding a new first step to the preexisting goodwill impairment test under Accounting Standards Codification (ASC) Topic 350, Intangibles — Goodwill and other. This amendment gives the entity the option to first assess a variety of qualitative factors such as economic conditions, cash flows, and competition to determine whether it was more likely than not that the fair value of goodwill has fallen below its carrying value. If the entity determines that it is not likely that the fair value has fallen below its carrying value, then the entity will not have to complete the original two-step test under Topic 350. The amendments in this ASU are effective for impairment tests performed for fiscal years beginning after December 15, 2011. Early adoption is permitted. The Corporation is evaluating the impact of this ASU on its consolidated financial statements.

ASU 2011-05

The provisions of this ASU amend FASB ASC Topic 220, Comprehensive Income, to facilitate the continued alignment of U.S. GAAP with International Accounting Standards. The ASU prohibits the presentation of the components of comprehensive income in the statement of stockholder’s equity. Reporting entities are allowed to present either: a statement of comprehensive income, which reports both net income and other comprehensive income; or separate but consecutive statements of net income and other comprehensive income. Under previous GAAP, any of the three presentations was acceptable. Regardless of the presentation selected, the reporting entity is required to present all reclassifications between other comprehensive and net income on the face of the new statement or statements. The provisions of this ASU are effective for fiscal years and interim periods beginning after December 15, 2011 for public entities. For nonpublic entities, the provisions are effective for fiscal years ending after December 15, 2012, and for interim and annual periods thereafter. As the two remaining options for presentation existed prior to the issuance of this ASU, early adoption is permitted. This guidance will not have an impact on the Corporation’s consolidated financial position or results of operations.

ASU 2011-04

This ASU amends FASB ASC Topic 820, Fair Value Measurements, to bring U.S. GAAP for fair value measurements in line with International Accounting Standards. The ASU clarifies existing guidance for items such as: the application of the highest and best use concept to non-financial assets and liabilities; the application of fair value measurement to financial instruments classified in a reporting entity’s stockholder’s equity; and disclosure requirements regarding quantitative information about unobservable inputs used in the fair value measurements of level 3 assets. The ASU also creates an exception to Topic 820 for entities which carry financial instruments within a portfolio or group, under which the entity is now permitted to base the price used for fair valuation upon a price that would be received to sell the net asset position or transfer a net liability position in an orderly transaction. The ASU also allows for the application of premiums and discounts in a fair value measurement if the financial instrument is categorized in level 2 or 3 of the fair value hierarchy. Lastly, the ASU contains new disclosure requirements regarding fair value amounts categorized as level 3 in the fair value hierarchy such as: disclosure of the valuation process used; effects of and relationships between unobservable inputs; usage of nonfinancial assets for purposes other than their highest and best use when that is the basis of the disclosed fair value; and categorization by level of items disclosed at fair value, but not measured at fair value for financial statement purposes. For public entities, this ASU is effective for interim and annual periods beginning after December 15, 2011. For nonpublic entities, the ASU is effective for annual periods beginning after December 15, 2011. Early adoption is not permitted. This guidance will not have a significant impact on the Corporation’s consolidated financial position or results of operations.

ASU 2011-03

The FASB has issued this ASU to clarify the accounting principles applied to repurchase agreements, as set forth by FASB ASC Topic 860, Transfers and Servicing. This ASU, entitled Reconsideration of Effective Control for Repurchase Agreements, amends one of three criteria used to determine whether or not a transfer of assets may be treated as a sale by the transferor. Under Topic 860, the transferor may not maintain effective control over the transferred assets in order to qualify as a sale. This ASU eliminates the criteria under which the transferor must retain collateral sufficient to repurchase or redeem the collateral on substantially agreed upon terms as a method of maintaining effective control. This ASU is effective for both public and nonpublic entities for interim and annual reporting periods beginning on or after December 15, 2011, and requires prospective application to transactions or modifications of transactions which occur on or after the effective date. Early adoption is not permitted. This guidance will not have a significant impact on the Corporation’s consolidated financial position or results of operations.

NOTE 3 — Comprehensive Income

U.S. GAAP requires that recognized revenue, expenses, gains, and losses be included in net income. Although certain changes in assets and liabilities, such as unrealized gains and losses on available for sale securities and the liability associated with defined benefit plans, are reported as a separate component of the equity section of the consolidated statements of financial condition, such items, along with net income, are components of comprehensive income.

The components of comprehensive income and related tax effects are as follows (in thousands):

		Three Months Ended September 30, 2011												Three Months Ended September 30, 2010
		Before												Before				Tax Expense
		Tax				Tax				Net-of-Tax				Tax				or				Net-of-Tax
		Amount				Expense				Amount				Amount				(Benefit)				Amount
Net income		$	1,627			$	413			$	1,214			$	1,727			$	442			$	1,285
Other comprehensive income:
Unrealized gains (losses) on available for sale securities:
Unrealized gains (losses) arising during the period			147				50				97				(25	)			(9	)			(16	)
Unrealized gains from unconsolidated subsidiary			1				—				1				1				—				1
Less reclassification adjustment for:
gains included in net income			—				—				—				(4	)			(1	)			(3	)
securities impairment charge			—				—				—				40				14				26
Change in pension liability			40				14				26				32				11				21
Other comprehensive income			188				64				124				44				15				29
Total comprehensive income		$	1,815			$	477			$	1,338			$	1,771			$	457			$	1,314

		Nine Months Ended September 30, 2011												Nine Ended September 30, 2010
		Before				Tax Expense								Before				Tax Expense
		Tax				or				Net-of-Tax				Tax				or				Net-of-Tax
		Amount				(Benefit)				Amount				Amount				(Benefit)				Amount
Net income		$	4,718			$	1,174			$	3,544			$	4,808			$	1,197			$	3,611
Other comprehensive income:
Unrealized gains on available for sale securities:
Unrealized gains arising during the period			556				189				367				239				81				158
Unrealized gains from unconsolidated subsidiary			6				—				6				14				—				14
Less reclassification adjustment for:
gains included in net income			(6	)			(2	)			(4	)			(31	)			(11	)			(20	)
securities impairment charge			—				—				—				40				14				26
Change in pension liability			118				40				78				96				33				63
Other comprehensive income			674				227				447				358				117				241
Total comprehensive income		$	5,392			$	1,401			$	3,991			$	5,166			$	1,314			$	3,852

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

		9/30/2011				12/31/2010
Unrealized gains on available for sale securities		$	768			$	399
Unrecognized expense for defined benefit pension			(1,786	)			(1,864	)
Accumulated other comprehensive loss		$	(1,018	)		$	(1,465	)

NOTE 4 — Earnings per Share

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

(Amounts, except earnings per share, in thousands)

		Three Months				Three Months
		Ended				Ended
		September 30, 2011				September 30, 2010
Net income		$	1,214			$	1,285
Weighted-average common shares outstanding			4,236				4,283
Basic earnings per share		$	0.29			$	0.30
Weighted-average common shares outstanding			4,236				4,283
Common stock equivalents due to effect of stock options			4				3
Total weighted-average common shares and equivalents			4,240				4,286
Diluted earnings per share		$	0.29			$	0.30

		Nine Months				Nine Months
		Ended				Ended
		September 30, 2011				September 30, 2010
Net income		$	3,544			$	3,611
Weighted-average common shares outstanding			4,243				4,307
Basic earnings per share		$	0.84			$	0.84
Weighted-average common shares outstanding			4,243				4,307
Common stock equivalents due to effect of stock options			3				4
Total weighted-average common shares and equivalents			4,246				4,311
Diluted earnings per share		$	0.83			$	0.84

NOTE 5 — Commitments, Contingent Liabilities and Guarantees

In the ordinary course of business, the Corporation makes commitments to extend credit to its customers through letters of credit, loan commitments and lines of credit. At September 30, 2011, the Corporation had $41,793,000 outstanding in loan commitments and other unused lines of credit extended to its customers as compared to $37,466,000 at December 31, 2010.

The Corporation does not issue any guarantees that would require liability recognition or disclosure, other than its letters of credit. Letters of credit are conditional commitments issued by the Corporation to guarantee the performance of a customer to a third party. Generally, letters of credit have expiration dates within one year of issuance. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Corporation generally holds collateral and/or personal guarantees supporting these commitments. The Corporation had outstanding $551,000 and $845,000 of letters of credit commitments as of September 30, 2011 and December 31, 2010, respectively. Management believes that the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding guarantees. The current amount of the liability as of September 30, 2011 for payments under letters of credit issued was not material. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk.

NOTE 6 — Defined Benefit Retirement Plan

The Corporation had a defined benefit retirement plan covering substantially all of its employees, prior to January 1, 2008. Effective January 1, 2008, the plan was amended to close the plan to new entrants. The benefits under the plan are based on years of service and the employees’ compensation. The Corporation’s funding policy allows contributions annually up to the maximum amount that can be deducted for federal income taxes purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The Corporation has made no contributions in the first nine months of 2011 and does not expect to contribute to the defined benefit plan in the remainder of 2011. Pension expense included the following components for the three and nine month periods ended September 30, 2011 and 2010:

(Dollars in thousands)

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Components of net periodic pension cost
Service cost		$	48			$	47			$	144			$	140
Interest cost			119				118				358				354
Expected return on plan assets			(158	)			(144	)			(474	)			(431	)
Additional recognized amounts			38				32				114				96
Net periodic pension cost		$	47			$	53			$	142			$	159

NOTE 7— Acquisition

In 2006, the Corporation acquired a branch office in Richfield, PA. The acquisition included real estate, deposits and loans. The assets and liabilities of the acquired business were recorded on the consolidated statement of financial condition at their estimated fair values as of September 8, 2006, and their results of operations have been included in the consolidated statements of income since such date.

Included in the purchase price of the branch was goodwill and core deposit intangible of $2,046,000 and $449,000, respectively. The core deposit intangible is being amortized over a ten-year period on a straight line basis. During the first nine months of 2011 and 2010, amortization expense was $34,000. Accumulated amortization of core deposit intangible through September 30, 2011 was $229,000. The goodwill is not amortized, but is measured annually for impairment or more frequently if certain events occur which might indicate goodwill has been impaired. There was no impairment of goodwill during the nine month periods ended September 30, 2011 or 2010.

NOTE 8 — Investment in Unconsolidated Subsidiary

The Corporation owns 39.16% of the outstanding common stock of The First National Bank of Liverpool (FNBL), Liverpool, PA. This investment is accounted for under the equity method of accounting. The investment is being carried at $3,734,000 as of September 30, 2011. The Corporation increases its investment in FNBL for its share of earnings and decreases its investment by any dividends received from FNBL. A loss in value of the investment which is other than a temporary decline will be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of FNBL to sustain an earnings capacity which would justify the carrying amount of the investment.

NOTE 9 — Securities

ASC Topic 320, Investments — Debt and Equity Securities, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. For equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses in assessing potential other-than-temporary impairment. More specifically, considerations used to determine other-than-temporary impairment status for individual equity holdings include the length of time the stock has remained in an unrealized loss position, the percentage of unrealized loss compared to the carrying cost of the stock, dividend reduction or suspension, market analyst reviews and expectations, and other pertinent developments that would affect expectations for recovery or further decline.

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

The Corporation’s investment portfolio includes primarily bonds issued by U.S. Government sponsored agencies (approximately 59%) and municipalities (approximately 37%) as of September 30, 2011. Most of the municipal bonds are general obligation bonds with maturities or pre-refunding dates within 5 years. The remaining 4% of the portfolio includes mortgage-backed securities issued by Government-sponsored agencies and backed by residential mortgages, corporate notes and a group of equity investments in other financial institutions. The amortized cost and fair value of securities as of September 30, 2011 and December 31, 2010, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.

		September 30, 2011
										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
Within one year		$	1,928			$	1,953			$	25			$	—
After one year but within five years			50,659				51,204				601				(56	)
After five years but within ten years			13,497				13,522				40				(15	)
			66,084				66,679				666				(71	)
Obligations of state and political subdivisions
Within one year			11,179				11,235				56				—
After one year but within five years			25,315				25,779				479				(15	)
After five years but within ten years			4,150				4,273				132				(9	)
			40,644				41,287				667				(24	)
Corporate notes
After one year but within five years			1,000				1,011				11				—
			1,000				1,011				11				—
Mortgage-backed securities			2,497				2,583				86				—
Equity securities			985				795				54				(244	)
Total		$	111,210			$	112,355			$	1,484			$	(339	)

		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	)

The following table shows gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at September 30, 2011 and December 31, 2010 (in thousands):

		Unrealized Losses at September 30, 2011
		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		$	18,429			$	(71	)		$	—			$	—			$	18,429			$	(71	)
Obligations of state and political subdivisions			3,114				(24	)			—				—				3,114				(24	)
Debt securities			21,543				(95	)			—				—				21,543				(95	)
Equity securities			388				(124	)			225				(120	)			613				(244	)
Total temporarily impaired securities		$	21,931			$	(219	)		$	225			$	(120	)		$	22,156			$	(339	)

		Unrealized Losses at December 31, 2010
		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. There are 24 debt securities that were in an unrealized loss position on September 30, 2011, but none that have had unrealized losses for more than 12 months. We believe that the decline in the value of our debt securities is due only to interest rate fluctuations, rather than erosion of quality. As a result, we also believe that the payment of contractual cash flows, including principal repayment, is not at risk. As management does not intend to sell the securities, does not believe the Corporation will be required to sell the securities before recovery and expects to recover the entire amortized cost basis, none of the debt securities are deemed to be other-than-temporarily impaired.

Equity securities owned by the Corporation consist of common stock of various financial services providers (“Bank Stocks”) and are evaluated quarterly for evidence of other-than-temporary impairment. There were 14 equity securities that were in an unrealized loss position on September 30, 2011, and six of those that comprise a group of securities with unrealized losses for 12 months or more. Individually, none of these six have significant unrealized losses. Management has identified no new other-than-temporary impairment as of September 30, 2011 in the equity portfolio.

Certain obligations of the U.S. Government and state and political subdivisions are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The fair value of the pledged assets amounted to $30,152,000 and $31,951,000 at September 30, 2011 and December 31, 2010, respectively.

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

		Three Months Ended								Nine Months Ended
		September 30,								September 30,
		2011				2010				2011				2010
Gross proceeds from sales of securities		$	—			$	—			$	—			$	—
Securities available for sale:
Gross realized gains from called securities		$	—			$	4			$	6			$	31
Gross realized losses			—				—				—				—

NOTE 10 — Loans and Related Allowance for Credit Losses

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.

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

The allowance for credit 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, when necessary. 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;

(4)

a confirming loss has occurred; or

(5)

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 Corporation’s existing loans. The analysis of the allowance for loan losses relies heavily on changes in observable trends that may indicate potential credit weaknesses. Management’s periodic evaluation of the adequacy of the allowance is based on the 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.

In addition, regulatory agencies, as an integral part of their examination process, periodically review the Corporation’s allowance for loan losses and may require the Corporation to recognize additions to the allowance based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the level of the allowance for loan losses as of September 30, 2011 to be adequate.

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

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 Corporation’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For commercial loans secured with real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the 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 Corporation 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 below-market-rate 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 of the allowance for contingencies relates to other loans that have been segmented into risk rated categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated quarterly or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified substandard have one or more well-defined weaknesses that jeopardize the liquidation of the debt. They include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis 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, as discussed above. Remaining loans are categorized into large groups of smaller balance homogeneous loans and are collectively evaluated for impairment. This computation is generally based on historical loss experience adjusted for qualitative factors. The historical loss experience is averaged over a ten-year period for each of the portfolio segments. The ten-year timeframe was selected in order to capture activity over a wide range of economic conditions and has been consistently used for the past five years. The qualitative risk factors are reviewed for relevancy each quarter and include:

1.

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;

2.

Nature and volume of the portfolio and terms of loans;

3.

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

4.

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

5.

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

6.

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 Corporation 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 Corporation and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, etc.