Washington, D.C. 20549
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
x
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions
of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging
growth company” in Rule 12b-2 of the Exchange Act.
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards
provided pursuant to Section 13(a) of the Exchange Act.
¨
Indicate by check mark whether the registrant
is a shell company (as defined in Rule 12b-2 of the Act)
The aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and
asked price of such common equity, as of the last business day of the registrants most recently completed second fiscal quarter
was $92,867,669.
(1)
There were 4,769,656 shares of the registrant’s
common stock outstanding as of March 16, 2018.
(1) The
aggregate dollar amount of the voting stock set forth equals the number of shares of the Company’s Common Stock outstanding,
reduced by the amount of Common Stock held by officers, directors, shareholders owning in excess of 10% of the Company’s
Common Stock and the Company’s employee benefit plans multiplied by the last reported sale price for the Company’s
Common Stock on June 30, 2017, the last business day of the registrants most recently completed second fiscal quarter. The information
provided shall not be construed as an admission that any officer, director or 10% shareholder of the Company, or any employee benefit
plan, may be deemed an affiliate of the Company or that such person or entity is the beneficial owner of the shares reported as
being held by such person or entity, and any such inference is hereby disclaimed.
(Specific sections incorporated are identified
under applicable items herein)
Certain portions of
the Company’s Annual Report to Shareholders for the year ended December 31, 2017 are incorporated by reference in Parts I
and II of this Report. The Company’s Annual Report to Shareholders is attached to this Report as Exhibit 13.1.
With the exception
of the information incorporated by reference in Parts I and II of this Report, the Company’s Annual Report to Shareholders
for the year ended December 31, 2017 is not to be deemed "filed" with the Securities and Exchange Commission for any
purpose.
Certain portions of
the Company’s Proxy Statement to be filed in connection with its 2018 Annual Meeting of Shareholders are incorporated by
reference in Part III of this Report; provided, however, that any information in such Proxy Statement that is not required to be
included in this Annual Report on Form 10-K shall not be deemed to be incorporated herein or filed for the purposes of the Securities
Act of 1933 or the Securities Exchange Act of 1934.
PART I
ITEM 1. BUSINESS
Overview
Juniata Valley Financial Corp. (the “Company”
or “Juniata”) is a Pennsylvania corporation that was formed in 1983 as a result of a plan of merger and reorganization
of The Juniata Valley Bank (the “Bank”). The plan received regulatory approval on June 7, 1983, and Juniata, a one-bank
holding company, registered under the Bank Holding Company Act of 1956. The Bank is the oldest independent commercial bank in Juniata
and Mifflin Counties, having originated under a state bank charter in 1867. The Company has one reportable segment, consisting
of the Bank, as described in Note 2 of Notes to Consolidated Financial Statements contained in the Company’s 2017 Annual
Report to Shareholders (“the 2017 Annual Report”).
Acquisition of Liverpool Community Bank
Juniata owns 39.16% of Liverpool Community
Bank (“LCB”). On December 29, 2017, Juniata entered into an Agreement and Plan of Merger with LCB, which provides that,
upon the terms, and subject to the conditions set forth therein, LCB will merge with, and into, The Bank, with the Bank continuing
as the surviving entity. The 1,214 shares of LCB common stock currently beneficially owned by Juniata will be canceled in the merger.
Assuming LCB shareholder approval and all required regulatory approvals are received, both parties anticipate that the merger will
close in the first half of 2018. See Note 25 of the Notes of Consolidated Financial Statements contained in the 2017 Annual Report
and incorporated by reference in this Item 1, for more information regarding the merger.
Nature of Operations
Juniata operates primarily in central and
northern Pennsylvania with the purpose of delivering financial services within its local markets. The Company provides retail and
commercial banking services through 15 offices in the following locations: five community offices in Juniata County; five community
offices in Mifflin County, as well as a financial services office; two community offices in McKean County; one community office
in each of Potter, Perry and Huntingdon Counties; and a loan production office in Centre County.
The Company offers a full range of consumer
and commercial banking services. Consumer banking services include: Internet banking; mobile banking; telephone banking; twelve
automated teller machines; personal checking accounts; club accounts; checking overdraft privileges; money market deposit accounts;
savings accounts; debit cards; certificates of deposit; individual retirement accounts; secured lines of credit; construction and
mortgage loans; and safe deposit boxes. Commercial banking services include: low and high-volume business checking accounts; Internet
account management services; remote deposit capability; ACH origination; payroll direct deposit; commercial lines of credit; commercial
letters of credit; mobile deposit for small business customers; and commercial term and demand loans.
The Bank also provides comprehensive trust,
asset management and estate services, and the Company has a contractual arrangement with a broker-dealer to offer a full range
of financial services, including annuities, mutual funds, stock and bond brokerage services and long-term care insurance to the
Bank’s customers. Management believes the Bank 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 and northern Pennsylvania.
Juniata’s loan underwriting policies
are updated periodically and are presented for approval to the Board of Directors of the Bank. The purpose of the policies is to
grant loans on a sound and collectible basis, to invest available funds in a safe, profitable manner, to serve the credit needs
of the communities in Juniata’s primary market area and to ensure that all loan applicants receive fair and equal treatment
in the lending process. It is the intent of the underwriting policies to seek to minimize loan losses by requiring careful investigation
of the credit history of each applicant, verifying the source of repayment and the ability of the applicant to repay, securing
those loans in which collateral is deemed to be required, exercising care in the documentation of the application, review, approval
and origination process and administering a comprehensive loan collection program.
The major types of investments held by
Juniata consist of obligations and securities issued by U.S. government agencies or corporations, obligations of state and local
political subdivisions, mortgage-backed securities and common stock. Juniata’s investment policy directs that investments
be managed in a way that provides necessary funding for the Company’s liquidity needs and adequate collateral to pledge for
public funds held and, as directed by the Asset Liability Committee, manages interest rate risk. The investment policy specifies
the types of permitted investments owned, addresses credit quality of investments and includes limitations by investment types
and issuer.
The Company’s primary source of funds
is deposits, consisting of transaction type accounts, such as demand deposits and savings accounts, and time deposits, such as
certificates of deposit. The majority of deposits are held by customers residing or located in Juniata’s market area. No
material portion of the deposits has been obtained from a single or small group of customers, and the Company believes that the
loss of any customer’s deposits or a small group of customers’ deposits would not have a material adverse effect on
the Company.
Other sources of funds used by the Company
include retail repurchase agreements, borrowings from the Federal Home Loan Bank of Pittsburgh and lines of credit established
with various correspondent banks for overnight funding.
Competition
The Bank’s service area is characterized
by a high level of competition for banking business among commercial banks, savings and loan associations and other financial institutions
located inside and outside the Bank’s market area. The Bank actively competes with dozens of such banks and institutions
for local consumer and commercial deposit accounts, loans and other types of banking business. Many competitors have substantially
greater financial resources and larger branch systems than those of the Bank.
In commercial transactions, the Company
believes that the Bank’s legal lending limit to a single borrower (approximately $8,087,000 as of December 31, 2017) enables
it to compete effectively for the business of small and mid-sized businesses. However, this legal lending limit is considerably
lower than that of various competing institutions and thus may act as a constraint on the Bank’s effectiveness in competing
for larger financings.
In consumer transactions, the Bank believes
that it is able to compete on a substantially equal basis with larger financial institutions because it offers competitive interest
rates on savings and time deposits and on loans.
In competing with other banks, savings
and loan associations and financial institutions, the Bank seeks to provide personalized services through management’s knowledge
and awareness of its service areas, customers and borrowers. In management’s opinion, larger institutions often do not provide
sufficient attention to the retail depositors and the relatively small commercial borrowers that comprise the Bank’s primary
customer base.
Other competitors, including credit unions,
consumer finance companies, insurance companies and money market mutual funds, compete with many of the lending and deposit services
offered by the Bank. The Bank also competes with insurance companies, investment counseling firms, mutual funds and other business
firms and individuals in corporate and trust investment management services.
Supervision and Regulation
General
The Company operates in a highly regulated
industry, and thus may be affected by changes in state and federal regulations and legislation. As a registered bank holding company
under the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), the Company is subject to
supervision and examination by the Board of Governors of the Federal Reserve System (“FRB”) and is required to file
periodic reports and information regarding its business operations and those of the Bank with the FRB. In addition, under the Pennsylvania
Banking Code of 1965, the Pennsylvania Department of Banking and Securities has the authority to examine the books, records and
affairs of the Company and to require any documentation deemed necessary to ensure compliance with the Pennsylvania Banking Code.
The Bank Holding Company Act requires the
Company to obtain FRB approval before: acquiring more than a five percent ownership interest in any class of the voting securities
of any bank; acquiring all or substantially all of the assets of a bank; or merging or consolidating with another bank holding
company. In addition, the Bank Holding Company Act prohibits a bank holding company from acquiring the assets, or more than five
percent of the voting securities, of a bank located in another state, unless such acquisition is specifically authorized by the
statutes of the state in which the bank is located.
The Company is generally prohibited under
the Bank Holding Company Act from engaging in, or acquiring direct or indirect ownership or control of more than five percent of
the voting shares of any company engaged in, nonbanking activities unless the FRB, by order or regulation, has found such activities
to be so closely related to banking or managing or controlling banks as to be a proper incident thereto. In making such determination,
the FRB considers whether the performance of these activities by a bank holding company can reasonably be expected to produce benefits
to the public that outweigh the possible adverse effects.
A satisfactory safety and soundness rating,
particularly with regard to capital adequacy, and a satisfactory Community Reinvestment Act rating are generally prerequisites
to obtaining federal regulatory approval to make acquisitions and open branch offices. As of December 31, 2017, the Bank was rated
“outstanding” under the Community Reinvestment Act and was a “well capitalized” bank. An institution’s
Community Reinvestment Act rating is considered in determining whether to grant approvals relating to charters, branches and other
deposit facilities, relocations, mergers, consolidations and acquisitions. Less than satisfactory performance may be the basis
for denying an application.
There are various legal restrictions on
the extent to which the Company and its non-bank subsidiaries can borrow or otherwise obtain credit from the Bank. In general,
these restrictions require that any such extensions of credit must be secured by designated amounts of specified collateral and
are limited, as to any one of the Company or such non-bank subsidiaries, to ten percent of the lending bank’s capital stock
and surplus and, as to the Company and all such non-bank subsidiaries in the aggregate, to 20 percent of the Bank’s capital
stock and surplus. Further, the Company and the Bank are prohibited from engaging in certain tie-in arrangements in connection
with any extension of credit, lease or sale of property or furnishing of services.
As a bank chartered under the laws of Pennsylvania,
the Bank is subject to the regulations and supervision of the Federal Deposit Insurance Corporation (“FDIC”) and the
Pennsylvania Department of Banking and Securities. These government agencies conduct regular safety and soundness and compliance
reviews that have resulted in satisfactory evaluations to date. Some of the aspects of the lending and deposit business of the
Bank that are regulated by these agencies include personal lending, mortgage lending and reserve requirements.
The operations of the Bank are also subject
to numerous Federal, state and local laws and regulations which set forth specific restrictions and procedural requirements with
respect to interest rates on loans, the extension of credit, credit practices, the disclosure of credit terms and discrimination
in credit transactions. The Bank also is subject to certain limitations on the amount of cash dividends that it can pay to the
Company. See Note 17 of Notes to Consolidated Financial Statements, contained in the 2017 Annual Report, which is included in Exhibit
13 to this report and incorporated by reference in this Item 1.
Under FRB policy, the Company is expected
to act as a source of financial strength to the Bank and LCB, and to commit resources to support the Bank and LCB in circumstances
where they might not be in a financial position to support themselves. Consistent with the “source of strength” policy
for subsidiary banks, the FRB has stated that, as a matter of prudent banking, a bank holding company generally should not maintain
a rate of cash dividends unless its net income available to common stockholders has been sufficient to fully fund the dividends
and the prospective rate of earnings retention appears to be consistent with the Company’s capital needs, asset quality and
overall financial condition.
As a public company, the Company is subject
to the Securities and Exchange Commission’s rules and regulations relating to periodic reporting, proxy solicitation and
insider trading.
FDIC Insurance
The FDIC is an independent federal agency
that insures the deposits, up to prescribed statutory limits, of federally insured banks and savings institutions and safeguards
the safety and soundness of the banking and savings industries. The FDIC administers the Deposit Insurance Fund (“DIF”).
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”) permanently raised the standard
maximum deposit insurance coverage amount to $250,000 and made the increase retroactive to January 1, 2008. The FDIC deposit insurance
coverage limit applies per depositor, per insured depository institution for each account ownership category. The FDIC has been
given greater latitude in setting the assessment rates for insured depository institutions which could be used to impose minimum
assessments.
The FDIC is authorized to set the reserve
ratios for the DIF annually at between 1.15% and 1.5% of estimated insured deposits. FDIC assessment rates currently range from
12 to 50 basis points. Institutions in the lowest risk category, Risk Category I, pay between 12 and 14 basis points. Initial base
assessment rates range between 12 and 45 basis points (12 – 16 basis points for Category I). The initial base rates for risk
categories II, III and IV were 20, 30 and 45 basis points, respectively. For institutions in any risk category, assessment rates
rose above initial rates for institutions relying significantly on secured liabilities. Assessment rates increased for institutions
with a ratio of secured liabilities (repurchase agreements, Federal Home Loan Bank advances, secured Federal Funds purchased and
other secured borrowings) to domestic deposits of greater than 15%, with a maximum of 50% above the rate before such adjustment.
The Dodd-Frank Wall Street Reform and Consumer
Protection Act of 2010 (“Dodd Frank Act”) revised the statutory authorities governing the FDIC’s management of
the DIF. Key requirements from the Dodd-Frank Act have resulted in the FDIC’s adoption of amendments that: (1) redefined
the assessment base used to calculate deposit insurance assessments to “average consolidated total assets minus average tangible
equity”; (2) raised the DIF’s minimum reserve ratio to 1.35 percent and removed the upper limit on the reserve
ratio; (3) revised adjustments to the assessment rates by eliminating one adjustment and adding another; and (4) revised
the deposit insurance assessment rate schedules due to changes to the assessment base. Revised rate schedules and other revisions
to the deposit insurance assessment rules became effective April 1, 2011. Though deposit insurance assessments maintain a
risk-based approach, the FDIC’s changes effective April 1, 2011, impose a more extensive risk-based assessment system
on large insured depository, institutions with at least $10 billion in total assets since they are more complex in nature
and could pose greater risk. Due to the changes to the assessment base and assessment rates, as well as the DIF restoration time
frame, the impact on the Company’s deposit insurance assessments resulted in lower premiums from 2011 through 2017 and will
likely continue in future years.
Under the Reform Act, the FDIC may terminate
the insurance of an institution’s deposits upon finding that the institution has engaged in unsafe and unsound practices,
is in an unsafe and unsound condition to continue operations or has violated any applicable law, regulation, rule, order or condition
imposed by the FDIC. The Company does not know of any practice, condition or violation that might lead to termination of its deposit
insurance.
In addition, all FDIC-insured institutions
are required to pay assessments to fund interest payments on bonds issued by the Financing Corporation, an agency of the Federal
government established to finance resolutions of insolvent thrifts. These assessments, the current quarterly rate of which is approximately
.00115% of the total assessment base, will continue until the Financing Corporation bonds fully mature in 2019.
Community Reinvestment Act
Under the Community Reinvestment Act, the
Bank has a continuing and affirmative obligation, consistent with its safe and sound operation, to help meet the credit needs of
its entire community, including low and moderate-income neighborhoods. However, the Community Reinvestment Act does not establish
specific lending requirements or programs for financial institutions nor does it limit an institution’s discretion to develop
the types of products and services that it believes are best suited to its particular community. The Community Reinvestment Act
also requires:
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the applicable regulatory agency to assess an institution’s record of meeting the credit
needs of its community;
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public disclosure of an institution’s CRA rating; and
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that the applicable regulatory agency provide a written evaluation of an institution’s CRA
performance utilizing a four-tiered descriptive rating system.
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Capital Regulation
All bank holding companies and banks, including
the Company and its subsidiary, are subject to risk-based and leverage capital standards. The risk-based capital standards relate
a banking organization’s capital to the risk profile of its assets and require that bank holding companies and banks have
Tier 1 capital of at least 4% of total risk-adjusted assets, and total capital, including Tier 1 capital, equal to at least 8%
of total risk-adjusted assets. Tier 1 capital includes common stockholders’ equity and qualifying perpetual preferred stock
together with related surpluses and retained earnings. The remaining portion of this capital standard, known as Tier 2 capital,
may be comprised of limited life preferred stock, qualifying subordinated debt instruments and the reserves for possible loan losses.
Additionally, banking organizations must
maintain a minimum leverage ratio of 3%, measured as the ratio of Tier 1 capital to adjusted average assets. This 3% leverage ratio
is a minimum for the most highly rated banking organizations without any supervisory, financial or operational weaknesses or deficiencies.
Other banking organizations are expected to maintain leverage capital ratios that are 100 to 200 basis points above such minimum,
depending upon their financial condition.
Under the Federal Deposit Insurance Corporation
Improvement Act of 1991 (the "1991 Act"), a bank holding company is required to guarantee that any "undercapitalized"
(as such term is defined in the statute) insured depository institution subsidiary will comply with the terms of any capital restoration
plan filed by such subsidiary with its appropriate federal banking agency up to the lesser of (i) an amount equal to 5% of the
institution's total assets at the time the institution became undercapitalized, or (ii) the amount which is necessary (or would
have been necessary) to bring the institution into compliance with all capital standards as of the time the institution failed
to comply with such capital restoration plan.
See Note 17 of Notes to Consolidated Financial
Statements, contained in the 2017 Annual Report and incorporated by reference in this Item 1, for a table that provides the Company’s
risk-based capital ratios and leverage ratio.
Federal banking agencies have broad powers
to take corrective action to resolve problems of insured depository institutions. The extent of these powers depends upon whether
the institutions in question are “well capitalized,” “adequately capitalized,” “undercapitalized”,
“significantly undercapitalized,” or “critically undercapitalized.” As of December 31, 2017, the Bank was
a “well-capitalized” bank, as defined by the FDIC.
The FDIC has issued a rule that sets the
capital level for each of the five capital categories by which banks are evaluated. A bank is deemed to be “well capitalized”
if the bank has a total risk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater, has
a leverage ratio of 5% or greater, and is not subject to any order or final capital directive by the FDIC to meet and maintain
a specific capital level for any capital measure. A bank may be deemed to be in a capitalization category that is lower than is
indicated by its actual capital position if it received an unsatisfactory safety and soundness examination rating.
All of the bank regulatory agencies have
issued rules that amend their capital guidelines for interest rate risk and require such agencies to consider in their evaluation
of a bank’s capital adequacy the exposure of a bank’s capital and economic value to changes in interest rates. These
rules do not establish an explicit supervisory threshold. The agencies intend, at a subsequent date, to incorporate explicit minimum
requirements for interest rate risk into their risk-based capital standards and have proposed a supervisory model to be used together
with bank internal models to gather data and hopefully propose at a later date, explicit minimum requirements.
The United States is a member of the Basel
Committee on Banking Supervision (the “Basel Committee”) that provides a forum for regular international cooperation
on banking supervisory matters. The Basel Committee develops guidelines and supervisory standards and is best known for its international
standards on capital adequacy.
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 published final rules to implement the Basel III capital framework and revise
the framework for the risk-weighting of assets. The Basel III rules, among other things, narrow the definition of regulatory capital.
When fully phased in on January 1, 2019, Basel III will require bank holding companies and their bank subsidiaries to maintain
substantially more capital, with a greater emphasis on common equity. Basel III also provides for a “countercyclical capital
buffer,” an additional capital requirement that generally is to be imposed when national regulators determine that excess
aggregate credit growth has become associated with a buildup of systemic risk, in order to absorb losses during periods of economic
stress. Banking institutions that maintain insufficient capital to comply with the capital conservation buffer will face constraints
on dividends, equity repurchases and compensation based on the amount of the shortfall.
Additionally, the Basel III framework requires
banks and bank holding companies to measure their liquidity against specific liquidity tests, including a liquidity coverage ratio
(LCR) designed to ensure that the banking entity maintains a level of unencumbered high-quality liquid assets greater than or equal
to the entity’s expected net cash outflow for a 30-day time horizon under an acute liquidity stress scenario, and a net stable
funding ratio (NSFR) designed to promote more medium and long-term funding based on the liquidity characteristics of the assets
and activities of banking entities over a one-year time horizon. In September 2014, the federal regulatory agencies finalized rules
implementing the LCR for U.S. financial institutions that are “internationally active banking organizations” and those
generally with more than $250 billion in total consolidated assets. The FRB separately adopted a less stringent, modified LCR requirement
for bank holding companies that have more than $50 billion in total consolidated assets. Neither of the final bank regulatory LCR
rules apply to the Company. The federal regulatory agencies have proposed rules to implement the NSFR, but the rules have not yet
been adopted and, as proposed, would not apply to the Company.
The final rules revise federal regulatory
agencies’ risk-based and leverage capital requirements and their method for calculating risk-weighted assets to make them
consistent with the Basel III framework. The final rules apply to all depository institutions, top-tier bank holding companies
with total consolidated assets of $500 million or more, and top-tier savings and loan holding companies (“banking organizations”).
Among other things, the rules establish a new common equity tier 1 (CET1) minimum capital requirement (4.5% of risk-weighted assets)
and a higher minimum tier 1 capital requirement (from 4.0% to 6.0% of risk-weighted assets), and assign higher risk weightings
(150%) to exposures that are more than 90 days past due or are on nonaccrual status and certain commercial real estate facilities
that finance the acquisition, development or construction of real property.
When fully phased in, Basel III requires
financial institutions to maintain: (a) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets
of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is
phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7.0%); (b) a minimum ratio of tier
1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% tier 1 capital
ratio as that buffer is phased in, effectively resulting in a minimum tier 1 capital ratio of 8.5% upon full implementation); (c)
a minimum ratio of total (that is, tier 1 plus tier 2) capital to risk-weighted assets of at least 8.0%, plus the capital conservation
buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital
ratio of 10.5% upon full implementation); and (d) 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). In addition, the final rules also limit a banking organization’s
capital distributions and certain discretionary bonus payments if the banking organization does not hold a “capital conservation
buffer”.
Under the final rules, compliance was required
beginning January 1, 2015 for most banking organizations, subject to a transition period for several aspects of the final rules,
including the new minimum capital ratio requirements, the capital conservation buffer and the regulatory capital adjustments and
deductions.
As a result of the new capital conservation
buffer rules, if the Company’s bank subsidiary fails to maintain the required minimum capital conservation buffer, the Company
may be 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, 2017, 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.
Gramm-Leach-Bliley Act
On November 12, 1999, the Gramm-Leach-Bliley
Act (“GLB”) became law. GLB permits commercial banks to affiliate with investment banks. It also permits bank holding
companies which elect financial holding company status to engage in any type of financial activity, including securities, insurance,
merchant banking/equity investment and other activities that are financial in nature. The Company has not elected financial holding
company status. The merchant banking provisions allow a bank holding company to make a controlling investment in any kind of company,
financial or commercial. GLB allows a bank to engage in virtually every type of activity currently recognized as financial or incidental
or complementary to a financial activity. A commercial bank that wishes to engage in these activities is required to be well capitalized,
well managed and to have a satisfactory or better Community Reinvestment Act rating. GLB also allows subsidiaries of banks to engage
in a broad range of financial activities that are not permitted for banks themselves. Although the Company and the Bank have not
commenced these types of activities to date, GLB enables them to evaluate new financial activities that would complement the products
already offered to enhance non-interest income.
Sarbanes-Oxley Act of 2002
The Sarbanes-Oxley Act of 2002 implemented
a broad range of corporate governance, accounting and reporting measures for companies, like Juniata, that have securities registered
under the Securities Exchange Act of 1934. Specifically, the Sarbanes-Oxley Act and the various regulations promulgated under the
Act, established, among other things: (i) requirements for audit committees, including independence, expertise, and responsibilities;
(ii) additional responsibilities relating to financial statements for the Chief Executive Officer and Chief Financial Officer of
reporting companies; (iii) standards for auditors and regulation of audits, including independence provisions that restrict non-audit
services that accountants may provide to their audit clients; (iv) increased disclosure and reporting obligations for reporting
companies and their directors and executive officers, including accelerated reporting of stock transactions and a prohibition on
trading during pension blackout periods; and (v) a range of civil and criminal penalties for fraud and other violations of the
securities laws. In addition, Sarbanes-Oxley required stock exchanges, such as NASDAQ, to institute additional requirements relating
to corporate governance in their listing rules.
Section 404 of the Sarbanes-Oxley Act requires
the Company to include in its Annual Report on Form 10-K a report by management and an attestation report by the Company’s
independent registered public accounting firm on the adequacy of the Company’s internal control over financial reporting.
Management’s internal control report must, among other things, set forth management’s assessment of the effectiveness
of the Company’s internal control over financial reporting.
Financial Privacy
Federal banking regulators have adopted
rules that limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated
third parties. These limitations require disclosure of privacy policies to consumers and, in some circumstances, allow consumers
to prevent disclosure of certain personal information to a nonaffiliated third party. The privacy provisions of the GLB Act affect
the Company by limiting how consumer information is transmitted and conveyed to outside vendors.
Anti-Money Laundering Initiatives and
the USA Patriot Act
A major focus of governmental policy on
financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA Patriot Act
of 2001 (“USA Patriot Act”) imposes significant compliance and due diligence obligations, creates criminal and financial
liability for non-compliance and expands the extra-territorial jurisdiction of the U.S. The United States Treasury has issued
a number of regulations that apply various requirements of the USA Patriot Act to financial institutions. These regulations require
financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering
and terrorist financing and to verify the identity of their customers. Failure of a financial institution to maintain and implement
adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations,
could have serious legal and reputational consequences for the institution.
Office of Foreign Assets Control Regulation
The U.S. has instituted economic sanctions
which restrict transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC
rules” because they are administered by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”).
The OFAC-administered sanctions target countries in various ways. Generally, however, they contain one or more of the following
elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect
imports from and exports to a sanctioned country, and prohibitions on “U.S. persons” engaging in financial transactions
which relate to investments in, or providing investment-related advice or assistance to, a sanctioned country; and (ii) a
blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting
transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons).
Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a
license from OFAC. Failure to comply with these sanctions could have serious legal and reputational consequences for the institution. As
U.S. financial institutions, the Company and the Bank are required to comply with the OFAC rules.
Consumer Protection Statutes and Regulations
The Company is subject to many federal
consumer protection statutes and regulations, including the Truth in Lending Act, Truth in Savings Act, Equal Credit Opportunity
Act, Fair Housing Act, Real Estate Settlement Procedures Act and Home Mortgage Disclosure Act. Among other things, these acts:
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require banks to disclose credit terms in meaningful and consistent ways;
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prohibit discrimination against an applicant in any consumer or business credit transaction;
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prohibit discrimination in housing-related lending activities;
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require banks to collect and report applicant and borrower data regarding loans for home purchases or improvement projects;
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require lenders to provide borrowers with information regarding the nature and cost of real estate settlements;
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prohibit certain lending practices and limit escrow account amounts with respect to real estate transactions; and
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prescribe possible penalties for violations of the requirements of consumer protection statutes and regulations.
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On November 17, 2009, the FRB published
a final rule amending Regulation E, which implements the Electronic Fund Transfer Act. The final rule limits the ability of a financial
institution to assess an overdraft fee for paying automated teller machine transactions and one-time debit card transactions that
overdraw a customer’s account, unless the customer affirmatively consents, or opts in, to the institution’s payment
of overdrafts for these transactions.
Dodd-Frank Act
The Dodd-Frank Act resulted in significant
financial regulatory reform. The Dodd-Frank Act also changed the responsibilities of the current federal banking regulators. Among
other things, the Dodd-Frank Act created the Financial Oversight Council, with oversight authority for monitoring and regulating
systemic risk, and the Consumer Financial Protection Bureau (“CFPB”), which has broad regulatory and enforcement powers
over consumer financial products and services. Effective July 21, 2011, the CFPB became responsible for administering and enforcing
numerous federal consumer financial laws enumerated in the Dodd-Frank Act. The Dodd Frank Act also provided that, for banks with
total assets of more than $10 billion, the CFPB would have exclusive or primary authority to examine those banks for, and enforce
compliance with, the federal consumer financial laws. Although not subject to examination by the CFPB, the Company remains subject
to the review and supervision of other applicable regulatory authorities, and such authorities may enforce compliance with regulations
issued by the CFPB.
The scope of the Dodd-Frank Act impacts
many aspects of the financial services industry, and it requires the development and adoption of numerous regulations, some of
which have not yet been issued. The effects of the Dodd-Frank Act on the financial services industry will depend, in large part,
upon the extent to which regulators exercise the authority granted to them under the Dodd-Frank Act and the approaches taken in
implementing those regulations. Additional uncertainty regarding the effects of the Dodd-Frank Act exists due to court decisions
and the potential for additional legislative changes to the Dodd-Frank Act.
The Dodd-Frank Act's provisions that have
received the most public attention have generally been those which apply only to larger institutions with total consolidated assets
of $50 billion or more. However, the Dodd-Frank Act contains numerous other provisions that affect all bank holding companies,
including the Company.
The following is a list of significant
provisions of the Dodd-Frank Act, and, if applicable, the resulting regulatory rules adopted, that apply (or will apply), most
directly to the Company and its subsidiary:
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Federal deposit insurance - On April 1,
2011, the FDIC's revised deposit insurance assessment base changed from total domestic deposits to average total assets, minus
average tangible equity. In addition, the Dodd-Frank Act created a two scorecard system, one for large depository institutions
that have more than $10 billion in assets and another for highly complex institutions that have over $50 billion in assets.
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Debit card interchange fees - In June
2011, the FRB adopted regulations, which became effective on October 1, 2011, setting maximum permissible interchange fees issuers
can receive or charge on electronic debit card transaction fees and network exclusivity arrangements (the "Current Rule").
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Interest on demand deposits - Beginning
in July 2011, depository institutions were no longer prohibited from paying interest on business transaction and other accounts.
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Stress testing - In October 2012, the
FRB issued final rules regarding company-run stress testing. In accordance with these rules, a company whose assets exceed $10
billion is required to conduct an annual stress test in the manner specified, and using assumptions for baseline, adverse and severely
adverse scenarios announced by the FRB
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The stress test
is designed to assess the potential impact of various scenarios on a company’s earnings, capital levels and capital ratios
over at least a nine-quarter time horizon. If applicable, the Company's board of directors and its senior management are required
to consider the results of the stress test in the normal course of business, including as part of its capital planning process
and the evaluation of the adequacy of its capital. While the Company believes that both the quality and magnitude of its capital
base are sufficient to support its current operations given its risk profile, this requirement is not applicable to the Company
because its assets are under $10 billion.
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Ability-to-pay rules and qualified mortgages
- As required by the Dodd-Frank Act, the CFPB issued a series of final rules in January 2013 amending Regulation Z, implementing
the Truth in Lending Act, by requiring mortgage lenders to make a reasonable and good faith determination, based on verified and
documented information, that a consumer applying for a residential mortgage loan has a reasonable ability to repay the loan according
to its terms. These final rules, most of which became effective January 10, 2014, prohibit creditors, such as the Company, from
extending residential mortgage loans without regard for the consumer's ability to repay and add restrictions and requirements to
residential mortgage origination and servicing practices. In addition, these rules restrict the imposition of prepayment penalties
and compensation practices relating to residential mortgage loan origination. Mortgage lenders are required to determine consumers'
ability to repay in one of two ways. The first alternative requires the mortgage lender to consider eight underwriting factors
when making the credit decision. Alternatively, the mortgage lender can originate "qualified mortgages," which are entitled
to a presumption that the creditor making the loan satisfied the ability-to-repay requirements. In general, a "qualified mortgage"
is a residential mortgage loan that does not have certain high-risk features, such as negative amortization, interest-only payments,
balloon payments, or a term exceeding 30 years. In addition, to be a qualified mortgage, the points and fees paid by a consumer
cannot exceed 3% of the total loan amount, and the borrower's total debt-to-income ratio must be no higher than 43% (subject to
certain limited exceptions for loans eligible for purchase, guarantee or insurance by a government sponsored entity or a federal
agency).
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Compliance with these rules has
increased Juniata's overall regulatory compliance costs and required changes to the underwriting practices of the Company with
respect to mortgage loans.
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Integrated disclosures under the Real
Estate Settlement Procedures Act and the Truth in Lending Act - In December 2013, the CFPB issued final rules revising and integrating
previously separate disclosures required under the Real Estate Settlement Procedures Act (RESPA) and the Truth in Lending Act (TILA)
in connection with certain closed-end consumer mortgage loans. These final rules became effective August 1, 2015 and require lenders
to provide a new Loan Estimate, combining content from the former Good Faith Estimate required under RESPA and the initial disclosures
required under TILA not later than the third business day after submission of a loan application, and a new Closing Disclosure,
combining content of the former HUD-1 Settlement Statement required under RESPA and the final disclosures required under TILA at
least three days prior to the loan closing.
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Volcker Rule — As mandated by the
Dodd-Frank Act, in December 2013, the OCC, FRB, FDIC, SEC and Commodity Futures Trading Commission issued a final rule (the "Final
Rules") implementing certain prohibitions and restrictions on the ability of a banking entity and non-bank financial company
supervised by the FRB to engage in proprietary trading and have certain ownership interests in, or relationships with, a "covered
fund" (the so-called "Volcker Rule"). The Final Rules generally treat as a covered fund any entity that would be
an investment company under the Investment Company Act of 1940 (the "1940 Act") but for the application of the exemptions
from SEC registration set forth in Section 3(c)(1) (fewer than l00 beneficial owners) or Section 3(c)(7) (qualified purchasers)
of the 1940 Act. The Final Rules also require regulated entities to establish an internal compliance program that is consistent
with the extent to which it engages in activities covered by the Volcker Rule, which must include making regular reports about
those activities to regulators. Although the Final Rules provide some tiering of compliance and reporting obligations based on
size, the fundamental prohibitions of the Volcker Rule apply to banking entities of any size, including the Company.
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While the Company does not engage
in proprietary trading or in any other activities prohibited by the Final Rules, the Company will continue to evaluate whether
any of its investments fall within the definition of a "covered fund" and would need to be disposed of by the extended
deadline. However, based on the Company's evaluation to date, it does not currently expect that the Final Rules will have a material
effect on its business, financial condition or results of operations.
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Incentive compensation — As required
by the Dodd-Frank Act, a joint interagency proposed regulation was issued in April 2011. The proposed rule would require the reporting
of incentive-based compensation arrangements by a covered financial institution and prohibit incentive-based compensation arrangements
at a covered financial institution that provides excessive compensation or that could expose the institution to inappropriate risks
that could lead to material financial loss. The proposed rule, if adopted as currently proposed, could limit the manner in which
the Company structures incentive compensation for its executives.
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National Monetary Policy
In addition to being affected by general
economic conditions, the earnings and growth of the Bank and, therefore, the earnings and growth of the Company, are affected by
the policies of regulatory authorities, including the FRB and the FDIC. An important function of the FRB is to regulate the money
supply and credit conditions. Among the instruments used to implement these objectives are open market operations in U.S. government
securities, setting the discount rate and changes in financial institution reserve requirements. These instruments are used in
varying combinations to influence overall growth and distribution of credit, bank loans, investments and deposits, and their use
may also affect interest rates charged on loans or paid on deposits.
The monetary policies and regulations of
the FRB have had a significant effect on the operating results of commercial banks in the past and are expected to continue to
do so in the future. The effects of such policies upon the future businesses, earnings and growth of the Company cannot be predicted
with certainty.
Tax Cuts and Jobs Act
On December 22, 2017, the Tax Cuts and
Jobs Act (“TCJA”) was signed into law. Among other changes, the TCJA significantly changes corporate income tax law
by reducing the corporate income tax rate from 35% to 21%, allowing for immediate capital expensing of certain qualified property
and eliminating the deductibility of DIF assessments. The tax laws are generally effective for the 2018 tax year; however, the
Company recognized certain effects of the changes in 2017, which was when the new legislation was enacted. Refer to Note 16 of
Notes to Consolidated Financial Statements contained in the 2017 Annual Report for additional disclosures regarding the impact
of the TCJA.
Employees
As of December 31, 2017, the Company had
a total of 122 full-time and 43 part-time employees.
Additional Information
The Company files annual, quarterly and
current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy any
reports, statements and other information we file at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington,
D.C. 20549. Please call the SEC at 1-800-SEC-0330 for further information on the operations of the Public Reference Room. Our
SEC filings are also available on the SEC’s Internet site (http://www.sec.gov).
The Company’s common stock is quoted
under the symbol “JUVF” on the OTC-Pink Bulletin Board, an automated quotation service, made available through, and
governed by, the NASDAQ system. You may also read reports, proxy statements and other information we file at the offices of the
National Association of Securities Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006.
The Company’s Internet address is
www.JVBonline.com. At that address, we make available, free of charge, the Company’s annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant
to Section 13(a) or 15(d) of the Exchange Act (see “Investor Information” section of website), as soon as reasonably
practicable after we electronically file such material with, or furnish it to, the SEC.
In addition, we will provide, at no cost,
paper or electronic copies of our reports and other filings made with the SEC (except for exhibits). Requests should be directed
to JoAnn N. McMinn, Chief Financial Officer, Juniata Valley Financial Corp., PO Box 66, Mifflintown, PA 17059, 717-436-8211.
The information on the websites listed above is not and should
not be considered to be part of this annual report on Form 10-K and is not incorporated by reference in this document.
ITEM 1A. RISK FACTORS
An investment in the Company's common
stock involves certain risks, including, among others, the risks described below. In addition to the other information contained
in this report, you should carefully consider the following risk factors in analyzing whether to make or to continue an investment
in the Company:
RISKS RELATED TO INTEREST RATES AND
LIQUIDITY
Fluctuations in market interest rates,
particularly in a continuing period of low market interest rates, and relative balances of rate-sensitive assets to rate-sensitive
liabilities, can negatively impact net interest margin and net interest income.
The operations of financial institutions
such as the Company are dependent to a large degree on net interest income, which is the difference between interest income from
loans and investments and interest expense on deposits and borrowings.
An institution's net interest income is
significantly affected by market rates of interest that in turn are affected by prevailing economic conditions, by the fiscal
and monetary policies of the federal government and by the policies of various regulatory agencies. The FRB regulates the national
money supply in order to manage recessionary and inflationary pressures. In doing so, the FRB may use techniques such as engaging
in open market transactions of U.S. Government securities, changing the discount rate and changing reserve requirements against
bank deposits. The use of these techniques may also affect interest rates charged on loans and paid on deposits. The interest
rate environment, which includes both the level of interest rates and the shape of the U.S. Treasury yield curve, has a significant
impact on net interest income.
Low market interest rates have pressured
the net interest margin in recent years. Interest-earning assets, such as loans and investments, 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, resulting in a narrowing of the net interest margin.
Competition sometimes requires the Company
to lower rates charged on loans more than the decline in market rates would otherwise indicate. Competition may also require the
Company to pay higher rates on deposits than market rates would otherwise indicate. Thus, although loan demand has improved in
recent years, intense competition among lenders has continued to place downward pressure on loan yields, also narrowing the net
interest margin. Further, due to historically low market interest rates, rates paid on deposits have tended to reach a natural
floor below which it is difficult to further reduce such rates.
Like all financial institutions, the Company's
consolidated statement of financial condition is affected by fluctuations in interest rates. Volatility in interest rates can
also result in disintermediation, which is the flow of deposits away from financial institutions into direct investments, such
as US Government and corporate securities and other investment vehicles, including mutual funds, which, because of the absence
of federal insurance premiums and reserve requirements, generally pay higher rates of return than bank deposit products. See "Item
7: Management's Discussion of Financial Condition and Results of Operations” and “Item 7A: Quantitative and Qualitative
Disclosure about Market Risk”.
See the section entitled “Market
/ Interest Rate Risk” and Table 5 – Maturity Distribution” in Management’s Discussion and Analysis of
Financial Condition in the 2017 Annual Report, incorporated by reference in this Item 1A, for a discussion of the effects on net
interest income over a twelve-month period beginning on December 31, 2017 of simulated interest rate changes.
Capital and liquidity strategies, including
the expected impact of the capital and liquidity requirements proposed by the Basel III standards, may require the Company to
maintain higher levels of capital, which could restrict the amount of capital that the Company has available to deploy for income
generating and other activities.
In July 2013, the FRB approved the final
rules implementing the Basel III capital standards (the “Basel III Rules”) which substantially revise the risk-based
capital requirements applicable to bank holding companies and depository institutions. See previous Capital Regulation discussion.
As of December 31, 2017, the Company believes
its current capital levels would meet the fully phased-in minimum capital requirements as prescribed in the U.S. Basel III Capital
Rules. However, the new rules, which began January 1, 2015 and will be fully phased in by 2019, effectively require financial
institutions to maintain higher capital levels. As a result, Juniata may have to maintain capital in the form of assets
that contribute less income to Juniata and that are not available for deployment as loans or other interest-income generating
assets, funding of capital projects or other growth initiatives.
Competition, including competition
on rates of deposit and for loan growth may negatively impact the Company’s net interest margin.
There is significant competition among
banks in the market areas served by the Company. In addition, as a result of deregulation of the financial industry, the Bank
also competes with other providers of financial services such as savings and loan associations, credit unions, consumer finance
companies, securities firms, insurance companies, the mutual funds industry, full service brokerage firms and discount brokerage
firms, some of which are subject to less extensive regulations than the Company with respect to the products and services they
provide. Some of the Company’s competitors have greater resources than the Company and, as a result, may have higher lending
limits and may offer other services not offered by the Company. See "Item 1: Business - Competition." Competition may
adversely affect the rates the Company pays on deposits and charges on loans, thereby potentially adversely affect the Company’s
profitability. The Company’s profitability depends upon its continued ability to successfully compete in the markets it
serves. Further, intense competition among lenders can contribute to downward pressure on loan yields.
Changes in interest rates or disruption
in liquidity markets may adversely affect the Company’s sources of funding.
The Company must maintain sufficient sources
of liquidity to meet the demands of its depositors and borrowers, support its operations and meet regulatory expectations. The
Company’s liquidity practices emphasize core deposits and repayments and maturities of loans and investments as its primary
sources of liquidity. These primary sources of liquidity can be supplemented by FHLB advances, borrowings from the Federal Reserve
Bank and lines of credit from correspondent bank. Lower-cost, core deposits may be adversely affected by changes in interest rates,
and secondary sources of liquidity can be costlier to the Company than funding provided by deposit account balances having similar
maturities. In addition, adverse changes in the Company’s results of operations or financial condition, regulatory actions
involving the Company, or changes in regulatory, industry or market conditions could lead to increases in the cost of these secondary
sources of liquidity, the inability to refinance or replace these secondary funding sources as they mature, or the withdrawal
of unused borrowing capacity under these secondary funding sources.
While the Company attempts to manage its
liquidity through various techniques, the assumptions and estimates used do not always accurately forecast the impact of changes
in customer behavior. For example, the Company may face limitations on its ability to fund loan growth if customers move funds
out of the Bank’s deposit accounts in response to increases in interest rates. In the years following the 2008 financial
crisis, even as the general level of market interest rates remained low by historical standards, depositors frequently avoided
higher-yielding and higher-risk alternative investments, in favor of the safety and liquidity of non-maturing deposit accounts.
These circumstances contributed to significant growth in non-maturing deposit account balances at the Company, and at depository
financial institutions generally. Should interest rates rise, customers may become more sensitive to interest rates when making
deposit decisions and considering alternative opportunities. This increased sensitivity to interest rates could cause customers
to move funds into higher-yielding deposit accounts offered by the Company’s bank subsidiary, require the Company’s
bank subsidiary to offer higher interest rates on deposit accounts to retain customer deposits or cause customers to move funds
into alternative investments or deposits of other banks or non-bank providers. Technology and other factors have also made it
more convenient for customers to transfer low-cost deposits into higher-cost deposits or into alternative investments or deposits
of other banks or non-bank providers. Movement of customer deposits into higher-yielding deposit accounts offered by the Company’s
bank subsidiary, the need to offer higher interest rates on deposit accounts to retain customer deposits or the movement of customer
deposits into alternative investments or deposits of other banks or non-bank providers could increase the Company’s funding
costs, reduce its net interest margin and/or create liquidity challenges.
Market conditions have been negatively
impacted by disruptions in the liquidity markets in the past, and such disruptions or an adverse change in the Company's results
of operations or financial condition could, in the future, have a negative impact on secondary sources of liquidity. If the Company
is not able to continue to rely primarily on customer deposits to meet its liquidity and funding needs, continue to access secondary,
non-deposit funding sources on favorable terms or otherwise fails to manage its liquidity effectively, the Company’s ability
to continue to grow may be constrained, and the Company’s liquidity, operating margins, results of operations and financial
condition may be materially adversely affected.
Regulators are increasingly emphasizing
liquidity planning at both the bank and Company levels.
Due to regulatory limitations on the Corporation’s
ability to rely on short-term borrowings, any significant movements of deposits away from traditional depository accounts which
negatively impacts the Corporation’s loan-to-deposit ratio could restrict its ability to achieve growth in loans or require
the Corporation to pay higher interest rates on deposit products in order to retain deposits to fund loans.
Liquidity must also be managed at the
holding company level. Banking regulators carefully scrutinize liquidity at the holding company level, in addition to consolidated
and bank liquidity levels. For safety and soundness reasons, banking regulations limit the amount of cash that can be transferred
from subsidiary banks to the parent company in the form of loans and dividends. Generally, these limitations are based on a subsidiary
bank’s regulatory capital levels and net income. These factors have affected some institutions' ability to pay dividends
and have required some institutions to establish borrowing facilities at the holding company level.
COMPLIANCE AND REGULATORY RISKS
The increasing time and expense associated with regulatory
compliance and risk management could negatively impact our results of operations.
The time, expense and internal and external
resources associated with regulatory compliance continue to increase. Thus, balancing the need to address regulatory changes and
effectively managing growth in non-interest expenses has become more challenging than it has been in the past.
The Company and the Bank are extensively
regulated under federal and state banking laws and regulations that are intended primarily for the protection of depositors, federal
deposit insurance funds and the banking system as a whole. In general, these laws and regulations establish: the eligible business
activities for the Company; certain acquisition and merger restrictions; limitations on intercompany transactions such as loans
and dividends; capital adequacy requirements; requirements for anti-money laundering programs; consumer lending and other compliance
requirements. While these statutes and regulations are generally designed to minimize potential loss to depositors and the FDIC
insurance funds, they do not eliminate risk, and compliance with such statutes and regulations increases the Company’s expense,
requires management’s attention and can be a disadvantage from a competitive standpoint with respect to non-regulated competitors
and larger bank competitors.
Compliance with banking statutes and regulations
is important to the Company's ability to engage in new activities and to consummate additional acquisitions. Bank regulators are
scrutinizing banks through longer and more extensive bank examinations in both the safety and soundness and compliance areas.
The results of such examinations could result in a delay in receiving required regulatory approvals for potential new activities
and transactional matters. In the event that the Company's compliance record would be determined to be unsatisfactory, such approvals
may not be able to be obtained. Federal and state banking regulators also possess broad powers to take supervisory actions, as
they deem appropriate. These supervisory actions may result in higher capital requirements, higher deposit insurance premiums
and limitations on the Company's operations that could have a material adverse effect on its business and profitability.
In addition, the Company is subject to
changes in federal and state tax laws as well as changes in banking and credit regulations, accounting principles, governmental
economic and monetary policies and collection efforts by taxing authorities.
Financial reform legislation is likely
to have a significant impact on the Company’s business and results of operations; however, until more implementing regulations
are adopted, the extent to which the legislation will impact the Company is uncertain.
In July, 2010, the President of the United
States signed into law the Dodd-Frank Act. Among other things, the Dodd-Frank Act created the Financial Stability Oversight Council,
with oversight authority for monitoring and regulating systemic risk, and the CFPB, which has broad regulatory and enforcement
powers over consumer financial products and services. The Dodd-Frank Act also changed the responsibilities of the current federal
banking regulators, imposed additional corporate governance and disclosure requirements in areas such as executive compensation
and proxy access, and restricted private equity activities of banks.
The scope of the Dodd-Frank Act impacted
many aspects of the financial services industry. However, its implementation requires the development and adoption of many regulations,
some of which have not yet been proposed, adopted or fully implemented. The ultimate effect of the Dodd-Frank Act on the financial
services industry will depend, in large part, upon the extent to which regulators exercise the authority granted to them under
the Dodd-Frank Act and the approaches taken in implementing regulations. Additional uncertainty regarding the effect of the Dodd-Frank
Act exists due to court decisions and the potential for additional legislative changes to the Dodd-Frank Act. The delay in the
implementation of many of the regulations mandated by the Dodd-Frank Act has resulted in a lack of clear regulatory guidance to
banks. The resulting uncertainty has caused banks to take a cautious approach to business initiatives and planning. The Company
has been impacted, and will likely continue to be in the future, by the so-called Durbin Amendment to the Dodd-Frank Act, which
reduced debit card interchange revenue of banks and revised deposit insurance assessments. It also is likely to be impacted by
the Dodd-Frank Act in the areas of corporate governance, capital requirements, risk management, stress testing and regulation
under consumer protection laws.
Pursuant to the Dodd-Frank Act, the CFPB
was given rulemaking authority over most providers of consumer financial services in the U.S., examination and enforcement authority
over the consumer operations of large banks, as well as interpretive authority with respect to numerous existing consumer financial
services regulations. The CFPB began exercising these oversight authorities over the largest banks during 2011.
In January 2013, the CFPB issued a series
of final rules related to mortgage loan origination and mortgage loan servicing, most provisions of which became effective January
10, 2014. These rules prohibit creditors, such as the Bank, from extending residential mortgage loans without regard for the consumer's
ability to repay, provide certain safe harbor protections for the origination of loans that meet the requirements for a "qualified
mortgage," add restrictions and requirements to residential mortgage origination and servicing practices and restrict the
imposition of prepayment penalties and compensation practices relating to residential mortgage loan origination. Compliance with
these rules has increased the Company’s overall regulatory compliance costs and required the Bank to change its underwriting
practices. Moreover, these rules may adversely affect the volume of mortgage loans that the Bank originates and may subject it
to increased potential liability related to its residential loan origination activities. In December 2013, the CFPB issued final
rules revising and integrating previously separate disclosures required under the Truth in Lending Act and RESPA in connection
with closed-end consumer mortgages. These final rules became effective August 1, 2015, and compliance with these rules required
the Corporation to adapt its systems and procedures to accommodate the use of new disclosure forms to be provided to closed-end
consumer mortgage borrowers at the time of application and at the time of closing for those loans within the timeframes required
under these new rules.
RISKS RELATED TO OPERATIONS
Cyber security incidents could disrupt
business operations, result in the loss of critical and confidential information, and adversely impact our reputation and results
of operations.
The Company’s computer systems,
software and networks are subject to ongoing cyber incidents, such as unauthorized access; mishandling or misuse of information;
loss or destruction of data (including confidential customer information); account takeovers; unavailability of service; computer
viruses or other malicious code; cyber attacks designed to obtain confidential information, destroy data, disrupt or degrade service,
sabotage systems or cause other damage; denial of service attacks; and other events. Cyber threats may arise from human error,
fraud or malice on the part of employees or third parties, including third party vendors, or may result from accidental technological
failure. In addition, parties intent on penetrating our systems may also attempt to fraudulently induce employees, customers,
third parties or other users of our systems to disclose sensitive information in order to gain access to our data or that of the
Company’s customers.
Cyber security incidents, depending on
their nature and scope, could potentially result in the misappropriation, destruction, corruption or unavailability of critical
data and confidential or proprietary information (the Company’s own or that of third parties) and the disruption of business
operations. The potential consequences of a material cyber security incident include reputational damage, litigation with third
parties, and increased cyber security protection and remediation costs, which in turn could adversely affect the Company’s
competitiveness and results of operations. The Company carries insurance to partially offset the risk of loss, however, there
can be no assurance that the limits are sufficient to minimize a related loss.
Potential disruption or failure of network and information
processing systems and those of third-party vendors may negatively impact our operations.
The Company's business activities are
dependent on its ability to accurately and timely process, record and monitor a large number of transactions. If any of its financial,
accounting, network or other information processing systems fail or have other significant shortcomings, the Company could be
materially adversely affected. The Company outsources some of it processing and other activities to third party vendors. Third
parties with which the Company does business could be sources of operational risk to the Company, including the risk that the
third parties' own network and information processing systems could fail. Any of these occurrences could materially diminish the
Company's ability to operate one or more of the Company's businesses, or cause the Company to suffer financial loss, a disruption
of its business, regulatory sanctions or damage to its reputation, any of which could materially adversely affect the Company.
The Company may be subject to disruptions
or failures of the Company's financial, accounting, network and information processing systems arising from events that are wholly
or partially beyond the Company's control, which may include, for example, computer viruses or electrical or telecommunications
outages, denial of service attacks or hacking targeting the Company's network or information processing systems or the Company's
websites, natural disasters, disease pandemics or other damage to property or physical assets or terrorist acts. The Company has
developed an emergency recovery program, which includes plans to maintain or resume operations in the event of an emergency, and
has contingency plans in the event that operations or systems cannot be resumed or restored. The emergency recovery program is
periodically reviewed and updated, and components of the emergency recovery program are periodically tested and validated. The
Company also reviews and evaluates the emergency recovery programs of vendors which provide certain third-party systems that the
Company considers critical. Nevertheless, there is no guarantee that these measures or any other measures can provide absolute
security. In addition, because the methods used to cause cyber attacks change frequently or, in some cases, are not recognized
until launched, the Corporation may be unable to implement effective preventive measures or proactively address these methods.
Resulting disruptions or failures affecting any of our systems may give rise to interruption in service to customers, damage to
the Company's reputation and loss or liability to the Company.
Failure by the Company to keep up with technological advancements
in deployment of services and efficiency of operations may make it more vulnerable to competition.
The financial services industry is continually
undergoing rapid technological change, with frequent introductions of new technology-driven products and services. The effective
use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. The Company’s
future success depends, in part, upon its ability to address the needs of its customers by using technology to provide products
and services that will satisfy customer demands, as well as to create additional efficiencies in the Company’s operations.
Many of the Company’s financial institution competitors have substantially greater resources to invest in technological
improvements, and new payment services developed and offered by non-financial institution competitors pose an increasing threat
to the traditional payment services offered by financial institutions. The Company may not be able to effectively implement new
technology-driven products and services, be successful in marketing these products and services to its customers, or effectively
deploy new technologies to improve the efficiency of its operations. Failure to successfully keep pace with technological change
affecting the financial services industry could have a material adverse impact on the Company’s business, financial condition
and results of operations.
Further, the costs of new technology,
including personnel, can be high in both absolute and relative terms. There can be no assurance, given the fast pace of change
and innovation, that the Company’s technology, either purchased or developed internally, will meet or continue to meet the
needs of the Company and the needs of its customers.
ECONOMIC AND CREDIT RISKS
Difficult economic conditions and real
estate markets, including protracted periods of low-growth and sluggish loan demand, can negatively impact the Company’s
income, and result in higher charge-offs as borrowers’ ability to repay is negatively impacted by those conditions.
Lending money is an essential part of
the banking business, and the revenues derived from lending activities are the most significant segment of the Company’s
income statement. Extended periods of sluggish loan demand can materially affect the composition of the Company’s consolidated
statement of financial condition, reducing the ratio of loans to deposits and the Company’s profitability. Adverse changes
in the economy and real estate markets and the duration of economic downturns can negatively affect the solvency of businesses
and consumers. Borrowers’ inability to repay loans causes increases in non-performing assets, which may result in elevated
collection and carrying costs related to such non-performing assets and increases in loan charge-offs, significantly impacting
the loan loss provision charged to earnings to fund the allowance for loan losses. The risk of non-payment is affected by credit
risks of the borrower, changes in economic and industry conditions, the duration of the loan and, in the case of a collateralized
loan, uncertainties as to the future value of the collateral supporting the loan. Historically, commercial loans have presented
a greater risk of non-payment than consumer loans. The application of various federal and state laws, including bankruptcy and
insolvency laws, may limit the amount that can be recovered on these loans.
The Company has established an allowance
for loan losses that management believes to be adequate to offset probable losses on the Company’s existing loans. However,
there is no precise method of estimating loan losses. The Company determines the appropriate level of the allowance for credit
losses based on many quantitative and qualitative factors, including, but not limited to: the size and composition of the loan
portfolio; changes in risk ratings; changes in collateral values; delinquency levels; historical losses; and economic conditions.
In addition, as the Company’s loan portfolio grows, it will generally be necessary to increase the allowance for credit
losses through additional provisions, which will impact the Company’s operating results. If the Company’s assumptions
and judgments regarding such matters prove to be inaccurate, its allowance for credit losses might not be sufficient, and additional
provisions for credit losses might need to be made. Depending on the amount of such provisions for credit losses, the adverse
impact on the Company’s earnings could be material. Also, there can be no assurance that any future declines in real estate
market conditions, general economic conditions or changes in regulatory policies will not require the Company to increase its
allowance for loan losses, through additional loan loss provisions, which could reduce earnings.
Investment securities losses, including other-than-temporary
declines in the value of securities which may result in charges to earnings, could negatively impact our results of operations.
Price fluctuations in securities markets,
as well as other market events, could have an impact on the Company’s results of operations. As described below, the Company’s
holding of certain securities and the revenues the Company earns from its trust and investment management services business are
particularly sensitive to those events:
Equity investments:
As of December 31, 2017, the
Company’s equity investments were comprised primarily of publicly traded financial institutions. The value of the securities
in the Company’s equity portfolio may be affected by a number of factors. General economic conditions and uncertainty surrounding
the financial institution sector as a whole, impacts the value of these securities. Declines in bank stock values in general,
as well as deterioration in the performance of specific banks, could result in other-than-temporary impairment charges. Considerations
used to determine other-than-temporary impairment status to individual holdings include the length of time the stock has remained
in an unrealized loss position, and the percentage of unrealized loss compared to the carrying cost of the stock, dividend reduction
or suspension, market analyst reviews and expectations, and other pertinent news that would affect expectations for recovery or
further decline.
Municipal securities:
As of December 31, 2017, the
Company had approximately $25.0 million of municipal securities issued by various municipalities in its investment portfolio.
Ongoing uncertainty with respect to the financial viability of municipal insurers places greater emphasis on the underlying strength
of issuers. Increasing pressure on local tax revenues of issuers due to adverse economic conditions could also have a negative
impact on the underlying credit quality of issuers.
Investment management and
trust services revenue:
The Company’s investment
management and trust services revenue is also impacted by fluctuations in the securities markets. A portion of this revenue is
based on the value of the underlying investment portfolios. If the values of those investment portfolios decrease, whether due
to factors influencing U.S. securities markets, in general, or otherwise, the Company’s revenue could be negatively impacted.
In addition, the Company’s ability to sell its brokerage services is dependent, in part, upon consumers’ level of
confidence in securities markets.
RISKS RELATED TO INVESTMENT IN THE
COMPANY’S STOCK
The Corporation is a holding company
and relies on dividends from its subsidiaries for substantially all of its revenue and its ability to make dividends, distributions
and other payments.
The Company is a separate and distinct
legal entity from the Bank, and depends on the payment of dividends from the Bank for substantially all of its revenues. As a
result, the Company's ability to make dividend payments on its common stock depends primarily on certain federal and state regulatory
considerations and the receipt of dividends and other distributions from its subsidiaries. There are various regulatory and prudential
supervisory restrictions, which may change from time to time, that impact the ability of the Bank to pay dividends or make other
payments to the Company. There can be no assurance that the Bank will be able to pay dividends at past levels, or at all, in the
future. If the Company does not receive sufficient cash dividends or is unable to borrow from the Bank, then the Company may not
have sufficient funds to pay dividends to its shareholders, repurchase its common stock or service its debt obligations.
"Anti-takeover" provisions
may keep shareholders from receiving a premium for their shares.
The Articles of Incorporation of the Company
presently contain certain provisions, such as staggered Board of Directors terms and super majority voting requirements for transactions
not approved by the Company’s Board of Directors, which may be deemed to be "anti-takeover" in nature in that
such provisions may deter, discourage or make more difficult the assumption of control of the Company by another Company or person
through a tender offer, merger, proxy contest or similar transaction or series of transactions. In addition, provisions of Pennsylvania
and applicable banking laws could similarly make it more difficult for a third party to acquire control of the Company. The overall
effects of the "anti-takeover” provisions may be to discourage, make costlier or more difficult, or prevent a future
takeover offer, thereby preventing shareholders from receiving a premium for their securities in a takeover offer. These provisions
may also increase the possibility that a future bidder for control of the Company will be required to act through arms-length
negotiation with the Company’s Board of Directors. Copies of the Articles of Incorporation of the Company are on file with
the Securities and Exchange Commission and the Pennsylvania Secretary of State.
If the Company fails to maintain an
effective system of internal controls, it may not be able to accurately report its financial results or prevent fraud. As a result,
current and potential shareholders could lose confidence in the Company’s financial reporting, which could harm its business
and the trading price of its common stock.
The Company has established a process
to document and evaluate its internal controls over financial reporting in order to satisfy the requirements of Section 404 of
the Sarbanes-Oxley Act of 2002 and related regulations, which require annual management assessments of the effectiveness of the
Company’s internal controls over financial reporting and a report by the Company’s independent registered public accounting
firm on the effectiveness of the Company’s internal control. In this regard, management has dedicated internal resources,
engaged outside consultants and adopted a detailed work plan to (i) assess and document the adequacy of internal controls over
financial reporting, (ii) take steps to improve control processes, where appropriate, (iii) validate through testing that controls
are functioning as documented and (iv) maintain a continuous reporting and improvement process for internal control over financial
reporting.
The Company’s efforts to comply
with Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations regarding the Company’s assessment of its
internal controls over financial reporting and the Company’s independent registered public accounting firm audit of internal
control are likely to continue to result in increased expenses. The Company’s management and audit committee have given
the Company’s compliance with Section 404 a high priority. The Company cannot be certain that these measures will ensure
that the Company implements and maintains adequate controls over its financial processes and reporting in the future. Any failure
to implement required new or improved controls, or difficulties encountered in their implementation, could harm the Company’s
operating results or cause the Company to fail to meet its reporting obligations. If the Company fails to correct any issues in
the design or operating effectiveness of internal controls over financial reporting or fails to prevent fraud, current and potential
shareholders could lose confidence in the Company’s financial reporting, which could harm its business and the trading price
of its common stock.
The Company has entered into a merger agreement that provides
for the merger of LCB Community Bank with and into Juniata’s wholly-owned subsidiary, The Juniata Valley Bank (JVB), with
JVB surviving. Risks associated with this transaction include, but are not limited to, the following.
The market price of Juniata common stock after the merger
may be affected by factors different from those affecting the shares of Juniata or LCB currently.
The markets of Juniata and LCB differ
and, accordingly, the results of operations of the combined company and the market price of the combined company’s shares
of common stock after the merger may be affected by factors different from those currently affecting the independent results of
operations and market prices of Juniata and LCB.
The merger is subject to the receipt
of consents and approvals from governmental and regulatory entities that may impose conditions that could delay or have an adverse
effect on Juniata.
Before the merger may be completed, various
waivers, approvals or consents must be obtained from the FRB, FDIC and PDB. Juniata and LCB have agreed to use their reasonable
best efforts to complete these filings and obtain these waivers, approvals and consents; however, satisfying any requirements
of regulatory agencies may delay the date of completion of the merger or such approval may not be obtained at all. In addition,
these governmental entities may impose conditions on the completion of the merger or require changes to the terms of the merger
that could have the effect of delaying completion of the merger or imposing additional costs on, or limiting the revenues of,
Juniata following the merger, any of which might have an adverse effect on Juniata following the merger. We cannot assure you
as to whether these regulatory waivers, approvals and consents will be received, the timing of such or whether any conditions
will be imposed. Applications with the FRB, PDB and FDIC are currently pending.
We may fail to realize all of the
anticipated benefits of the merger.
The success of the merger will depend,
in part, on our ability to realize the anticipated benefits and cost savings from combining the businesses of Juniata and LCB.
However, to realize these anticipated benefits and cost savings, we must successfully combine the businesses of Juniata and LCB.
If we are not able to achieve these objectives, the anticipated benefits and cost savings of the merger may not be realized fully
or at all, or may take longer to realize than expected. Juniata and LCB have operated and, until the completion of the merger,
will continue to operate, independently. It is possible that the integration process could result in the loss of key employees,
the disruption of each company’s ongoing businesses or inconsistencies in standards, controls, procedures and policies that
adversely affect our ability to maintain relationships with clients, customers, depositors and employees or to achieve the anticipated
benefits of the merger.
If the merger is not completed,
Juniata and LCB will have incurred substantial expenses without realizing the expected benefits of the merger.
Juniata and LCB have incurred substantial
expenses in connection with the merger described in this proxy statement/prospectus. The completion of the merger depends on the
satisfaction of specified conditions and the receipt of regulatory approvals. If the merger is not completed, these expenses would
have been expended or would be recognized currently and not capitalized, and Juniata and LCB would not have realized the expected
benefits of the merger.
Each of Juniata and LCB will be
subject to business uncertainties and contractual restrictions while the merger is pending.
Uncertainty about the effect of the merger
on employees and customers may have an adverse effect on each of the parties to the merger agreement. These uncertainties may
impair Juniata’s and/or LCB’s ability to attract, retain and motivate key personnel until the merger is consummated,
and could cause customers and others that deal with each of Juniata and LCB to seek to change existing business relationships
with them.
Retention of certain LCB employees may
be challenging during the pendency of the merger, as certain employees may experience uncertainty about their future roles with
Juniata. If key employees depart because of issues relating to the uncertainty and difficulty of integration or a desire not to
continue with Juniata, Juniata’s business following the merger could be harmed. In addition, the merger agreement restricts
each of Juniata and LCB from taking specified actions until the merger occurs without the consent of the other. These restrictions
may prevent Juniata and/or LCB from pursuing attractive business opportunities that may arise prior to the completion of the merger.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2. PROPERTIES
The physical properties of the Company
are all owned or leased by the Bank.
The Bank owns and operates, for banking
purposes, the buildings located at:
One South Main Street, Mifflintown, Pennsylvania
218 Bridge Street, Mifflintown, Pennsylvania
(its corporate headquarters)
4068 William Penn Highway, Mifflintown,
Pennsylvania (branch office)
1762 Butcher Shop Road, Mifflintown, Pennsylvania
(operations center and Trust offices)
301 Market Street, Port Royal, Pennsylvania
(branch office)
30580 Rt. 35, McAlisterville, Pennsylvania
(branch office)
Four North Market Street, Millerstown,
Pennsylvania (branch office)
17428 Tuscarora Creek Road, Blairs Mills,
Pennsylvania (branch office)
One East Market Street, Lewistown, Pennsylvania
(branch office)
20 Prince Street, Reedsville, Pennsylvania
(branch office)
100 West Water Street, Lewistown, Pennsylvania
(branch office)
320 South Logan Boulevard, Burnham, Pennsylvania
(branch office)
571 Main Street, Richfield, Pennsylvania
(branch office)
64 Main Street, Port Allegany, Pennsylvania
(branch office)
118 East Second Street, Coudersport, Pennsylvania
(branch office)
The Bank leases four offices:
Branch Offices
Wal-Mart Supercenter, Route 522 South,
Lewistown, Pennsylvania (lease expires November 2022)
52 West Mill Street, Port Allegany, Pennsylvania
(lease expires July 1, 2018)
Financial Services Office
129 South Main Street, Suite 600, Lewistown,
Pennsylvania (lease expires October 2019)
Loan Production Office
1366 South Atherton Street, State College,
Pennsylvania (lease expires November 2018)
ITEM 3. LEGAL PROCEEDINGS
The nature of the Company’s and
Bank’s business, at times, generates litigation involving matters arising in the ordinary course of business. However, in
the opinion of management, there are no proceedings pending to which the Company or the Bank is a party or to which its property
is subject, which, if adversely determined, would be material in relation to their financial condition. In addition, no material
proceedings are pending or are known to be threatened or contemplated against the Company by government authorities or others.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.