Juniata Valley Financial Corp.
Annual Report 2015

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BANKINg ON COmmUNIT y A healthy economy is dependent upon a banking system which provides access to basic financial services. Access to fairly-priced loans, a safe and sound repository for savings, and secure and robust payment systems are basic financial services universally necessary for consumer and businesses alike. That fact is understood. Less understood is the fact that underlying the national economy are thousands of diverse economic communities, often with specific industries and cultural heritages which have unique financial service needs or preferred service delivery systems. Community Banks recognize that specific localities and cultures have customized needs that are best met by community bankers who understand those needs. Those bankers also know that meeting their communities’ needs plays a critical role in the regional, state-wide and national economy. Community Bankers know their customers and their customers know their bankers. Community Bankers are your church choir director, your son’s little league coach and your daughter’s dance class assistant. They are Rotarians, Kiwanians, and library and hospital volunteers. In short, they are a big part of the social and economic fabric of their hometowns. And we need them. charles cole MeMorial hosPital Pool| coudersPort, Pa Photo Credit: Curt Weinhold com·mu·ni·ty noun 1. a social group of any size whose members reside in a specific locality, share government, and often have a common cultural and historical heritage. Potter couNty courthouse BeNches coudersPort, Pa Photo Credit: Curt Weinhold I J U N A T A V A L L E y I F I N A N C A L C O R P . A N N U A L R E P O R T 2 0 1 5 2015 ANNUAL REPORT JUNIATA VALLEy FINANCIAL CORP. 218 Bridge Street | mifflintown, PA 17059 | www.jvbonline.com 002CSN60AB Nickel Plate traiN at lewistowN statioN Photo Credit: Nathaniel Thierwechter MiffliN couNty field Photo Credit: Nathaniel Thierwechter BANKINg ON COmmUNIT y A healthy economy is dependent upon a banking system which provides access to basic financial services. Access to fairly-priced loans, a safe and sound repository for savings, and secure and robust payment systems are basic financial services universally necessary for consumer and businesses alike. That fact is understood. Less understood is the fact that underlying the national economy are thousands of diverse economic communities, often with specific industries and cultural heritages which have unique financial service needs or preferred service delivery systems. Community Banks recognize that specific localities and cultures have customized needs that are best met by community bankers who understand those needs. Those bankers also know that meeting their communities’ needs plays a critical role in the regional, state-wide and national economy. Community Bankers know their customers and their customers know their bankers. Community Bankers are your church choir director, your son’s little league coach and your daughter’s dance class assistant. They are Rotarians, Kiwanians, and library and hospital volunteers. In short, they are a big part of the social and economic fabric of their hometowns. And we need them. charles cole MeMorial hosPital Pool| coudersPort, Pa Photo Credit: Curt Weinhold com·mu·ni·ty noun 1. a social group of any size whose members reside in a specific locality, share government, and often have a common cultural and historical heritage. Potter couNty courthouse BeNches coudersPort, Pa Photo Credit: Curt Weinhold I J U N A T A V A L L E y I F I N A N C A L C O R P . A N N U A L R E P O R T 2 0 1 5 2015 ANNUAL REPORT JUNIATA VALLEy FINANCIAL CORP. 218 Bridge Street | mifflintown, PA 17059 | www.jvbonline.com 002CSN60AB Nickel Plate traiN at lewistowN statioN Photo Credit: Nathaniel Thierwechter MiffliN couNty field Photo Credit: Nathaniel Thierwechter JUNIATA VALLEy FINANCIAL CORP. | ANNUAL REPORT 2015 JUNIATA VALLEy FINANCIAL CORP. | ANNUAL REPORT 2015 JUVF UNdERSTANdS ThIS BUSINESS The Juniata Valley Bank opened its doors in 1867, in We added our Richfield branch through acquisition mifflintown, PA, Juniata County. Nearly one hundred years in 2006 and, on November 30th, 2015, we closed the later, from 1962 through 1967, our bank grew through acquisition of First National Bank of Port Allegany and acquisition of The First National Bank of millerstown, Farmers formally entered the Northern Tier with three new banking National Bank of mcAlisterville, The Port Royal National Bank locations in mcKean and Potter Counties. and finally the Tuscarora State Bank of Blairs mills. After all these years, we have proudly maintained high- In 1998, The Juniata Valley Bank merged with the touch personal service in all these varied communities. Lewistown Trust Company, extending its footprint throughout mifflin County with four additional branches. ThIS BUSINESS IS ChANgINg But in every community, regardless of size and demographics...the need for innovative delivery systems continues to grow. JVB is committed to providing robust electronic services responsively designed to facilitate electronic banking from any device. Our customers can look forward to an enhanced internet banking website in 2016 with even greater access to loan and deposit services. MaiN street | Port allegaNy, Pa Photo Credit: Susan Carlson JuNiata couNty, Pa| riverscaPe Photo Credit: Nathaniel Thierwechter “community banking has a special meaning to our shareholders. our belief in the value of community banking and our ability to successfully execute a community banking business strategy throughout varied pennsylvania regions is the essence of how we are building shareholder value.” and liabilities and managing risk, helping to assure the long- term growth and health of your financial company. We look forward to 2016 and the challenges and opportunities the opportunities for the satisfaction of our customers, the professional gratification of our dedicated employees, and the enrichment of our shareholders. COmmUNITy BANKINg FOR OUR ShAREhOLdERS “Community Banking has a special meaning to our shareholders. Our belief in the value of Community Banking and our ability to successfully execute a Community Banking business strategy throughout varied Pennsylvania regions is the essence of how we are building shareholder value.” We will continue to adapt our banking model to the changing needs and demands of our consumer and business clients; however, acquisition remains a strategic focus. Through this strategy, we can leverage our capital and overhead to deliver stronger returns to our bottom line. Additionally, new markets provide expanded opportunities to drive fee-based products and services to a larger customer base. dIRECTORy OF OFFICERS OF JVB ExECUTIVE Marcie A. Barber..................................................................President, Chief Executive Officer BRANCh AdmINISTRATION Patricia J. Yearick .............. Senior Vice President, Community Banking Division Manager JoAnn N. McMinn ............................................................................... Executive Vice President, Chief Financial Officer Joseph W. Lashway....................... Senior Vice President, Northern Tier Division Manager Cynthia L. Bosworth ....................... Northern Tier Branch Administrator and Loan Officer Danyelle M. Pannebaker ............................................................................. Executive Assistant AdmINISTRATION Tina J. Smith........................................Senior Vice President, Director of Human Resources Suzanne E. Booher ........................................................Vice President, Director of Marketing and Facilities Management Brent M. Miller ..................................................................Vice President, Compliance Officer Kathy Hutchinson .........................................................Vice President, Compliance Specialist and Security/BSA Officer FINANCE Kristi J. Burdge .............................................Assistant Vice President, Accounting Manager Renee D. Williamson ..............................................................Financial Information Manager LENdINg Corbett J. Monica .................................. Senior Vice President, Lending Division Manager William T. Campbell, Jr. ..............................................Vice President, Relationship Manager Christine D. Coscia ....................................... Northern Tier Assistant Branch Administrator and Loan Officer Lora J. Rankin .............................................................................................Collections Manager Jane A. Harrier ..............................................................................................Loan Administrator blairs mills office Wayne S. McCoy ............................................... Vice President, Community Office Manager burnham office Leann M. Fisher ................................................. Vice President, Community Office Manager coudersport office Kelly L. Bruno .................................................................................Community Office Manager gardenview office Larry B. Cottrill, Jr. ............................................ Vice President, Community Office Manager Denise M. Rothrock .......................................................................... Assistant Office Manager lillibridge office Danielle H. Bennett ......................................................................Community Office Manager it holds for JUVF. We intend to meet the challenges and leverage Lisa K. Hobbs .......................................................................Northern Tier Compliance Officer Thoughtful acquisition also provides an opportunity to enhance both sides of our balance sheet by diversifying assets marcie A. Barber | President and CEO TOTAL ASSETS AT yEAR ENd (In Thousands) $600,000 $580,000 $560,000 $540,000 $520,000 $500,000 $480,000 $460,000 $440,000 $420,000 $400,000 2009 2008 $442,109 $428,084 2010 $435,753 2006 $415,931 2007 $420,146 2014 $480,529 2011 $447,433 2012 2013 $448,869 $448,782 $583,928 2015 Jeffrey A. Herr ..............................................................Vice President, Relationship Manager Scott E. Nace ................................................................Vice President, Relationship Manager mcalisterville office Leslie A. Miller ................................................... Vice President, Community Office Manager H. Fred Wallace ............................................................Vice President, Relationship Manager Kelly M. Neimond ............................................................................. Assistant Office Manager Jon R. Yarger .....................................................Vice President, Consumer Lending Manager Betty D. Ryan ................................ Vice President, Secondary Mortgage Market Manager Pamela K. Parson ........................................................... Vice President, Collections Manager Christine L. Burlew ............................................................. Vice President, Collections Officer Lisa M. Snyder .............................................Vice President, Credit Administration Manager mifflintown & mountain view offices Annette M. Price ................................................ Vice President, Community Office Manager millerstown office Thomas P. O’Connell ........................................ Vice President, Community Office Manager Matthew J. Waddell ...........................................................Vice President, Portfolio Manager Lisa M. Freet ..................................................................................... Assistant Office Manager OPERATIONS Steven T. Kramm .......................................................................................Senior Vice President, Operations/Technology Division Manager S. Marlene Hubler .................................................................. Computer Operations Manager Kelly L. Yetter ....................................................... Electronic and Business Banking Manager Curtis M. Crouse ....................................................................................Network Administrator Beverly M. McClellan ..............................................................................................Data Analyst Tammy L Miller ........................................................................... Deposit Operations Manager TRUST ANd INVESTmENT SERVICES Donald E. Shawley ....................................................................................Senior Vice President, Trust and Investment Services Division Manager Cynthia L. Williams .......................................................................Vice President, Trust Officer Paul M. Grego............................................................Vice President, Trust Investment Officer Jonathan F. King ...................................................................Financial Services Representative monument square office Lee Ellen Foose ................................................ Vice President, Community Office Manager Stacey K. McMurtrie ......................................................................... Assistant Office Manager port allegany office Shelly S. Morey ..............................................................................Community Office Manager port royal office Barbara I. Seaman ......................................... Vice President, Community Office Manager richfield office Brenda A. Brubaker .......................................... Vice President, Community Office Manager wal-mart office Kristi A. Dippery ................................................................................ Assistant Office Manager water street office Christine L. Searer ...........................Assistant Vice President, Community Office Manager JuNiata couNty courthouse | MiffliNtowN, Pa Photo Credit: Nathaniel Thierwechter eMBassy theatre | lewistowN, Pa Photo Credit: Nathaniel Thierwechter acadeMia PoMeroy covered Bridge | Port royal, Pa Photo Credit: Sandy Sieber JUNIATA VALLEy FINANCIAL CORP. ANNUAL REPORT 2015 JUNIATA VALLEy FINANCIAL CORP. | ANNUAL REPORT 2015 JUNIATA VALLEy FINANCIAL CORP. | ANNUAL REPORT 2015 JUVF UNdERSTANdS ThIS BUSINESS The Juniata Valley Bank opened its doors in 1867, in We added our Richfield branch through acquisition mifflintown, PA, Juniata County. Nearly one hundred years in 2006 and, on November 30th, 2015, we closed the later, from 1962 through 1967, our bank grew through acquisition of First National Bank of Port Allegany and acquisition of The First National Bank of millerstown, Farmers formally entered the Northern Tier with three new banking National Bank of mcAlisterville, The Port Royal National Bank locations in mcKean and Potter Counties. and finally the Tuscarora State Bank of Blairs mills. After all these years, we have proudly maintained high- In 1998, The Juniata Valley Bank merged with the touch personal service in all these varied communities. Lewistown Trust Company, extending its footprint throughout mifflin County with four additional branches. ThIS BUSINESS IS ChANgINg But in every community, regardless of size and demographics...the need for innovative delivery systems continues to grow. JVB is committed to providing robust electronic services responsively designed to facilitate electronic banking from any device. Our customers can look forward to an enhanced internet banking website in 2016 with even greater access to loan and deposit services. MaiN street | Port allegaNy, Pa Photo Credit: Susan Carlson JuNiata couNty, Pa| riverscaPe Photo Credit: Nathaniel Thierwechter “community banking has a special meaning to our shareholders. our belief in the value of community banking and our ability to successfully execute a community banking business strategy throughout varied pennsylvania regions is the essence of how we are building shareholder value.” and liabilities and managing risk, helping to assure the long- term growth and health of your financial company. We look forward to 2016 and the challenges and opportunities the opportunities for the satisfaction of our customers, the professional gratification of our dedicated employees, and the enrichment of our shareholders. COmmUNITy BANKINg FOR OUR ShAREhOLdERS “Community Banking has a special meaning to our shareholders. Our belief in the value of Community Banking and our ability to successfully execute a Community Banking business strategy throughout varied Pennsylvania regions is the essence of how we are building shareholder value.” We will continue to adapt our banking model to the changing needs and demands of our consumer and business clients; however, acquisition remains a strategic focus. Through this strategy, we can leverage our capital and overhead to deliver stronger returns to our bottom line. Additionally, new markets provide expanded opportunities to drive fee-based products and services to a larger customer base. dIRECTORy OF OFFICERS OF JVB ExECUTIVE Marcie A. Barber..................................................................President, Chief Executive Officer BRANCh AdmINISTRATION Patricia J. Yearick .............. Senior Vice President, Community Banking Division Manager JoAnn N. McMinn ............................................................................... Executive Vice President, Chief Financial Officer Joseph W. Lashway....................... Senior Vice President, Northern Tier Division Manager Cynthia L. Bosworth ....................... Northern Tier Branch Administrator and Loan Officer Danyelle M. Pannebaker ............................................................................. Executive Assistant AdmINISTRATION Tina J. Smith........................................Senior Vice President, Director of Human Resources Suzanne E. Booher ........................................................Vice President, Director of Marketing and Facilities Management Brent M. Miller ..................................................................Vice President, Compliance Officer Kathy Hutchinson .........................................................Vice President, Compliance Specialist and Security/BSA Officer FINANCE Kristi J. Burdge .............................................Assistant Vice President, Accounting Manager Renee D. Williamson ..............................................................Financial Information Manager LENdINg Corbett J. Monica .................................. Senior Vice President, Lending Division Manager William T. Campbell, Jr. ..............................................Vice President, Relationship Manager Christine D. Coscia ....................................... Northern Tier Assistant Branch Administrator and Loan Officer Lora J. Rankin .............................................................................................Collections Manager Jane A. Harrier ..............................................................................................Loan Administrator blairs mills office Wayne S. McCoy ............................................... Vice President, Community Office Manager burnham office Leann M. Fisher ................................................. Vice President, Community Office Manager coudersport office Kelly L. Bruno .................................................................................Community Office Manager gardenview office Larry B. Cottrill, Jr. ............................................ Vice President, Community Office Manager Denise M. Rothrock .......................................................................... Assistant Office Manager lillibridge office Danielle H. Bennett ......................................................................Community Office Manager it holds for JUVF. We intend to meet the challenges and leverage Lisa K. Hobbs .......................................................................Northern Tier Compliance Officer Thoughtful acquisition also provides an opportunity to enhance both sides of our balance sheet by diversifying assets marcie A. Barber | President and CEO TOTAL ASSETS AT yEAR ENd (In Thousands) $600,000 $580,000 $560,000 $540,000 $520,000 $500,000 $480,000 $460,000 $440,000 $420,000 $400,000 2009 2008 $442,109 $428,084 2010 $435,753 2006 $415,931 2007 $420,146 2014 $480,529 2011 $447,433 2012 2013 $448,869 $448,782 $583,928 2015 Jeffrey A. Herr ..............................................................Vice President, Relationship Manager Scott E. Nace ................................................................Vice President, Relationship Manager mcalisterville office Leslie A. Miller ................................................... Vice President, Community Office Manager H. Fred Wallace ............................................................Vice President, Relationship Manager Kelly M. Neimond ............................................................................. Assistant Office Manager Jon R. Yarger .....................................................Vice President, Consumer Lending Manager Betty D. Ryan ................................ Vice President, Secondary Mortgage Market Manager Pamela K. Parson ........................................................... Vice President, Collections Manager Christine L. Burlew ............................................................. Vice President, Collections Officer Lisa M. Snyder .............................................Vice President, Credit Administration Manager mifflintown & mountain view offices Annette M. Price ................................................ Vice President, Community Office Manager millerstown office Thomas P. O’Connell ........................................ Vice President, Community Office Manager Matthew J. Waddell ...........................................................Vice President, Portfolio Manager Lisa M. Freet ..................................................................................... Assistant Office Manager OPERATIONS Steven T. Kramm .......................................................................................Senior Vice President, Operations/Technology Division Manager S. Marlene Hubler .................................................................. Computer Operations Manager Kelly L. Yetter ....................................................... Electronic and Business Banking Manager Curtis M. Crouse ....................................................................................Network Administrator Beverly M. McClellan ..............................................................................................Data Analyst Tammy L Miller ........................................................................... Deposit Operations Manager TRUST ANd INVESTmENT SERVICES Donald E. Shawley ....................................................................................Senior Vice President, Trust and Investment Services Division Manager Cynthia L. Williams .......................................................................Vice President, Trust Officer Paul M. Grego............................................................Vice President, Trust Investment Officer Jonathan F. King ...................................................................Financial Services Representative monument square office Lee Ellen Foose ................................................ Vice President, Community Office Manager Stacey K. McMurtrie ......................................................................... Assistant Office Manager port allegany office Shelly S. Morey ..............................................................................Community Office Manager port royal office Barbara I. Seaman ......................................... Vice President, Community Office Manager richfield office Brenda A. Brubaker .......................................... Vice President, Community Office Manager wal-mart office Kristi A. Dippery ................................................................................ Assistant Office Manager water street office Christine L. Searer ...........................Assistant Vice President, Community Office Manager JuNiata couNty courthouse | MiffliNtowN, Pa Photo Credit: Nathaniel Thierwechter eMBassy theatre | lewistowN, Pa Photo Credit: Nathaniel Thierwechter acadeMia PoMeroy covered Bridge | Port royal, Pa Photo Credit: Sandy Sieber JUNIATA VALLEy FINANCIAL CORP. ANNUAL REPORT 2015 2015 AnnuAl RepoRt TABLE OF CONTENTS Message from the President ------------------------------------------------------------------------------------ Inside Front Cover Five-Year Financial Summary - Selected Financial Data ------------------------------------------------------------------------ 2 Management's Discussion and Analysis of Financial Condition and Results of Operations ----------------------------- 3 Report on Management's Assessment of Internal Control over Financial Reporting ----------------------------------- 44 Report of Independent Registered Public Accounting Firm on Effectiveness of Internal Control over Financial Reporting ------------------------------------------------------------------------------ 45 Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements ---------------- 46 Financial Statements Consolidated Statements of Financial Condition -------------------------------------------------------------------------- 47 Consolidated Statements of Income ----------------------------------------------------------------------------------------- 48 Consolidated Statements of Comprehensive Income--------------------------------------------------------------------- 49 Consolidated Statements of Stockholders' Equity ------------------------------------------------------------------------ 50 Consolidated Statements of Cash Flows ------------------------------------------------------------------------------------ 51 Notes to Consolidated Financial Statements ------------------------------------------------------------------------------- 53 Common Stock Market Prices and Dividends ----------------------------------------------------------------------------------104 Corporate Information -------------------------------------------------------------------------------------------------------------104 Corporate Officers, Directors and Business Development Boards ---------------------------------------------------------106 Officers of The Juniata Valley Bank ---------------------------------------------------------------------------- Inside Back Cover The Juniata Valley Bank, as an independent community bank, will endeavor to identify customers' financial needs and exceed their expectations in delivering quality products and services at a fair price to assure shareholders an above average return and employees competitive salaries and benefits. The business of the bank will be conducted with integrity and responsiveness to the communities served. Five-YeAR FinAnciAl SummARY - Selected FinAnciAl dAtA BALANCE SHEET INFORMATION (In thousands of dollars, except share and per share data) at December 31 Assets Deposits Loans, net of allowance for loan losses Investments Goodwill Short-term borrowings Long-term debt Stockholders’ equity Number of shares outstanding Average for the year Assets Stockholders’ equity Weighted average shares outstanding INCOME STATEMENT INFORMATION 2015 2014 2013 2012 2011 $ 583,928 457,126 374,565 156,186 5,381 35,057 22,500 59,962 4,798,086 $ 480,529 380,884 292,521 145,629 2,046 20,544 22,500 49,856 4,187,441 $ 448,782 379,645 275,511 128,262 2,046 13,797 - 49,984 4,196,266 $ 448,869 386,751 274,219 124,911 2,046 5,436 - 50,297 4,218,361 $ 447,433 386,665 286,750 114,077 2,046 3,500 - 49,720 4,228,218 489,323 51,131 4,240,319 470,660 50,704 4,192,761 450,031 49,571 4,210,336 454,057 49,766 4,231,404 447,323 50,355 4,241,286 Years Ended December 31 Total interest income Total interest expense Net interest income Provision for loan losses Other income Other expenses Income before income taxes Federal income tax expense Net income PER SHARE DATA Earnings per share - basic Earnings per share - diluted Cash dividends Book value FINANCIAL RATIOS $ 17,379 2,042 $ 16,932 2,598 $ 16,734 2,900 $ 18,170 3,648 $ 20,033 4,591 15,337 502 4,505 16,199 3,141 83 14,334 357 4,334 13,570 4,741 525 13,834 415 4,233 13,146 4,506 505 14,522 1,411 4,592 13,077 4,626 978 15,442 364 3,946 12,802 6,222 1,542 $ 3,058 $ 4,216 $ 4,001 $ 3,648 $ 4,680 $ $ $ 0.72 0.72 0.88 12.50 1.01 1.01 0.88 11.91 0.95 0.95 0.88 11.91 $ $ 0.86 0.86 0.88 11.92 1.10 1.10 0.86 11.76 Return on average assets Return on average equity Dividend payout Average equity to average assets Loans to deposits (year end) 0.62% 5.98 120.57 10.45 81.94 0.90% 8.31 87.52 10.77 76.80 0.89% 8.07 92.65 11.02 72.57 0.80% 7.33 102.08 10.96 70.90 1.05% 9.29 77.95 11.26 74.16 2 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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 statements which are not historical facts or that reflect 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 impact of adverse changes in the economy and real estate markets, including protracted periods of low-growth and sluggish loan demand; the effect of market interest rates, particularly a continuing period of low market interest rates, and relative balances of rate-sensitive assets to rate-sensitive liabilities, on net interest margin and net interest income; • the effect of competition on rates of deposit and loan growth and net interest margin; • • increases in non-performing assets, which may result in increases in the allowance for credit losses, loan charge-offs and elevated collection and carrying costs related to such non-performing assets; other income growth, including the impact of regulatory changes which have reduced debit card interchange revenue; investment securities gains and losses, including other than temporary declines in the value of securities which may result in charges to earnings; • the level of other expenses, including salaries and employee benefit expenses; • the increasing time and expense associated with regulatory compliance and risk management; the uncertainty and lack of clear regulatory guidance associated with the delay in implementing many of the regulations mandated by the Dodd Frank Act; • capital and liquidity strategies, including the expected impact of the capital and liquidity requirements modified by the Basel III standards; and • integration costs and cost savings related to business combinations. 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, 2015, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto). 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 3 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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. 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 15 offices in Juniata, Mifflin, Perry, Huntingdon, McKean, Potter and Centre counties. On November 30, 2015, Juniata acquired FNBPA Bancorp, Inc. (“FNBPA”), a Pennsylvania corporation. Under the terms of a merger agreement between the parties, FNBPA merged with, and into Juniata, with Juniata continuing as the surviving entity. Simultaneously with the consummation of the foregoing merger, First National Bank of Port Allegany (“FNB”), a nationally chartered bank and wholly-owned subsidiary of FNBPA, merged with and into The Juniata Valley Bank, a Pennsylvania state-chartered bank and wholly-owned subsidiary of Juniata. The trade name “JVB Northern Tier” is used to reference the former offices and service area of FNB. Additionally, Juniata owns 39.16% of Liverpool Community Bank (“LCB”), 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, mobile and telephone banking, an automated teller machine network, personal checking accounts, interest checking accounts, savings accounts, insured money market accounts, debit cards, 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 and mobile 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’ needs for financing, thus affecting loan growth. Additionally, changes in the economy can directly impact the credit strength of existing and potential borrowers. 4 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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 Management seeks to be the preeminent financial institution in its market area and measures its success by five key elements. ShAREhOLDER SATISFACTION Committed Connected Capable Caring and , , . committed Above all else, management is both stock value appreciation and dividend returns. Remaining identify the financial needs of our market and to deliver those products and services profitably grow the balance sheet and enhance core earnings, while maintaining capital and liquidity levels well exceeding all regulatory guidelines. CuSTOMER RELATIONShIpS to maximizing the value of our shareholders’ investment, through to our communities will allow us to capably . In doing so, we will connected committed to maximizing customer satisfaction. We are sensitive to the expanding array of financial We are 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 connection which we deliver our services must change as well. One element of the Company’s strategic plan is to provide through every means available, wherever we are needed, whether through a 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 capable of profitable balance sheet growth. Rapid growth should not be a substitute for careful fiscal We are 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 high credit standards, 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 prior years. Late in 2015, we consummated one such acquisition and are in the process of integrating the operation of our JVB Northern Tier region. OpERATING RESuLTS capable We are 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 non- interest expense from escalating in areas that can be controlled. In 2015, we continued to make advances in technological resources, placing data and information in the hands of our customers and employees, committed to optimizing the customer experience. 5 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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 not only still valid, but essential. 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 financial condition is strong. We enjoy strong capital and liquidity ratios that significantly exceed regulatory guidelines. 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 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 continually seek and implement back-room efficiencies. We recognize change is taking place in a world where convenience and mobility are priorities for consumers and businesses when choosing a financial institution with whom to do business. We offer full-featured secure mobile banking that includes remote check deposit for use on home computers and all mobile devices for consumers. For businesses, we provide options for cash management and remote deposit. We offer identity protection to the families of our customers, which we believe to be a true value-added service, with features that go far beyond traditional banking services, and sets us apart from other financial institutions in our market area. On November 30, 2015, with the acquisition of FNBPA, we expanded our market into the northern tier region of Pennsylvania and are actively integrating the JVB brand there. DELIVERy SySTEM ENhANCEMENTS 4 1 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. We believe that it is imperative that our customers have convenient and easy access to personal financial services that complement their particular lifestyle, whether it is through electronic or personal delivery. We achieved an early entry into the mobile banking arena in 2011 and have since expanded on-line delivery each year following, including consumer remote deposit and Touch ID. Our suite of on-line services now include the convenience of on-line loan 6 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 applications for residential mortgages, home equity, vehicle and other personal loans. On-line and mobile banking features include full bill-pay and monetary transfers between internal and external accounts. In 2015, we replaced our ATM network with all new highly functional state-of-the art machines. Our new Customer Resource Center became operational in 2015, providing dedicated service to all customer inquiries. In 2016, we will be introducing remote deposit for our small business customers through our business mobile app. Also in 2016, on-line deposit account opening will become available. The roll-out of a fully re-designed JVBonline.com website is planned for 2016 as well. JuniAtA’S chAllenGeS NET INTEREST MARGIN COMpRESSION Low market interest rates have pressured the net interest margin for most banks, including Juniata, in recent years. Loans have been originated, acquired or repriced at lower rates, reducing the average rate earned on those assets. While the average rate paid on interest-bearing liabilities, such as deposits and borrowings, has also declined, the decline has not always occurred at the same pace as the decline in the average rate earned on interest-earning assets, which can result in a narrowing of the net interest margin. We believe that this will continue to be a challenge until general market rates rise more significantly. COMpETITION Each year, competition becomes more intense 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 5 1 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 (“Sarbanes-Oxley”) and the Dodd-Frank Wall Street Reform and Consumer Protection 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 the Sarbanes-Oxley Act, 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. 7 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 ApplicAtion oF cRiticAl AccountinG policieS The Company’s consolidated financial statements are prepared based upon the application of accounting principles generally accepted in the United States of America (“GAAP”), the most significant of which are described in Note 2 to our consolidated financial statements – Summary of Significant Accounting Policies. Certain of these policies, particularly with respect to allowance for loan losses and the investment portfolio, 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 from those currently 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. In addition, regulatory agencies, as an integral part of their examination process, periodically review the Company’s allowance for loan losses and may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Considerations used by management to determine other-than-temporary impairment status of individual holdings within the investment securities 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 of operations. 8 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 ReSultS oF opeRAtionS 2015 FINANCIAL pERFORMANCE OVERVIEW Net income for Juniata in 2015 was $3,058,000, representing a 27.4% decrease as compared to net income for 2014. The comparability of the results of operations for 2015 were significantly impacted by the acquisition of FNBPA Bancorp, Inc. (“FNBPA”) on November 30, 2015. Juniata incurred $1,806,000 of non-recurring expense in conjunction with the acquisition of FNBPA during 2015. Exclusive of these expenses and the corresponding tax impact, net income for the year ended December 31, 2015 was $4,369,000, an increase of $153,000, or 3.6%, over net income of $4,216,000 in 2014. Operating results for the year included those of FNBPA beginning on December 1, 2015. Earnings per share on a fully diluted basis decreased from $1.01 in 2014 to $0.72, in 2015. When adjusted for the impact of tax-effected non-recurring merger and acquisition costs, earnings per share was $1.03 in 2015. The net interest margin, on a fully tax-equivalent basis, increased from 3.48% in 2014 to 3.56% in 2015. The ratio of non-interest income (excluding gains on sales of securities) to average assets remained unchanged at 0.92% in both 2015 and 2014, while the ratio of non-interest expense to average assets increased by 43 basis points to 3.31%. Of the increase in the non-interest expense ratio, 37 basis points related to the non-recurring merger and acquisition costs. Five-year historical ratios are presented below, followed by a reconciliation of non-GAAP comparative disclosures for the most recent three years. 2015 0.62% 5.98 3.88 0.59 3.56 2013 0.89% 8.07 4.09 0.71 3.53 2014 0.90% 8.31 3.94 0.60 3.48 2012 0.80% 7.33 4.39 0.88 3.68 2011 1.05% 9.29 4.91 1.13 3.97 Return on average assets Return on average equity Yield on earning assets Cost to fund earning assets Net interest margin (fully tax equivalent) Non-interest income (excluding gains on sales or calls of securities and securities impairment charges) to average assets Non-interest expense to average assets Net non-interest expense to average assets Non-GAAP presentation of comparative net income and performance ratios Net Income, as reported Merger and acquisition costs Tax impact of merger and acquisition costs Net income, exclusive of merger and acquisition costs, net of corresponding tax impact Return on average assets, adjusted Return on average equity, adjusted Earnings per share, adjusted 0.92 3.31 2.39 0.92 2.88 1.96 0.94 2.92 1.98 1.01 2.88 1.87 0.88 2.86 1.98 2015 3,058 1,806 (495) 4,369 0.89% 8.54% 1.03 $ $ $ 2014 4,216 - - 4,216 0.90% 8.31% 1.01 $ $ $ 2013 4,001 - - 4,001 0.89% 8.07% 0.95 $ $ $ 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 return on assets (“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 2015 and 2014. 9 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Net interest income Provision for loan losses $ 15,337 (502) 3.13% (0.10) $ 14,334 (357) 3.05% (0.08) 2015 % of Average Assets 2014 % of Average Assets Customer service fees Debit card fee income BOLI Trust fees Commissions from sales of non-deposit products Income from unconsolidated subsidiary Insurance-related gains Security gains Mortgage banking income Other noninterest income Total noninterest income Employee expense Occupancy and equipment Data processing expense Director compensation Professional fees Taxes, other than income FDIC insurance premiums (Loss) gain on sales of other real estate owned Intangible amortization Merger and acquisition expense Amortization of investment in partnership Other noninterest expense Total noninterest expense Income tax expense Net income Average assets NET INTEREST INCOME 1,563 866 378 396 347 238 98 13 190 416 4,505 (7,911) (1,558) (1,589) (192) (430) (368) (318) 14 (51) (1,806) (479) (1,511) (16,199) 0.32 0.18 0.08 0.08 0.07 0.05 0.02 0.00 0.04 0.09 0.92 (1.62) (0.32) (0.32) (0.04) (0.09) (0.08) (0.06) 0.00 (0.01) (0.37) (0.10) (0.31) (3.31) 1,278 847 391 438 352 236 165 9 214 404 4,334 (7,320) (1,463) (1,545) (205) (396) (340) (310) (22) (45) - (479) (1,445) (13,570) 0.27 0.18 0.08 0.09 0.07 0.05 0.04 0.00 0.05 0.09 0.92 (1.56) (0.31) (0.33) (0.04) (0.08) (0.07) (0.07) (0.00) (0.01) 0.00 (0.10) (0.31) (2.88) (83) 3,058 (0.02) 0.62% 489,323 (525) 4,216 (0.11) 0.90% 470,660 $ $ $ $ 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 77% of total revenues (the total of net interest income and non-interest income, exclusive of security gains) for 2015. 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 2015, 2014 and 2013. Table 2 further shows changes attributable to the volume and rate components of net interest income. 10 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 TABLE 1 AVERAGE BALANCE ShEETS AND NET INTEREST INCOME ANALySIS Year Ended December 31 2015 2014 2013 Average Balance(1) Interest Yield/ Rate Average Balance(1) Interest Yield/ Rate Average Balance(1) Interest Yield/ Rate (Dollars in thousands) ASSETS Interest earning assets: Loans: Taxable (5) Tax-exempt Total loans (8) Investment securities: Taxable Tax-exempt Total investment securities Interest bearing deposits Federal funds sold Total interest earning assets Non-interest earning assets: Cash and due from banks Allowance for loan losses Premises and equipment Other assets (7) Total assets $ 280,920 25,208 306,128 $ 13,894 751 14,645 4.95% 2.98 4.78 $ 260,613 20,995 281,608 $ 13,840 625 14,465 5.31% 2.98 5.14 $ 258,116 18,621 276,737 $ 14,310 558 14,868 112,459 28,687 2,267 465 141,146 597 32 447,903 2,732 2 0 17,379 2.02 1.62 1.94 0.34 0.25 3.88 7,417 (2,349) 6,506 29,846 $ 489,323 111,649 34,203 145,852 1,368 455 429,283 7,618 (2,313) 6,314 29,758 $ 470,660 1,950 513 2,463 3 1 16,932 1.75 1.50 1.69 0.23 0.22 3.94 1,267 583 1,850 16 0 16,734 91,972 37,210 129,182 2,834 - 408,753 8,557 (2,679) 6,305 29,095 $ 450,031 5.54% 3.00 5.37 1.38 1.57 1.43 0.56 0.00 4.09 LIABILITIES AND STOCKHOLDERS’ EQUITY Interest bearing liabilities: Demand deposits (2) Savings deposits Time deposits Other, including short and long-term borrowings, and other $ 98,618 74,268 130,843 161 76 1,440 0.16 0.10 1.10 $ 97,920 65,275 147,745 163 65 2,128 0.17 0.10 1.44 $ 94,338 59,926 161,677 160 69 2,642 0.17 0.12 1.63 interest bearing liabilities 44,941 365 0.81 27,589 242 0.88 8,848 29 0.33 Total interest bearing liabilities 348,670 2,042 0.59 338,529 2,598 0.77 324,789 2,900 0.89 Non-interest bearing liabilities: Demand deposits Other Stockholders’ equity Total liabilities and 84,295 5,227 51,131 stockholders’ equity $ 489,323 Net interest income Net margin on interest earning assets (3) Net interest income and margin - Tax equivalent basis (4) 77,399 4,028 50,704 $ 470,660 71,006 4,665 49,571 $ 450,031 $ 15,337 $ 14,334 $ 13,834 3.42% 3.34% 3.38% $ 15,964 3.56% $ 14,920 3.48% $ 14,422 3.53% Notes: (1) Average balances were calculated using a daily average. (2) Includes interest-bearing demand and money market accounts. (3) Net margin on interest earning assets is net interest income divided by average interest earning assets. (4) Interest on obligations of states and municipalities is not subject to federal income tax. In order to make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 34%. 11 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 TABLE 2 RATE/VOLuME ANALySIS OF NET INTEREST INCOME (dollars in thousands) ASSETS Interest earning assets: Loans: Taxable (5) Tax-exempt Total loans (8) Investment securities: Taxable Tax-exempt Total investment securities Interest bearing deposits 2015 compared to 2014 Increase (Decrease) Due To (6) 2014 compared to 2013 Increase (Decrease) Due To (6) Volume Rate Total Volume Rate Total $ 1,039 126 1,165 $ (985) - (985) $ 54 126 180 $ 137 71 208 $ (607) (4) (611) $ (470) 67 (403) 14 (87) (73) (2) (1) 1,089 303 39 342 1 - (642) 317 (48) 269 (1) (1) 447 303 (46) 257 (6) 1 460 380 (24) 356 (7) - (262) 683 (70) 613 (13) 1 198 Federal funds sold Total interest earning assets LIABILITIES AND STOCKHOLDERS’ EQUITY Interest bearing liabilities: Demand deposits (2) Savings deposits Time deposits Other, including short-term borrowings, and other 1 9 (225) (3) 2 (463) (2) 11 (688) 6 6 (216) (3) (10) (298) 3 (4) (514) interest bearing liabilities Total interest bearing liabilities Net interest income 142 (73) $ 1,162 (19) (483) $ (159) 123 (556) $ 1,003 119 (85) 545 $ 94 (217) (45) $ 213 (302) 500 $ (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 net unrealized gains (losses) on securities available for sale: $897 in 2015, $(38) in 2014 and $86 in 2013. (8) Interest income includes loan fees of $93, $153 and $185, in 2015, 2014 and 2013, respectively. 12 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 On average, total loans outstanding in 2015 increased from 2014 by 8.7%, to $306,128,000. Average yields on loans decreased by 36 basis points in 2015 when compared to 2014. As shown in the preceding Rate – Volume Analysis of Net Interest Income Table 2, the decrease in yield reduced interest income on loans by approximately $985,000, while the increase in volume increased interest income by $1,165,000, resulting in an aggregate increase in interest recorded on loans of $180,000. While the prime rate had remained unchanged at 3.25% from December of 2008 through mid-December 2015, most new and refinanced portfolio loans were priced at lower rates than maturing loans during 2015, contributing to the decrease in overall yield. Because the acquisition of FNBPA was consummated on November 30, 2015, the increase in average loans outstanding for 2015 was affected only slightly by the loans acquired in the business combination, increasing average loan balances by approximately $3,822,000. The remaining increase of $24,520,000 was attributable to increased loan demand and participations with other banks. During 2015, cash flows from maturities, sales and repayments of investment securities were primarily used to fund a portion of the loan growth and to reinvest in the investment portfolio. Additionally, the acquired investment portfolio from the merger, approximately $35.5 million, was immediately sold with proceeds used to fund the cash needs of the merger and reinvest into securities with characteristics consistent with the Company’s investment policy. The portfolio reinvestment was principally focused on government sponsored agency mortgage backed securities with relatively short weighted average lives and similar risk characteristics to government sponsored agency bonds and investments that can be used for pledging requirements. As a result, while average balances of investment securities decreased by $4,706,000, and this volume decrease accounted for a $73,000 decrease in interest income as compared to 2014, the improvement in the overall yield of the investment portfolio between 2014 and 2015 further increased net interest income by $342,000. In total, yield on earning assets in 2015 was 3.88% as compared to 3.94% in 2014, a decrease of 6 basis points. On a fully tax equivalent basis, yield on earning assets decreased from 4.08% in 2014 to 4.02% in 2015. Average interest bearing liabilities increased by $10,141,000 in 2015, as compared to 2014. Within the categories of interest bearing liabilities, deposits decreased on average by $7,211,000, and borrowings increased by $17,352,000 on average, in order to fund the increase in earning assets. Deposits assumed in the merger with FNBPA increased interest-bearing liabilities on average by approximately $4,888,000 in 2015, and non-interest bearing deposits by approximately $1,809,000. In total, average interest bearing transaction accounts and savings accounts increased $9,691,000 while average time deposits decreased $16,902,000. This shift away from time deposits continued a trend that has been occurring for several years. Management believes this trend reflects the consumers’ response to historical low interest rates. In 2015, time deposits accounted for 43.1% of total interest- bearing deposits. During 2014 and 2013, time deposits represented 47.5% and 51.2%, respectively, of all interest-bearing deposits. Changes in total interest-bearing liabilities reduced interest expense by $73,000 in 2015 as compared to 2014, while decreases in interest rates further reduced interest expense by $483,000. Non- interest bearing liabilities used to fund earning assets included demand deposits, which increased $6,896,000 on average. The percentage of interest earning assets funded by non-interest bearing liabilities was approximately 22.2% in 2015 versus 21.1% in 2014. The total cost to fund earning assets (computed by dividing the total interest expense by the total average earning assets) in 2015 was 0.46%, as compared to 0.60% in 2014. Net interest income was $15,337,000 for 2015, an increase of $1,003,000 when compared to 2014. Increases in volumes contributed $1,162,000 toward the improved net interest income, partially offset by a $159,000 reduction of net interest income due to rate changes. 13 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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 unallocated allowance. Using the process of analysis described in “Application of Critical Accounting Policies” earlier in this discussion, the Company determined that a provision of $502,000 was appropriate for 2015, an increase of $145,000 when compared to 2014 when the total loan loss provision was $357,000. The higher provision in 2015 primarily resulted from the increase in loan volumes in 2015; in 2015, the provision exceeded net charge-offs by $98,000. The discussion included in the Loans and Allowance for Loan Losses in the section below titled “Financial Condition” explains the information and analysis used to arrive at the provision for 2015. NON-INTEREST 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 continually explore avenues to enhance product offerings in areas beneficial to customers. We offer a variety of options for financing to home-buyers that includes a secondary market lending program, providing significant fee income. We continue to add new features and services for our electronic banking clientele. In 2014, we made fraud protection services available to all consumer depositors. We provide alternative investment opportunities through an arrangement with a broker dealer, and integrate 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 non-interest revenues consist of customer service fees derived from deposit accounts, trust relationships and sales of non-deposit products. In 2015, revenues from these services totaled $2,306,000, representing an increase of $238,000, or 10.5%, from 2014 revenues, primarily due to increases in fees earned from customer deposit services. Total fees from customer deposits increased by $285,000, or 22.3%, due primarily to fees earned from the new deposit product line introduced in 2014. Fees from estate settlements increased by $32,000 in 2015 as compared to 2014, and non-estate fees decreased by $74,000, due to the final settlement of several trust accounts in 2014. 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 or decrease and as new relationships are established. Commissions from sales of non-deposit products decreased in 2015, in comparison to 2014, by $5,000. 0 2 Fees and income derived from the origination, sale and servicing of residential mortgage loans (mortgage banking income) was $190,000 in 2015, a decrease of $24,000, or 11.2%, compared to 2014, as refinancing activity declined. Other non-interest-related fees derived from loan activity decreased by $15,000 when comparing 2015 to 2014. Gains of $98,000 and $165,000 were recorded in 2015 and 2014, respectively, as a result of life insurance claims 14 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The Company owns 39.16% of the stock of Liverpool Community Bank (“LCB”) and accounts for its ownership through the equity method. As such, 39.16% of the income of LCB is recorded by Juniata as non-interest income. As a result of this investment, $238,000 was recorded as income in 2015, compared to $236,000 in 2014. Earnings on bank-owned life insurance and annuities decreased in 2015 by $13,000, or 3.3%, when compared to the previous year, because investment in BOLI was lower and crediting rates were reduced. As a percentage of average assets, non-interest income (excluding securities gains and losses) was 0.92% in both 2015 and 2014. NON-INTEREST ExpENSE Management strives to control non-interest expense where possible in order to achieve maximum operating results. In 2015, total non-interest expense increased by $2,629,000, or 19.4%, when compared to 2014. The primary driver in the change in non-interest expense was attributable to non-recurring merger and acquisition costs of $1,806,000 recorded in 2015. Exclusive of these costs, non-interest expense increased by $823,000, or 13.4%. Compensation expense for 2015 increased by $219,000 as compared to 2014, due to a number of offsetting factors, including an increase in full-time equivalent employment (due to the addition of personnel from JVB Northern Tier), lower commissions paid for sales of non-deposit products, and lower levels of accruals for employee incentive bonus, pursuant to the Company’s Employee Annual Incentive Plan. Costs of employee benefits was $372,000 higher in 2015 than in 2014. Payroll taxes increased, as a result of higher employee compensation costs, and the cost of providing medical coverage within the Company’s self-funded plan were higher by $275,000. Additionally, costs associated with maintaining the Company’s defined benefit plans increased by $62,000 in 2015 versus 2014 and employer contributions to the defined contribution plan increased by $27,000. Data processing expense increased by $44,000 in 2015 as compared to 2014, as new electronic delivery services were initiated for the benefit of consumer and business customers. Occupancy and equipment expense increased in the aggregate by $95,000, or 6.5%, due to maintenance and repairs in facilities and equipment. Costs associated with loan documentation and foreclosure activities (included in “other non-interest expense) increased in 2015 as compared to 2014 by $74,000. Amortization expense associated with the Bank’s investment in a low-income housing project, which first became applicable during the second quarter of 2013, was more than offset by the recording of the benefit of the tax credit from the project in both 2015 and 2014. Amortization was $479,000 in each of the years 2015 and 2014. Amortization is scheduled to continue through 2023 at similar amounts. Small variances in director compensation, professional fees, net gains and losses on sales of assets, amortization of intangibles and FDIC insurance essentially offset each other. As a percentage of average assets, non-interest expense was 3.31% in 2015 as compared to 2.88% in 2014. Exclusive of merger and acquisition expenses the ratio was 2.94% in 2015. 15 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 INCOME TAxES Income tax expense for 2015 amounted to $83,000 versus $525,000 in 2014. Both periods included the effect of a tax credit in the amounts of $570,000 and $575,000, respectively. The tax credit was available to the Company as a result of an equity investment in a low income housing project. The effective tax rate in 2015 was 2.6% versus 11.1% in 2014. See Note 16 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. As reported Net Income Return on average assets Return on average equity OuTLOOK FOR 2016 $ $ 2015 3,058 0.62% 5.98% 2014 4,216 $ 0.90% 8.31% 2013 4,001 0.89% 8.07% Despite the 25 basis point increase in mid-December 2015, the national prime rate and the federal funds rate have remained at a historically low levels since 2008. We expect, and are prepared for, the interest rate environment to begin to change more significantly in 2016. And, 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. We enter 2016 with non-performing loans at the lowest level since 2010 and expect to see further reductions by year-end as problem credits are resolved. Our net interest margin remains a primary component of profitability; however, we continue to focus on opportunities for fee services, and look forward to providing services in the Northern Tier region that were not included in FNBPA’s product line, such as trust and wealth management. We will maintain the conservative lending and investing philosophies and responsible deposit pricing that have resulted in our healthy net interest margin and solid balance sheet and apply those philosophies to our new market in the Northern Tier. We expect that the increased legal lending limit will provide new opportunities for expanding our loan customer base throughout the organization. Also necessary to our success is the satisfaction level of our customers and employees. In recent years, we have introduced many new avenues of service delivery through technology, and continue to evaluate new technology. In 2015, we replaced our ATM network with new state-of-the art machines, designed with high-level functionality. Also in 2015, we enhanced our consumer mobile banking apps with remote deposit, enabling quick and easy deposit of checks, and will soon offer the same functionality to our small business owners. Consumer mobile banking was further enhanced with Touch ID, giving our customers even faster, more responsive mobile banking experience. We added to our online banking the ease and convenience of consumer loan applications. Lastly, our new Customer Resource Center group was formed and is now our dedicated resource for all manner of customer inquiries. Increasing our customer base and connection with our customers is a priority. In 2015, we expanded our marketing efforts through various campaigns. 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 remain priorities for a large segment of the population in deciding with whom one will do business, and thus we have made it our priority to provide such convenience. 16 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 In recent years, attempts to defraud consumers have continued to grow. For several years we have had mechanisms in place to detect and thwart fraud attempts against our customers before monetary loss. We believe our customers value the service. In 2014, we went beyond fraud detection on singular deposit accounts and now provide the opportunity for full ID protection for families of our depositors. This service accompanies a complete new line-up of accounts, designed to support the lifestyles and needs of our clientele. While over 80% of our consumer account holders are taking advantage of this service, we plan to market more broadly its features and benefits to further increase deposit market share, particularly in our new Northern Tier region. Additionally, in 2015, our business development plan continued to expand and reward 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. 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. The confidence of our stockholders and the trust of our community are vital to our ongoing success. 17 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 2014 FinAnciAl peRFoRmAnce oveRview Net income for Juniata in 2014 was $4,216,000, representing a 5.4% increase as compared to net income for 2013. Earnings per share on a fully diluted basis increased by 6.3%, from $0.95 in 2013 to $1.01 in 2014. The net interest margin, on a fully tax-equivalent basis, decreased from 3.53% in 2013 to 3.48% in 2014. The ratio of non-interest income (excluding gains on sales of securities) to average assets decreased by 2 basis points, while the ratio of non-interest expense to average assets decreased by 4 basis points to 2.88%. Summarized below are the components of net income (in thousands of dollars) and the contribution of each to ROA for 2014 and 2013. 2014 2013 Net interest income Provision for loan losses Customer service fees Debit card fee income BOLI Trust fees Commissions from sales of non-deposit products Income from unconsolidated subsidiary Security gains (losses) Mortgage banking income Other noninterest income Total noninterest income Employee expense Occupancy and equipment Data processing expense Director compensation Professional fees Taxes, other than income FDIC insurance premiums (Loss) gain on sales of other real estate owned Intangible amortization Amortization of investment in partnership Other noninterest expense Total noninterest expense Income tax expense Net income Average assets % of Average Assets % of Average Assets $ 14,334 (357) 3.05% (0.08) $ 13,834 (415) 3.07% (0.09) 1,278 847 391 438 352 236 9 214 569 4,334 (7,320) (1,463) (1,545) (205) (396) (340) (310) (22) (45) (479) (1,445) (13,570) 0.27 0.18 0.08 0.09 0.07 0.05 0.00 0.05 0.12 0.92 (1.56) (0.31) (0.33) (0.04) (0.08) (0.07) (0.07) (0.00) (0.01) (0.10) (0.31) (2.88) 1,290 822 416 355 375 237 (2) 338 402 4,233 (7,028) (1,433) (1,450) (223) (388) (483) (331) 39 (45) (448) (1,356) (13,146) 0.29 0.18 0.09 0.08 0.08 0.05 (0.00) 0.08 0.09 0.94 (1.56) (0.32) (0.32) (0.05) (0.09) (0.11) (0.07) 0.01 (0.01) (0.10) (0.30) (2.92) (525) 4,216 (0.11) 0.90% $ (505) 4,001 (0.11) 0.89% 470,660 $ 450,031 $ $ 18 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 NET INTEREST INCOME On average, total loans outstanding in 2014 increased from 2013 by 1.8%, to $281,608,000. Average yields on loans decreased by 23 basis points in 2014 when compared to 2013. As shown in the preceding Rate – Volume Analysis of Net Interest Income Table 2, the decrease in yield reduced interest income on loans by approximately $611,000, while the increase in volume increased interest income by $208,000, resulting in an aggregate decrease in interest recorded on loans of $403,000. During 2014, the investment portfolio was restructured and increased. A portion of cash available from maturities, sales and repayments of investment securities, along with long-term debt, was used to invest in government sponsored agency mortgage backed securities with relatively short weighted average lives and similar risk characteristics to the former portfolio. Average balances of investment securities increased by $16,670,000, and this volume increase accounted for a $257,000 increase in interest income as compared to 2013. The improvement in the overall yield of the investment portfolio between 2013 and 2014 further increased net interest income by $356,000. In total, yield on earning assets in 2014 was 3.94% as compared to 4.09% in 2013, a decrease of 15 basis points. On a fully tax equivalent basis, yield on earning assets decreased from 4.24% in 2013 to 4.08% in 2014. Average interest bearing liabilities increased by $13,740,000 in 2014, as compared to 2013. Within the categories of interest bearing liabilities, deposits decreased on average by $5,001,000, and borrowings increased by $18,741,000 on average, in order to fund the increase in earning assets. During 2014, the most significant change in interest bearing deposits was in time deposit balances, which decreased on average by $13,932,000, while interest-bearing demand and savings accounts increased on average by $8,931,000. This shift continued a trend that has been occurring for several years. Management believes this trend away from time deposits reflects the consumers’ response to historically low interest rates. In 2014, time deposits accounted for 47.5% of total interest-bearing deposits. In 2013 and 2012, time deposits represented 51.2% and 53.4%, respectively, of all interest-bearing deposits. Changes in total interest-bearing liabilities reduced interest expense by $85,000 in 2014 as compared to 2013, while decreases in interest rates further reduced interest expense by $217,000. Non- interest bearing liabilities used to fund earning assets included demand deposits, which increased $6,393,000 on average. The percentage of interest earning assets funded by non-interest bearing liabilities was approximately 21.1% in 2014 versus 20.5% in 2013. The total cost to fund earning assets (computed by dividing the total interest expense by the total average earning assets) in 2014 was 0.60%, as compared to 0.71% in 2013. Net interest income was $14,334,000 for 2014, an increase of $500,000 when compared to 2013. Increases in volumes contributed $545,000 toward the improved net interest income, partially offset by a $45,000 reduction of net interest income due to rate changes. pROVISION FOR LOAN LOSSES Management performed an analysis following the process described in “Application of Critical Accounting Policies” earlier in this discussion, and determined that a provision of $357,000 was appropriate for 2014, a decrease of $58,000 when compared to 2013 when the total loan loss provision was $415,000. The lower provision in 2014 primarily resulted from an analysis of the values of collateral securing certain impaired loans, which improved during 2014 with the reduction of impaired loans; in 2014, the provision exceeded net charge- offs by $93,000. 19 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 NON-INTEREST INCOME In 2014, revenues from fee-generated services (customer service fees derived from deposit accounts, trust relationships and sales of non-deposit products) totaled $2,068,000, representing an increase of $48,000, or 2.4%, from 2013 revenues, primarily due to increases in fees earned from trust services. Total fees for trust services increased by $83,000, or 23.4%, due primarily to fees earned from the final settlement of trust accounts. Fees from estate settlements decreased by $7,000 in 2014 as compared to 2013, and non-estate fees increased by $90,000. Commissions from sales of non-deposit products decreased in 2014, by $23,000, as a result of fewer sales. Fees and income derived from the origination, sale and servicing of residential mortgage loans (mortgage banking income) was $214,000 in 2014, a decrease of $124,000, or 36.7%, compared to 2013, when more refinancing activity occurred. Other non-interest-related fees derived from loan activity increased by $37,000 when comparing 2014 to 2013. A gain of $165,000 was recorded in 2014 as a result of a life insurance claim. No such activity occurred in 2013. From the investment in LCB, $236,000 was recorded as income in 2014, compared to $237,000 in 2013. Earnings on bank-owned life insurance and annuities decreased in 2014 by $25,000, or 6.0%, when compared to the previous year, because investment in BOLI was lower and crediting rates were reduced. As a percentage of average assets, non-interest income (excluding securities gains and losses) was 0.92% in 2014 as compared to 0.94% in 2013. NON-INTEREST ExpENSE In 2014, total non-interest expense increased by $424,000, or 3.2%, when compared to 2013. The primary driver in the change in non-interest expense was attributable to the cost of employee compensation. Compensation expense for 2014 increased by $463,000 as compared to 2013, due to a number of factors, including an increase in full-time equivalent employment, higher commissions paid for sales of non-deposit products, and higher levels of accruals for employee incentive bonus, pursuant to the Company’s Employee Annual Incentive Plan. Costs of employee benefits was $171,000 lower in 2014 than in 2013. An increase in payroll taxes, resulting from higher employee compensation costs, was offset by lower medical coverage expenses within the Company’s self-funded plan and lower cost of accounting for the frozen defined benefit plan. On December 31, 2012, the Company froze its defined benefit plan to future service accruals while at the same time significantly enhancing the defined contribution plan employer match for its employees. Data processing expense increased by $95,000 in 2014 as compared to 2013, as new electronic delivery services were initiated for the benefit of consumer and business customers. Expense for taxes, other than income taxes, declined by $143,000 when comparing 2014 to 2013 as a result of a change in the computation of Pennsylvania Bank Shares Tax. Amortization expense associated with the Bank’s investment in a low-income housing project, which first became applicable during the second quarter of 2013, was more than offset by the recording of the benefit of the tax credit from the project in both 2014 and 2013. Amortization was $479,000 in 2014 and $448,000 in 2013. Amortization is scheduled to continue through 2023 at similar amounts. 20 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Small variances in occupancy, equipment, director compensation, professional fees and FDIC insurance essentially offset each other, while sales of properties carried as other real estate owned generated net losses of $22,000 in 2014, as compared to net gains of $39,000 for 2013. As a percentage of average assets, non-interest expense was 2.88% in 2014 as compared to 2.92% in 2013. INCOME TAxES Income tax expense for 2014 amounted to $525,000 versus $505,000 in 2013. Both periods included the effect of a tax credit in the amounts of $575,000 and $556,000, respectively. The tax credit was available to the Company as a result of an equity investment in a low income housing project. The effective tax rate in 2014 was 11.1% versus 11.2% in 2013. See Note 16 of Notes to Consolidated Financial Statements for further information on income taxes. 21 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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) Funding Uses: $ Taxable loans Tax-exempt loans Taxable securities Tax-exempt securities Interest bearing deposits Federal funds sold Total interest earning assets Investment in: Unconsolidated subsidiary Low income housing BOLI and annuities Goodwill and intangible 2015 Average Balance 280,920 25,208 112,459 28,687 597 32 Increase (Decrease) Amount % 2014 Average Balance Increase (Decrease) Amount % 2013 Average Balance $ 20,307 4,213 810 (5,516) (771) (423) 7.8% $ 20.1 0.7 (16.1) (56.4) (93.0) 260,613 20,995 111,649 34,203 1,368 455 $ 2,497 2,374 19,677 (3,007) (1,466) 455 1.0% 12.7 21.4 (8.1) (51.7) - $ 258,116 18,621 91,972 37,210 2,834 - 447,903 18,620 4.3 429,283 20,530 5.0 408,753 4,443 3,625 14,960 207 (433) 203 4.9 (10.7) 1.4 4,236 4,058 14,757 176 69 141 4.3 1.7 1.0 4,060 3,989 14,616 assets 2,422 277 12.9 2,145 (176) (7.6) 2,321 Other non-interest earning assets Unrealized gains (losses) on securities Less: Allowance for loan losses Funding Sources: Total uses Interest bearing demand deposits Savings deposits Time deposits under $100,000 Time deposits over $100,000 Repurchase agreements Short-term borrowings Long-term debt Other interest bearing liabilities Total interest bearing liabilities Demand deposits Other liabilities Stockholders’ equity 17,422 (1,110) (6.0) 18,532 (353) (1.9) 18,885 897 935 (2,460.5) (38) (124) (144.2) 86 (2,349) (36) 1.6 (2,313) 366 (13.7) (2,679) $ 489,323 $ 18,663 4.0% $ 470,660 $ 20,629 4.6% $ 450,031 $ 98,618 74,268 $ 698 8,993 0.7 % $ 13.8 97,920 $ 3,582 5,349 65,275 3.8% 8.9 $ 94,338 59,926 105,804 (12,890) (10.9) 118,694 (10,723) (8.3) 129,417 25,039 4,716 16,309 22,500 (4,012) 451 11,306 5,548 (13.8) 10.6 226.0 32.7 29,051 4,265 5,003 16,952 (3,209) (67) 1,804 16,952 (9.9) (1.5) 56.4 - 32,260 4,332 3,199 - 1,416 47 3.4 1,369 52 3.9 1,317 348,670 84,295 5,227 51,131 10,141 6,896 1,199 427 3.0 8.9 29.8 0.8 338,529 77,399 4,028 50,704 13,740 6,393 (637) 1,133 4.2 9.0 (13.7) 2.3 324,789 71,006 4,665 49,571 Total sources $ 489,323 $ 18,663 4.0% $ 470,660 $ 20,629 4.6 % $ 450,031 22 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Overall, total average assets increased by $18,663,000, or 4.0%, for the year 2015 compared to 2014, following an increase of $20,629,000, or 4.6%, in 2014 over average assets in 2013. The ratio of average earning assets to total average assets was consistent at 91% in each of the last three years, while the ratio of average interest- bearing liabilities to total average assets decreased slightly from 72% in 2013 and 2014 to 71% in 2015. Although Juniata’s investment in its unconsolidated subsidiary, investment in a low income elderly housing project 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 4.7% and 4.9% of total average assets in 2015 and 2014, respectively. A more detailed discussion of the Company’s earning assets and interest bearing liabilities will follow in the 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, Commercial, financial and agricultural Real estate - commercial Real estate - construction Real estate - mortgage Obligations of states and political subdivisions Personal Total $ 2015 34,171 127,213 26,672 164,617 17,524 6,846 $ 377,043 $ 2014 23,738 90,000 20,713 140,676 15,730 4,044 $294,901 $ 2013 26,281 74,471 19,681 140,459 12,702 4,204 $277,798 $ 2012 19,296 69,187 18,092 153,122 12,769 5,034 $277,500 2011 $ 19,417 60,774 17,508 176,548 8,780 6,654 $289,681 From year-end 2014 to year-end 2015, total loans outstanding increased by $82,142,000, following an increase of $17,103,000 in 2014 when compared to year-end 2013. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years. Loans Beginning balance Net new loans (repayments) Loans acquired through merger, net of fair value adjustments Loans charged off Loans transferred to other real estate owned and other adjustments to carrying value Net change Ending balance 2015 $ 294,901 38,004 45,372 (415) 2014 $ 277,798 17,891 - (275) 2013 $ 277,500 2,359 - (1,431) (819) 82,142 $ 377,043 (513) 17,103 $ 294,901 (630) 298 $ 277,798 The loan portfolio was comprised of approximately 45% consumer loans and 55% commercial loans (including construction) on December 31, 2015 as compared to 49% consumer loans and 51% commercial loans on December 31, 2014. 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 real estate loans secured by income-producing property, with debt service on this category of loans being reliant upon the cash flow generated by the property. In the aggregate, loans in this category had outstanding balances of $43,476,000 at December 31, 2015, or 80.1% of the Bank’s capital. Components of this concentration group with balances considered for general reserve purposes are as follows: Operators of Non-Residential Buildings Operators of Apartment Buildings Operators of Dwellings other than apts Hotels and Motels Total 23 Outstanding Balance % of Bank Capital 16.99% 18.18% 30.30% 14.62% 80.10% 9,223,009 9,869,586 16,445,365 7,937,825 43,475,785 $ $ JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Given the reserves allocated to this sector over the past several years and the continuing softness in the market, management has assigned an additional concentration risk factor to this group of loans when analyzing the adequacy of the Allowance for Loan Losses. See Note 7 of Notes to Consolidated Financial Statements. During 2015 and 2014, exclusive of the loans acquired through the acquisition of FNBPA, there was growth in the commercial, commercial real estate and construction lines of business, primarily as a result of participation opportunities with other banks as well as new business development. This growth was offset somewhat by the decrease in loans to states and political subdivisions and residential real estate loans, as the secondary market continued to offer more appealing fixed rates and longer terms to borrowers. Growth was further offset by payments and charge-downs of non-performing loans. Juniata is willing, able and continues to lend to qualifying businesses and individuals and is optimistic about increasing opportunities for loans in the newly acquired JVB Northern Tier region. Management also believes that the economic climate is improving and is resulting in loan growth. Our business model closely aligns lenders and community office managers’ efforts to effectively develop referrals and existing customer relationships. Continued emphasis is placed on responsiveness and personal attention given to customers, which we believe differentiates the Bank from its competition. Nearly all commercial loans are either variable or adjustable rate loans, while non-mortgage consumer loans generally have fixed rates for the duration of the loan. 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. Management further believes that non-performing loans will continue to decline in 2016. The Company maintains a dedicated credit administration division, 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, 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 3 of Notes to Consolidated Financial Statements. The allowance for loan losses has been established in order to absorb probable losses on existing loans. A quarterly 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, 2015 was 0.66% of total loans, net of unearned interest, as compared to 0.81% of total loans, net of unearned interest, at the end of 2014. Loans that Juniata acquired through the combination with FNBPA on November 30, 2015 are recorded at fair value with no carryover of the related allowance for loan losses, thus resulting in a lower allowance as a percentage of total loans. The allowance increased $98,000 when compared to December 31, 2014, as a result of net charge-offs of $404,000 offset by the provision of $502,000. Net charge-offs for 2015 and 2014 were 0.13% and 0.09% of average loans, respectively. 24 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 At December 31, 2015, non-performing loans (as defined in Table 4 below), as a percentage of the allowance for loan losses, were 148.9% as compared to 237.2% at December 31, 2014. Non-performing loans were 0.98% of loans as of December 31, 2015, and 1.91% of loans as of December 31, 2014. Management believes that the decreasing levels of nonperforming loans in 2014 and 2015 will continue into 2016. All $3,690,000 of non- performing loans at December 31, 2015 are collateralized with real estate. TABLE 4 NON-pERFORMING LOANS Nonaccrual loans Accruing loans past due 90 days or more, exclusive of loans acquired with credit deterioration Restructured loans in default and non-accruing Total non-performing loans 2015 2014 $ 3,688 $ 4,880 2013 (In thousands) 5,952 $ 2012 2011 $ 8,846 $ 7,947 2 - 3,690 $ 400 366 5,646 $ 251 - 6,203 $ 742 - 9,588 2,743 - $ 10,690 $ Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is generally discontinued when the contractual payment of principal or interest has become 90 days past due or reasonable doubt exists as to the full, timely collection of principal or interest. However, it is the Company’s policy to continue to accrue interest on loans over 90 days past due as long as (1) they are guaranteed or well secured and (2) there is an effective means of timely collection in process. When a loan is placed on non- accrual status, all unpaid interest credited to income in the current year is reversed against current period income, and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, accruals are resumed on loans only when the obligation is brought fully current with respect to interest and principal, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The Company’s nonaccrual and charge-off policies are the same, regardless of loan type. During 2015, gross interest income that would have been recorded if loans on nonaccrual status had been current was $336,000, of which $74,000 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. To assess potential credit weaknesses, it is critical to analyze observable trends that may be occurring. 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. 25 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Component for impaired loans: A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For commercial loans secured with real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the current appraisal and the condition of the property. Appraised values may be discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include the estimated costs to sell the property. For commercial loans secured by non-real estate collateral, estimated fair values are determined based on the borrower’s financial statements, inventory reports, aging accounts receivable, equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The Company generally does not separately identify individual consumer segment loans for impairment analysis, unless such loans are subject to a restructuring agreement. Loans whose terms are modified are classified as troubled debt restructurings if the Company grants borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a below-market interest rate based on the loan’s risk characteristics or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period of time after modification. Loans classified as troubled debt restructurings are designated as impaired. As of December 31, 2015, 40 loans, with aggregate outstanding balances of $4,962,000, were evaluated for impairment. A collateral analysis was performed on each of these 40 loans in order to establish a portion of the reserve needed to carry impaired loans at no higher than fair value. As a result of this analysis, no loans were determined to have insufficient collateral, and no specific reserves were established. Also included as impaired loans are loans in the amount of $1,464,000 that were acquired with credit impairment. 26 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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. The component of the allowance for contingencies relates to other loans that have been segmented into risk rated categories as follows: • • • • • • Commercial, financial and agricultural Real estate – commercial Real estate - construction Real estate – mortgage Obligations of states and political subdivisions Personal Contingency allowance evaluation consists of several key elements. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated quarterly or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified as substandard have one or more well-defined weaknesses that jeopardize the liquidation of the debt. Substandard loans include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified as doubtful have all the weaknesses inherent in loans classified as substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. Specific reserves may be established for larger, individual classified loans as a result of this evaluation, as discussed above. Remaining loans are categorized into large groups of smaller balance homogeneous loans and are collectively evaluated for impairment. This computation is generally based on historical loss experience adjusted for qualitative factors. The historical loss experience is averaged over a ten-year period for each of the portfolio segments. The ten-year timeframe was selected in order to capture activity over a wide range of economic conditions and has been consistently used for the past seven years. The qualitative risk factors are reviewed for relevancy each quarter and include: • • • • • • National, regional and local economic and business conditions, as well as the condition of various market segments, including the underlying collateral for collateral dependent loans; Nature and volume of the portfolio and terms of loans; Experience, ability and depth of lending and credit management 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; and Effect of external factors, including competition. 27 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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. A summary of activity in the allowance for loan loss for the last five years (in thousands) is shown below. The area most affected by charge-offs in each of the five years presented was real estate – mortgages, whose balances accounted for approximately 44% of the total loan portfolio at December 31, 2015. In 2015, the Company recorded net charge-offs of $404,000. Due to charge-offs and successful resolution of other troubled debt, non-performing loans decreased by $1,956,000, or 34.6%, at December 31, 2015 compared to December 31, 2014. The increase in the required allowance needed to adequately reserve for loan losses was due to the growth in loans, exclusive of loans acquired. Management’s analysis indicated that an adequate loan loss allowance was $2,478,000 at December 31, 2015. Balance of allowance - beginning of period Loans charged off: Commercial, financial and agricultural Real estate - commercial Real estate - construction Real estate - mortgage Personal Total charge-offs Recoveries of loans previously charged off: Commercial, financial and agricultural Real estate - commercial Real estate - mortgage Personal Total recoveries Years Ended December 31, 2015 $ 2,380 $ 2014 2,287 $ 2013 3,281 2012 2,931 2011 2,824 $ $ 11 66 24 305 9 415 7 - 1 3 11 20 92 18 125 20 275 4 5 - 2 11 4 - 117 1,281 29 1,431 13 - - 9 22 25 - 193 852 1 1,071 8 - - 2 10 18 37 - 205 22 282 2 - 10 13 25 Net charge-offs Provision for loan losses Balance of allowance - end of period 404 502 2,478 $ 264 357 2,380 $ 1,409 415 2,287 $ 1,061 1,411 3,281 $ 257 364 2,931 $ Ratio of net charge-offs during period to average loans outstanding 0.13% 0.09% 0.51% 0.38% 0.09% 28 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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. Commercial, financial and agricultural Real estate - commercial Real estate - construction Real estate - mortgage Obligations of states and political subdivisions Personal Allocation of the Allowance for Loan Losses (in thousands) December 31, 2015 264 836 191 1,140 - 47 2,478 $ $ 2014 222 665 155 1,300 - 38 2,380 $ $ $ $ 2013 253 534 212 1,246 - 42 2,287 $ $ 2012 179 463 202 2,387 - 50 3,281 $ $ 2011 195 455 442 1,771 - 68 2,931 Commercial, financial and agricultural Real estate - commercial Real estate - construction Real estate - mortgage Obligations of states and political subdivisions Personal INVESTMENTS 2015 9.1% 33.7% 7.1% 43.7% 4.6% 1.8% 100.0% Percent of Loan Type to Total Loans 2014 2013 2012 8.0% 30.5% 7.0% 47.8% 5.3% 1.4% 100.0% 9.5% 26.8% 7.1% 50.5% 4.6% 1.5% 100.0% 7.0% 24.9% 6.5% 55.2% 4.6% 1.8% 100.0% 2011 6.7% 21.0% 6.0% 61.0% 3.0% 2.3% 100.0% Total investments, defined to include all interest earning assets except loans (i.e. investment securities available for sale (at fair value), federal funds sold, interest bearing deposits, Federal Home Loan Bank stock and other interest-earning assets), totaled $156,259,000 on December 31, 2015, representing an increase of $10,620,000 when compared to year-end 2014. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years. Beginning balance Purchases of investment securities Investments acquired through merger Sales, calls and maturities of investment securities Adjustment in market value of AFS securities Amortization/Accretion Federal Home Loan Bank stock, net change Federal funds sold, net change Interest bearing deposits with others, net change Net change 2015 $ 145,639 68,094 35,458 (92,989) (296) (764) 704 - 413 10,620 2014 $ 128,305 66,451 - (50,533) 1,573 (634) 759 - (282) 17,334 2013 $ 125,047 45,446 - (38,973) (2,325) (440) 241 - (691) 3,258 Ending balance $ 156,259 $ 145,639 $ 128,305 29 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 On average, investments decreased by $5,900,000, or 3.4%, during 2015, following an increase of $15,659,000, or 11.9%, during 2014. The decrease in 2015 was experienced as cash flows from maturing bonds and mortgage backed securities were used to fund loan growth. The increase in 2014 resulted from a restructuring of a portion of the investment securities portfolio, funded partly by issuing long-term debt. 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 or trading classifications. At December 31, 2015, the market value of the entire securities portfolio was greater than amortized cost by $132,000 as compared to December 31, 2014, when market value was greater than amortized cost by $435,000. The weighted average life of the investment portfolio was 3.7 years on December 31, 2015 versus 2.8 years on December 31, 2014. 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, 2015 Weighted Average Yield Fair Value December 31, 2014 Weighted Average Yield Fair Value December 31, 2013 Fair Value Weighted Average Yield Securities Type and maturity Obligations of U.S. Government agencies and corporations Within one year After one year but within five years After five years but within ten years $ $ 1,003 2.13% 24,264 1.34% 7,465 2.07% 32,732 1.53% Obligations of state and political subdivisions Within one year After one year but within five years After five years but within ten years After ten years Mortgage-backed securities Within one year After one year but within five years After five years but within ten years After ten years 5,771 1.97% 16,151 2.64% 7,282 3.42% 331 1.85% 29,535 2.66% - - 242 1.35% 5,059 2.27% 2.16% 82,440 87,741 2.16% 4,566 38,723 6,812 50,101 9,934 16,853 8,748 338 35,873 - 537 3,417 51,475 55,429 1.96% 1.28% 1.44% 1.37% 1.71% 2.14% 3.27% 1.83% 2.29% - 2.08% 1.58% 2.13% 2.10% $ 4,192 47,578 26,508 78,278 8,314 26,098 7,182 338 41,932 878 1,003 2,588 - 0.77% 1.26% 1.50% 1.32% 2.36% 1.94% 3.11% 1.82% 2.23% 2.86% 2.63% 2.09% 4,469 2.36% Equity securities 2,319 $ 152,327 1,500 $ 142,903 1,367 $ 126,046 30 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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. See Note 9 of Notes to Consolidated Financial Statements. The following table summarizes how the cash surrender values (in thousands) of these instruments changed annually in each of the last three years. Beginning balance BOLI increase in cash surrender value BOLI receipt of death benefit Annuities net (decrease) increase in cash surrender value Net change Ending balance INVESTMENT IN uNCONSOLIDATED SuBSIDIARy $ $ 2015 14,807 362 (259) (5) 98 2014 14,848 386 (450) 23 (41) 2013 $ 14,402 426 - 20 446 $ 14,905 $ 14,807 $ 14,848 The Company owns 39.16% of the outstanding common stock of Liverpool Community Bank (LCB), Liverpool, Pennsylvania. This investment is accounted for under the equity method of accounting. The investment was carried at $4,553,000 as of December 31, 2015. The Company increases its investment in LCB for its share of earnings and decreases its investment by any dividends received from LCB. The investment is evaluated quarterly for impairment. A loss in value of the investment which is determined to be other than a temporary decline would be recognized as a loss in the period in which such determination is made. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of LCB to sustain an earnings capacity which would justify the current carrying value of the investment. The carrying amount at December 31, 2015 represented an increase of $184,000 when compared to December 31, 2014. In connection with this investment, two representatives of Juniata serve on the Board of Directors of LCB. GOODWILL AND INTANGIBLE ASSETS Branch Acquisition On September 8, 2006, the Company acquired a branch office in Richfield, PA. Goodwill at December 31, 2015 and 2014 was $2,046,000. Core deposit intangible was $29,000 net of amortization of $402,000 at December 31, 2015 and $74,000 net of amortization of $375,000 at December 31, 2014. The core deposit intangible is being amortized over a ten-year period on a straight line basis. 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 2015, 2014 and 2013. Intangible amortization expense projected for the remaining year in 2016 is estimated to be $29,000. FNBPA Acquisition On November 30, 2015, the Company completed its acquisition of FNBPA and as a result, recorded goodwill of $3,335,000. In addition, core deposit intangible in the amount of $303,000 was recorded and will be amortized over a ten-year period using a sum of the year’s digits basis. Core deposit intangible amortization expense recorded in 2015 was $4,000 and for the succeeding five years beginning 2016 is estimated to be $55,000, $49,000, $44,000, $38,000 and $33,000 per year, respectively, and $80,000 in total for years after 2020. Other intangible assets were identified and recorded as of November 30, 2015,in the amount of $40,000 and will be 31 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 amortized on a straight line basis over two years, through November 30, 2017. Expense recognized in 2015 was $2,000, and is projected to be $20,000 and $18,000 for 2016 and 2017, respectively. Core deposit and other intangible assets, net of amortization, was $337,000 as of December 31, 2015. The Company originates and sells residential mortgage loans into the secondary market, but retains the servicing on the loans. The mortgage servicing rights are valued based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date. The computed value is carried as an intangible asset. As of December 31, 2015, the fair value of mortgage servicing rights was $205,000, compared to $193,000 on December 31, 2014. 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, 2015 and 2014. As of December 31, 2015 and 2014, the Company recorded a net deferred tax asset of $1,054,000 and $672,000, respectively, which was carried as a non-interest earning asset. Significant components of the increase of $382,000 included: 1. Additions to deferred tax assets of $733,000 as a result of the business combination; 2. A carryforward of $80,000 for a tax credit for low income housing investment; 3. A decrease of $67,000 in the deferred tax asset relating to defined benefit liabilities; 4. A decrease of $189,000 in the deferred tax asset relating to loan origination costs and prepaid expense; and 5. A $122,000 decrease in the deferred tax asset relating to the allowance for loan losses. The remainder of the difference was due to the various other changes in gross temporary tax differences. See Note 16 of Notes to Consolidated Financial Statements. OThER NON-INTEREST EARNING ASSETS 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. Beginning balance Cash and due from banks Premises and equipment, net Other real estate owned Investment in low income housing Other receivables and prepaid expenses, including deferred tax assets Net change Ending balance $ 2015 20,879 3,628 376 385 (479) 1,097 5,007 $ 2014 23,614 (1,813) 203 (49) (143) (933) (2,735) 2013 $ 28,893 (5,691) (142) (147) 194 507 (5,279) $ 25,886 $ 20,879 $ 23,614 32 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 DEpOSITS At December 31, 2015, total deposits were $457,126,000, an increase of $76,242,000 from total deposits on December 31, 2014. Deposits assumed from the FNBPA acquisition accounted for an increase of $77,392,000. Otherwise, deposits decreased by $1,150,000 at December 31, 2015 as compared to December 31, 2014. From year-end 2013 to year-end 2014, total deposits increased by $1,239,000. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years. Beginning balance Demand deposits Interest bearing demand deposits Savings deposits Time deposits, $100,000 and greater Time deposits, other Net change 2015 Exclusive of Acquisition FNBPA Acquisition 8,709 (3,114) 8,344 (2,146) (12,943) (1,150) 20,261 21,845 19,149 5,277 10,860 77,392 2015 2014 $ 380,884 28,970 18,731 27,493 3,131 (2,083) 76,242 $ 379,645 3,086 5,808 6,669 (3,290) (11,034) 1,239 2013 $ 386,751 3,293 (482) 4,379 (2,012) (12,284) (7,106) Ending balance $ 457,126 $ 380,884 $ 379,645 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. 2015 Average Balance Increase (Decrease) Amount % Increase (Decrease) Amount % 2013 Average Balance Changes in Deposits (Dollars in thousands) 2014 Average Balance Core transaction deposits: Money market $ Interest bearing demand Savings Demand Total Time deposits: $100,000 and greater Other Total 33,688 64,930 74,268 84,295 257,181 $ (3,686) 4,384 8,993 6,896 16,587 (9.9)% $ 7.2 13.8 8.9 6.9 37,374 $ (1,546) 5,128 60,546 5,349 65,275 6,393 77,399 15,324 240,594 (4.0)% $ 9.3 8.9 9.0 6.8 38,920 55,418 59,926 71,006 225,270 25,039 105,804 130,843 (4,012) (12,890) (16,902) (13.8) (10.9) (11.4) 29,051 118,694 147,745 (3,209) (10,723) (13,932) (9.9) (8.3) (8.6) 32,260 129,417 161,677 Total deposits $ 388,024 $ (315) (0.1)% $ 388,339 $ 1,392 0.4% $ 386,947 Average deposits decreased $315,000, or 0.1%, to $388,024,000 in 2015 following an increase in 2014 of $1,392,000, or 0.4%, to $388,339,000. Core transaction accounts increased by 6.9% and 6.8%, respectively, in 2015 and 2014. We believe that, over the past two years, because of the market uncertainties that accompany uncertain economic periods, investors continued to move balances of available funds into safe, FDIC-insured banking institutions and particularly into liquid transaction accounts. In both 2015 and 2014 however, funds invested in time deposits declined. Due to the sustained low-interest rate environment, we believe many investors are seeking higher yields than are available in time deposit products. We continue to provide alternatives to such investors through the sale of our wealth management (non-deposit) products and are seeing investors seeking dividend yields in the stock market as well. 33 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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 customers’ changing needs and new methods of connectivity, in an effort to increase deposit (and loan) market share. The Bank offers identity protection services as an option for all consumer demand depositors. We believe this product to be a valuable and essential tool necessary to combat the upsurge in fraud and identity theft. This product is a unique benefit to our customers as there are no other banks in our immediate market that offer a similar service. The Bank competes in the marketplace with many sources that offer products that directly compete with traditional banking products. In keeping with our desire to provide our customers with 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 customer base. Fee income from the sale of non-deposit products (primarily annuities and mutual funds) was $347,000 and $352,000 in 2015 and 2014, respectively, representing approximately 7.7% and 8.1%, respectively, of total non-interest income. OThER INTEREST BEARING LIABILITIES Juniata funds its needs primarily with local deposits and when necessary, relies on external funding sources for additional funding requirements. These funding sources include credit facilities at correspondent banks and the Federal Home Loan Bank of Pittsburgh. Juniata’s average balances for all borrowings increased in 2015 by $17,352,000, following an increase of $18,741,000 in 2014 as compared to 2013. The increase in 2015 was related to the Company’s use of short-term borrowings to fund loan growth. The increase in 2014 was primarily due to the issuance of long-term debt to provide funding for the loan growth and the restructuring of the investment portfolio. Changes in Borrowings (Dollars in thousands) Repurchase agreements Short-term borrowings Long-term debt Other interest bearing liabilities pENSION pLAN $ $ 2015 Average Balance Increase (Decrease) Amount 4,716 16,309 22,500 $ 451 11,306 5,548 2014 Average Balance Increase (Decrease) Amount % (1.5)% $ 56.4 - $ 4,265 $ 5,003 16,952 (67) 1,804 16,952 % 10.6% 226.0 32.7 1,416 44,941 47 17,352 $ 3.4 62.9 % $ 1,369 52 27,589 $ 18,741 3.9 211.8% $ 2013 Average Balance 4,332 3,199 - 1,317 8,848 The Company sponsors two noncontributory pension plans, the JVB Plan and the FNB Plan. The FNB Plan was assumed by the Company as part of the merger with FNBPA and is expected to be merged into the JVB Plan in 2016. Both plans have unfunded liabilities, which together total $2,308,000 as of December 31, 2015. Through the JVB 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 through December 31, 2012. Effective December 31, 2012, the JVB Plan was amended to cease future service accruals after that date (frozen). The FNB Plan provides pension benefits to substantially all former FNBPA employees that were employed prior to September 30, 2008 and was partially frozen at the time of the FNBPA merger. Effective December 31, 2015, the FNBPA Plan was amended to cease future service accruals to previously 34 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 unfrozen participants and is now fully frozen ASC Topic 715 gives guidance on the allowable pension expense that is recognized in any given year. In determining the appropriate amount of pension expense to recognize, management must make subjective assumptions relating to amounts and rates that are inherently uncertain. Please refer to Note 21 of Notes to Consolidated Financial Statements. STOCKhOLDERS’ EquITy Total stockholders’ equity increased by $10,106,000 in 2015. Common stock issued to FNBPA stockholders in conjunction with the FNBPA acquisition increased stockholders’ equity by $10,637,000. Offsetting that increase were dividend payments in excess of net income of $629,000. The Company is well-capitalized and had the capacity to maintain the traditional dividend level in 2015 when net income was significantly affected by non- recurring merger and acquisition costs. The remaining change in stockholders’ equity resulted from a number of factors. The other comprehensive income associated with the company’s defined benefit plan, net of tax, caused an increase of $194,000. In 2015, changes in assumptions applied to the actuarial calculation of the projected benefit obligation resulted in the increase. It is the Company’s practice to use the most recently updated mortality tables in the assumptions, which, when applied to the Company’s participant characteristics, resulted in an increase. Additionally, the discount rate assumption used to determine the benefit obligations increased by 25 basis points as of December 31, 2015 compared to December 31, 2014. Substantially offsetting this change was a decrease in fair values of investment securities at year-end 2015 as compared to year-end 2014, reducing equity by $200,000. The following table summarizes how the components of equity (in thousands) changed annually in each of the last three years. Beginning balance Net income Dividends Common stock issued to FNBPA stockholders Stock-based compensation Repurchase of stock, net of re-issuance Net change in unrealized security gains Defined benefit retirement plan adjustments, net of tax Net change $ 2015 49,856 3,058 (3,687) 10,637 57 47 (200) 194 10,106 $ 2014 49,984 4,216 (3,690) - 47 (163) 1,047 (1,585) (128) 2013 $ 50,297 4,001 (3,707) - 30 (397) (1,551) 1,311 (313) Ending balance $ 59,962 $ 49,856 $ 49,984 On average, stockholders’ equity in 2015 was $51,131,000, an increase of 0.8% from $50,704,000 in 2014. The average in 2013 was $49,571,000. At December 31, 2015, Juniata held no shares of stock in treasury as compared to 558,385 shares in 2014 at a cost of $10,746,000. The decrease was primarily a result of using treasury shares for issuance to FNBPA shareholders in exchange for FNBPA shares in the merger. (See Note 17 of Notes to Consolidated Financial Statements). Return on average equity decreased to 5.98% in 2015 from 8.31% in 2014. Return on average equity was decreased in 2015 due to significant non-recurring merger and acquisition expenses recorded. See the discussion in 2015 Financial Overview section. 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 accomplished 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 35 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 purchase plan purchases, to fulfill dividend reinvestment program needs and to supply shares needed for exchange in an acquisition. During 2015, 2014 and 2013, 3,504, 12,322 and 24,918 shares, respectively, were repurchased in conjunction with this program. Remaining shares authorized in the program were 27,649 as of December 31, 2015. On November 30, 2015, 555,555 treasury shares were reissued to former FNBPA shareholders in conjunction with the acquisition of FNBPA. In each of the years 2015, 2014 and 2013, Juniata declared dividends of $0.88 per common share. (See Note 17 of Notes to Consolidated Financial Statements regarding restrictions on dividends from the Bank to the Company.) The dividend payout ratio was 120.6% and 87.5% in 2015 and 2014, respectively. The dividend payout ratio in 2015 was unusually high due to the impact on net income of non-recurring merger expenses. In January 2016, the Board of Directors declared a dividend of $0.22 per share to stockholders of record on February 16, 2016, payable on March 1, 2016. Juniata’s book value per share at December 31, 2015 was $12.50, as compared to $11.91 at each of December 31, 2014 and 2013. Juniata’s average equity to assets ratio for 2015, 2014 and 2013 was 10.45%, 10.77% and 11.02%, 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 Liquidity Risk Capital Risk Market / Interest Rate Risk Investment Portfolio Risk Economic 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. Liquidity management 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. Juniata relies on three main types of liquidity sources: (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 36 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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 10% of total assets and contingency liquidity at a minimum of 7.5% of total assets. Juniata is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh, which provides short-term liquidity and a source for long-term borrowings. The Bank uses this vehicle to satisfy temporary funding needs throughout the year. The Company had short-term borrowings of $30,061,000 on December 31, 2015 and $15,950,000 on December 31, 2014. The Bank’s maximum borrowing capacity with the Federal Home Loan Bank of Pittsburgh (“FHLB”) was $132,644,000 at December 31, 2015. In order to borrow additional amounts, 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 to secure all outstanding advances. Juniata needs to have liquid resources available to fulfill contractual obligations that require future cash payments. The table below summarizes the Company’s significant contractual obligations to third parties (in thousands of dollars), by type, that were fixed and determined at December 31, 2015. Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements. 37 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 CONTRACTuAL OBLIGATIONS Certificates of deposits Short-term borrowings and security repurchase agreements Long-term debt Operating lease obligations Other long-term liabilities 3rd party data processor contract Supplemental retirement and deferred compensation Note Reference 13 Total $ 141,130 Less than One Year 58,561 $ Payments Due by Period Three to One to Five Three Years Years $ 34,739 $ 36,808 More than Five Years $ 11,022 14 14 15 24 21 35,057 22,500 555 35,057 7,500 138 - 11,250 216 - 3,750 138 1,320 528 792 - - - 63 - 2,911 $ 203,473 263 $ 102,047 $ 476 47,473 380 $ 41,076 1,792 $ 12,877 The schedule of contractual obligations (above) excludes expected defined benefit retirement payments that will be paid from the plan assets, as referenced in Note 21 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. In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, officially identified by the Basel Committee as “Basel III”. In July 2013, the FRB approved final rules to implement the Basel III capital framework which revises the risk-based capital requirements applicable to bank holding companies and depository institutions. The new minimum regulatory capital requirements established by the U.S. Basel III Capital Rules became effective for the Company on January 1, 2015, and will be fully phased in on January 1, 2019. When fully phased in, Basel III requires financial institutions to maintain: (a) Common Equity Tier 1 (CET1) to risk-weighted assets ratio of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%); (b) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum tier 1 capital ratio of 8.5% upon full implementation); (c) a minimum ratio of total (that is, tier 1 plus tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation); and (d) as a newly adopted international standard, a minimum leverage ratio of 3.0%, calculated as the ratio of tier 1 capital balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). As a result of the new capital conservation buffer rules, once in effect, if the Company’s bank subsidiary (The Juniata Valley Bank) fails to maintain the required minimum capital conservation buffer, the Company may be 38 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 unable to obtain capital distributions from it, which could negatively impact the Company’s ability to pay dividends, service debt obligations or repurchase common stock. In addition, such a failure could result in a restriction on the Company’s ability to pay certain cash bonuses to executive officers, negatively impacting the Company’s ability to retain key personnel. As of December 31, 2015, the Company believes its current capital levels would meet the fully phased-in minimum capital requirements, including capital conservation buffer, as prescribed in the U.S. Basel III Capital Rules. See Note 17 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 institution stocks accounted for 0.4% of the Company’s total assets as of December 31, 2015. Management performs an impairment analysis on the entire investment portfolio, including the financial institution stocks on a quarterly basis. No “other-than-temporary” impairment was identified or recorded on stocks in 2015, 2014 or 2013; however, there is no assurance that declines in market values of the common stock portfolio in the future will not result in subsequent “other-than-temporary” impairment charges, depending upon facts and circumstances present. The equity investments in the Corporation’s portfolio had a cost basis of $1,692,000 and a fair value of $2,319,000 at December 31, 2015, resulting in net unrealized gains in this portfolio of $627,000 at December 31, 2015. 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 39 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure profitability. A full simulation approach is used to assess earnings and capital at risk from movements in interest rates. First, all rate-sensitive assets and rate-sensitive liabilities are segregated into their respective repricing intervals to determine expected cash flows. Next, a multiplier (BETA) is assigned to rate sensitive instruments to apply management’s repricing behavior. Management reprices differently in rising and declining rates, so different Betas are used to better simulate, especially in regard to deposit pricing. Next, interest income or expense is modeled by determining the impact based on amount of contribution remaining over the following 12 months in the simulation. The model considers three major components of income simulation consisting of (1) determining repricing cash flows, (2) modeling management’s repricing behavior, and (3) accounting for the instruments positions within the 12 month simulation period. 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 decline. The modeled effects for increases and decreases to net interest income over a twelve-month period as a result of this modeling approach are shown in the table below. 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, and Juniata is in compliance with those policy limits. Effect of Interest Rate Risk on Net Interest Income (Dollars in thousands) Change in Interest Rates (Basis Points) 400 300 200 100 0 (100) (200) (300) (400) $ Total Change in Net Interest Income (5,793) (4,345) (825) (387) - 703 329 (160) (1,033) The net interest income at risk position remained within the guidelines established by the Company’s asset/ liability policy in each of the above scenarios. Table 5, presented below, illustrates the maturity distribution of the Company’s interest-sensitive assets and liabilities as of December 31, 2015. 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 0.54, indicating a liability-sensitive balance sheet, when measured on a static basis. 40 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 TABLE 5 MATuRITy DISTRIBuTION Interest Earning Assets Interest bearing deposits Investment securities: Debt securities - taxable Debt securities - tax-exempt Mortgage-backed securities Stocks Loans: Commercial, financial, and agricultural Real estate - construction Other loans Total Interest Earning Assets Interest Bearing Liabilities Demand deposits Savings deposits Certificates of deposit over $100,000 Time deposits Securities sold under agreements to repurchase Short-term borrowings Long-term debt Other interest bearing liabilities Total Interest Bearing Liabilities Gap Cumulative Gap Cumulative sensitivity ratio Commercial, financial and agricultural loans maturing after one year with: Fixed interest rates Variable interest rates Total AS OF DECEMBER 31, 2015 (Dollars in thousands) Remaining Maturity / Earliest Possible Repricing Within One Year Over One Year But Within Five Years Over Five Years Total $ 173 $ 250 $ - $ 423 25,370 9,101 12,406 - 16,855 11,320 88,057 9,629 16,198 37,788 - - 1,969 37,547 2,319 34,999 27,268 87,741 2,319 9,451 7,633 125,232 7,865 7,719 102,911 34,171 26,672 316,200 163,282 206,181 160,330 529,793 114,406 94,923 12,497 46,064 4,996 30,061 - 1,471 304,418 $ (141,136) $ (141,136) 0.54 - - 12,756 58,791 - - 22,500 - 94,047 $ 112,134 (29,002) $ 0.93 - - 5,583 5,439 - - - - 11,022 $ 149,308 $ 120,306 114,406 94,923 30,836 110,294 4,996 30,061 22,500 1,471 409,487 $ 120,306 1.29 $ $ 8,626 10,325 18,951 $ $ 7,648 817 8,465 $ 16,274 11,142 $ 27,416 41 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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, 300 and 400 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, 2015, 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 change in the value of the balance sheet without regard to business continuity. 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. Rate shocks are applied to all financial assets and liabilities, using parallel and non-parallel rate shifts of 100 to 400 basis points to estimate the change in EVE under the various scenarios. As of December 31, 2015, a non-parallel 200 basis point increase shock in rates produced an estimated 9.8% decline in EVE, indicating a stable value well within Juniata’s policy guidelines. 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 $42,619,000 and $38,776,000 at December 31, 2015 and 2014, respectively. In addition, the Company had $4,661,000 and $6,245,000 outstanding in unused lines of credit commitments extended to its customers at December 31, 2015 and 2014, respectively. Letters of credit are instruments issued by the Company that guarantee payment by the Bank to the beneficiary 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 a one-year period. 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, 2015 and 2014 for guarantees under letters of credit issued is not material. 42 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The maximum undiscounted exposure related to these guarantees at December 31, 2015 was $2,586,000, and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $5,818,000. 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 $729,000 at December 31, 2015. Since the Company does not expect to terminate these services prior to the end of the commitment period, no liability has been recorded at December 31, 2015. 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 to the Company as it is to 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. 43 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 REpORT ON MANAGEMENT’S ASSESSMENT OF INTERNAL CONTROL OVER FINANCIAL REpORTING Management is responsible for the preparation, integrity and fair presentation of the consolidated financial statements included in this Annual Report on Form 10-K. The consolidated financial statements and notes included in this annual report have been prepared in conformity with accounting principles generally accepted in the United States of America, and as such, include some amounts that are based on management’s best estimates and judgments. The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting. The system of internal control over financial reporting, as it relates to the financial statements, is evaluated for effectiveness by management and tested for reliability through a program of internal audits and management testing and review. Actions are taken to correct potential deficiencies as they are identified. Any system of internal control, no matter how well designed, has inherent limitations, including the possibility that a control can be circumvented or overridden and misstatements due to error or fraud may occur and not be detected. Also, because of changes in conditions, internal control effectiveness may vary over time. Accordingly, even an effective system of internal control will provide only a reasonable assurance with respect to financial statement preparation. Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework (2013) . General guidance from the SEC staff provides that if a registrant consummates a business combination during its fiscal year and it is not possible to conduct an assessment of the acquired business’s internal control over financial reporting in the period between the consummation date and the date of management’s assessment, management may exclude the acquired business from management’s report on internal control over financial reporting. As previously described in this annual report, Juniata and FNBPA consummated their merger on November 30, 2015. In accordance with the SEC staff guidance, our management excluded the former FNBPA, now known as JVB Northern Tier, which represents the acquired business, from management’s report on internal control over financial reporting as of December 31, 2015. JVB Northern Tier constituted approximately 15.5 % of total assets of Juniata as of December 31, 2015 and 1.1 % and 2.0 % of Juniata’s total revenues and net income, respectively, for the year then ended. Based on our assessment, management concluded that as of December 31, 2015, the Company’s internal Framework (2013). control over financial reporting is effective and meets the criteria of the Internal Control-Integrated The independent registered public accounting firm that audited the consolidated financial statements included in the annual report has issued an attestation report on the Company’s internal control over financial reporting. Marcie A. Barber, President and Chief Executive Officer JoAnn N. McMinn, Chief Financial Officer 44 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 REpORT OF INDEpENDENT REGISTERED puBLIC ACCOuNTING FIRM ON EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REpORTING REpORT OF INDEpENDENT REGISTERED puBLIC ACCOuNTING FIRM 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, 2015, based on criteria established in Internal Control – Integrated Framework (2013) 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 “Item 9A, 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 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 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. On November 30, 2015, FNBPA Bancorp, Inc. merged with and into Juniata Valley Financial Corp., with Juniata Valley Financial Corp. being the surviving entity. In connection with the merger, First National Bank of Port Allegany, a wholly owned subsidiary of FNBPA Bancorp, Inc. merged with and into The Juniata Valley Bank, a wholly owned subsidiary of Juniata Valley Financial Corp. with The Juniata Valley Bank being the surviving entity. The former FNBPA Bancorp, Inc., now known as JVB Northern Tier, constituted approximately 15.5 % of total assets of Juniata Valley Financial Corp. as of December 31, 2015 and 1.1 % and 2.0 % of its total revenues and net income, respectively, for the year then ended. As indicated in the accompanying Item 9A, Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of JVB Northern Tier due to the timing of the merger. Our audit of internal control over financial reporting of Juniata Valley Financial Corp. also did not include an evaluation of the internal control over financial reporting of JVB Northern Tier. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition as of December 31, 2015 and 2014 and the related consolidated statements of income, comprehensive income, stockholders’ equity, and cash flows of Juniata Valley Financial Corp. and its wholly-owned subsidiary, The Juniata Valley Bank for each of the three years in the period ended December 31, 2015, and our report dated March 15, 2016 expressed an unqualified opinion thereon. /s/ BDO USA, LLP Harrisburg, Pennsylvania March 15, 2016 45 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 REpORT OF INDEpENDENT REGISTERED puBLIC ACCOuNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS REpORT OF INDEpENDENT REGISTERED puBLIC ACCOuNTING FIRM 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, 2015 and 2014 and the related consolidated statements of income, comprehensive income, stockholders’ equity and cash flows for each of the three years in the period ended December 31, 2015. 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 also includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated 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 at December 31, 2015 and 2014, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2015, 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, 2015, based on criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 15, 2016, expressed an unqualified opinion. /s/ BDO USA, LLP Harrisburg, Pennsylvania March 15, 2016 46 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 JuNIATA VALLEy FINANCIAL CORp. AND SuBSIDIARy CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION ASSETS Cash and due from banks Interest bearing deposits with banks Cash and cash equivalents Interest bearing time deposits with banks Securities available for sale Restricted investment in Federal Home Loan Bank (FHLB) stock Investment in unconsolidated subsidiary Residential mortgage loans held for sale Student loans held for sale Total loans Less: Allowance for loan losses Total loans, net of allowance for loan losses Premises and equipment, net Other real estate owned Bank owned life insurance and annuities Investment in low income housing partnership Core deposit and other intangible Goodwill Mortgage servicing rights Accrued interest receivable and other assets Total assets LIABILITIES AND STOCKHOLDERS’ EQUITY Liabilities: Deposits: Non-interest bearing Interest bearing Total deposits Securities sold under agreements to repurchase Short-term borrowings Long-term debt Other interest bearing liabilities Total liabilities Accrued interest payable and other liabilities Stockholders’ Equity: Preferred stock, no par value: Authorized - 500,000 shares, none issued Common stock, par value $1.00 per share: Authorized - 20,000,000 shares Issued - 4,798,086 shares at December 31, 2015; 4,745,826 shares at December 31, 2014 Outstanding - 4,798,086 shares at December 31, 2015; 4,187,441 shares at December 31, 2014 Surplus Retained earnings Accumulated other comprehensive loss Cost of common stock in Treasury: Total stockholders’ equity 558,385 shares at December 31, 2014 Total liabilities and stockholders’ equity See Notes to Consolidated Financial Statements - - 47 December 31, 2015 2014 (In Thousands, Except Share and Per Share Data $ $ 10,385 73 10,458 6,757 10 6,767 350 152,327 3,509 4,553 125 1,683 377,043 (2,478) 374,565 6,909 617 14,905 3,368 366 5,381 205 4,607 583,928 - 142,903 2,726 4,369 - - 294,901 (2,380) 292,521 6,533 232 14,807 3,847 74 2,046 193 3,511 $ 480,529 106,667 350,459 457,126 $ 77,697 303,187 380,884 4,996 30,061 22,500 1,471 7,812 523,966 4,594 15,950 22,500 1,412 5,333 430,673 $ $ 4,798 18,352 39,015 (2,203) 4,746 18,409 39,644 (2,197) - 59,962 $ 583,928 (10,746) 49,856 $ 480,529 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 JuNIATA VALLEy FINANCIAL CORp. AND SuBSIDIARy CONSOLIDATED STATEMENTS OF INCOME Interest income: Loans, including fees Taxable securities Tax-exempt securities Other interest income Interest expense: Total interest income Deposits Securities sold under agreements to repurchase Short-term borrowings Long-term debt Other interest bearing liabilities Net interest income Total interest expense Net interest income after provision for loan losses Provision for loan losses Non-interest income: Customer service fees Debit card fee income Earnings on bank owned life insurance and annuities Trust fees Commissions from sales of non-deposit products Income from unconsolidated subsidiary Fees derived from loan activity Mortgage banking income Gain (loss) on sales and calls of securities Gain from life insurance proceeds Total non-interest incom Other non-interest income Non-interest expense: e Employee compensation expense Employee benefits Occupancy Equipment Data processing expense Director compensation Professional fees Taxes, other than income FDIC Insurance premiums (Gain) loss on sales of other real estate owned Amortization of intangibles Amortization of investment in low-income housing partnership Merger and acquisition expense Other non-interest expense Income before income taxes Total non-interest expense Net income Provision for income taxes Earnings per share Basic Diluted Cash dividends declared per share Weighted average basic shares outstanding Weighted average diluted shares outstanding See Notes to Consolidated Financial Statements 48 Years Ended December 31, 2014 2013 2015 (In Thousands, Except per Share Data) 14,645 2,267 465 2 17,379 1,677 5 63 275 22 2,042 15,337 502 14,835 1,563 866 378 396 347 238 187 190 13 98 229 4,505 6,095 1,816 1,039 519 1,589 192 430 368 318 (14) 51 479 1,806 1,511 16,199 3,141 83 3,058 $ $ 14,465 1,950 513 4 16,932 2,356 4 15 207 16 2,598 14,334 357 13,977 1,278 847 391 438 352 236 202 214 9 165 202 4,334 5,876 1,444 993 470 1,545 205 396 340 310 22 45 479 - 1,445 13,570 4,741 525 4,216 $ $ 14,868 1,267 583 16 16,734 2,871 4 8 - 17 2,900 13,834 415 13,419 1,290 822 416 355 375 237 165 338 (2) - 237 4,233 5,413 1,615 971 462 1,450 223 388 483 331 (39) 45 448 - 1,356 13,146 4,506 505 4,001 $ $ 0.72 $ 0.72 $ $ 0.88 4,240,319 4,241,265 1.01 $ 1.01 $ $ 0.88 4,192,761 4,193,129 0.95 $ 0.95 $ $ 0.88 4,210,336 4,211,078 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 JuNIATA VALLEy FINANCIAL CORp. AND SuBSIDIARy CONSOLIDATED STATEMENTS OF COMpREhENSIVE INCOME ( in thousands) Net income Other comprehensive income (loss): Available for sale securities : Unrealized holding loss arising during the period Unrealized holding gains from unconsolidated subsidiary Less reclassification adjustment for gains included in net income (1) (3) Unrecognized pension net loss (2) (3) Unrecognized pension gain due to change in assumptions (2) (3) Amortization of pension net actuarial loss (2) (3) Other comprehensive loss Total comprehensive income Net income Other comprehensive income (loss): Available for sale securities : Unrealized holding gains arising during the period Unrealized holding gains from unconsolidated subsidiary Less reclassification adjustment for gains included in net income (1) (3) Unrecognized pension net loss (2) (3) Unrecognized pension loss due to change in assumptions (2) (3) Amortization of pension net actuarial loss (2) (3) Other comprehensive loss Total comprehensive income Net income Other comprehensive income (loss): Available for sale securities : Unrealized holding losses arising during the period Unrealized holding losses from unconsolidated subsidiary Less reclassification adjustment for losses included in net income (1) (3) Unrecognized pension net gain (2) (3) Unrecognized pension gain due to change in assumptions (2) (3) Amortization of pension prior service income (2) (3) Amortization of pension net actuarial loss (2) (3) Other comprehensive loss Total comprehensive income Year ended December 31, 2015 Before Tax Effect Tax Amount $ 3,141 $ (83) $ Net-of-Tax Amount 3,058 (291) 1 (13) (571) 623 242 (9) 3,132 $ 99 - 4 194 (212) (82) 3 (80) $ (192) 1 (9) (377) 411 160 (6) 3,052 $ Year ended December 31, 2014 Before Tax Effect Tax Amount $ 4,741 $ (525) $ Net-of-Tax Amount 4,216 1,582 10 (9) (144) (2,297) 40 (818) 3,923 $ (539) - 1,043 10 3 49 781 (14) 280 (245) $ (6) (95) (1,516) 26 (538) 3,678 $ Year ended December 31, 2013 Before Tax Effect Tax Amount $ 4,506 $ (505) $ Net-of-Tax Amount 4,001 (2,325) (18) 2 821 962 (1) 203 (356) 4,150 $ 791 - (1,534) (18) (1) (279) (327) - (68) 116 (389) $ 1 542 635 (1) 135 (240) 3,761 $ (1) Amounts are included in (loss) gain on calls of securities on the Consolidated Statements of Income as a separate element within total non-interest income. (2) Amounts are included in the computation of net periodic benefit cost and are included in employee benefits expense on the Consolidated Statements of Income as a separate element within total non-interest expense. (3) See Notes to Consolidated Financial Statements Income tax amounts are included in the provision for income taxes on the Consolidated Statements of Income. 49 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 JuNIATA VALLEy FINANCIAL CORp. AND SuBSIDIARy CONSOLIDATED STATEMENTS OF STOCKhOLDERS’ EquITy Balance at January 1, 2013 Net income Other comprehensive loss Cash dividends at $0.88 per share Stock-based compensation activity Purchase of treasury stock Treasury stock issued for stock Balance at December 31, 2013 purchase plan Net income Other comprehensive loss Cash dividends at $0.88 per share Stock-based compensation activity Purchase of treasury stock Treasury stock issued for stock Balance at December 31, 2014 purchase plan Net income Other comprehensive loss Cash dividends at $0.88 per share Stock-based compensation activity Purchase of treasury stock Treasury stock issued for stock purchase and stock option plans Common stock issued to Balance at December 31, 2015 FNBPA stockholders Years Ended December 31, 2015, 2014 and 2013 Number of Shares Outstanding Common Stock Accumulated Other Stock Surplus Retained Comprehensive Treasury Loss Earnings Stock Total Stockholders' Equity (Dollars in Thousands, Except Per Share Data) 4,218,361 $ 4,746 $ 18,346 (24,918) 2,823 4,196,266 (12,322) 30 4,746 (6) 18,370 47 3,497 4,187,441 (8) 4,746 18,409 (3,504) 6,334 57 (12) $ 38,824 4,001 (3,707) $ (1,419) $ (10,200) $ (240) (445) 54 (10,591) 39,118 4,216 (3,690) (1,659) (538) (222) 67 (2,197) 59 (10,746) (6) 39,644 3,058 (3,687) (63) 122 50,297 4,001 (240) (3,707) 30 (445) 48 49,984 4,216 (538) (3,690) 47 (222) 49,856 3,058 (6) (3,687) 57 (63) 110 607,815 4,798,086 $ 52 4,798 (102) 18,352 $ $ 39,015 $ (2,203) $ 10,687 - 10,637 59,962 $ See Notes to Consolidated Financial Statements 50 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 JuNIATA VALLEy FINANCIAL CORp. AND SuBSIDIARy CONSOLIDATED STATEMENTS OF CASh FLOWS Years Ended December 31, 2014 2013 2015 Operating Activities Net income : (In Thousands) $ 3,058 $ 4,216 $ 4,001 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses Depreciation Net amortization of securities premiums Net amortization of loan origination costs Deferred net loan origination (costs) fees Amortization of core deposit intangible Amortization of investment in low income housing partnership Net amortization of purchase fair value adjustments Net realized (gain) loss on sales and calls of securities Net (gain) loss on sales of other real estate owned Earnings on bank owned life insurance and annuities Deferred income tax (benefit) expense Equity in earnings of unconsolidated subsidiary, net of dividends of $55, $48 and $47 Stock-based compensation expense Mortgage loans originated for sale Proceeds from loans sold to others Gains on sales of loans Gain from life insurance proceeds Decrease (increase) in accrued interest receivable and other assets Increase (decrease) in accrued interest payable and other liabilities Net cash provided by operating activities 502 506 764 68 (139) 51 479 (3) (13) (14) (378) (66) (183) 57 (3,385) 3,438 (190) (98) 292 497 5,243 Investing activities: Purchases of: Securities available for sale FHLB stock Premises and equipment Bank owned life insurance and annuities Proceeds from: Sales of securities available for sale Maturities of and principal repayments on securities available for sale Bank owned life insurance and annuities Life insurance claim Sale of other real estate owned Sale of other assets Net cash received from acquisition of FNBPA Investment in low income housing partnership Net decrease in interest bearing time deposits with banks Net increase in loans Financing activities: Net cash used in investing activities (67,047) (704) (463) (54) 53,213 39,776 34 357 644 - 1,244 - - (38,004) (11,004) 357 494 634 13 142 45 479 - (9) 22 (391) 194 (188) 47 (3,759) 3,949 (214) (165) (41) 83 5,908 (66,451) (759) (697) (60) 14,631 35,911 5 615 396 - - (336) 249 (17,891) (34,387) 415 497 440 25 15 45 448 - 2 (39) (416) 662 (190) 30 (8,173) 8,442 (338) - 930 (997) 5,799 (45,446) (241) (355) (68) - 38,973 8 - 780 18 - (642) 598 (2,359) (8,734) Net increase (decrease) in deposits Net increase in short-term borrowings and securities sold under agreements to repurchase Issuance of long-term debt Cash dividends Purchase of treasury stock Treasury stock issued for employee stock plans Net cash provided by (used in) financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (1,421) 1,239 (7,106) 14,513 - (3,687) (63) 110 9,452 3,691 6,767 10,458 6,747 22,500 (3,690) (222) 59 26,633 (1,846) 8,613 6,767 8,361 - (3,707) (445) 48 (2,849) (5,784) 14,397 8,613 $ $ $ 51 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Supplemental information: Supplemental schedule of noncash investing and financing activities: Interest paid Income taxes paid Transfer of loans to other real estate owned Supplemental schedule of assets and liabilities in connection with merger: Transfer of loans to other assets Assets acquired: Interest bearing time deposits with banks Securities Loans Property and equipment Accrued interest receivable Core deposit and other intangible assets Deferred income taxes Other real estate owned Other assets Liabilities assumed: Deposits Pension liability Accrued interest payable and other liabilities $ $ $ $ $ $ 2,104 100 901 - $ $ 2,584 50 369 - $ $ 2,967 695 594 18 350 35,458 47,055 419 550 343 732 114 31 85,052 77,665 1,248 81 78,994 - - - - - - - - - - - - - - - - - - - - - - - - - See Notes to Consolidated Financial Statements 52 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 JuNIATA VALLEy FINANCIAL CORp. AND SuBSIDIARy NOTES TO CONSOLIDATED FINANCIAL STATEMENTS yEARS ENDED DECEMBER 31, 2015, 2014 AND 2013 1. 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 15 branch locations located in Juniata, Mifflin, Perry, McKean, Potter and Huntingdon Counties. Additionally, in Mifflin, Juniata and Centre Counties, the Company maintains three offices for loan production, trust services and wealth management 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. As a result, the Company has only one reportable segment for financial reporting purposes. The Bank provides a full range of banking services, including on-line and mobile banking, an automatic teller machine network, checking accounts, identity protection products for consumers, 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 and credit loans with overdraft checking protection. 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. Juniata is subject to regulation by the Board of Governors of the Federal Reserve Bank and the Pennsylvania Department of Banking. 2. SuMMARy OF SIGNIFICANT ACCOuNTING pOLICIES The accounting policies of Juniata Valley Financial Corp. and its wholly owned subsidiary conform to accounting principles generally accepted in the United States of America (“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 determination of other-than-temporary impairment on securities, impairment of goodwill and the value of assets acquired and liabilities assumed in business combinations. 53 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Basis of presentation Certain amounts previously reported have been reclassified to conform to the consolidated financial statement presentation for 2015. The reclassification had no effect on net income. Significant group concentrations of credit risk Most of the Company’s activities are with customers located within the Juniata Valley and the JVB Northern Tier regions. Note 6 discusses the types of securities in which the Company invests. Note 7 discusses the types of lending in which the Company engages. As of December 31, 2015, credit exposure to operators of dwellings other than apartment buildings represented 31.7% of capital. Otherwise, there were no concentrations of credit to any particular industry equaling more than 25% of total capital. The Bank’s business activities are geographically concentrated in the counties of Juniata, Mifflin, Perry, Huntingdon, Centre, Franklin, McKean, Potter 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 five 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 other comprehensive income (loss). Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Investment securities that management has the positive intent and ability to hold until 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 had no securities classified as held to maturity at December 31, 2015 and 2014. Accounting Standards Codification (ASC) Topic 320, Investments – Debt and Equity Securities, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than- temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are taken before an assessment is made as to whether the entity will recover the cost basis of the investment. For equity securities, consideration is given to management’s intention and ability to hold the securities until recovery of unrealized losses in assessing potential other-than-temporary impairment. More 54 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 specifically, factors considered to determine other-than-temporary impairment status for individual equity holdings include the length of time the stock has remained in an unrealized loss position, the percentage of unrealized loss compared to the carrying cost of the stock, dividend reduction or suspension, market analyst reviews and expectations, and other pertinent factors that would affect expectations for recovery or further decline. In instances when a determination is made that an other-than-temporary impairment exists and the entity does not intend to sell the debt security and it is not more likely than not that it will be required to sell the debt security prior to its anticipated recovery, the other-than-temporary impairment is separated into the amount of the total other-than-temporary impairment related to a decrease in cash flows expected to be collected from the debt security (the credit loss) and the amount of the total other-than-temporary impairment related to all other factors. The amount of the total other-than-temporary impairment related to the credit loss is recognized in earnings. The amount of the total other-than-temporary impairment related to all other factors is recognized in other comprehensive (loss) income. 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. Management evaluates the restricted stock for impairment on an annual basis. Management’s determination of whether these investments are impaired is based on management’s assessment of the ultimate recoverability of the cost of these investments rather than by recognizing temporary declines in value. The determination of whether a decline affects the ultimate recoverability of the cost of these investments 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 2015, 2014 or 2013. Loans Loans that the Company has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the outstanding unpaid principal balances, net of any deferred fees or costs and the allowance for loan losses. Interest income on all loans, other than nonaccrual loans, is accrued over the term of the loans based on the amount of principal outstanding. Unearned income is amortized to income over the life of the loans, using the interest method. The loan portfolio is segmented into commercial and consumer loans. Commercial loans are comprised of the following classes of loans: (1) commercial, financial and agricultural, (2) commercial real estate, (3) real estate construction, a portion of (4) mortgage loans and (5) obligations of states and political subdivisions. Consumer loans are comprised of a portion of (4) mortgage loans and (6) personal loans. Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is generally discontinued when the contractual payment of principal or interest has become 90 55 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 days past due or reasonable doubt exists as to the full, timely collection of principal or interest. However, it is the Company’s policy to continue to accrue interest on loans over 90 days past due as long as (1) they are guaranteed or well secured and (2) there is an effective means of collection in process. When a loan is placed on non-accrual status, all unpaid interest credited to income in the current year is reversed against current period income and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, accruals are resumed on loans only when the obligation is brought fully current with respect to interest and principal, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The Company originates loans in the portfolio with the intent to hold them until maturity. At the time the Company no longer intends to hold loans to maturity based on asset/liability management practices, the Company transfers loans from its portfolio to held for sale at fair value. Any write-down recorded upon transfer is charged against the allowance for loan losses. Any write-downs recorded after the initial transfers are recorded as a charge to other non-interest expense. Gains or losses recognized upon sale are included in other non-interest income. 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, 2015 and 2014, the amount of net unamortized origination fees carried as an adjustment to outstanding loan balances was $152,000 and $234,000, respectively. Allowance for credit losses The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses (“allowance”) represents management’s estimate of losses inherent in the loan portfolio as of the consolidated statement of financial condition date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded lending commitments and is recorded in other liabilities on the consolidated statement of financial condition, when necessary. The amount of the reserve for unfunded lending commitments is not material to the consolidated financial statements. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance. 4 4 For financial reporting purposes, the provision for loan losses charged to current operating income is based on management’s estimates, and actual losses may vary from estimates. These estimates are reviewed and adjusted at least quarterly and are reported in earnings in the periods in which they become known. Loans included in any class are considered for charge-off when: • principal or interest has been in default for 120 days or more and for which no payment has been received during the previous four months; all collateral securing the loan has been liquidated and a deficiency balance remains; a bankruptcy notice is received for an unsecured loan; a confirming loss event has occurred; or the loan is deemed to be uncollectible for any other reason. • • • • The allowance for loan losses is maintained at a level considered adequate to offset probable losses on the Company’s existing loans. The analysis of the allowance for loan losses relies heavily on changes in observable trends that may indicate potential credit weaknesses. Management’s periodic evaluation of the adequacy of the 56 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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 Company’s allowance for loan losses and may require the Company to recognize additions to the allowance for loan losses based on their judgments about information available to them at the time of their examination, which may not be currently available to management. Based on management’s comprehensive analysis of the loan portfolio, management believes the level of the allowance for loan losses as of December 31, 2015 was adequate. There are two components of the allowance: a specific component for loans that are deemed to be impaired; and a general component for contingencies. A loan is considered to be impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis by the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s observable market price or the fair value of the collateral if the loan is collateral dependent. The estimated fair values of substantially all of the Company’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For commercial loans secured with real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the current appraisal and the condition of the property. Appraised values may be discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include the estimated costs to sell the property. For commercial loans secured by non-real estate collateral, estimated fair values are determined based on the borrower’s financial statements, inventory reports, aging accounts receivable, equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The Company generally does not separately identify individual consumer segment loans for impairment analysis, unless such loans are subject to a restructuring agreement. Loans whose terms are modified are classified as troubled debt restructurings if the Company grants borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a below-market interest rate based on the loan’s risk characteristics or an extension of a loan’s stated maturity date. Nonaccrual troubled debt restructurings are 57 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period of time after modification. Loans classified as troubled debt restructurings are designated as impaired. The component of the allowance for contingencies relates to other loans that have been segmented into risk rated categories. The borrower’s overall financial condition, repayment sources, guarantors and value of collateral, if appropriate, are evaluated quarterly or when credit deficiencies arise, such as delinquent loan payments. Credit quality risk ratings include regulatory classifications of special mention, substandard, doubtful and loss. Loans classified as special mention have potential weaknesses that deserve management’s close attention. If uncorrected, the potential weaknesses may result in deterioration of the repayment prospects. Loans classified as substandard have one or more well-defined weaknesses that jeopardize the liquidation of the debt. Substandard loans include loans that are inadequately protected by the current net worth and paying capacity of the obligor or of the collateral pledged, if any. Loans classified doubtful have all the weaknesses inherent in loans classified substandard with the added characteristic that collection or liquidation in full, on the basis of current conditions and facts, is highly improbable. Loans classified as a loss are considered uncollectible and are charged to the allowance for loan losses. Loans not classified are rated pass. Specific reserves may be established for larger, individual classified loans as a result of this evaluation, as discussed above. Remaining loans are categorized into large groups of smaller balance homogeneous loans and are collectively evaluated for impairment. This computation is generally based on historical loss experience adjusted for qualitative factors. The historical loss experience is averaged over a ten-year period for each of the portfolio segments. The ten-year timeframe was selected in order to capture activity over a wide range of economic conditions and has been consistently used for the past seven years. The qualitative risk factors are reviewed for relevancy each quarter and include: • • • • • • National, regional and local economic and business conditions, as well as the condition of various market segments, including the underlying collateral for collateral dependent loans; Nature and volume of the portfolio and terms of loans; Experience, ability and depth of lending and credit management 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; and Effect of external factors, including competition. Each factor is assigned a value to reflect improving, stable or declining conditions based on management’s best judgment using relevant information available at the time of the evaluation. Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation. Acquired Loans Loans that Juniata acquires through business combinations are recorded at fair value with no carryover of the related allowance for loan losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest. The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount includes estimated future credit losses expected to be 58 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 incurred over the life of the loan. Subsequent decreases to the expected cash flows will require Juniata to evaluate the need for an additional allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which Juniata will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan. Acquired loans that met the criteria for impaired or nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent if Juniata expects to fully collect the new carrying value (i.e. fair value) of the loans. As such, Juniata may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment. Loans acquired through business combinations that do not meet the specific criteria of ASC 310-30, but for which a discount is attributable at least in part to credit quality, are also accounted for in accordance with this guidance. As a result, related discounts are recognized subsequently through accretion based on the contractual cash flows of the acquired loans. Loans Held for Sale The Company also originates residential mortgage loans with the intent to sell. These individual loans are normally funded by the buyer immediately. The Company maintains servicing rights on these loans. Mortgage servicing rights are recognized as an asset upon the sale of a mortgage loan. A portion of the cost of the loan is allocated to the servicing right based upon relative fair value. Servicing rights are intangible assets and are carried at estimated fair value. Adjustments to fair value are recorded as non-interest income and included in gain on sales of loans in the consolidated statements of income. In a business combination, the Company may acquire loans which it intends to sell. These loans are assigned a fair value by obtaining actual bids on the loans and adjusting for contingencies in the bids. These loans are carried at lower of cost or market value until sold, adjusted periodically if conditions change before the subsequent sale. Adjustments to fair value and gains or losses recognized upon sale are included in gains on sales of loans which is a component of non-interest income. Commercial, Financial and Agricultural Lending The Company originates commercial, financial and agricultural loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes, which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is shorter and does not exceed the projected useful life of such machinery and equipment. Most business lines of credit are written with a five year maturity, subject to an annual review. Commercial loans are generally secured with short-term assets; however, in many cases, additional collateral, such as real estate, is provided as additional security for the loan. Loan-to-value maximum values have been established by the Company and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, 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. 59 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Concentration analysis assists in identifying industry specific risk inherent in commercial, financial and agricultural lending. Mitigants include the identification of secondary and tertiary sources of repayment and appropriate increases in oversight. Commercial, financial and agricultural loans generally present a higher level of risk than certain other types of loans, particularly during slow economic conditions. Commercial Real Estate Lending The Company engages in commercial real estate lending in its primary market area and surrounding areas. The Company’s commercial real estate portfolio is secured primarily by residential housing, commercial buildings, raw land and hotels. Generally, commercial real estate loans have terms that do not exceed 20 years, have loan-to- value ratios of up to 80% of the appraised value of the property and are typically secured by personal guarantees of the borrowers. As economic conditions deteriorate, the Company reduces its exposure in real estate loans with higher risk characteristics. In underwriting these loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, and the reliability and predictability of the cash flow generated by the property securing the loan. Appraisals on properties securing commercial real estate loans originated by the Company are performed by independent appraisers. Commercial real estate loans generally present a higher level of risk than certain other types of loans, particularly during slow economic conditions. Real Estate Construction Lending The Company engages in real estate construction lending in its primary market area and surrounding areas. The Company’s real estate construction lending consists of commercial and residential site development loans, as well as commercial building construction and residential housing construction loans. The Company’s commercial real estate construction loans are generally secured with the subject property, and advances are made in conformity with a pre-determined draw schedule supported by independent inspections. Terms of construction loans depend on the specifics of the project, such as estimated absorption rates, estimated time to complete, etc. In underwriting commercial real estate construction loans, the Company performs a thorough analysis of the financial condition of the borrower, the borrower’s credit history, the reliability and predictability of the cash flow generated by the project using feasibility studies, market data, 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 certain other types of loans, particularly during slow economic conditions. The difficulty of estimating total construction costs adds to the risk as well. Mortgage Lending The Company’s real estate mortgage portfolio is comprised of consumer residential mortgages and business loans secured by one-to-four family properties. One-to-four family residential mortgage loan originations, including home equity installment and home equity lines of credit loans, are generated by the Company’s 60 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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. 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 one-to-four family residential real estate loans, the Company evaluates the borrower’s ability to make monthly payments, the borrower’s repayment history and the value of the property securing the loan. The ability to repay is determined by the borrower’s employment history, current financial conditions, and credit background. The analysis is based primarily on the customer’s ability to repay and secondarily on the collateral or security. Most properties securing real estate loans made by the Company are appraised by independent fee appraisers. The Company generally requires mortgage loan borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Company does not engage in sub-prime residential mortgage originations. Residential mortgage loans and home equity loans generally present a lower level of risk than certain other types of consumer loans because they are secured by the borrower’s primary residence. Risk is increased when the Company is in a subordinate position for the loan collateral. Obligations of States and Political Subdivisions The Company lends to local municipalities and other tax-exempt organizations. These loans are primarily tax-anticipation notes and, as such, carry little risk. Historically, the Company has never had a loss on any loan of this type. Personal Lending The Company offers a variety of secured and unsecured personal loans, including vehicle loans, mobile home loans and loans secured by savings deposits as well as other types of personal loans. Personal loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis of the borrower’s willingness and financial ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial conditions and credit background. Personal loans may entail greater credit risk than do residential mortgage loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability and, thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans. 61 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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, establishing a new cost basis. Costs to maintain the assets and subsequent gains and losses attributable to their disposal are included in other expense as realized. No depreciation or amortization expense is recognized. At December 31, 2015 and 2014, the carrying value of other real estate owned was $617,000 and $232,000, respectively. Goodwill and intangibles The Company accounts for its business combinations using the purchase accounting method. Purchase accounting requires the total purchase price to be allocated to the estimated fair values of assets acquired and liabilities assumed, including certain intangible assets that must be recognized. Typically, this allocation results in the purchase price exceeding the fair value of net assets acquired, which is recorded as goodwill. Core deposit intangibles are a measure of the value of checking, money market and savings deposits acquired in business combinations accounted for under the purchase method. Core deposit intangibles and other identified intangibles with finite useful lives are amortized over their estimated useful lives. Goodwill and other intangible assets are tested for impairment annually or when circumstances arise indicating impairment may have occurred. In determining whether impairment has occurred, management considers a number of factors including, but not limited to, the market value of the Company’s stock, operating results, business plans, economic projections, anticipated future cash flows and current market data. There are inherent uncertainties related to these factors and management’s judgment in applying them to the analysis of impairment. Changes in economic and operating conditions, as well as other factors, could result in impairment in future periods. Any impairment losses arising from such testing would be reported in the Consolidated Statements of Income as a separate line item within operations. There were no impairment losses recognized as a result of periodic impairment testing in each of the three years ended December 31, 2015. Mortgage servicing rights The Company originates residential mortgage loans with the intent to sell. These individual loans are normally funded by the buyer immediately. The Company maintains servicing rights on these loans. Mortgage servicing rights are recognized as an asset upon the sale of a mortgage loan. A portion of the cost of the loan is allocated to the servicing right based upon relative fair value. Servicing rights are intangible assets and are carried at estimated fair value. The carrying amount of mortgage servicing rights was $205,000 and $193,000 at December 31, 2015 and 2014, respectively. Adjustments to fair value are recorded as non-interest income and included in gain on sales of loans in the consolidated statements of income. The Company retains the servicing rights on certain mortgage loans sold to the FHLB and receives mortgage banking fee income based upon the principal balance outstanding. Total loans serviced for the FHLB were $21,841,000 and $20,960,000 at December 31, 2015 and 2014, respectively. The mortgage loans sold to the FHLB and serviced by the Company are not reflected in the consolidated statements of financial condition. 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. Amortization of leasehold improvements is computed on a straight line basis over the shorter of the assets’ useful life or the related lease term. 62 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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, annuities and split-dollar arrangements 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. The accrued benefit liability was $887,000 and $858,000 as of December 31, 2015 and 2014, respectively. Related expenses for 2015, 2014 and 2013 were $29,000, $66,000 and $54,000, respectively. Investments in low-income housing partnerships Juniata has invested as a limited partner in a partnership that provides low-income housing in Lewistown, Pennsylvania. The carrying value of the investment in the limited partnership was $3,368,000 at December 31, 2015 and $3,847,000 at December 31, 2014. The partnership anticipates receiving $569,000 annually in low- income housing tax credits over ten years, which began in 2013. Amortization of the investment using the cost method is scheduled to occur over the same period as tax credits are earned. The maximum exposure to loss is limited to the carrying value of its investment at year-end. Income taxes ASC Topic 740, Income Taxes The Company accounts for income taxes in accordance with income tax accounting guidance . Current income tax accounting guidance results in two components of income tax expense: current and deferred. Current income tax expense reflects taxes to be paid or refunded for the current period by applying the provisions of the enacted tax law to the taxable income or excess of deductions over revenues. The Company determines deferred income taxes using the liability (or balance sheet) method. Under this method, the net deferred tax asset or liability is based on the tax effects of the differences between the book and tax bases of assets and liabilities, and enacted changes in tax rates and laws are recognized in the period in which they occur. Deferred income tax expense results from changes in deferred tax assets and liabilities between periods. Deferred tax assets are reduced by a valuation allowance if, based on the weight of the evidence available, it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company accounts for uncertain tax positions if it is more likely than not, based on the technical merits, that the tax position will be realized or sustained upon examination. The term more likely than not means a likelihood of more than 50 percent; the terms examined and upon examination also include resolution of the related appeals or litigation processes, if any. A tax position that meets the more-likely-than-not recognition threshold is initially and subsequently measured as the largest amount of tax benefit that has a greater than 50 percent likelihood of being realized upon settlement with a taxing authority that has full knowledge of all relevant information. The determination of whether or not a tax position has met the more-likely-than-not recognition threshold considers the facts, circumstances and information available at the reporting date and is subject to management’s judgment. The Company recognizes interest and penalties on income taxes, if any, as a component of income tax expense. 63 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Advertising The Company follows the policy of charging costs of advertising to expense as incurred. Advertising expenses were $222,000, $169,000 and $207,000 in 2015, 2014 and 2013, 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 statement of financial condition 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 sponsors a stock option plan for certain key officers. Compensation expense for stock options granted is measured using the fair value of the award on the grant date and is recognized over the vesting period. The Company recognized $57,000, $47,000 and $30,000 of expense for the years ended December 31, 2015, 2014 and 2013, respectively, for stock-based compensation. The stock-based compensation expense amounts were derived based on the fair value of options using the Black-Scholes option-pricing model. The following weighted average assumptions were used to value options granted in the periods indicated. Expected life of options Risk-free interest rate Expected volatility Expected dividend yield Segment reporting 2015 7.4 years 1.95 % 21.42 % 4.87 % 2014 7 years 2.14 % 21.39 % 4.83 % 2013 7 years 1.41 % 21.57 % 4.91 % 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 consolidated statement of financial condition date of December 31, 2015, 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. 64 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 3. RECENT ACCOuNTING STANDARDS upDATE (ASu) Accounting Standards Update 2016-02, Leases Issued: Summary: February 2016 The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. Effective Date: The new standard is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company is currently evaluating the impact this Update will have on its consolidated financial position and results of operations. Accounting Standards Update 2016-01, Measurement of Financial Instruments Issued: Summary: January 2016 The amendments in this Update require all equity investments to be measured at fair value with changes in the fair value recognized through net income (other than those accounted for under equity method of accounting or those that result in consolidation of the investee). The amendments in this Update also require an entity to present separately in other comprehensive income the portion of the total change in the fair value of a liability resulting from a change in the instrument-specific credit risk when the entity has elected to measure the liability at fair value in accordance with the fair value option for financial instruments. In addition the amendments in this Update eliminate the requirement to disclose the fair value of financial instruments measured at amortized cost for entities that are not public business entities and the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet for public business entities. Effective Date: For public entities, the amendments in the Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The Company is currently evaluating the impact this Update will have on its consolidated financial position and results of operations. Accounting Standards Update 2015-16, Business Combination (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments) Issued: Summary: September 2015 ASU 2015-16 requires adjustments to provisional amounts that are identified during the measurement period to be recognized in the reporting period in which the adjustment amounts are determined. This includes any effect on earnings of changes in depreciation, amortization, or other income effects as a result of the change to the provisional amounts, calculated as if the accounting had been completed at the acquisition date. In addition, the amendments in the Update would require an entity to disclose (either on the face of the income statement or in the notes) the nature and amount of measurement-period adjustments recognized in the current period, including separately the amounts in current-period income statement line items that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. 65 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Effective Date: The amendments are effective for public business entities for fiscal years, and for interim periods within those fiscal years, beginning after December 15, 2015. The Company is currently evaluating the impact of this Update on its consolidated financial statements. Accounting Standards Update 2014-04, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Reclassification of Residential Real Estate Collateralized Consumer Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force) Issued: January 2014 Summary: The Update clarifies that when an in substance repossession or foreclosure occurs, and a creditor is considered to have received physical possession of residential real estate property collateralizing a consumer mortgage loan, upon either (1) the creditor obtaining legal title to the residential real estate property upon completion of a foreclosure or (2) the borrower conveying all interest in the residential real estate property to the creditor to satisfy that loan through completion of a deed in lieu of foreclosure or through a similar legal agreement. Effective Date and Transition: The Amendments in this Update are effective for public business entities for annual periods and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this Update had no material effect on its consolidated financial condition or results of operations. Accounting Standards Update 2014-09, Revenue from Contracts with Customers (Topic 606) Issued: May 2014 Summary: The amendments in this Update establish a comprehensive revenue recognition standard for virtually all industries under U.S. GAAP, including those that previously followed industry-specific guidance such as the real estate, construction and software industries. The revenue standard’s core principle is built on the contract between a vendor and a customer for the provision of goods and services. It attempts to depict the exchange of rights and obligations between the parties in the pattern of revenue recognition based on the consideration to which the vendor is entitled. To accomplish this objective, the standard requires five basic steps: (i) identify the contract with the customer, (ii) identify the performance obligations in the contract, (iii) determine the transaction price, (iv) allocate the transaction price to the performance obligations in the contract, and (v) recognize revenue when (or as) the entity satisfies a performance obligation. Effective Date and Transition: Public entities will apply the new standard for annual reports beginning after December 15, 2016, including interim periods therein. Three basic transition methods are available – full retrospective, retrospective with certain practical expedients, and a cumulative effect approach. Under the third alternative, an entity would apply the new revenue standard only to contracts that are incomplete under legacy U.S. GAAP at the date of initial application (e.g. January 1, 2017) and recognize the cumulative effect of the new standard as an adjustment to the opening balance of retained earnings. That is, prior years would not be restated and additional disclosures would be required to enable users of the financial statements to understand the impact of adopting the new standard in the current year compared to prior years that are presented under legacy U.S. GAAP. Early adoption is prohibited under U.S. GAAP. The Company is evaluating the effects this Update will have on the Company’s consolidated financial condition or results of operations. 66 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Accounting Standards Update 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date Issued: Summary: August 2015 ASU 2015-14 defers the effective date of the new revenue recognition standard by one year. As such, it now takes effect for public entities in fiscal years beginning after December 15, 2017. All other entities have an additional year. However, early adoption is permitted for any entity that chooses to adopt the new standard as of the original effective date. Early adoption is permitted only as of annual reporting periods beginning after December 15, 2016, including interim periods within that year. The Company is evaluating the effects this Update will have on its consolidated financial condition or results of operations. Accounting Standards Update 2014-14, Receivables – Troubled Debt Restructurings by Creditors (Subtopic 310-40): Classification of Certain Government-Guaranteed Mortgage Loans upon Foreclosure (a consensus of the FASB Emerging Issues Task Force) Issued: Summary: August 2014 The amendments in this Update address a practice issue related to the classification of certain foreclosed residential and nonresidential mortgage loans that are either fully or partially guaranteed under government programs. Specifically, creditors should reclassify loans that meet certain conditions to “other receivables” upon foreclosure, rather than reclassifying them to other real estate owned (OREO). The separate other receivable recorded upon foreclosure is to be measured based on the amount of the loan balance (principal and interest) the creditor expects to recover from the guarantor. Effective Date and Transition: The ASU is effective for public business entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2014. The adoption of this Update had no material effect on the Company’s consolidated financial condition or results of operations. 4. MERGER On November 30, 2015, Juniata consummated the merger with FNBPA Bancorp, Inc. (“FNBPA”), a Pennsylvania corporation. FNBPA merged with, and into Juniata, with Juniata continuing as the surviving entity. Simultaneously with the consummation of the foregoing merger, First National Bank of Port Allegany (“FNB”), a national banking association and a wholly-owned subsidiary of FNBPA, merged with and into the Bank. As part of this transaction, FNBPA shareholders received either 2.7813 shares of Juniata’s common stock or $50.34 in cash in exchange for each share of FNBPA common stock. As a result, Juniata issued 607,815 shares of common stock with an acquisition date fair value of approximately $10,637,000, based on Juniata’s closing stock price of $17.50 on November 30, 2015, and cash of $2,208,000, including cash in lieu of fractional shares. The fair value of total consideration paid was $12,845,000. The assets and liabilities of FNB and FNBPA were recorded on the consolidated balances sheet at their estimated fair value as of November 30, 2015, and their results of operations have been included in the consolidated income statement since such date. Included in the purchase price was goodwill and a core deposit intangible of $3,335,000 and $343,000, respectively. The core deposit intangible will be amortized over a ten-year period using a sum of the year’s digits basis. The goodwill will not be amortized, but will be measured annually for impairment or more frequently if circumstances require. 67 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Core deposit intangible amortization expense projected for the succeeding five years beginning 2016 is estimated to be $55,000, $49,000, $44,000, $38,000 and $33,000 per year, respectively, and $80,000 in total for years after 2020. The allocation of the purchase price is as follows, in thousands of dollars: Purchase price assigned to FNBPA common shares exchanged for 607,815 Juniata common shares Purchase price assigned to FNBPA common shares exchanged for cash Total purchase price FNBPA net assets acquired: Tangible common equity Adjustments to reflect assets acquired and liabilities assumed at fair value: Total fair value adjustments Associated deferred income taxes Fair value adjustment to net assets acquired, net of tax Total FNBPA net assets acquired Goodwill resulting from the merger $ 10,637 2,208 12,845 9,854 (523) 179 (344) 9,510 3,335 $ While Juniata believes that accounting for the merger is complete, ASC 805 allows for adjustments to goodwill for a period of up to one year after the merger date for information that becomes available that reflects circumstances at the merger date. The following table summarizes the estimated fair value of the assets acquired and liabilities assumed, in thousands of dollars. Total purchase price Net assets acquired Cash and cash equivalents Investment securities Loans Premises and equipment Accrued interest receivable Core deposit and other intangibles Other real estate owned Other assets Deposits Accrued interest payable Other liabilities Goodwill $ 12,845 3,802 35,458 47,055 419 550 343 114 763 (77,665) (13) (1,316) 9,510 3,335 $ The fair value of the financial assets acquired included loans receivable with a gross amortized cost basis of $47,797,000. The table below illustrates the fair value adjustments made to the amortized cost basis in order to present a fair value of the loans acquired, in thousands of dollars. Gross amortized cost basis at November 30, 2015 Market rate adjustment Credit fair value adjustment on pools of homogeneous loans Credit fair value adjustment on impaired loans Fair value of purchased loans at November 30, 2015 $ 47,797 (110) (73) (559) 47,055 $ 68 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The market rate adjustment represents the movement in market interest rates, irrespective of credit adjustments, compared to the stated rates of the acquired loans. The credit adjustment made on pools of homogeneous loans represents the changes in credit quality of the underlying borrowers from the loan inception to the acquisition date. The credit adjustment on impaired loans is derived in accordance with ASC 310-30 and represents the portion of the loan balances that has been deemed uncollectible based on the Company’s expectations of future cash flows for each respective loan. The information about the acquired FNBPA impaired loan portfolio as of November 30, 2015 is as follows, in thousands of dollars. Contractually required principal and interest at acquisition Contractual cash flows not expected to be collected (nonaccretable discount) Expected cash flows at acquisition Interest component of expected cash flows (accretable discount) Fair value of acquired loans $ $ 2,488 (1,427) 1,061 (157) 904 The following table presents unaudited pro forma information, in thousands, as if the merger between Juniata and FNBPA had been completed on January 1, 2014. The pro forma information does not necessarily reflect the results of operations that would have occurred had Juniata merged with FNBPA at the beginning of 2014. Supplemental pro forma earnings for 2015 were adjusted to exclude $1,637,000 of merger related costs (exclusive of the corresponding tax impact) incurred in 2015; the results for 2014 were adjusted to include these charges. The pro forma financial information does not include the impact of possible business model changes, nor does it consider any potential impacts of current market conditions or revenues, expense efficiencies or other factors. Net interest income after loan loss provision Noninterest income Noninterest expense Net income Net income per common share $ $ Years Ended December 31, 2015 17,731 4,841 17,124 4,862 1.01 2014 $ 17,089 4,745 18,358 3,353 0.70 $ The amount of total revenue, consisting of interest income plus noninterest income, as well as the net income specifically related to FNBPA for the period beginning December 1, 2015, included in the consolidated statements of income of Juniata for the year ended December 31, 2015, was $242,000 and $61,000, respectively. 5. RESTRICTIONS ON CASh AND DuE FROM BANKS The Bank is required to maintain cash reserve balances with the Federal Reserve Bank. The total required reserve balances were $340,000 and $276,000 as of December 31, 2015 and 2014, respectively. 6. SECuRITIES The Company’s investment portfolio includes primarily mortgage-backed securities issued by U.S. Government sponsored agencies and backed by residential mortgages (approximately 58%), bonds issued by U.S. Government sponsored agencies (approximately 21%) and municipalities (approximately 19%) as of December 31, 2015. Most of the municipal bonds are general obligation bonds with maturities or pre-refunding dates within 5 years. The remaining 2% of the portfolio includes a group of equity investments in other financial institutions. 69 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The amortized cost and fair value of securities as of December 31, 2015 and 2014, 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. Securities Available for Sale Type and maturity Obligations of U.S. Government agencies and corporations Within one year After one year but within five years After five years but within ten years Obligations of state and political subdivisions Within one year After one year but within five years After five years but within ten years After ten years Mortgage-backed securities Equity securities Total Securities Available for Sale Type and maturity Obligations of U.S. Government agencies and corporations Within one year After one year but within five years After five years but within ten years Obligations of state and political subdivisions Within one year After one year but within five years After five years but within ten years After ten years Mortgage-backed securities Equity securities Total December 31, 2015 Gross Gross Amortized Cost Fair Value Unrealized Unrealized Gains Losses $ $ 1,000 24,489 7,495 32,984 1,003 24,264 7,465 32,732 $ $ 3 19 7 29 5,756 16,070 7,204 330 29,360 88,159 1,692 $ 152,195 5,771 16,151 7,282 331 29,535 87,741 2,319 $ 152,327 $ 15 101 78 1 195 213 645 1,082 $ - (244) (37) (281) - (20) - - (20) (631) (18) (950) December 31, 2014 Gross Gross Amortized Cost Fair Value Unrealized Unrealized Gains Losses $ $ 4,510 39,110 6,996 50,616 4,566 38,723 6,812 50,101 $ $ 56 31 1 88 9,903 16,822 8,609 340 35,674 55,123 1,055 $ 142,468 9,934 16,853 8,748 338 35,873 55,429 1,500 142,903 $ $ 31 78 143 - 252 367 475 1,182 $ - (418) (185) (603) - (47) (4) (2) (53) (61) (30) (747) Certain obligations of the U.S. Government and state and political subdivisions are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The carrying value of the pledged assets was $45,101,000 and $30,770,000 at December 31, 2015 and 2014, respectively. 70 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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): Gross proceeds from sales of securities Securities available for sale: Gross realized gains from sold and called securities Gross realized losses from sold and called securities Years Ended December 31, 2015 53,213 83 (70) $ $ 2014 14,631 43 (34) $ $ 2013 - - (2) $ $ 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, 2015 (in thousands): Unrealized Losses at December 31, 2015 Less than 12 Months Fair Value Unrealized Losses 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses $ 10,887 $ (102) $ 12,814 $ (179) $ 23,701 $ (281) 7,469 57,454 75,810 62 (13) (631) (746) (3) 692 - 13,506 75 (7) - (186) (15) 8,161 57,454 89,316 137 (20) (631) (932) (18) Obligations of U.S. Government agencies and corporations Obligations of state and political subdivisions Mortgage-backed securities Debt securities Equity securities Total temporarily impaired securities $ 75,872 $ (749) $ 13,581 $ (201) $ 89,453 $ (950) At December 31, 2015, 16 U.S. Government and agency securities had unrealized losses that, in the aggregate, did not exceed 1% of amortized cost. Seven of these securities have been in a continuous loss position for 12 months or more. At December 31, 2015, 21 obligations of state and political subdivision bonds had unrealized losses that, in the aggregate, did not exceed 1% of amortized cost. Two of these securities have been in a continuous loss position for 12 months or more. At December 31, 2015, 16 mortgage-backed securities had an unrealized loss that did not exceed 1% of amortized cost. None of these securities has been in a continuous loss position for 12 months or more. The mortgage-backed securities in the Company’s portfolio are government sponsored enterprise (GSE) pass- through instruments issued by the Federal National Mortgage Association (FNMA), which guarantees the timely payment of principal on these investments. The unrealized losses noted above are considered to be temporary impairments. The decline in the values of the debt securities is due only to interest rate fluctuations, rather than erosion of issuer credit quality. As a result, the payment of contractual cash flows, including principal repayment, is not at risk. As the Company does not intend to sell the securities, does not believe the Company will be required to sell the securities before recovery and expects to recover the entire amortized cost basis, none of the debt securities are deemed to be other-than- temporarily impaired. 71 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Equity securities owned by the Company consist of common stock of various financial services providers (“Bank Stocks”) and are evaluated quarterly for evidence of other-than-temporary impairment. There were five equity securities that were in an unrealized loss position on December 31, 2015, and have carried unrealized losses for 12 months or more. Individually, none of these five equity securities have significant unrealized losses. Of the five equity securities that have sustained unrealized losses for more than 12 months, all have increased in fair value during 2015, indicating the possibility of full recovery and therefore are deemed to be temporarily impaired. Additionally, there are six equity securities in an unrealized loss position as of December 31, 2015 that have been in that position for less than 12 months. The unrealized losses present in those securities are insignificant. Management has identified no other-than-temporary impairment as of, or for the years ended, December 31, 2015, 2014 and 2013 in the equity portfolio. Management continues to track the performance of each stock owned to determine if it is prudent to deem any further other-than-temporary impairment charges. The Company has the ability and intent to hold its equity securities until recovery of unrealized losses. 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, 2014 (in thousands): Less than 12 Months Unrealized Fair Losses Value Unrealized Losses at December 31, 2014 12 Months or More Total Fair Value Unrealized Losses Fair Value Unrealized Losses Obligations of U.S. Government agencies and corporations Obligations of state and political subdivisions Mortgage-backed securities Debt securities Equity securities Total temporarily $ 6,998 $ (26) $ 32,515 $ (577) $ 39,513 $ (603) 5,592 13,550 26,140 31 (33) (60) (119) (2) 2,426 95 35,036 179 (20) (1) (598) (28) 8,018 13,645 61,176 210 (53) (61) (717) (30) impaired securities $ 26,171 $ (121) $ 35,215 $ (626) $ 61,386 $ (747) 7. LOANS AND RELATED ALLOWANCE FOR LOAN LOSSES 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, 2015 and December 31, 2014 (in thousands): Pass Special Mention Substandard Doubtful Total As of December 31, 2015 Commercial, financial and agricultural Real estate - commercial Real estate - construction Real estate - mortgage Obligations of states and political subdivisions Personal Total $ 30,814 106,629 16,351 152,161 17,069 6,787 $ 329,811 $ $ 1,853 16,067 7,024 6,595 455 56 32,050 $ $ 1,504 3,274 3,297 4,656 - 3 12,734 $ $ - 1,243 - 1,205 - - 2,448 $ 34,171 127,213 26,672 164,617 17,524 6,846 $ 377,043 72 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Pass Special Mention Substandard Doubtful Total As of December 31, 2014 Commercial, financial and agricultural Real estate - commercial Real estate - construction Real estate - mortgage Obligations of states and political subdivisions Personal Total $ 17,904 70,369 12,934 128,898 15,708 3,987 $ 249,800 $ $ 5,697 15,297 3,486 5,611 22 57 30,170 $ $ 137 3,037 3,957 4,280 - - 11,411 $ $ - 1,297 336 1,887 - - 3,520 $ 23,738 90,000 20,713 140,676 15,730 4,044 $ 294,901 The Company has certain loans in its portfolio that are considered to be impaired. It is the policy of the Company to recognize income on impaired loans that have been transferred to nonaccrual status on a cash basis, only to the extent that it exceeds principal balance recovery. A collateral analysis is performed on each impaired loan at least quarterly and results are used to determine if a specific reserve is necessary to adjust the carrying value of each individual loan down to the estimated fair value. Generally, specific reserves are carried against impaired loans based upon estimated collateral value until a confirming loss event occurs or until termination of the credit is scheduled through liquidation of the collateral or foreclosure. Consumer mortgage loans secured by residential real estate properties for which formal foreclosure proceedings were in process at December 31, 2015 and December 31, 2014 totaled $382,000 and $384,000, respectively. Charge off will occur when a confirmed loss is identified. Professional appraisals of collateral, discounted for expected selling costs, are used to determine the charge-off amount. The following tables summarize information regarding impaired loans by portfolio class as of December 31, 2015 and December 31, 2014 (in thousands): As of December 31, 2015 Unpaid Principal Balance Related Allowance Recorded Investment Impaired Loans With no related allowance recorded: Commercial, financial and agricultural Real estate - commercial Acquired with credit deterioration Real estate - construction Real estate - mortgage Acquired with credit deterioration With an allowance recorded: Real estate - mortgage Total: Commercial, financial and agricultural Real estate - commercial Acquired with credit deterioration Real estate - construction Real estate - mortgage Acquired with credit deterioration $ 475 1,851 $ 475 2,024 $ 834 - 2,636 630 893 - 4,127 642 - $ - $ 475 1,851 834 - 2,636 $ 475 2,024 $ 893 - 4,127 $ $ 630 6,426 $ 642 8,161 $ $ - - - - - - - - - - - - - - 73 As of December 31, 2014 Unpaid Principal Balance Recorded Investment Related Allowance $ 1 2,264 $ 1 2,357 $ - 336 3,056 - 664 4,324 - - - - - - - - 896 $ 937 $ 150 1 2,264 $ 1 2,357 $ - 336 3,952 - 664 5,261 - 6,553 $ - 8,283 $ $ - - - - 150 - 150 $ $ JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Year Ended December 31, 2015 Cash Basis Interest Income Interest Income Recognized Average Recorded Investment Year Ended December 31, 2014 Average Recorded Investment Interest Income Recognized Cash Basis Interest Income Year Ended December 31, 2013 Cash Basis Interest Income Interest Income Recognized Average Recorded Investment $ 48 2,141 $ 1 62 $ 2 49 127 2,345 $ $ - 96 $ 238 2,058 $ 25 $ 45 417 168 2,846 53 - - 27 - - $ 27 - - 36 - - 420 3,205 - - - 76 - - - 71 - - 1,254 1,920 - $ $ - - - 448 - $ - - - - $ - - - - 119 739 631 $ - $ - $ 119 $ - - - 5 838 1,253 238 2,058 25 45 - 27 48 $ 1 $ 2 $ 2,260 62 417 - - - - 49 - 127 2,464 $ $ - 96 - - - 2 64 - - - - - $ - 24 - 6 24 - - - - 7 - 24 - Impaired loans With no related allowance: Commercial, financial and agricultural Real estate - commercial Acquired with credit deterioration Real estate - construction Real estate - mortgage Acquired with credit deterioration With an allowance recorded: Commercial, financial and agricultural Real estate - commercial Real estate - construction Real estate - mortgage Total: Commercial, financial and agricultural Real estate - commercial Acquired with credit deterioration The following table presents nonaccrual loans by classes of the loan portfolio as of December 31, 2015 and December 31, 2014 (in thousands): Nonaccrual loans: Real estate - commercial Real estate - construction Real estate - mortgage Total December 31, 2015 December 31, 2014 1,717 $ 336 3,193 5,246 1,286 - 2,402 3,688 $ $ $ Interest income not recorded based on the original contractual terms of the loans for nonaccrual loans was $239,000, $382,000 and $490,000 in 2015, 2014 and 2013, respectively. The aggregate amount of demand deposits that have been reclassified as loan balances at December 31, 2015 and 2014 were $146,000 and $36,000, respectively. 74 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a recorded payment is past due. The following table presents the classes of the loan portfolio summarized by the past due status as of December 31, 2015 and December 31, 2014 (in thousands): Loans Past Due Greater than 90 Days and Accruing $ - - 443 - - 119 - 2 564 Loans Past Due Greater than 90 Days and Accruing - - - 400 - - 400 $ $ $ As of December 31, 2015 Commercial, financial and agricultural Real estate - commercial Real estate - commercial Acquired with credit deterioration Real estate - construction Real estate - mortgage Real estate - mortgage Acquired with credit deterioration Obligations of states and political subdivisions Personal Total As of December 31, 2014 Commercial, financial and agricultural Real estate - commercial Real estate - construction Real estate - mortgage Obligations of states and political subdivisions Personal Total 30-59 Days 60-89 Days Past Due Past Due Greater than 90 Days Total Past Due Current $ 92 - - $ 92 $ 34,079 $ Total Loans 34,171 112 - - 124 175 - 1,243 443 - 1,479 618 - 124,900 216 26,672 126,379 834 26,672 1,038 - - 56 1,298 $ 761 61 - 48 1,169 $ 1,669 119 - 2 3,476 $ 3,468 180 - 106 160,519 450 17,524 6,740 5,943 $ 371,100 163,987 630 17,524 6,846 $ 377,043 $ $ Total Loans 23,738 90,000 20,713 140,676 15,730 4,044 $ 294,901 30-59 Days 60-89 Days Past Due Past Due Greater than 90 Days Total Past Due Current 14 $ 23,724 87,834 20,273 135,884 15,730 4,027 7,429 $ 287,472 2,166 440 4,792 - 17 $ 2 $ 388 - 498 - 17 905 $ $ 12 $ 61 104 1,326 - - 1,503 $ $ - 1,717 336 2,968 - - 5,021 $ 75 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The following table summarizes information regarding troubled debt restructurings by loan portfolio class as of and for the years ended December 31, 2015 and 2014, in thousands of dollars. As of December 31, 2015 Accruing troubled debt restructurings: Real estate - commercial Real estate - mortgage As of December 31, 2014 Accruing troubled debt restructurings: Real estate - commercial Real estate - mortgage Non-accruing troubled debt restructurings: Real estate - mortgage Pre-Modification Post-Modification Number of Contracts Outstanding Recorded Investment Outstanding Recorded Investment Recorded Investment 1 6 7 1 6 1 8 $ $ $ $ 148 254 402 148 254 364 766 $ $ $ $ 148 282 430 148 282 371 801 $ $ $ $ 142 234 376 145 256 366 767 The Company’s troubled debt restructurings are also impaired loans, which may result in a specific allocation and subsequent charge-off if appropriate. As of December 31, 2015, there were no specific reserves and no charge-offs relating to the troubled debt restructurings. The amended terms of the restructured loans vary, whereby interest rates have been reduced, principal payments have been reduced or deferred for a period of time and/or maturity dates have been extended. As of December 31, 2014, one restructured loan with a balance of $366,000 was in default because it was delinquent in excess of 90 days with respect to the terms of the restructuring and was placed in non-accrual. In 2015, the loan was foreclosed upon and the property was sold. There have been no defaults of troubled debt restructurings that took place during 2015, 2014 or 2013 within 12 months of restructure. There were no loans whose terms have been modified resulting in troubled debt restructurings during 2015. The following table summarizes loans whose terms have been modified, resulting in troubled debt restructurings during 2014, in thousands of dollars. As of December 31, 2014 Accruing troubled debt restructurings: Real estate - mortgage Pre-Modification Post-Modification Number of Contracts Outstanding Recorded Investment Outstanding Recorded Investment Recorded Investment 3 3 $ $ 92 92 $ $ 92 92 $ $ 87 87 76 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The following tables summarize loans and the activity in the allowance for loan losses by loan class, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of and for the years ended December 31, 2015, 2014 and 2013 (in thousands): Allowance for loan losses Beginning Balance, January 1, 2015 Charge-offs Recoveries Provisions Ending balance As of December 31, 2015 Allowance for loan losses: Ending balance evaluated for impairment individually collectively Loans: Ending balance evaluated for impairment individually collectively acquired with credit deterioration Allowance for loan losses Beginning Balance, January 1, 2014 Charge-offs Recoveries Provisions Ending balance As of December 31, 2014 Allowance for loan losses: Ending balance evaluated for impairment individually collectively Loans: Ending balance evaluated for impairment individually collectively Commercial, financial and agricultural commercial Real estate- Real estate- Real estate- construction mortgage Obligations of states and political subdivisions $ $ 222 $ (11) 7 46 264 $ 665 $ (66) - 237 836 $ 155 $ (24) - 60 191 $ 1,300 $ (305) 1 144 1,140 $ - - - - - Commercial, financial and agricultural commercial Real estate- Real estate- Real estate- construction mortgage Obligations of states and political subdivisions $ 264 $ 836 $ 191 $ 1,140 $ $ $ - $ 264 $ - $ 836 $ - $ 191 $ - $ 1,140 $ - - - Personal 38 (9) 3 15 47 Personal 47 - 47 $ $ $ $ $ Total 2,380 (415) 11 502 2,478 Total 2,478 - 2,478 $ $ $ $ $ $ 34,171 $ 127,213 $ 26,672 $ 164,617 $ 17,524 $ 6,846 $ 377,043 $ 475 $ $ 33,696 $ 124,551 834 - $ $ 1,828 $ $ $ - $ 26,672 $ $ - 2,532 $ $ $ 161,455 630 - 17,524 - Commercial, financial and agricultural commercial Real estate- Real estate- Real estate- construction mortgage Obligations of states and political subdivisions $ $ 253 $ (20) 4 (15) 222 $ 534 $ (92) 5 218 665 $ 212 $ (18) - (39) 155 $ 1,246 $ (125) - 179 1,300 $ - - - - - Commercial, financial and agricultural commercial Real estate- Real estate- Real estate- construction mortgage Obligations of states and political subdivisions $ 222 $ 665 $ 155 $ 1,300 $ $ $ - $ 222 $ - $ 665 $ - $ 155 $ 150 $ 1,150 $ - - - $ $ $ $ $ $ $ $ - 6,846 - $ 4,835 $ 370,744 1,464 $ Personal 42 (20) 2 14 38 Personal 38 - 38 Total 2,287 (275) 11 357 2,380 Total 2,380 150 2,230 $ $ $ $ $ $ 23,738 $ 90,000 $ 20,713 $ 140,676 $ 15,730 $ 4,044 $ 294,901 $ 1 $ $ 23,737 $ 2,264 $ 87,736 $ 336 $ 20,377 $ 3,952 $ 136,724 $ - 15,730 $ $ - 4,044 $ 6,553 $ 288,348 77 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Allowance for loan losses Beginning Balance, January 1, 2013 Charge-offs Recoveries Provisions Ending balance As of December 31, 2013 Allowance for loan losses: Ending balance evaluated for impairment individually collectively Loans: Ending balance evaluated for impairment individually collectively Commercial, financial and agricultural commercial Real estate- Real estate- Real estate- construction mortgage Obligations of states and political subdivisions $ $ 179 $ (4) 13 65 253 $ 463 $ - - 71 534 $ 202 $ (117) - 127 212 $ 2,387 $ (1,281) - 140 1,246 $ - - - - - Personal 50 (29) 9 12 42 $ $ Total 3,281 (1,431) 22 415 2,287 $ $ Commercial, financial and agricultural commercial Real estate- Real estate- Real estate- construction mortgage Obligations of states and political subdivisions Personal Total $ 253 $ 534 $ 212 $ 1,246 $ $ $ - $ 253 $ 26 $ 508 $ 93 $ 119 $ 45 $ 1,201 $ - - - $ $ $ 42 $ 2,287 - 42 $ $ 164 2,123 $ 26,281 $ 74,471 $ 19,681 $ 140,459 $ 12,702 $ 4,204 $ 277,798 $ 94 $ $ 26,187 $ 2,255 $ 72,216 $ 1,982 $ 17,699 $ 3,718 $ 136,741 $ - 12,702 $ $ - 4,204 $ 8,049 $ 269,749 78 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 8. pLEDGED ASSETS The Bank must maintain sufficient qualifying collateral with the Federal Home Loan Bank (FHLB) in order to secure borrowings. 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 investment securities. As of December 31, 2015, the amount of loans included in qualifying collateral was $184,153,000, for a collateral value of $133,309,000. No investment securities are included in qualifying collateral as of December 31, 2015. 9. 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 $14,905,000 and $14,807,000 at December 31, 2015 and 2014, 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 $97,000, $411,000 and $446,000 in 2015, 2014 and 2013, 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 2015 and 2014 are shown below (in thousands): Life Insurance 14,462 $ Deferred Annuities 381 $ Payout Annuities 5 $ Total $ 14,848 Balance as of January 1, 2014 Earnings Premiums on existing policies Annuity payments received Net proceeds from life insurance claim Balance as of December 31, 2014 Earnings Premiums on existing policies Annuity payments received Net proceeds from life insurance claim Balance as of December 31, 2015 10. pREMISES AND EquIpMENT 339 46 - (450) 14,397 321 41 - (259) 14,500 $ $ 15 14 - - 410 16 13 (34) - 405 Premises and equipment consist of the following (in thousands): Land Buildings and improvements Furniture, computer software and equipment Less: accumulated depreciation - - (5) - - - - - - - 354 60 (5) (450) 14,807 337 54 (34) (259) 14,905 $ $ December 31, 2015 1,126 9,226 4,901 15,253 (8,344) 6,909 2014 1,066 8,828 4,690 14,584 (8,051) 6,533 $ $ $ $ Depreciation expense on premises and equipment charged to operations was $506,000 in 2015, $494,000 in 2014 and $497,000 in 2013. 79 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 11. GOODWILL AND OThER INTANGIBLE ASSETS Branch Acquisition On September 8, 2006, the Company acquired a branch office in Richfield, PA. Goodwill at December 31, 2015 and 2014 was $2,046,000. Core deposit intangible was $29,000 net of amortization of $402,000 at December 31, 2015 and $74,000 net of amortization of $375,000 at December 31, 2014. The core deposit intangible is being amortized over a ten-year period on a straight line basis. 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 2015, 2014 and 2013. Intangible amortization expense projected for the remaining year in 2016 is estimated to be $29,000. FNBPA Acquisition On November 30, 2015, the Company completed its acquisition of FNBPA and, as a result, recorded goodwill of $3,335,000. Core deposit intangible in the amount of $303,000 was recorded and will be amortized over a ten-year period using a sum of the year’s digits basis. Core deposit intangible amortization expense recorded in 2015 was $4,000 and for the succeeding five years beginning 2016 is estimated to be $55,000, $49,000, $44,000, $38,000 and $33,000 per year, respectively, and $80,000 in total for years after 2020. Other intangible assets were identified and recorded as of November 30, 2015,in the amount of $40,000 and will be amortized on a straight line basis over two years, through November 30, 2017. Expense recognized in 2015 was $2,000, and is projected to be $20,000 and $18,000 for 2016 and 2017, respectively. Core deposit and other intangible assets, net of amortization, was $337,000 as of December 31, 2015. 12. INVESTMENT IN uNCONSOLIDATED SuBSIDIARy On September 1, 2006, the Company invested in Liverpool Community Bank (formerly known as The First National Bank of Liverpool) (“LCB”), Liverpool, Pennsylvania, by purchasing 39.16% of its outstanding common stock. This investment is accounted for under the equity method of accounting. The investment was carried at $4,553,000 and $4,369,000 as of December 31, 2015 and 2014, respectively. The Company increases its investment in LCB for its share of earnings and decreases its investment by any dividends received from LCB. The investment is evaluated quarterly for impairment. A loss in value of the investment which is determined to be other than a temporary decline would be recognized as a loss in the period in which such determination is made. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of LCB to sustain an earnings capacity which would justify the current carrying value of the investment. 13. DEpOSITS Deposits consist of the following (in thousands): Demand, non-interest bearing Interest-bearing demand and money market Savings Time deposits, $250,000 or more Other time deposits 80 $ December 31, 2015 $ 106,667 114,406 94,923 5,222 135,908 $ 457,126 2014 77,697 95,675 67,430 4,501 135,581 $ 380,884 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Aggregate amount of scheduled maturities of time deposits as of December 31, 2015 include the following (in thousands): Maturing in: 2016 2017 2018 2019 2020 Later $250,000 or more $ 962 252 626 1,683 503 1,309 5,335 Other 57,599 21,262 12,600 16,987 17,634 9,713 135,795 $ $ $ Total Time Deposits 58,561 21,514 13,226 18,670 18,137 11,022 141,130 $ 14. BORROWINGS $ Borrowings consist of the following (dollars in thousands): Securities sold under agreements to repurchase $ 4,996 0.10% $ 4,594 0.10% $ 4,716 0.10% December 31, 2015 December 31, 2014 For the year 2015 Outstanding Balance Rate Outstanding Balance Rate Average Balance Weighted Average Rate Short-term borrowings with Federal Home Loan Bank Overnight advances 30,061 0.44% 9,700 0.27% Mid-term repo maturing August 2015 Long-term debt with Federal Home Loan Bank Mid-term repo maturing April 2016 Mid-term repo maturing March 2017 Fixed rate loan maturing April 2018 Fixed rate loan maturing April 2019 7,500 6,250 5,000 3,750 $ 57,557 0.63% 1.10% 1.60% 2.00% 0.71% 6,250 0.39% 7,500 0.63% 6,250 1.10% 5,000 1.60% 3,750 2.00% 10,693 5,616 0.38% 0.39% 7,500 6,250 5,000 3,750 0.63% 1.10% 1.60% 2.00% 0.78% $ 43,044 0.76% $ 43,525 The maximum balance of short-term borrowings at any month-end during 2015 was $ 35,234,000. 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, 2015, the securities that serve as collateral for securities sold under agreements to repurchase had a fair value of $7,964,000. 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 $133,309,000, with a balance of $52,561,000 outstanding as of December 31, 2015. In order to borrow additional amounts, 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 to secure all outstanding advances. Qualifying collateral is defined by the FHLB and includes outstanding balances of the Company’s real estate loans, excluding loans with certain risk mitigants, including delinquencies and loans made to insiders, borrowers with low credit scores or loans with high loan-to-value ratios. 81 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 15. 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 $127,000, $124,000 and $122,000 in 2015, 2014 and 2013, 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, 2015 (in thousands): Years ending December 31, 2016 2017 2018 2019 2020 2021 and beyond Total minimum payments required $ $ 138 132 84 78 60 63 555 16. INCOME TAxES The components of income tax expense for the three years ended December 31 were (in thousands): Current tax (benefit) expense Deferred tax expense (benefit) Total tax expense 2015 149 (66) 83 $ $ 2014 331 194 525 $ $ 2013 (157) 662 505 $ $ 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): Income before income taxes Statutory tax rate Federal tax at statutory rate Tax-exempt interest Net earnings on BOLI Gain from life insurance proceeds Dividend from unconsolidated subsidiary Stock-based compensation Federal tax credits Merger and acquisition expenses Other permanent differences Total tax expense Effective tax rate 82 Years Ended December 31, 2015 3,141 2014 4,741 2013 4,506 $ $ $ 34.0% 34.0% 34.0% 1,068 (391) (99) (34) (15) 20 (570) 115 (11) 83 2.6% $ 1,612 (358) (93) (56) (13) 16 (575) - (8) 525 11.1% $ 1,532 (354) (108) - (13) 10 (556) - (6) 505 11.2% $ JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Deductible temporary differences and taxable temporary differences gave rise to a net deferred tax asset for the Company as of December 31, 2015 and 2014. The components giving rise to the net deferred tax asset are detailed below (in thousands): Deferred Tax Assets Allowance for loan losses Deferred directors’ compensation Employee and director benefits Qualified pension liability Unrealized loss from securities impairment Investment in low income housing project Fair value adjustments to acquired assets and liabilities Tax credit carryforward Other Total deferred tax assets Deferred Tax Liabilities Depreciation Equity income from unconsolidated subsidiary Loan origination costs Prepaid expense Unrealized gains on securities available for sale Annuity earnings Fair value of mortgage servicing rights Intangible assets Goodwill Total deferred tax liabilities Net deferred tax asset included in other assets December 31, 2015 2014 489 511 534 785 236 96 493 80 104 3,328 $ 675 519 553 457 239 52 - - 57 2,552 (288) (589) (412) (284) (58) (73) (70) (67) (433) (2,274) 1,054 (199) (526) (348) (138) (148) (68) (66) - (387) (1,880) 672 $ $ $ 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, 2015, 2014 and 2013. The Company is no longer subject to examination by taxing authorities for years before 2012. Tax years 2012 through the present, with limited exception, remain open to examination. 83 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 17. 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. 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. Any adjustment in capitalization of the Company will result in a proportionate adjustment to the reserved shares for this plan. At December 31, 2015, 141,887 shares were available for issuance under the Dividend Reinvestment Plan. The Company periodically repurchases shares of its common stock under a 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, to fulfill dividend reinvestment program needs and to supply shares needed for exchange in an acquisition. During 2015, 2014 and 2013, 3,504, 12,322 and 24,918 shares, respectively, were repurchased in conjunction with this program. Remaining shares authorized in the program were 27,649 as of December 31, 2015. On November 30, 2015, 555,555 treasury shares were reissued to former FNBPA shareholders in conjunction with the acquisition of FNBPA. The Company and the Bank are subject to risk-based capital standards by which 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 result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the Company’s consolidated 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. The requirements were revised and became effective on a phased-in basis beginning January 1, 2015 and include the establishment of a new Common Equity Tier I level. Juniata’s and the Bank’s Total, Tier I and Common Equity 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) are set forth in the table below. The new risk-based capital rules require that banks and holding companies maintain a “capital conservation buffer” of 250 basis points in excess of the “minimum capital ratio”. The minimum capital ratio is equal to the prompt corrective action adequately capitalized threshold ratio. The capital conservation buffer will be phased in over four years beginning on January 1, 2016, with a maximum buffer of 0.625% of risk weighted assets for 2016, 1.25% for 2017, 1.875% for 2018 and 2.5% for 2019 and thereafter. Failure to maintain the required capital conservation buffer will result in limitations on capital distributions and on discretionary bonuses to executive officers. Management believes, as of December 31, 2015 and 2014, that the Company and the Bank met all capital adequacy requirements to which they were subject. 84 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 As of December 31, 2015, 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, Common Equity 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 as of the dates indicated (dollars in thousands). Juniata Valley Financial Corp. (Consolidated) As of December 31, 2015: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Common Equity Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) Leverage As of December 31, 2014: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) Leverage The Juniata Valley Bank As of December 31, 2015: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Common Equity Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) Leverage As of December 31, 2014: Total Capital (to Risk Weighted Assets) Tier 1 Capital (to Risk Weighted Assets) Tier 1 Capital (to Average Assets) Leverage Actual Amount Ratio Minimum Requirement for Capital Adequacy Purposes Ratio Amount $ 57,098 15.03% $ 30,385 8.00% 54,338 14.31% 22,789 6.00% 54,338 14.31% 17,092 4.50% 54,338 11.23% 19,352 4.00% $ 52,492 17.12% $ 24,531 8.00% 49,912 16.28% 12,265 4.00% 49,912 10.65% 18,741 4.00% Actual Amount Ratio Minimum Requirement For Capital Adequacy Purposes Amount Ratio Minimum Regulatory Requirements to be "Well Capitalized" under Prompt Corrective Action Provisions Amount Ratio $ 51,491 14.11% $ 29,186 8.00% $ 36,482 10.00% 48,861 13.39% 14,593 4.00% 29,186 8.00% 48,861 13.39% 16,417 4.50% 23,713 6.50% 48,861 10.21% 19,146 4.00% 23,932 5.00% $ 47,145 15.59% $ 24,186 8.00% $ 30,233 10.00% 44,688 14.78% 12,093 4.00% 18,140 6.00% 44,688 9.42% 18,969 4.00% 23,711 5.00% 85 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Certain regulatory restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. At December 31, 2015, $33,862,000 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 the regulatory capital requirements above. 18. 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, Net income Weighted-average common shares outstanding Basic earnings per share Weighted-average common shares outstanding Common stock equivalents due to effect of stock options Total weighted-average common shares and equivalents Diluted earnings per share Anti-dilutive stock options outstanding 19. ACCuMuLATED OThER COMpREhENSIVE LOSS $ $ $ $ 2015 $ $ 2013 2014 (Amounts, except earnings per share, in thousands) 4,216 4,193 1.01 4,193 - 4,193 1.01 100 4,001 4,210 0.95 4,210 1 4,211 0.95 78 $ $ $ $ $ $ 3,058 4,240 0.72 4,240 1 4,241 0.72 103 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): Unrealized gains (losses) on available for sale securities Unrecognized expense for defined benefit pension Accumulated other comprehensive loss 20. FAIR VALuE MEASuREMENT 12/31/2015 96 $ (2,299) (2,203) $ 12/31/2014 296 $ (2,493) (2,197) $ 12/31/2013 (751) $ (908) (1,659) $ Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell an asset or transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes guidance on identifying circumstances when a transaction may not be considered orderly. Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed, and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance. 86 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 This guidance clarifies that, when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be orderly. In those situations, the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value. Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. A fair value measurement assumes that the transaction to sell the asset or transfer the liability occurs in the principal market for the asset or liability or, in the absence of a principal market, the most advantageous market for the asset or liability. The price in the principal (or most advantageous) market used to measure the fair value of the asset or liability is not adjusted for transaction costs. An orderly transaction is a transaction that assumes exposure to the market for a period prior to the measurement date to allow for marketing activities that are usual and customary for transactions involving such assets and liabilities; it is not a forced transaction. Market participants are buyers and sellers in the principal market that are (i) independent, (ii) knowledgeable, (iii) able to transact and (iv) willing to transact. 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 Level 2 Inputs reporting entity has the ability to access at the measurement date. – 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. 87 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 An asset’s or liability’s placement in the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below. In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market- based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality, the 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 debt securities’ 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 since repayment is expected solely from the collateral. Fair value is generally determined based upon independent third-party appraisals of the properties, or discounted cash flows based upon the expected proceeds. These assets are included as Level 3 fair values, based upon the lowest level of input that is significant to the fair value measurements. Other Real Estate Owned Certain assets included in other real estate owned are carried at fair value as a result of impairment and accordingly are presented as measured on a non-recurring basis. Values are estimated using Level 3 inputs, based on appraisals that consider the sales prices of property in the proximate vicinity. Mortgage Servicing Rights The fair value of servicing assets is based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date and are considered Level 3 inputs. 88 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The following table summarizes financial assets and financial liabilities measured at fair value as of December 31, 2015 and December 31, 2014, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands). There were no transfers of assets between fair value Level 1 and Level 2 during the years ended December 31, 2015 or 2014. (Level 1) (Level 2) Quoted Prices in Significant Active Markets for Identical Assets Inputs Other (Level 3) Significant Other Inputs Observable Unobservable December 31, 2015 Measured at fair value on a recurring basis: Debt securities available-for-sale: Obligations of U.S. Government agencies and corporations Obligations of state and political subdivisions Mortgage-backed securities Equity securities available-for-sale $ 32,732 29,535 87,741 2,319 $ $ - - - 2,319 $ 32,732 29,535 87,741 - - - - - Measured at fair value on a non-recurring basis: Impaired loans Other real estate owned Mortgage servicing rights 2,232 150 205 - - - - - - 2,232 150 205 (Level 1) (Level 2) Quoted Prices in Significant Active Markets for Identical Assets Inputs Other (Level 3) Significant Other Inputs Observable Unobservable December 31, 2014 Measured at fair value on a recurring basis: Debt securities available-for-sale: Obligations of U.S. Government agencies and corporations Obligations of state and political subdivisions Mortgage-backed securities Equity securities available-for-sale $ 50,101 35,873 55,429 1,500 $ $ - - - 1,500 $ 50,101 35,873 55,429 - - - - - Measured at fair value on a non-recurring basis: Impaired loans Mortgage servicing rights 3,370 193 - - - - 3,370 193 89 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The following table presents additional quantitative information about assets measured at fair value on a nonrecurring basis and for which Level 3 inputs have been used to determine fair value: December 31, 2015 Impaired loans Fair Value Estimate 2,232 $ Valuation Technique Appraisal of collateral (1) Other real estate owned 150 Appraisal of collateral (1) Mortgage servicing rights 205 Multiple of annual servicing fee December 31, 2014 Impaired loans Fair Value Estimate 3,370 $ Valuation Technique Appraisal of collateral (1) Mortgage servicing rights 193 Multiple of annual servicing fee Unobservable Input Appraisal and liquidation adjustments (2) Appraisal and liquidation adjustments (2) Estimated pre-payment speed, based on rate and term Unobservable Input Appraisal and liquidation adjustments (2) Estimated pre-payment speed, based on rate and term Range Average 7% - 37% 16.1% 32% 32% 300% - 400% 364% Range Average 7% - 15% 11.2% 300% - 400% 360% (1) Fair value is generally determined through independent appraisals of the underlying collateral that generally include various level 3 inputs which are not identifiable. (2) Appraisals may be adjusted downward by management for qualitative factors such as economic conditions and estimated liquidation expenses. The range of liquidation expenses and other appraisal adjustments are presented as a percent of the appraisal. Fair Value of Financial Instruments Management uses its best judgment in estimating the fair value of the Company’s financial instruments; however, there are inherent weaknesses in any estimation technique. Therefore, the fair value estimates herein are not necessarily indicative of the amounts the Company could have realized in sales transactions on the dates indicated. The estimated fair value amounts have been measured as of their respective year ends and have not been re-evaluated or updated for purposes of these consolidated financial statements subsequent to those respective dates. As such, the estimated fair values of these financial instruments subsequent to the respective reporting dates may be different from the amounts reported at each year end. The information presented below should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is provided only for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful. The following describes the estimated fair value of the Company’s financial instruments as well as the significant methods and assumptions not previously disclosed used to determine these estimated fair values. Carrying values approximate fair value for cash and due from banks, interest-bearing demand deposits with banks, restricted stock in the Federal Home Loan Bank, loans held for sale, interest receivable, mortgage servicing rights, non-interest bearing deposits, securities sold under agreements to repurchase, short-term borrowings and 90 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 interest payable. Other than cash and due from banks, which are considered Level 1 inputs, and mortgage servicing rights, which are Level 3 inputs, these instruments are Level 2 inputs. Interest bearing time deposits with banks - The estimated fair value is determined by discounting the contractual future cash flows, using the rates currently offered for deposits of similar remaining maturities. Loans – For variable-rate loans that reprice frequently and which entail no significant changes in credit risk, carrying values approximated fair value. Substantially all commercial loans and real estate mortgages are variable rate loans. The fair value of other loans (i.e. consumer loans and fixed-rate real estate mortgages) 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. 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 are estimated using discounted cash flow analysis, based on incremental borrowing rates for similar types of arrangements. Commitments to extend credit and letters of credit – The fair value of commitments to extend credit is estimated using the fees currently charged to enter into similar agreements, taking into account market interest rates, the remaining terms and present credit-worthiness of the counterparties. The fair value of guarantees and letters of credit is based on fees currently charged for similar agreements. The estimated fair values of the Company’s financial instruments are as follows (in thousands): FINANCIAL INSTRuMENTS (in thousands) Financial assets: Cash and due from banks Interest bearing deposits with banks Interest bearing time deposits with banks Securities Restricted investment in FHLB stock Loans held for sale Loans, net of allowance for loan losses Mortgage servicing rights Accrued interest receivable Financial liabilities: Non-interest bearing deposits Interest bearing deposits Securities sold under agreements to repurchase Short-term borrowings Long-term debt Other interest bearing liabilities Accrued interest payable Off-balance sheet financial instruments: Commitments to extend credit Letters of credit December 31, 2015 Carrying Value Fair Value December 31, 2014 Fair Carrying Value Value $ 10,385 73 350 152,327 3,509 1,808 374,565 205 1,806 106,667 350,459 4,996 30,061 22,500 1,471 238 $ 10,385 73 350 152,327 3,509 1,808 373,078 205 1,806 106,667 352,859 4,996 30,061 22,482 1,476 238 $ 6,757 10 - 142,903 2,726 - 292,521 193 1,491 77,697 303,187 4,594 15,950 22,500 1,412 301 $ 6,757 10 - 142,903 2,726 - 294,083 193 1,491 77,697 305,635 4,594 15,950 22,464 1,416 301 - - - - - - - - 91 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The following presents the carrying amount, fair value and placement in the fair value hierarchy of the Company’s financial instruments not previously disclosed as of December 31, 2015 and December 31, 2014. This table excludes financial instruments for which the carrying amount approximates fair value. December 31, 2015 Financial Instruments - Assets Interest bearing time deposits with banks $ Loans held for sale Loans, net of allowance for loan losses Financial instruments - Liabilities Interest bearing deposits Long-term debt Other interest bearing liabilities December 31, 2014 Financial instruments - Assets (Level 1) Quoted Prices in Active Markets for Identical (Level 2) Significant Other (Level 3) Significant Other Observable Unobservable Fair Value Assets or Liabilities Inputs Inputs Carrying Amount 350 1,808 374,565 $ 350 1,808 373,078 $ 350,459 22,500 1,471 352,859 22,482 1,476 - - - - - - $ 350 1,808 - $ - - 373,078 352,859 22,482 1,476 - - - (Level 1) Quoted Prices in Active Markets for Identical (Level 2) Significant Other (Level 3) Significant Other Observable Unobservable Fair Value Assets or Liabilities Inputs Inputs Carrying Amount Interest bearing time deposits with banks $ 292,521 $ 294,083 Loans, net of allowance for loan losses Financial instruments - Liabilities Interest bearing deposits Other interest bearing liabilities 21. EMpLOyEE BENEFIT pLANS Stock Option Plan 303,187 22,500 1,412 305,635 22,464 1,416 - - - - $ - $ 294,083 305,635 22,464 1,416 - - - The 2000 Incentive Stock Option Plan expired in May 2010 and was replaced with the 2011 Stock Option Plan in May 2011 (collectively, the “Plans”). The 2011 Stock Option Plan has essentially the same structure as the 2000 plan. Under the provisions of the Plans, while active, options can be granted to officers and key employees of the Company. The Plans provide that the option price per share is 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 Plans are exercisable no earlier than one year after the date of grant and expire ten years after the date of the grant. The Plans are administered by a committee of the Board of Directors, whose members are not eligible to receive options under the Plans. The Committee determines, among other things, which officers and key employees receive 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 Plans are scheduled to expire through February 17, 2025. The aggregate number of shares that may be issued upon the exercise of options under the 2011 Stock Option Plan is 300,000 shares, and 177,975 shares were available for grant as of December 31, 2015. Total options outstanding at December 31, 2015 have exercise prices between $17.22 and $24.00, with a weighted average exercise price of $18.07 and a weighted average remaining contractual life of 7.0 years. 92 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 As of December 31, 2015, there was $86,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plans. That cost is expected to be recognized through 2020. Cash received from option exercises under the Plans for the year ended December 31, 2015 was $53,000. No options were exercised in 2014 or 2013. A summary of the status of the Plans as of December 31, 2015, 2014 and 2013, and changes during the years ending on those dates is presented below: 2015 2014 2013 Shares 109,816 35,800 (3,092) - 142,524 70,920 Outstanding at beginning of year Granted Exercised Forfeited Outstanding at end of year Options exercisable at year-end Weighted-average fair value of options granted during the year Intrinsic value of options exercised during the year Intrinsic value of options outstanding and exercisable at December 31, 2015 Shares 83,930 33,525 - (7,639) 109,816 51,396 Weighted Average Exercise Price 18.50 17.72 - 20.44 18.13 1.96 - $ $ $ $ Shares 97,792 21,800 - (35,662) 83,930 43,079 Weighted Average Exercise Price $ $ $ $ 19.04 17.65 .0- 19.45 18.50 1.75 .0 - Weighted Average Exercise Price 18.13 17.80 17.22 - 18.07 1.90 866 2,840 $ $ $ $ $ The following table summarizes characteristics of stock options as of December 31, 2015: Outstanding Grant Date 10/18/2005 10/17/2006 10/16/2007 10/21/2008 10/20/2009 9/20/2011 3/20/2012 2/19/2013 2/18/2014 2/17/2015 Exercise Price 24.00 21.00 20.05 21.10 17.22 17.75 18.00 17.65 17.72 17.80 Contractual Average Life (Years) 0.00 0.80 1.80 2.81 3.81 5.72 6.22 7.14 8.14 9.14 Shares 1,531 1,838 4,425 6,100 6,605 13,850 17,050 21,800 33,525 35,800 142,524 93 Exercisable Shares 1,531 1,838 4,425 6,100 6,605 12,850 14,850 12,106 10,615 - 70,920 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Defined Benefit Retirement Plan s The Company sponsors a defined benefit retirement plan (The Juniata Valley Bank Retirement Plan (“JVB Plan”)) which covers substantially all of its employees employed prior to December 31, 2007. As of January 1, 2008, the JVB Plan was amended to close the plan to new entrants. All active participants as of December 31, 2007 became 100% vested in their accrued benefit and, as long as they remained eligible, continued to accrue benefits until December 31, 2012. The benefits are based on years of service and the employee’s compensation. Effective December 31, 2012, the JVB Plan was amended to cease future service accruals after that date (frozen). 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 for benefits attributed to service through December 31, 2012. The Company does not expect to contribute to the JVB Plan in 2016. Management expects to record a $122,000 net periodic expense in 2016 for the JVB Plan, which includes expected amortization out of accumulated other comprehensive loss. The following table sets forth by level, within the fair value hierarchy, debt and equity instruments included in the JVB Plan’s assets at fair value as of December 31, 2015 and December 31, 2014 (in thousands). Assets included in the JVB Plan that are not valued in the hierarchy table consist of cash and cash equivalents, totaling $250,000 and $527,000, at December 31, 2015 and 2014, respectively. (Level 1) (Level 2) Quoted Prices in Significant Active Markets Other (Level 3) Significant Other Measured at fair value on a recurring basis: U.S. Government and agency securities Corporate bonds and notes Mutual funds Value funds Blend funds Growth funds Money market funds Measured at fair value on a recurring basis: U.S. Government and agency securities Corporate bonds and notes Mutual funds Value funds Blend funds Growth funds Money market funds December 31, for Identical Observable Unobservable 2015 Assets Inputs Inputs $ 324 4,156 $ - - $ $ 324 4,156 1,878 1,433 1,500 172 9,463 $ 1,878 1,433 1,500 172 4,983 $ - - - - 4,480 $ $ - - - - - - - (Level 1) (Level 2) Quoted Prices in Significant Active Markets Other (Level 3) Significant Other December 31, for Identical Observable Unobservable 2014 Assets Inputs Inputs $ 1,113 3,147 $ - - $ $ 1,113 3,147 1,977 1,696 1,585 85 9,603 $ 1,977 1,696 1,585 85 5,343 $ - - - - 4,260 $ $ - - - - - - - 94 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The measurement date for the JVB Plan is December 31. Information pertaining to the activity in the defined benefit plan is as follows (in thousands): Change in projected benefit obligation (PBO) PBO at beginning of year Interest cost Change in assumptions Actuarial loss Benefits paid PBO at end of year Change in plan assets Fair value of plan assets at beginning of year Actual return on plan assets, net of expenses Benefits paid Fair value of plan assets at end of year Years Ended December 31, 2015 2014 $ $ $ $ 11,473 450 (623) 37 (474) 10,863 10,130 57 (474) 9,713 $ $ $ $ 9,108 426 2,297 110 (468) 11,473 10,114 484 (468) 10,130 Funded status, included in other (liabilities) assets $ (1,150) $ (1,343) Amounts recognized in accumulated comprehensive loss before income taxes consist of: Unrecognized actual loss Accumulated benefit obligation $ (3,483) $ (3,777) $ 10,863 $ 11,473 For the year ended December 31, 2014, the mortality assumptions were derived using the RP-2014 White Collar Mortality Table, with rates that were projected generationally using Scale MP-2014. The impact on the benefit obligation for the mortality assumption change in 2014 was an increase in the projected benefit obligation of $1,079,000. For the year ended December 31, 2015, the mortality assumptions were derived using the Adjusted RP-2014 White Collar Mortality Table. Incorporated into the most recent table are rates projected generationally using Scale MP-2015 to reflect mortality improvement. The impact on the benefit obligation for the mortality assumption change in 2015 was a decrease in the projected benefit obligation of $623,000. Pension expense for the JVB Plan included the following components for the years ended December 31 (in thousands): Interest cost on projected benefit obligation Expected return on plan assets Net (amortization) accretion Recognized net actuarial loss Net periodic benefit cost Net loss (gain) Amortization of net loss Net amortization (accretion) Total recognized in other comprehensive loss (income) Total recognized in net periodic benefit cost and other comprehensive loss (income) 95 2015 450 (592) - 242 100 2014 426 (518) - 40 (52) 2013 395 (561) (1) 203 36 (52) (242) - (294) $ 2,441 (40) - 2,401 (1,782) (203) 1 (1,984) $ (194) $ 2,349 $ (1,948) $ $ JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Assumptions used to determine benefit obligations were: Discount rate Rate of compensation increase Assumptions used to determine the net periodic benefit cost were: Discount rate Expected long-term return on plan assets Rate of compensation increase 2015 4.25% N/A 2015 4.00% 6.00 N/A 2014 4.00% N/A 2014 4.75% 5.25 N/A 2013 4.75% N/A 2013 4.00% 6.35 N/A As a result of the FNBPA acquisition, the Company sponsors a second defined benefit retirement plan (Retirement Plan for the First National Bank of Port Allegany (“FNB Plan”)) which covers substantially all former FNBPA employees that were employed prior to September 30, 2008. The FNBPA Plan was amended as of December 31, 2015 to cease future service accruals to previously unfrozen participants and is now considered to be “frozen”. 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 for benefits attributed to service prior to the frozen date. The Company does not expect to contribute to the FNB Plan in 2016. Management expects $17,000 expense to be recorded as net periodic expense in 2016 for the FNB Plan. The following table sets forth by level, within the fair value hierarchy, debt and equity instruments included in the FNB Plan’s assets at fair value as of December 31, 2015 (in thousands). (Level 1) (Level 2) Quoted Prices in Significant Active Markets Other (Level 3) Significant Other Measured at fair value on a recurring basis: Mutual funds Aggressive growth funds Growth funds Growth and income funds Income December 31, for Identical Observable Unobservable 2015 Assets Inputs Inputs $ $ 1,003 589 1,433 878 3,903 $ $ 1,003 589 1,433 878 3,903 $ $ - - - - - $ $ - - - - - 96 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The measurement date for the FNB Plan is December 31. Information pertaining to the activity in the defined benefit plan is as follows (in thousands): Change in projected benefit obligation (PBO) PBO at December 1, 2015 Service cost Interest cost Change in assumptions Curtailment gain ($108) net of actuarial loss $2 Benefits paid PBO at end of year Change in plan assets Fair value of plan assets at December 1, 2015 Actual return on plan assets, net of expenses Benefits paid Fair value of plan assets at end of year Funded status, included in other (liabilities) assets Accumulated benefit obligation 2015 5,249 3 18 (87) (106) (16) 5,061 4,001 (82) (16) 3,903 $ $ $ $ $ (1,158) $ 5,061 For the year ended December 31, 2015, the mortality assumptions were derived using the Adjusted RP-2014 White Collar Mortality Table. Incorporated into the most recent table are rates projected generationally using Scale MP-2015 to reflect mortality improvement. Pension expense included the following components for the year ended December 31 (in thousands): Service cost during the year Interest cost on projected benefit obligation Expected return on plan assets Net periodic benefit gain Total recognized in net periodic benefit cost and other comprehensive income Assumptions used to determine benefit obligations were: Discount rate Rate of compensation increase Assumptions used to determine the net periodic benefit cost were: Discount rate Expected long-term return on plan assets Rate of compensation increase 97 2015 3 18 (23) (2) (2) $ $ 2015 4.25% N/A 2015 4.00% 6.00 N/A JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 The investment strategy and investment policy for both the JVB Plan and the FNBPA Plan is to target the plan assets to contain 50% equity and 50% fixed income securities. The asset allocation as of December 31, 2015 was approximately 49% fixed income securities, 50% equities and 1% cash equivalents in the JVB Plan. Future expected benefit payments (in thousands): Estimated future benefit payments JVB Plan FNB Plan Total Defined Contribution Plan 2016 470 209 679 $ $ $ $ 2017 475 205 $ 2018 524 199 $ 680 $ 723 $ 2019 528 295 823 $ $ 2020 551 288 2021-2025 2,884 $ 1,541 839 $ 4,425 The Company has a Defined Contribution Plan under which employees, through payroll deductions, are able to defer portions of their compensation. The Company makes an annual non-elective fully vested contribution equal to 3% of compensation to each eligible participant. As of December 31, 2015 a liability of $157,000 was recorded to satisfy this obligation, and was credited to employees’ accounts by January 31, 2016. This liability at December 31, 2014 totaled $191,000 and was credited to employee accounts during 2015. Expense incurred under this plan was $192,000, $180,000 and $175,000 in 2015, 2014 and 2013, respectively. Effective January 1, 2013, the Company amended the Defined Contribution Plan to include an employer matching contribution for employees that elect to defer compensation into this program. The matching contribution in 2015, 2014 and 2013 was $162,000, $147,000 and 123,000, 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 Company 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 3,242 shares issued in 2015, 3,497 shares issued in 2014 and 2,823 shares issued in 2013 under this plan. At December 31, 2015, there were 180,818 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, 2015 and 2014, the present value of the future liability associated with these plans was $392,000 and $459,000, respectively. For the years ended December 31, 2015, 2014 and 2013, $34,000, $39,000 and $47,000, 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 9. 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, 2015 and 2014, the present value of the future liability was $1,504,000 and $1,528,000, respectively. For the years ended December 31, 2015, 2014 and 2013, $30,000, $33,000 and $47,000, 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 9. 98 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 Salary Continuation Plans The Company has non-qualified salary continuation plans for key employees. At December 31, 2015 and 2014, the present value of the future liability was $1,178,000 and $1,167,000, respectively. For the years ended December 31, 2015, 2014 and 2013, $119,000, $118,000 and $97,000, 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 9. 22. 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, Commitments to grant loans Unfunded commitments under lines of credit Outstanding letters of credit $ 2015 42,619 4,661 2,586 2014 $ 38,776 6,245 1,703 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, 2015 and 2014 for guarantees under letters of credit issued is not material. The maximum undiscounted exposure related to these guarantees at December 31, 2015 was $2,586,000, and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $5,818,000. 99 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 23. 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 $4,749,000 and $1,764,000 at December 31, 2015 and 2014, respectively. During 2015, $3,114,000 of new loans were made and repayments totaled $451,000. None of these loans were past due, in non-accrual status or restructured at December 31, 2015 or 2014. 24. COMMITMENTS AND CONTINGENT LIABILITIES 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 $729,000 at December 31, 2015. Since the Company does not expect to terminate these services prior to the end of the commitment period, no liability has been recorded at December 31, 2015. 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. Additionally, the Company has committed to fund and sell qualifying residential mortgage loans to the Federal Home Loan Bank of Pittsburgh in the total amount of $10,000,000. As of December 31, 2015, $8,736,000 remains to be delivered on that commitment, of which none has been committed to borrowers. 25. SuBSEquENT EVENTS In January 2016, the Board of Directors declared a dividend of $0.22 per share to shareholders of record on February 16, payable on March 1, 2016. 100 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 26. JuNIATA VALLEy FINANCIAL CORp. (pARENT COMpANy ONLy) FINANCIAL INFORMATION: CONDENSED BALANCE SHEETS (in thousands) ASSETS Cash and cash equivalents Investment in bank subsidiary Investment in unconsolidated subsidiary Investment securities available for sale Other assets TOTAL ASSETS LIABILITIES Accounts payable and other liabilities STOCKHOLDERS’ EQUITY TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY CONDENSED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (in thousands) INCOME Interest and dividends on investment securities available for sale Dividends from bank subsidiary Income from unconsolidated subsidiary Gain on sale of securities Other non-interest income TOTAL INCOME EXPENSE Merger-related expenses Other non-interest expense TOTAL EXPENSE INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY Income tax expense Undistributed net income (loss) of subsidiary NET INCOME COMPREHENSIVE INCOME December 31, 2015 2014 $ $ 89 54,279 4,553 1,399 143 60,463 $ $ 132 44,437 4,369 1,225 96 50,259 $ 501 $ 403 59,962 49,856 $ 60,463 $ 50,259 Years Ended December 31, 2014 2013 2015 $ $ $ 34 3,900 238 19 1 4,192 279 131 410 3,782 27 3,755 (697) 3,058 3,052 $ $ $ 32 3,691 236 - 1 3,960 - 132 132 3,828 25 3,803 413 4,216 3,678 $ $ $ 28 4,290 237 - - 4,555 - 140 140 4,415 23 4,392 (391) 4,001 3,761 101 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 CONDENSED STATEMENTS OF CASH FLOWS (in thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Undistributed net loss (income) of subsidiary Realized gains on sales of investment securities Equity in earnings of unconsolidated subsidiary, net of dividends of $55, $48 and $47 Stock-based compensation expense Increase in other assets Increase in taxes payable Increase (decrease) in accounts payable and other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of available for sale securities Proceeds from the sale of available for sale securities Proceeds from the maturity of available for sale investment securities Net cash received from acquisition Net cash provided by (used in) investing activities Cash flows from financing activities: Cash dividends Purchase of treasury stock Treasury stock issued for dividend reinvestment and employee stock purchase plan Net cash used in financing activities Years Ended December 31, 2015 2014 2013 $ 3,058 $ 4,216 $ 4,001 698 (19) (183) 57 (112) 72 13 3,584 - 9 - 4 13 (413) - (188) 47 (87) 65 (20) 3,620 - - - - - 391 - (190) 30 (72) 87 (7) 4,240 (252) - 250 - (2) (3,687) (63) 110 (3,640) (3,690) (222) (3,707) (445) 59 (3,853) 48 (4,104) Net (decrease) increase in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year (43) 132 89 $ (233) 365 132 $ 134 231 365 $ 102 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 27. quARTERLy RESuLTS OF OpERATIONS (uNAuDITED) The unaudited quarterly results of operations for the years ended December 31, 2015 and 2014 follow (in thousands, except per-share data): 2015 Quarter ended Total interest income Total interest expense Net interest income Provision for loan losses Mortgage banking income Other income Merger and acquisition expense Other expense Income before income taxes Income tax expense (benefit) Net income Per-share data: Basic earnings Diluted earnings Cash dividends Total interest income Total interest expense Net interest income Provision for loan losses Mortgage banking income Other income Other expense Income before income taxes Income tax expense Net income Per-share data: Basic earnings Diluted earnings Cash dividends March 31 $ 4,226 565 3,661 50 54 946 10 3,594 1,007 83 924 $ June 30 $ 4,220 496 3,724 112 60 1,070 48 3,573 1,121 120 $ 1,001 $ September 30 December 31 $ 4,651 502 4,149 200 46 1,136 1,595 3,677 (141) (266) 125 4,282 479 3,803 140 30 1,163 153 3,549 1,154 146 1,008 $ $ $ $ .22 .22 .22 .24 .24 .22 $ $ .24 .24 .22 .02 .02 .22 2014 Quarter ended March 31 $ 4,036 627 3,409 20 29 891 3,336 973 70 903 $ June 30 $ 4,325 683 3,642 117 56 1,114 3,401 1,294 131 $ 1,163 $ September 30 December 31 4,344 $ 628 3,716 110 75 1,076 3,495 1,262 170 1,092 4,227 660 3,567 110 54 1,039 3,338 1,212 154 1,058 $ $ $ $ .22 .22 .22 .28 .28 .22 $ $ .25 .25 .22 .26 .26 .22 103 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 COMMON STOCK MARKET pRICES AND DIVIDENDS The common stock of Juniata Valley Financial Corp. is quoted under the symbol “JUVF” on the over-the-counter (“OTC-Pink”) Electronic Bulletin Board, a regulated electronic quotation service made available through, and governed by, the NASDAQ system. As of December 31, 2015, the Company had 1,837 stockholders of record. The following table presents the quarterly high and low prices of the Company’s common stock and per common share cash dividends declared for each of the quarterly periods in 2015 and 2014. Quarter Ended March 31 June 30 September 30 December 31 Quarter Ended March 31 June 30 September 30 December 31 High $ 18.75 18.90 19.95 19.50 High $ 19.00 18.50 19.00 19.00 $ $ 2015 Low 17.80 17.55 17.28 17.50 2014 Low 17.30 17.36 17.45 17.70 $ $ Dividends Declared 0.22 0.22 0.22 0.22 Dividends Declared 0.22 0.22 0.22 0.22 As stated in “Note 17 – 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. 128 Bridge Street P.O. Box 66 Mifflintown, PA 17059 (855) 582-5101 JVBonline.com INVESTOR INFORMATION JoAnn N. McMinn, Executive Vice President and Chief Financial Officer P.O. Box 66 Mifflintown, PA 17059 JoAnn.McMinn@JVBonline.com 104 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 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, 2015 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: INVESTMENT CONSIDERATIONS Ms. Danyelle Pannebaker The Juniata Valley Bank P.O. Box 66 Mifflintown, PA 17059 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, 2015, a copy of which can be obtained as described above. Registrar and Transfer Agent By regular mail: Computershare P.O. Box 30170 College Station, TX 77842-3170 United States By overnight delivery: Computershare 211 Quality Circle, Suite 210 College Station, TX 77845 Telephone: (800) 368-5948 Website: www.Computershare.com/investor Stockholders of record may access their accounts via the Internet to review account holdings and transaction history through Computershare’s website: www.Computershare.com/investor. Information regarding the Company’s Dividend Reinvestment and Stock Purchase Plan, including a Prospectus, may be obtained by contacting Computershare, 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 Computershare 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, 2016 at the Lewistown Country Club, 306 Country Club Road, Lewistown, Pennsylvania. 105 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 JuNIATA VALLEy FINANCIAL CORp. CORpORATE OFFICERS Timothy I. Havice --------------------------------------------------------------------------- Chairman Philip E. Gingerich, Jr. --------------------------------------------------------------- Vice Chairman Marcie A. Barber ----------------------------------------- President and Chief Executive Officer JoAnn N. McMinn ------- Executive Vice President, Treasurer and Chief Financial Officer Charles L. Hershberger ---------------------------------------------------------------------Secretary JuNIATA VALLEy FINANCIAL CORp. AND ThE JuNIATA VALLEy BANK BOARD OF DIRECTORS Marcie A. Barber President and Chief Executive Officer Martin L. Dreibelbis Self-Employed, Petroleum Consultant Philip E. Gingerich, Jr., Vice Chairman President, Central Insurers Group, Inc. Timothy I. Havice, Chairman Owner, T.I. Havice, Developer The Rev. Charles L. Hershberger Pastor, Port Royal Lutheran Church and President, Stonewall Equity, Inc. Gary E. Kelsey Potter County, PA Register of Wills and Recorder of Deeds and Co-Owner of Appalachian Basin Land Resources, LLC. Richard M. Scanlon, DMD Retired Dentist Jan G. Snedeker Retired President, Snedeker Oil Co., Inc. Bradley J. Wagner Partner-Owner and General Manager of Hoober Feeds ThE JuNIATA VALLEy BANK BuSINESS DEVELOpMENT BOARD MEMBERS Mifflin County Juniata/Perry/Huntingdon McKean/Potter/Northern Tier George W. Anderson Mark S. Elsesser Donald R. Hartzler Sharon D. Havice Jeffrey C. Moyer Craig M. Rupert William J. Rupp, Jr. David E. Walker Corey P. Wray Kim E. Bomberger R. Franklin Campbell Steven R. Ehrenzeller Gregory J. Gordon Robert D. Hower Carl F. Jaymes N. Jeffrey Leonard Dennis A. Long Georgiana Snyder-Leitzel R. Keith Fortner Gary E. Kelsey Dan F. Lane III Martin L. Moses Benjamin R. Olney 106 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 ThIS pAGE INTENTIONALLy LEFT BLANK 107 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 ThIS pAGE INTENTIONALLy LEFT BLANK 108 JuNIATA VAlley FINANcIAl corp - ANNuAl reporT 2015 JUNIATA VALLEy FINANCIAL CORP. | ANNUAL REPORT 2015 JUNIATA VALLEy FINANCIAL CORP. | ANNUAL REPORT 2015 JUVF UNdERSTANdS ThIS BUSINESS The Juniata Valley Bank opened its doors in 1867, in We added our Richfield branch through acquisition mifflintown, PA, Juniata County. Nearly one hundred years in 2006 and, on November 30th, 2015, we closed the later, from 1962 through 1967, our bank grew through acquisition of First National Bank of Port Allegany and acquisition of The First National Bank of millerstown, Farmers formally entered the Northern Tier with three new banking National Bank of mcAlisterville, The Port Royal National Bank locations in mcKean and Potter Counties. and finally the Tuscarora State Bank of Blairs mills. After all these years, we have proudly maintained high- In 1998, The Juniata Valley Bank merged with the touch personal service in all these varied communities. Lewistown Trust Company, extending its footprint throughout mifflin County with four additional branches. ThIS BUSINESS IS ChANgINg But in every community, regardless of size and demographics...the need for innovative delivery systems continues to grow. JVB is committed to providing robust electronic services responsively designed to facilitate electronic banking from any device. Our customers can look forward to an enhanced internet banking website in 2016 with even greater access to loan and deposit services. MaiN street | Port allegaNy, Pa Photo Credit: Susan Carlson JuNiata couNty, Pa| riverscaPe Photo Credit: Nathaniel Thierwechter “community banking has a special meaning to our shareholders. our belief in the value of community banking and our ability to successfully execute a community banking business strategy throughout varied pennsylvania regions is the essence of how we are building shareholder value.” and liabilities and managing risk, helping to assure the long- term growth and health of your financial company. We look forward to 2016 and the challenges and opportunities the opportunities for the satisfaction of our customers, the professional gratification of our dedicated employees, and the enrichment of our shareholders. COmmUNITy BANKINg FOR OUR ShAREhOLdERS “Community Banking has a special meaning to our shareholders. Our belief in the value of Community Banking and our ability to successfully execute a Community Banking business strategy throughout varied Pennsylvania regions is the essence of how we are building shareholder value.” We will continue to adapt our banking model to the changing needs and demands of our consumer and business clients; however, acquisition remains a strategic focus. Through this strategy, we can leverage our capital and overhead to deliver stronger returns to our bottom line. Additionally, new markets provide expanded opportunities to drive fee-based products and services to a larger customer base. dIRECTORy OF OFFICERS OF JVB ExECUTIVE Marcie A. Barber..................................................................President, Chief Executive Officer BRANCh AdmINISTRATION Patricia J. Yearick .............. Senior Vice President, Community Banking Division Manager JoAnn N. McMinn ............................................................................... Executive Vice President, Chief Financial Officer Joseph W. Lashway....................... Senior Vice President, Northern Tier Division Manager Cynthia L. Bosworth ....................... Northern Tier Branch Administrator and Loan Officer Danyelle M. Pannebaker ............................................................................. Executive Assistant AdmINISTRATION Tina J. Smith........................................Senior Vice President, Director of Human Resources Suzanne E. Booher ........................................................Vice President, Director of Marketing and Facilities Management Brent M. Miller ..................................................................Vice President, Compliance Officer Kathy Hutchinson .........................................................Vice President, Compliance Specialist and Security/BSA Officer FINANCE Kristi J. Burdge .............................................Assistant Vice President, Accounting Manager Renee D. Williamson ..............................................................Financial Information Manager LENdINg Corbett J. Monica .................................. Senior Vice President, Lending Division Manager William T. Campbell, Jr. ..............................................Vice President, Relationship Manager Christine D. Coscia ....................................... Northern Tier Assistant Branch Administrator and Loan Officer Lora J. Rankin .............................................................................................Collections Manager Jane A. Harrier ..............................................................................................Loan Administrator blairs mills office Wayne S. McCoy ............................................... Vice President, Community Office Manager burnham office Leann M. Fisher ................................................. Vice President, Community Office Manager coudersport office Kelly L. Bruno .................................................................................Community Office Manager gardenview office Larry B. Cottrill, Jr. ............................................ Vice President, Community Office Manager Denise M. Rothrock .......................................................................... Assistant Office Manager lillibridge office Danielle H. Bennett ......................................................................Community Office Manager it holds for JUVF. We intend to meet the challenges and leverage Lisa K. Hobbs .......................................................................Northern Tier Compliance Officer Thoughtful acquisition also provides an opportunity to enhance both sides of our balance sheet by diversifying assets marcie A. Barber | President and CEO TOTAL ASSETS AT yEAR ENd (In Thousands) $600,000 $580,000 $560,000 $540,000 $520,000 $500,000 $480,000 $460,000 $440,000 $420,000 $400,000 2009 2008 $442,109 $428,084 2010 $435,753 2006 $415,931 2007 $420,146 2014 $480,529 2011 $447,433 2012 2013 $448,869 $448,782 $583,928 2015 Jeffrey A. Herr ..............................................................Vice President, Relationship Manager Scott E. Nace ................................................................Vice President, Relationship Manager mcalisterville office Leslie A. Miller ................................................... Vice President, Community Office Manager H. Fred Wallace ............................................................Vice President, Relationship Manager Kelly M. Neimond ............................................................................. Assistant Office Manager Jon R. Yarger .....................................................Vice President, Consumer Lending Manager Betty D. Ryan ................................ Vice President, Secondary Mortgage Market Manager Pamela K. Parson ........................................................... Vice President, Collections Manager Christine L. Burlew ............................................................. Vice President, Collections Officer Lisa M. Snyder .............................................Vice President, Credit Administration Manager mifflintown & mountain view offices Annette M. Price ................................................ Vice President, Community Office Manager millerstown office Thomas P. O’Connell ........................................ Vice President, Community Office Manager Matthew J. Waddell ...........................................................Vice President, Portfolio Manager Lisa M. Freet ..................................................................................... Assistant Office Manager OPERATIONS Steven T. Kramm .......................................................................................Senior Vice President, Operations/Technology Division Manager S. Marlene Hubler .................................................................. Computer Operations Manager Kelly L. Yetter ....................................................... Electronic and Business Banking Manager Curtis M. Crouse ....................................................................................Network Administrator Beverly M. McClellan ..............................................................................................Data Analyst Tammy L Miller ........................................................................... Deposit Operations Manager TRUST ANd INVESTmENT SERVICES Donald E. Shawley ....................................................................................Senior Vice President, Trust and Investment Services Division Manager Cynthia L. Williams .......................................................................Vice President, Trust Officer Paul M. Grego............................................................Vice President, Trust Investment Officer Jonathan F. King ...................................................................Financial Services Representative monument square office Lee Ellen Foose ................................................ Vice President, Community Office Manager Stacey K. McMurtrie ......................................................................... Assistant Office Manager port allegany office Shelly S. Morey ..............................................................................Community Office Manager port royal office Barbara I. Seaman ......................................... Vice President, Community Office Manager richfield office Brenda A. Brubaker .......................................... Vice President, Community Office Manager wal-mart office Kristi A. Dippery ................................................................................ Assistant Office Manager water street office Christine L. Searer ...........................Assistant Vice President, Community Office Manager JuNiata couNty courthouse | MiffliNtowN, Pa Photo Credit: Nathaniel Thierwechter eMBassy theatre | lewistowN, Pa Photo Credit: Nathaniel Thierwechter acadeMia PoMeroy covered Bridge | Port royal, Pa Photo Credit: Sandy Sieber JUNIATA VALLEy FINANCIAL CORP. ANNUAL REPORT 2015 BANKINg ON COmmUNIT y A healthy economy is dependent upon a banking system which provides access to basic financial services. Access to fairly-priced loans, a safe and sound repository for savings, and secure and robust payment systems are basic financial services universally necessary for consumer and businesses alike. That fact is understood. Less understood is the fact that underlying the national economy are thousands of diverse economic communities, often with specific industries and cultural heritages which have unique financial service needs or preferred service delivery systems. Community Banks recognize that specific localities and cultures have customized needs that are best met by community bankers who understand those needs. Those bankers also know that meeting their communities’ needs plays a critical role in the regional, state-wide and national economy. Community Bankers know their customers and their customers know their bankers. Community Bankers are your church choir director, your son’s little league coach and your daughter’s dance class assistant. They are Rotarians, Kiwanians, and library and hospital volunteers. In short, they are a big part of the social and economic fabric of their hometowns. And we need them. charles cole MeMorial hosPital Pool| coudersPort, Pa Photo Credit: Curt Weinhold com·mu·ni·ty noun 1. a social group of any size whose members reside in a specific locality, share government, and often have a common cultural and historical heritage. Potter couNty courthouse BeNches coudersPort, Pa Photo Credit: Curt Weinhold I J U N A T A V A L L E y I F I N A N C A L C O R P . A N N U A L R E P O R T 2 0 1 5 2015 ANNUAL REPORT JUNIATA VALLEy FINANCIAL CORP. 218 Bridge Street | mifflintown, PA 17059 | www.jvbonline.com 002CSN60AB Nickel Plate traiN at lewistowN statioN Photo Credit: Nathaniel Thierwechter MiffliN couNty field Photo Credit: Nathaniel Thierwechter

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