UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended~~September 30, 2010~~March 31, 2011


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

For the transition period from ~~_________~~ to ~~_________~~

Commission File Number000-13232

Juniata Valley Financial Corp.

(Exact name of registrant as specified in its charter)


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


Bridge and Main Streets, Mifflintown, Pennsylvania		17059

(Address of principal executive offices)		(Zip Code)

(717) 436-8211

(Registrant’s telephone number, including area code)

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

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

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


Large accelerated filero	Accelerated filerþ	Non-accelerated filero	Smaller reporting companyo
		(Do not check if a smaller reporting company)	~~Smaller reporting company~~o

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

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


Class		Outstanding as of ~~November 8, 2010~~May 9, 2011
Common Stock ($1.00 par value)		~~4,275,265~~4,238,265 shares

PART I — FINANCIAL INFORMATION


Item 1.		~~Item 1.~~ Financial Statements

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Financial Condition

(Unaudited, ~~Dollar amounts~~ in thousands, except share data)


		September 30,			December 31,				March 31,			December 31,
		2010			2009				2011			2010
ASSETS	ASSETS							ASSETS
Cash and due from banks		$	10,178		$	18,613			$	8,481		$	12,758
Interest bearing deposits with banks			355			82				147			218
Federal funds sold			5,000			1,200				4,900			12,300

Cash and cash equivalents			15,533			19,895				13,528			25,276

Interest bearing time deposits with banks			1,345			1,420				1,096			1,345
Securities available for sale			78,900			77,356				100,982			79,923
Restricted investment in Federal Home Loan Bank (FHLB) stock			2,197			2,197				1,983			2,088
Investment in unconsolidated subsidiary			3,503			3,338				3,607			3,550

Total loans, net of unearned interest			304,260			311,630				297,450			298,102
Less: Allowance for loan losses			(2,811	)		(2,719	)			(2,901	)		(2,824	)

Total loans, net of allowance for loan losses			301,449			308,911				294,549			295,278
Premises and equipment, net			7,176			6,878				6,943			7,067
Other real estate owned			494			476				340			412
Bank owned life insurance and annuities			13,459			13,066				13,693			13,568
Core deposit intangible			265			299				243			254
Goodwill			2,046			2,046				2,046			2,046
Accrued interest receivable and other assets			5,622			6,227				5,730			4,946

Total assets		$	431,989		$	442,109			$	444,740		$	435,753


LIABILITIES AND STOCKHOLDERS’ EQUITY	LIABILITIES AND STOCKHOLDERS’ EQUITY							LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing		$	53,886		$	55,030			$	62,219		$	60,696
Interest bearing			318,662			322,367				324,198			316,094


Total deposits			372,548			377,397				386,417			376,790
Securities sold under agreements to repurchase			2,875			3,207				2,631			3,314
Long-term debt			—			5,000
Other interest bearing liabilities			1,178			1,146				1,201			1,200
Accrued interest payable and other liabilities			4,634			4,756				4,588			4,473

Total liabilities			381,235			391,506				394,837			385,777

Stockholders’ Equity:
Preferred stock, no par value:
Authorized — 500,000 shares, none issued			—			—				—			—
Common stock, par value $1.00 per share:
Authorized — 20,000,000 shares
Issued — 4,745,826 shares
Outstanding —
4,275,265 shares at September 30, 2010;
4,337,587 shares at December 31, 2009			4,746			4,746
4,238,265 shares at March 31, 2011;
4,257,765 shares at December 31, 2010										4,746			4,746
Surplus			18,332			18,315				18,360			18,354
Retained earnings			37,462			36,478				38,213			37,868
Accumulated other comprehensive loss			(564	)		(805	)			(1,558	)		(1,465	)
Cost of common stock in Treasury:
470,561 shares at September 30, 2010;
408,239 shares at December 31, 2009			(9,222	)		(8,131	)
507,561 shares at March 31, 2011;
488,061 shares at December 31, 2010										(9,858	)		(9,527	)

Total stockholders’ equity			50,754			50,603				49,903			49,976

Total liabilities and stockholders’ equity		$	431,989		$	442,109			$	444,740		$	435,753

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Income

(Unaudited)

(~~Dollar amounts~~ in thousands, except share data)


	Three Months Ended						Nine Months Ended						Three Months Ended
	September 30,						September 30,						March 31,
	2010			2009			2010			2009			2011		2010
Interest income:
Loans, including fees	$	4,824		$	5,126		$	14,756		$	15,671		$	4,592	$	5,036
Taxable securities		257			281			753			909			253		233
Tax-exempt securities		245			305			784			864			233		275
Federal funds sold		3			33			7			147			2		1
Other interest income		10			2			29			7			8		9

Total interest income		5,339			5,747			16,329			17,598			5,088		5,554

Interest expense:
Deposits		1,288			1,770			4,154			5,469			1,175		1,519
Securities sold under agreements to repurchase		1			1			2			2			1		1
Short-term borrowings		—			—			1			1			—		1
Long-term debt		29			36			99			105			—		34
Other interest bearing liabilities		2			5			9			16			7		3

Total interest expense		1,320			1,812			4,265			5,593			1,183		1,558

Net interest income		4,019			3,935			12,064			12,005			3,905		3,996
Provision for loan losses		70			165			637			377			88		285

Net interest income after provision for loan losses		3,949			3,770			11,427			11,628			3,817		3,711

Noninterest income:
Trust fees		90			83			300			253			113		120
Customer service fees		335			437			1,104			1,235			312		382
Earnings on bank-owned life insurance and annuities		133			130			393			348			119		122
Commissions from sales of non-deposit products		80			66			301			324			103		96
Income from unconsolidated subsidiary		60			50			179			146			65		56
Securities impairment charge		(40	)		—			(40	)		(226	)
Gain on sale or call of securities		4			—			31			—
Gain on sales or calls of securities														5		12
Gain (Loss) on sales of other assets		30			(33	)		36			—			15		(1	)
Prior period income from insurance sales		—			—			—			323
Other noninterest income		244			219			679			700			292		236

Total noninterest income		936			952			2,983			3,103			1,024		1,023

Noninterest expense:
Employee compensation expense		1,232			1,199			3,826			3,699			1,255		1,286
Employee benefits		363			391			1,182			1,246			401		416
Occupancy		243			218			692			693			243		233
Equipment		148			149			403			473			155		119
Data processing expense		366			324			1,077			994			322		365
Director compensation		88			100			261			318			77		87
Professional fees		128			90			357			301			139		93
Taxes, other than income		124			125			379			380			127		130
FDIC Insurance premiums		138			121			435			526			133		147
Amortization of intangibles		11			11			34			34			11		11
Other noninterest expense		317			276			956			846			315		258

Total noninterest expense		3,158			3,004			9,602			9,510			3,178		3,145

Income before income taxes		1,727			1,718			4,808			5,221			1,663		1,589
Provision for income taxes		442			430			1,197			1,358			424		401

Net income	$	1,285		$	1,288		$	3,611		$	3,863		$	1,239	$	1,188

Earnings per share
Basic	$	0.30		$	0.30		$	0.84		$	0.89		$	0.29	$	0.27
Diluted	$	0.30		$	0.30		$	0.84		$	0.89		$	0.29	$	0.27
Cash dividends declared per share	$	0.21		$	0.20		$	0.61		$	0.58		$	0.21	$	0.20
Weighted average basic shares outstanding		4,283,024			4,342,587			4,307,417			4,340,595			4,255,982		4,330,136
Weighted average diluted shares outstanding		4,286,350			4,346,353			4,310,989			4,344,720			4,259,061		4,334,000

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Changes in Stockholders’ Equity

(Unaudited)

(~~Dollars~~ in thousands, except share data)

Nine Months Ended September 30, 2010
Number Accumulated
of Other Total
Shares Common Retained Comprehensive Treasury Stockholders’
Outstanding Stock Surplus Earnings Loss Stock Equity
Balance at December 31, 2009
4,337,587 $ 4,746 $ 18,315 $ 36,478 $ (805 ) $ (8,131 ) $ 50,603
Comprehensive income:
Net income 3,611 3,611
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects 178 178
Defined benefit retirement plan adjustments, net of tax effects 63 63

Total comprehensive income 3,852
Cash dividends at $0.61 per share (2,627 ) (2,627 )
Stock-based compensation activity 36 36
Purchase of treasury stock, at cost (66,400 ) (1,171 ) (1,171 )
Treasury stock issued for stock option and stock purchase plans 4,078 (19 ) 80 61

Balance at September 30, 2010
4,275,265 $ 4,746 $ 18,332 $ 37,462 $ (564 ) $ (9,222 ) $ 50,754

Nine Months Ended September 30, 2009
Number Accumulated
of Other Total
Shares Common Retained Comprehensive Treasury Stockholders’
Outstanding Stock Surplus Earnings Loss Stock Equity
Balance at December 31, 2008
4,341,055 $ 4,746 $ 18,324 $ 34,758 $ (1,247 ) $ (8,096 ) $ 48,485
Comprehensive income:
Net income 3,863 3,863
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects 305 305
Defined benefit retirement plan adjustments, net of tax effects (5 ) (5 )

Total comprehensive income 4,163
Cash dividends at $0.58 per share (2,518 ) (2,518 )
Stock-based compensation activity 29 29
Purchase of treasury stock, at cost (7,600 ) (128 ) (128 )
Treasury stock issued for stock option and stock purchase plans 9,132 (49 ) 182 133

Balance at September 30, 2009
4,342,587 $ 4,746 $ 18,304 $ 36,103 $ (947 ) $ (8,042 ) $ 50,164

Three Months Ended March 31, 2011


	Number										Accumulated
	of										Other						Total
	Shares			Common				Retained			Comprehensive			Treasury			Stockholders’
	Outstanding			Stock		Surplus		Earnings			Loss			Stock			Equity
Balance at December 31, 2010		4,257,765		$	4,746	$	18,354	$	37,868		$	(1,465	)	$	(9,527	)	$	49,976
Comprehensive income:
Net income									1,239									1,239
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects												(119	)					(119	)
Defined benefit retirement plan adjustments, net of tax effects												26						26

Total comprehensive income																		1,146
Cash dividends at $0.21 per share									(894	)								(894	)
Stock-based compensation activity							6											6
Purchase of treasury stock		(19,500	)												(331	)		(331	)

Balance at March 31, 2011		4,238,265		$	4,746	$	18,360	$	38,213		$	(1,558	)	$	(9,858	)	$	49,903

Three Months Ended March 31, 2010


	Number										Accumulated
	of										Other						Total
	Shares			Common				Retained			Comprehensive			Treasury			Stockholders’
	Outstanding			Stock		Surplus		Earnings			Income (Loss)			Stock			Equity
Balance at December 31, 2009		4,337,587		$	4,746	$	18,315	$	36,478		$	(805	)	$	(8,131	)	$	50,603
Comprehensive income:
Net income									1,188									1,188
Change in unrealized gains on securities available for sale, net of reclassification adjustment and tax effects												140						140
Defined benefit retirement plan adjustments, net of tax effects												21						21

Total comprehensive income																		1,349
Cash dividends at $0.21 per share									(867	)								(867	)
Stock-based compensation activity							12											12
Purchase of treasury stock		(16,100	)												(284	)		(284	)

Balance at March 31, 2010		4,321,487		$	4,746	$	18,327	$	36,799		$	(644	)	$	(8,415	)	$	50,813

See accompanying notes to consolidated financial statements.

Juniata Valley Financial Corp. and Subsidiary

Consolidated Statements of Cash Flows

(Unaudited)

(~~Dollars~~ in thousands)


	Nine Months Ended September 30,						Three Months Ended March 31
	2010			2009			2011			2010
Operating activities:
Net income	$	3,611		$	3,863		$	1,239		$	1,188
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		637			377			88			285
Depreciation		406			457			152			127
Net amortization of securities premiums		216			156			77			70
Amortization of core deposit intangible		34			34			11			11
Amortization of deferred net loan costs		17			35
Deferral of net loan costs (fees)		35			(3	)
Securities impairment charge		40			226
Net amortization of loan origination costs								14			5
Deferral of net loan costs								15			39
Net realized gains on sales or calls of securities		(31	)		—			(5	)		(12	)
Net gains on sales of other assets		(36	)		—
(Gains) losses on sales of other real estate owned								(15	)		1
Earnings on bank owned life insurance and annuities		(393	)		(348	)		(119	)		(122	)
Deferred income tax expense		15			94			30			19
Equity in earnings of unconsolidated subsidiary, net of dividends of $28 and $34		(151	)		(112	)
Equity in earnings of unconsolidated subsidiary, net of dividends of $10 and $9								(55	)		(47	)
Stock-based compensation expense		36			29			6			12
Decrease in accrued interest receivable and other assets		559			78
Decrease in accrued interest payable and other liabilities		(74	)		(1	)
Increase in accrued interest receivable and other assets								(726	)		(432	)
Increase (decrease) in accrued interest payable and other liabilities								122			(114	)

Net cash provided by operating activities		4,921			4,885			834			1,030

Investing activities:
Purchases of:
Securities available for sale		(39,157	)		(43,026	)		(25,708	)		(10,226	)
Premises and equipment		(704	)		(103	)		(28	)		(98	)
Bank owned life insurance and annuities		(66	)		(94	)		(18	)		(30	)
Proceeds from:
Maturities of and principal repayments on securities available for sale		37,636			25,757
Maturities and calls of and principal repayments on securities available for sale								4,394			12,754
Redemption of FHLB stock								105			—
Bank owned life insurance and annuities		50			52			6			17
Sale of fixed assets		—			33
Sale of other real estate owned		747			435			166			296
Sale of other assets		11			80			—			11
Net decrease in interest-bearing time deposits		75			3,726			249			75
Net decrease in loans receivable		6,043			3,169
Net decrease (increase) in loans receivable								533			(330	)

Net cash provided by (used in) investing activities		4,635			(9,971	)
Net cash (used in) provided by investing activities								(20,301	)		2,469

Financing activities:
Net (decrease) increase in deposits		(4,849	)		15,002
Net decrease in short-term borrowings and securities sold under agreements to repurchase		(332	)		(8,644	)
Repayment of long-term debt		(5,000	)		—
Net increase (decrease) in deposits								9,627			(2,766	)
Net decrease in securities sold under agreements to repurchase								(683	)		(655	)
Cash dividends		(2,627	)		(2,518	)		(894	)		(867	)
Purchase of treasury stock		(1,171	)		(128	)		(331	)		(284	)
Treasury stock issued for employee stock plans		61			133

Net cash (used in) provided by financing activities		(13,918	)		3,845
Net cash provided by (used in) financing activities								7,719			(4,572	)


Net decrease in cash and cash equivalents		(4,362	)		(1,241	)		(11,748	)		(1,073	)
Cash and cash equivalents at beginning of period		19,895			12,457			25,276			19,895

Cash and cash equivalents at end of period	$	15,533		$	11,216		$	13,528		$	18,822


Supplemental information:
Interest paid	$	4,358		$	5,668		$	1,187		$	1,595
Income taxes paid	$	1,145		$	910		$	75		$	200

Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate owned and repossessed assets	$	730		$	609		$	79		$	112

Juniata Valley Financial Corp. and Subsidiary

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 — Basis of Presentation and Accounting Policies

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

The accompanying unaudited consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted accounting principles (U.S. GAAP) for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the ~~nine-month~~three-month period ended ~~September 30, 2010,~~March 31, 2011, are not necessarily indicative of the results for the year ended December 31, ~~2010.~~2011. For further information, refer to the consolidated financial statements and footnotes thereto included in Juniata Valley Financial Corp.’s Annual Report on Form 10-K for the year ended December 31, ~~2009.~~2010.

The Corporation has evaluated events and transactions occurring subsequent to the balance sheet date of ~~September 30, 2010~~March 31, 2011 for items that should potentially be recognized or disclosed in these consolidated financial statements. The evaluation was conducted through the date these consolidated financial statements were issued.

NOTE 2 — Recent Accounting Pronouncements

ASU ~~2010-09~~2011-02

The Financial Accounting Standards Board (FASB) has issued this Accounting Standards Update (ASU) ~~2010-09,~~~~Subsequent Events (Topic 855): Amendments~~ to ~~Certain Recognition and Disclosure Requirements~~clarify the accounting principles applied to loan modifications, as defined by FASB Accounting Standards Codification (ASC) Subtopic 310-40,Receivables — Troubled Debt Restructurings by Creditors. This guidance was prompted by the increased volume in loan modifications prompted by the recent economic downturn. The ~~amendments~~ASU clarifies guidance on a creditor’s evaluation of whether or not a concession has been granted, with an emphasis on evaluating all aspects of the modification rather than a focus on specific criteria, such as the effective interest rate test, to determine a concession. The ASU goes on to provide guidance on specific types of modifications such as changes in the ~~ASU remove~~interest rate of the ~~requirement for~~borrowing, and insignificant delays in payments, as well as guidance on the creditor’s evaluation of whether or not a ~~Securities Exchange Commission (SEC) filer to disclose a date through which subsequent events have been evaluated in both issued and revised~~debtor is experiencing financial statements. Revised financial statements include financial statements revised as a result of either correction of an error or retrospective application of U.S. GAAP. The FASB also clarified that if the financial statements have been revised, then an entity that is not an SEC filer should disclose both the date that the financial statements were issued or available to be issued and the date the revised financial statements were issued or available to be issued. The FASB believes these amendments remove potential conflicts with the SEC’s literature.difficulties.

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

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

2011, and should be applied retrospectively to the beginning of the annual period of adoption. The entity should also disclose information required by ASU 2010-20,Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses, which had previously been deferred by ASU 2011-01,Deferral of the Effective Date of Disclosures about Troubled Debt Restructuringsin ASU No. 2010-20, for interim and annual periods beginning on or after June 15, 2011. Nonpublic entities are required to adopt the amendments in this Update for annual periods ending on or after December 15, 2012. Early adoption is permitted. This guidance ~~did~~will not have ana significant impact on the Corporation’s financial position or results of operations.

ASU ~~2010-13~~2010-29

The ~~FASB issued~~objective of this ASU ~~2010-13,~~~~Compensation—Stock Compensation (Topic 718): Effect~~is to address diversity in practice about the interpretation of ~~Denominating~~ the ~~Exercise Price of~~pro forma revenue and earnings disclosure requirements for business combinations.

Subsection 805-10-50-2(h) requires a ~~Share-Based Payment Award~~public entity to disclose pro forma information for business combinations that occurred in the ~~Currency~~current reporting period. The disclosures include pro forma revenue and earnings of the ~~Market in Which~~combined entity for the ~~Underlying Equity Security Trades. The ASU codifies~~current reporting period as though the ~~consensus reached in Emerging Issues Task Force (EITF) Issue No. 09-J. The amendments to~~acquisition date for all business combinations that occurred during the ~~codification clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion~~year had been as of the ~~entity’s equity shares trades~~beginning of the annual reporting period. If comparative financial statements are presented, the pro forma revenue and earnings of the combined entity for the comparable prior reporting period should ~~not~~ be ~~considered to contain a condition~~reported as though the acquisition date for all business combinations that ~~is not a market, performance, or service condition. Therefore, an entity would not classify such an award~~occurred during the current year had been as ~~a liability if it otherwise qualifies as equity.~~of the beginning of the comparable prior annual reporting period.

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

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

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

The amendments in this ASU are effective prospectively for ~~fiscal years, and interim periods within those fiscal years,~~business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2010. ~~Earlier~~Early adoption is permitted. ~~The amendments are to be applied by recording a cumulative-effect adjustment to beginning retained earnings. The amendments~~This guidance will not have an impact on the Corporation’s financial position or results of operations.

ASU ~~2010-18~~2010-28

The amendments in this ASU ~~2010-18,~~~~Receivables (Topic 310): Effect~~modify Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not that a goodwill impairment exists. In determining whether it is more likely than not that a goodwill impairment exists, an entity should consider whether there are any adverse qualitative factors indicating that an impairment may exist. The qualitative factors are consistent with the existing guidance and examples in subsection 350-20-35-30, which requires that goodwill of a ~~Loan Modification When~~reporting unit be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the ~~Loan Is Part~~fair value of a ~~Pool That Is Accounted for as~~reporting unit below its carrying amount.

These amendments eliminate an entity’s ability to assert that a ~~Single Asset,~~codifies the consensus reached in EITF Issue No. 09-I, “Effect of a Loan Modification When the Loan Is Part of a Pool That Is Accounted for as a Single Asset.” The amendments to the Codification provide that modifications of loans that are accounted for within a pool under Subtopic 310-30 doreporting unit is not ~~result in the removal of those loans from the pool even if the modification of those loans would otherwise be considered a troubled debt restructuring. An entity will continue to be~~ required to ~~consider whether~~perform Step 2 because the ~~pool~~carrying amount of ~~assets~~the reporting unit is zero or negative despite the existence of qualitative factors that indicate the goodwill is more likely than not impaired. As a result, goodwill impairments may be reported sooner than under current practice.

For public entities, the amendments in ~~which the loan is included is impaired if expected cash flows~~this ASU are effective for ~~the pool change. ASU 2010-18 does not affect the accounting for loans under the scope of Subtopic 310-30 that are not accounted for~~fiscal years, and interim periods within ~~pools. Loans accounted for individually under Subtopic 310-30 continue to be subject to the troubled debt restructuring accounting provisions within Subtopic 310-40.~~

~~ASU 2010-18 is effective prospectively for modifications of loans accounted for within pools under Subtopic 310-30 occurring in the first interim or annual period ending on or~~those years, beginning after ~~July~~December 15, 2010. Early ~~application~~adoption is not permitted. For nonpublic entities, the amendments are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. Nonpublic entities may early adopt the amendments using the effective date for public entities.

Upon adoption of the amendments, an entity with reporting units that have carrying amounts that are zero or negative is required to assess whether it is more likely than not that the reporting units’ goodwill is impaired. If the entity determines that it is more likely than not that the goodwill of one or more of its reporting units is impaired, the entity should perform Step 2 of the goodwill impairment test for those reporting unit(s). Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. Any goodwill impairments occurring after the initial adoption of ~~ASU 2010-18, an entity may make a one-time election to terminate accounting for loans~~the amendments should be included in earnings as ~~a pool under Subtopic 310-30.~~required by Section 350-20-35. This ~~election may be applied on a pool-by-pool basis and does~~guidance will not ~~preclude an entity from applying pool accounting to subsequent acquisitions of loans with credit deterioration. The Corporation does not expect that the adoption of this standard will~~ have a significant impact on the Corporation’s financial ~~condition or results of operations.~~

~~ASU 2010-20~~

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

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

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

The effective date of ASU 2010-20 differs for public and nonpublic companies. For public companies, the amendments that require disclosures as of the end of a reporting period are effective for periods ending on or after December 15, 2010. The amendments that require disclosures about activity that occurs during a reporting period are effective for periods beginning on or after December 15, 2010. The Corporation does not expect that the adoption of this standard will have a significant impact on the Corporation’s financial conditionposition or results of operations.

NOTE 3 — Comprehensive Income

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

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


	Three Months Ended September 30, 2010									Three Months Ended September 30, 2009									Three Months Ended March 31, 2011									Three Months Ended March 31, 2010
	Before			Tax Expense						Before			Tax Expense						Before			Tax Expense						Before			Tax Expense
	Tax			or			Net-of-Tax			Tax			or			Net-of-Tax			Tax			or			Net-of-Tax			Tax			or			Net-of-Tax
	Amount			(Benefit)			Amount			Amount			(Benefit)			Amount			Amount			(Benefit)			Amount			Amount			(Benefit)			Amount
Net income	$	1,727		$	442		$	1,285		$	1,718		$	430		$	1,288		$	1,663		$	424		$	1,239		$	1,589		$	401		$	1,188
Other comprehensive income:
Other comprehensive income (loss):
Unrealized gains (losses) on available for sale securities:
Unrealized gains (losses) arising during the period		(25	)		(9	)		(16	)		506			172			334			(180	)		(62	)		(118	)		215			73			142

Unrealized gains (losses) from unconsolidated subsidiary		1			—			1			(12	)		—			(12	)
Unrealized gains from unconsolidated subsidiary																				2			—			2			6			—			6
Less reclassification adjustment for:
gains included in net income		(4	)		(1	)		(3	)		—			—			—			(5	)		(2	)		(3	)		(12	)		(4	)		(8	)
securities impairment charge		40			14			26			—			—			—
Change in pension liability		32			11			21			(7	)		(2	)		(5	)		40			14			26			32			11			21

Other comprehensive income		44			15			29			487			170			317
Other comprehensive income (loss)																				(143	)		(50	)		(93	)		241			80			161

Total comprehensive income	$	1,771		$	457		$	1,314		$	2,205		$	600		$	1,605		$	1,520		$	374		$	1,146		$	1,830		$	481		$	1,349


	Nine Months Ended September 30, 2010									Nine Months Ended September 30, 2009
	Before			Tax Expense						Before			Tax Expense
	Tax			or			Net-of-Tax			Tax			or			Net-of-Tax
	Amount			(Benefit)			Amount			Amount			(Benefit)			Amount
Net income	$	4,808		$	1,197		$	3,611		$	5,221		$	1,358		$	3,863
Other comprehensive income:
Unrealized gains (losses) on available for sale securities:
Unrealized gains arising during the period		239			81			158			236			80			156

Unrealized gains (losses) from unconsolidated subsidiary		14			—			14			(5	)		—			(5	)
Less reclassification adjustment for:
gains included in net income		(31	)		(11	)		(20	)		—			—			—
securities impairment charge		40			14			26			226			77			149
Change in pension liability		96			33			63			—			—			—

Other comprehensive income		358			117			241			457			157			300

Total comprehensive income	$	5,166		$	1,314		$	3,852		$	5,678		$	1,515		$	4,163

NOTE 8 — Investment in Unconsolidated Subsidiary

The Corporation owns 39.16% of the outstanding common stock of The First National Bank of Liverpool (FNBL), Liverpool, PA. This investment is accounted for under the equity method of accounting. The investment is being carried at ~~$3,503,000~~$3,607,000 as of ~~September 30, 2010.~~March 31, 2011. The Corporation increases its investment in FNBL for its share of earnings and decreases its investment by any dividends received from FNBL. A loss in value of the investment which is other than a temporary decline will be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of FNBL to sustain an earnings capacity which would justify the carrying amount of the investment.

NOTE 9 — Securities

~~Accounting Standards Codification (ASC)~~ASC Topic 320,Investments — Debt and Equity Securities, clarifies the interaction of the factors that should be considered when determining whether a debt security is other-than-temporarily impaired. For debt securities, management must assess whether (a) it has the intent to sell the security and (b) it is more likely than not that it will be required to sell the security prior to its anticipated recovery. These steps are done before assessing whether the entity will recover the cost basis of the investment. Previously, this assessment required management to assert it has both the intent and the ability to hold a security for a period of time sufficient to allow for an anticipated recovery in fair value to avoid recognizing an other-than-temporary impairment. This change does not affect the need to forecast recovery of the value of the security through either cash flows or market price.

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

The amortized cost and fair value of securities as of ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.

September 30, 2010
Gross Gross
Securities Available for Sale Amortized Fair Unrealized Unrealized
Type and maturity Cost Value Gains Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations
After one year but within five years $ 33,139 $ 33,612 $ 473 $ —
After five years but within ten years 4,500 4,513 13 —

37,639 38,125 486 —
Obligations of state and political subdivisions
Within one year 5,312 5,373 70 (9 )
After one year but within five years 29,530 30,367 877 (40 )
After five years but within ten years 1,771 1,787 17 (1 )

36,613 37,527 964 (50 )
Corporate notes
After one year but within five years 1,000 1,033 33 —

1,000 1,033 33 —

Mortgage-backed securities 1,291 1,380 89 —
Equity securities 935 835 67 (167 )

Total $ 77,478 $ 78,900 $ 1,639 $ (217 )


Securities Available for Sale										March 31, 2011
														Gross		Gross
	December 31, 2009									Amortized		Fair		Unrealized		Unrealized
					Gross		Gross
Securities Available for Sale	Amortized		Fair		Unrealized		Unrealized
Type and maturity	Cost		Value		Gains		Losses			Cost		Value		Gains		Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations
Within one year										$	5,813	$	5,831	$	18	$	—
After one year but within five years	$	32,503	$	32,620	$	194	$	(77	)	$	47,185	$	47,170	$	275	$	(290	)
After five years but within ten years		940		933		—		(7	)		1,000		953		—		(47	)

		33,443		33,553		194		(84	)		53,998		53,954		293		(337	)
Obligations of state and political subdivisions
Within one year		6,775		6,863		88		—			13,689		13,834		146		(1	)
After one year but within five years		32,022		32,972		958		(8	)		26,408		26,756		446		(98	)
After five years but within ten years		544		562		18		—			1,826		1,648		—		(178	)

		39,341		40,397		1,064		(8	)		41,923		42,238		592		(277	)
Corporate notes
After one year but within five years		1,000		1,026		26		—			1,000		1,027		27		—

		1,000		1,026		26		—			1,000		1,027		27		—

Mortgage-backed securities		1,425		1,515		90		—			2,712		2,779		81		(14	)
Equity securities		975		865		58		(168	)		935		984		127		(78	)

Total	$	76,184	$	77,356	$	1,432	$	(260	)	$	100,568	$	100,982	$	1,120	$	(706	)

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

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

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

1,000 1,028 28 —

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

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

The following table shows gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009~~2010 (in thousands):


	Unrealized Losses at September 30, 2010															Unrealized Losses at March 31, 2011
	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations																$	30,299	$	(337	)	$	—	$	—		$	30,299	$	(337	)
Obligations of state and political subdivisions	$	5,251	$	(45	)	$	880	$	(5	)	$	6,131	$	(50	)		10,676		(257	)		2,555		(20	)		13,231		(277	)
Mortgage-backed securities																	1,498		(14	)		—		—			1,498		(14	)

Debt securities		5,251		(45	)		880		(5	)		6,131		(50	)		42,473		(608	)		2,555		(20	)		45,028		(628	)

Equity securities		370		(67	)		245		(100	)		615		(167	)		27		(1	)		268		(77	)		295		(78	)


Total temporarily impaired securities	$	5,621	$	(112	)	$	1,125	$	(105	)	$	6,746	$	(217	)	$	42,500	$	(609	)	$	2,823	$	(97	)	$	45,323	$	(706	)

Equity securities owned by the Corporation consist of common stock of various financial services providers (“Bank Stocks”) ~~that have traditionally been high-performing stocks prior to 2008. During 2008~~ and ~~into 2009, market values~~are evaluated quarterly for evidence of ~~most of the Bank Stocks materially declined.~~other-than-temporary impairment. Considerations used to determine other-than-temporary impairment (“OTTI”) status for individual holdings include the length of time the stock has remained in an unrealized loss position, the percentage of unrealized loss compared to the carrying cost of the stock, dividend reduction or suspension, market analyst reviews and expectations, and other pertinent developments that would affect expectations for recovery or further decline. There were ~~seven~~six equity securities that comprise a group of securities with unrealized losses for 12 months or more at ~~September 30, 2010 and December~~March 31, ~~2009 prior to an analysis for OTTI.~~2011. In the aggregate and individually, the unrealized loss on this group of securities ~~increased very slightly~~did not significantly change from ~~period~~December 31, 2010 to ~~period; however, some individual securities within this group declined in value more than others. Of the two securities~~March 31, 2011, and, individually, none of these six have significant monetary unrealized losses. Management has identified no new other-than-temporary impairment as of March 31, 2011 in the group that experienced the greatest decline in value, one has declined to 76% of cost and continues to pay full dividends. The other has sustained unrealized losses in excess of 50%, with no prospects or signs of improvement. Therefore, based on the quarterly analysis performed as of September 30, 2010 to assess impairment of the investment portfolio, management has determined that the unrealized loss in this one investment is “other than temporary” and recorded a charge to earnings of $40,000.equity portfolio.

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

Certain obligations of the U.S. Government and state and political subdivisions are pledged to secure public deposits, securities sold under agreements to repurchase and for other purposes as required or permitted by law. The fair value of the pledged assets amounted to ~~$30,863,000~~$30,937,000 and ~~$30,403,000~~$31,951,000 at ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, respectively.

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


	Three Months Ended				Nine Months Ended				Three Months Ended
	September 30,				September 30,				March 31,
	2010		2009		2010		2009		2011		2010
Gross proceeds from sales of securities	$	—	$	—	$	—	$	—	$	—	$	—
Securities available for sale:
Gross realized gains from called securities	$	4	$	—	$	31	$	—	$	5	$	12
Gross realized losses		—		—		—		—		—		—

Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is discontinued when the contractual payment of principal or interest has become 90 days past due or reasonable doubt exists as to the full, timely collection of principal or interest. However, it is the Corporation’s policy to continue to accrue interest on loans over 90 days past due as long as they are (1) guaranteed or well secured and (2) there is an effective means of collection. When a loan is placed on non-accrual status, all unpaid interest credited to income in the current year is reversed against current period income and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of principal. Generally, accruals are resumed on loans only when the obligation is brought fully current with respect to interest and principal, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

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

The allowance for credit losses consists of the allowance for loan losses and the reserve for unfunded lending commitments. The allowance for loan losses represents management’s estimate of losses inherent in the loan portfolio as of the balance sheet date and is recorded as a reduction to loans. The reserve for unfunded lending commitments represents management’s estimate of losses inherent in its unfunded lending commitments and is recorded in other liabilities on the consolidated balance sheet. The allowance for loan losses is increased by the provision for loan losses, and decreased by charge-offs, net of recoveries. Loans deemed to be uncollectible are charged against the allowance for loan losses, and subsequent recoveries, if any, are credited to the allowance.

For financial reporting purposes, the provision for loan losses charged to current operating income is based on management’s estimates, and actual losses may vary from estimates. These estimates are reviewed and adjusted at least quarterly and are reported in earnings in the periods in which they become known. The loan loss provision for federal income tax purposes is based on current income tax regulations, which allow for deductions equal to net charge-offs.

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

(1)

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

(2)

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

(3)

a bankruptcy notice is received for an unsecured loan; or

(4)

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

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

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

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

A large commercial loan is considered impaired when, based on current information and events, it is probable that the Bank will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. (A “large” loan (or group of like-loans within one relationship) is defined as a commercial/business loan, with an aggregate outstanding balance in excess of $150,000, or any other loan that management deems of similar characteristics inherent to the deficiencies of an impaired large loan by definition.) Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loans and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan by loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. The estimated fair values of substantially all of the Corporation’s impaired loans are measured based on the estimated fair value of the loan’s collateral. For commercial loans secured with real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the original appraisal and the condition of the property. Appraised values are discounted to arrive at the estimated selling price of the collateral, which is considered to be the estimated fair value. The discounts also include the estimated costs to sell the property. For commercial loans secured by non-real estate collateral, estimated fair values are determined based on the borrower’s financial statements, inventory reports, accounts receivable agings or equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The Bank generally does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject to a restructuring agreement.

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

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

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

Nature and volume of the portfolio and terms of loans;

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

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

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

Effect of external factors, including competition.

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

Commercial, Financial and Agricultural Lending- The Corporation originates commercial, financial and agricultural loans primarily to businesses located in its primary market area and surrounding areas. These loans are used for various business purposes which include short-term loans and lines of credit to finance machinery and equipment purchases, inventory and accounts receivable. Generally, the maximum term for loans extended on machinery and equipment is shorter or does not exceed the projected useful life of such machinery and equipment. Most business lines of credit are written on demand and may be renewed annually.

Commercial loans are generally secured with short-term assets, however, in many cases, additional collateral such as real estate is provided as additional security for the loan. Loan-to-value maximum values have been established by the Corporation and are specific to the type of collateral. Collateral values may be determined using invoices, inventory reports, accounts receivable aging reports, collateral appraisals, etc.

In underwriting commercial loans, an analysis of the borrower’s character, capacity to repay the loan, the adequacy of the borrower’s capital and collateral, as well as an evaluation of conditions affecting the borrower, is performed. Analysis of the borrower’s past, present and future cash flows is also an important aspect of the Corporation’s analysis.

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

Commercial loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

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

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

Commercial real estate loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions.

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

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

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

Real estate construction loans generally present a higher level of risk than other types of loans due primarily to the effect of general economic conditions and the difficulty of estimating total construction costs.

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

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

In underwriting one-to-four family residential real estate loans, the Corporation evaluates the borrower’s ability to make monthly payments, the borrower’s repayment history and the value of the property securing the loan. Properties securing real estate loans made by the Corporation are appraised by independent fee appraisers. The Corporation generally requires borrowers to obtain an attorney’s title opinion or title insurance, and fire and property insurance (including flood insurance, if necessary) in an amount not less than the amount of the loan. The Corporation does not engage in sub-prime residential mortgage originations.

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

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

Home equity installment loans are secured by the borrower’s primary residence with a maximum loan-to-value of 80% and a maximum term of 15 years.

Home equity lines of credit are secured by the borrower’s primary residence with a maximum loan-to-value of 90% and a maximum term of 20 years.

In underwriting home equity lines of credit, a thorough analysis of the borrower’s ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial conditions, and credit background. The analysis is based primarily on the customer’s ability to repay and secondarily on the collateral or security.

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

Obligations of States and Political Subdivisions— The Corporation lends to local municipalities and other tax-exempt organizations. These loans are primarily tax-anticipation notes and as such carry little risk. Historically, the Corporation has never had a loss on any loan of this type.

Personal Lending— The Corporation offers a variety of secured and unsecured personal loans, including vehicle, mobile homes and loans secured by savings deposits, as well as other types of personal loans.

Personal loan terms vary according to the type and value of collateral and creditworthiness of the borrower. In underwriting personal loans, a thorough analysis of the borrower’s ability to repay the loan as agreed is performed. The ability to repay is determined by the borrower’s employment history, current financial conditions, and credit background. Personal loans may entail greater credit risk than do residential mortgage loans, particularly in the case of personal loans which are unsecured or are secured by rapidly depreciable assets, such as automobiles or recreational equipment. In such cases, any repossessed collateral for a defaulted personal loan may not provide an adequate source of repayment of the outstanding loan balance as a result of the greater likelihood of damage, loss or depreciation. In addition, personal loan collections are dependent on the borrower’s continuing financial stability, and thus are more likely to be affected by adverse personal circumstances. Furthermore, the application of various federal and state laws, including bankruptcy and insolvency laws, may limit the amount which can be recovered on such loans.

The following tables present the classes of the loan portfolio summarized by the aggregate pass rating and the classified ratings of special mention, substandard and doubtful within the Corporation’s internal risk rating system as of March 31, 2011 and December 31, 2010 (in thousands).

Special
As of March 31, 2011 Pass Mention Substandard Doubtful Total

Commercial financial and agricultural $ 34,612 $ 2,160 $ 583 $ 305 $ 37,660
Real estate — commercial 31,121 10,392 2,097 — 43,610
Real estate — construction 8,948 2,298 250 600 12,096
Real estate — mortgage 126,634 7,072 4,162 1,414 139,282
Home equity 43,524 342 — — 43,866
Obligations of states and political subdivisions 12,692 — — — 12,692
Personal 8,143 99 2 — 8,244

Total $ 265,674 $ 22,363 $ 7,094 $ 2,319 $ 297,450

Special
As of December 31, 2010 Pass Mention Substandard Doubtful Total

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

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

The Corporation has certain loans in its portfolio that are considered to be impaired. It is the policy of the Corporation to recognize income on impaired loans that have been transferred to nonaccrual status on a cash basis, only to the extent that it exceeds principal balance recovery. Until an impaired loan is placed on nonaccrual status, income is recognized on the accrual basis. The following tables summarize information regarding impaired loans by portfolio class as of March 31, 2011 and December 31, 2010 (in thousands):

Unpaid Average
As of March 31, 2011 Recorded Principal Related Recorded Interest Income
Impaired loans Investment Balance Allowance Investment Recognized⁽¹⁾
With no related allowance recorded:
Commercial financial and agricultural $ 288 $ 288 $ — $ 288 $ 5
Real estate — commercial 4,425 4,425 — 4,728 53

With an allowance recorded:
Real estate — commercial 2,136 2,136 570 2,137 3

Total:
Commercial financial and agricultural 288 288 — 288 5
Real estate — commercial 6,561 6,561 570 6,865 56

$ 6,849 $ 6,849 $ 570 $ 7,153 $ 61


(1)		Represents interest income recognized for the three months ended March 31, 2011

Unpaid Average
As of December 31, 2010 Recorded Principal Related Recorded Interest Income
Impaired loans Investment Balance Allowance Investment Recognized⁽²⁾
With no related allowance recorded:
Real estate — commercial $ 5,606 $ 5,606 $ — $ 6,203 $ 260

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

Total:

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


(2)		Represents interest income recognized for the year ended December 31, 2010

The following table presents nonaccrual loans by classes of the loan portfolio as of March 31, 2011 and December 31, 2010 (in thousands):

March 31, 2011 December 31, 2010
Nonaccrual loans:
Commercial financial and agricultural $ 600 $ 784
Real estate — commercial 240 240
Real estate — construction 913 850
Real estate — mortgage 3,655 3,564
Home equity 472 524
Obligations of states and political subdivisions — —
Personal 6 2

Total $ 5,886 $ 5,964

The performance and credit quality of the loan portfolio is also monitored by analyzing the age of the loans receivable as determined by the length of time a payment is past due. The following tables present the classes of the loan portfolio summarized by the past due status as of March 31, 2011 and December 31, 2010 (in thousands):

Loans Past
Due greater
30-59 Days 60-89 Days Greater than Total Past than 90 Days
As of March 31, 2011 Past Due Past Due 90 Days Due Current Total Loans and Accruing

Commercial financial and agricultural $ 72 $ 172 $ 600 $ 844 $ 36,816 $ 37,660 $ —
Real estate — commercial 436 1,284 240 1,960 41,650 43,610 —
Real estate — construction — — 913 913 11,183 12,096 —
Real estate — mortgage 3,017 914 3,520 7,451 131,831 139,282 255
Home equity 733 46 469 1,248 42,618 43,866 158
Obligations of states and political subdivisions — — — — 12,692 12,692 —
Personal 89 33 11 133 8,111 8,244 5

Total $ 4,347 $ 2,449 $ 5,753 $ 12,549 $ 284,901 $ 297,450 $ 418

Loans Past
Due greater
30-59 Days 60-89 Days Greater than Total Past than 90 Days
As of December 31, 2010 Past Due Past Due 90 Days Due Current Total Loans and Accruing

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

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

The following tables summarize the activity and the primary segments of the allowance for loan losses, segregated into the amount required for loans individually evaluated for impairment and the amount required for loans collectively evaluated for impairment as of and for the three months ended March 31, 2011 and as of and for the year ended December 31, 2010 (in thousands):

Obligations of
Commercial, states and
financial and Real estate - Real estate - Real estate - political
As of March 31, 2011 agricultural commercial construction mortgage Home equity subdivisions Personal Total
Allowance for loan losses:
Beginning Balance, January 1, 2011 $ 283 $ 875 $ 93 $ 1,098 $ 391 $ — $ 84 $ 2,824
Charge-offs (4 ) — — (16 ) — — — (20 )
Recoveries — — — — — — 9 9
Provisions 70 26 17 13 (19 ) — (19 ) 88

Ending balance $ 349 $ 901 $ 110 $ 1,095 $ 372 $ — $ 74 $ 2,901

Ending balance: individually evaluated for impairment $ — $ 570 $ — $ — $ — $ — $ — $ 570
Ending balance: collectively evaluted for impairment $ 349 $ 331 $ 110 $ 1,095 $ 372 $ — $ 74 $ 2,331

Loans, net of unearned interest:
Ending balance $ 37,660 $ 43,610 $ 12,096 $ 139,282 $ 43,866 $ 12,692 $ 8,244 $ 297,450

Ending balance: individually evaluted for impairment $ 288 $ 6,561 $ — $ — $ — $ — $ — $ 6,849
Ending balance: collectively evaluated for impairment $ 37,372 $ 37,049 $ 12,096 $ 139,282 $ 43,866 $ 12,692 $ 8,244 $ 290,601

Obligations of
Commercial, states and
financial and Real estate - Real estate - Real estate - political
As of December 31, 2010 agricultural commercial construction mortgage Home equity subdivisions Personal Total
Allowance for loan losses:
Ending balance $ 283 $ 875 $ 93 $ 1,098 $ 391 $ — $ 84 $ 2,824

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

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

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

NOTE 11 — Fair Value Measurements

~~ASC Topic 820,~~~~Fair Value Measurements and Disclosures~~, is effective January 1, 2008, for financial assets and financial liabilities and on January 1, 2009, for non-financial assets and non-financial liabilities. This guidance defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and expands disclosures about fair value measurements.

Fair value measurement and disclosure guidance defines fair value as the price that would be received to sell the asset or transfer the liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions. Additional guidance is provided on determining when the volume and level of activity for the asset or liability has significantly decreased. The guidance also includes guidance on identifying circumstances when a transaction may not be considered orderly.

Fair value measurement and disclosure guidance provides a list of factors that a reporting entity should evaluate to determine whether there has been a significant decrease in the volume and level of activity for the asset or liability in relation to normal market activity for the asset or liability. When the reporting entity concludes there has been a significant decrease in the volume and level of activity for the asset or liability, further analysis of the information from that market is needed, and significant adjustments to the related prices may be necessary to estimate fair value in accordance with fair value measurement and disclosure guidance.

This guidance clarifies that, when there has been a significant decrease in the volume and level of activity for the asset or liability, some transactions may not be ~~orderly. In those situations,~~orderly and the entity must evaluate the weight of the evidence to determine whether the transaction is orderly. The guidance provides a list of circumstances that may indicate that a transaction is not orderly. A transaction price that is not associated with an orderly transaction is given little, if any, weight when estimating fair value.

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

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

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

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

A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters. Valuation adjustments may be made to ensure that financial instruments are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and the ~~Corporation’s~~counter party’s creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. The Corporation’s valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While management believes the Corporation’s valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

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

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

The following table summarizes financial assets and financial liabilities measured at fair value as of ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009,~~2010, segregated by the level of the valuation inputs within the fair value hierarchy utilized to measure fair value (in thousands). There were no transfers of assets between fair value Level 1 and Level 2 for the quarter ended ~~September 30, 2010.~~March 31, 2011.


			(Level 1)		(Level 2)		(Level 3)				(Level 1)		(Level 2)		(Level 3)
					Significant		Significant						Significant
			Quoted Prices in		Other		Other				Quoted Prices in		Other		Significant Other
	September 30,		Active Markets for		Observable		Unobservable		March 31,		Active Markets for		Observable		Unobservable
	2010		Identical Assets		Inputs		Inputs		2011		Identical Assets		Inputs		Inputs
Measured at fair value on a recurring basis:
Debt securities available-for-sale:

U.S. Treasury securities and obligations of U.S.
Government agencies and corporations									$	53,954	$	—	$	53,954	$	—
Obligations of state and political subdivisions										42,238		—		42,238		—
Corporate notes										1,027		—		1,027		—
Mortgage-backed securities										2,779		—		2,779		—
Equity securities available-for-sale	$	835	$	835	$	—	$	—		984		984		—		—
Debt securities available-for-sale		78,065		—		78,065		—

Measured at fair value on a non-recurring basis:
Impaired loans		1,568		—		—		1,568		1,566		—		—		1,566
Other real estate owned		494		—		—		494

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

Financial Instruments
(in thousands)


	September 30, 2010				December 31, 2009				March 31, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair		Carrying		Fair		Carrying		Fair
	Value		Value		Value		Value		Value		Value		Value		Value
Financial assets:
Cash and due from banks	$	10,178	$	10,178	$	18,613	$	18,613	$	8,481	$	8,481	$	12,758	$	12,758
Interest bearing deposits with banks		355		355		82		82		147		147		218		218
Federal funds sold		5,000		5,000		1,200		1,200		4,900		4,900		12,300		12,300
Interest bearing time deposits with banks		1,345		1,341		1,420		1,447		1,096		1,119		1,345		1,360
Securities		78,900		78,900		77,356		77,356		100,982		100,982		79,923		79,923
Restricted investment in FHLB stock		2,197		2,197		2,197		2,197		1,983		1,983		2,088		2,088
Total loans, net of unearned interest		304,260		321,788		311,630		324,061		297,450		310,495		298,102		312,621
Accrued interest receivable		1,897		1,897		2,284		2,284		1,845		1,845		1,763		1,763

Financial liabilities:
Non-interest bearing deposits		53,886		53,886		55,030		55,030		62,219		62,219		60,696		60,696
Interest bearing deposits		318,662		325,510		322,367		327,724		324,198		330,779		316,094		323,003
Securities sold under agreements to repurchase		2,875		2,875		3,207		3,207		2,631		2,631		3,314		3,314
Long-term debt		—		—		5,000		5,077
Other interest bearing liabilities		1,178		1,180		1,146		1,148		1,201		1,208		1,200		1,202
Accrued interest payable		588		588		681		681		495		495		499		499

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

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

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

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

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

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

~~NOTE 11 — Subsequent Events~~

On October 19, 2010, the Board of Directors declared a regular cash dividend for the fourth quarter of 2010 of $0.21 per share to shareholders of record on November 15, 2010, payable on December 1, 2010.


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

Forward Looking Statements:

The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words “believes,” “anticipates,” “contemplates,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results, performance or achievements expressed or implied by such forward-looking statements to differ materially from those projected. Those risks and uncertainties include changes in interest rates and their impact on the level of deposits, loan demand and value of loan collateral, changes in the market value of the securities portfolio, increased competition from other financial institutions, governmental monetary policy, legislation and changes in banking regulations, changes in levels of FDIC deposit insurance premiums and assessments, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. The Corporation undertakes no obligation to update such forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Critical Accounting Policies:

Disclosure of the Corporation’s significant accounting policies is included in the notes to the consolidated financial statements of the Corporation’s Annual Report on Form 10-K for the year ended December 31, ~~2009.~~2010. Some of these policies require significant judgments, estimates, and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses, as well as management’s evaluation of the investment portfolio for other-than-temporary impairment.

General:

The following discussion relates to the consolidated financial condition of the Corporation as of ~~September 30, 2010,~~March 31, 2011, as compared to December 31, ~~2009,~~2010, and the consolidated results of operations for the three ~~and nine~~ months ended ~~September 30, 2010,~~March 31, 2011, compared to the same ~~periods~~period in ~~2009.~~2010. This discussion should be read in conjunction with the interim consolidated financial statements and related ~~footnotes~~notes included herein.

Introduction:

Juniata Valley Financial Corp. is a Pennsylvania corporation organized in 1983 to become the holding company of The Juniata Valley Bank. The Bank is a state-chartered bank headquartered in Mifflintown, Pennsylvania. Juniata Valley Financial Corp. and its subsidiary bank derive substantially all of their income from banking and bank-related services, including interest earned on residential real estate, commercial mortgage, commercial and consumer loans, interest earned on investment securities and fee income from deposit services and other financial services to its customers through 12 locations in central Pennsylvania. Juniata Valley Financial Corp. also owns 39.16% of the First National Bank of Liverpool (“Liverpool”), located in Liverpool, Pennsylvania. The Corporation accounts for Liverpool as an unconsolidated subsidiary using the equity method of accounting.

As of ~~September 30, 2010,~~March 31, 2011, the Corporation ~~has~~ evaluated its large commercial loan relationships and other significant loans for impairment. Of the ~~loans~~eight loan relationships considered to be impaired that were evaluated by management, there is one loan relationship onwith respect to which ~~a determination has been made~~management determined that it is probable that principal and interest will not be collected in full. This loan relationship has an aggregate outstanding balance of ~~$2,138,000.~~$2,136,000. The amount of impairment estimated for these collateral-dependent loans included in the loan relationship is ~~$570,000. Specific allocations totaling~~ $570,000 ~~have~~and a specific allocation has been included within the loan loss reserve for these loans, adjusting the carrying value of these loans to the fair value of ~~$1,568,000.~~$1,566,000. Management believes that the specific reserve is adequate to cover potential future losses related to this relationship. Other loans evaluated for impairment have an aggregate outstanding balance of ~~$4,785,000,~~$4,713,000, but it has been determined that there is sufficient collateral to expect full repayment, and no impairment charge has been recorded. ~~Management believes that the specific reserve is adequate to cover potential future losses related to these relationships.~~ Otherwise, there are no material loans classified for regulatory purposes as loss, doubtful, substandard, or special mention which management expects to significantly impact future operating results, liquidity or capital resources. Following is a summary of the Bank’s non-performing loans on ~~September 30, 2010~~March 31, 2011 as compared to December 31, ~~2009.~~2010.

Trust fee income was $7,000, or ~~8.4% higher~~5.8%, less in the ~~third~~first quarter of ~~2010~~2011 as compared to the ~~third~~first quarter of ~~2009,~~2010, and commissions from sales of non-deposit products in the ~~third~~first quarter of ~~2010~~2011 were ~~21.2%~~7.3%, or ~~$14,000,~~$7,000, higher than in the same quarter of the previous year.

Customer service fees ~~were $102,000,~~declined by $70,000, or ~~23.3%~~18.3%, ~~lower~~ in the ~~third~~first quarter of ~~2010 versus~~2011 compared to the ~~third quarter of 2009, primarily~~same period in 2010 as a direct result of ~~reductions~~regulations enacted in July of 2010 that prohibit banks from charging certain fees ~~collected on overdrawn~~for services provided to customers that overdraw deposit accounts. ~~On July 1, 2010, a regulation change resulted in a modification to the conditions under which overdraft fees may be assessed, which contributed to the decline in customer service fees.~~

Sales of properties carried as other real estate generated net gains of ~~$30,000~~$15,000 in the ~~third~~first quarter of ~~2010,~~2011, as compared to a net loss of ~~$33,000~~$1,000 during the same period one year earlier.

In An increase in fees derived from electronic payment activity through the ~~third~~use of debit cards was primarily responsible for the increase in other noninterest income in the first quarter of ~~2010, management identified other-than-temporary impairment on one equity in~~2011 compared to the ~~Corporation’s common stock portfolio and, accordingly, an impairment charge to earnings of $40,000 was recorded. The same type of analysis in the third~~first quarter of ~~2009 resulted in no other-than-temporary impairment charge in that quarter.~~2010.

As a percentage of average assets, annualized non-interest income, exclusive of net gains on the sale of securities, was 0.93% in both the first quarter periods of 2011 and ~~impairment charge, was 0.88% in the third quarter of 2010 as compared to 0.86% in the same period of 2009, an improvement of 2 basis points.~~2010.

Non-interest Expense:

Total non-interest expense increased ~~$154,000,~~$33,000, or ~~5.1%~~1.0%, in the ~~third~~first quarter of ~~2010~~2011 as compared to ~~2009.~~2010.

Employee compensation expense and employee benefits combined for a total of $1,656,000 in the first quarter of 2011, representing a decrease in expense of $46,000 when compared to the first quarter of 2010. Temporary staffing reductions, coupled with reductions in costs for medical insurance and net periodic expense for the Corporation’s defined benefit plan were responsible for the variance. Occupancy and equipment expense increased by ~~$25,000,~~a combined total of $46,000, or ~~11.5%~~13.1%, in the ~~third~~first quarter of ~~2010~~2011 as compared to the ~~third~~first quarter of ~~2009,~~2010, due to higher utility costs, fixed asset additions and facilities maintenance. Data processing expenses in the ~~third~~first quarter of 2011 were less than in the first quarter of 2010 ~~exceeded those in~~by $43,000, resulting from cost benefits realized from the ~~third quarter of 2009 by $42,000, or 13%, as a result of a~~ major data processing ~~conversion. The increased cost~~conversion that took place in ~~this period is not expected to continue to be a trend, as it was~~ the ~~result~~second quarter of ~~conversion-related costs.~~2010. Professional fees were ~~42.2%~~49.5%, or ~~$38,000,~~$46,000, greater in the ~~third~~first quarter of ~~2010~~2011 as compared to the ~~third~~first quarter of ~~2009,~~2010, due to some fees incurred for ~~special~~consulting services that occur infrequently. ~~FDIC insurance premiums were $17,000, or 14.0%, higher in the third quarter of 2010 as compared to the third quarter of 2009, because the premium rates have increased.~~

~~As a percentage of average assets, annualized non-interest expense was 2.86% in the third quarter of 2010 as compared to 2.72% in the same period of 2009, an increase of 14 basis points.~~

~~Provision for income taxes:~~

~~Income tax expense in the third quarter of 2010 was $12,000, or 2.8%, higher than in the same time period in 2009.~~ The effective tax rate in the third quarter of 2010 was 25.6% versus 25.0% in 2009. The ratio of tax-free interest-earning assets to total assets decreased in 2010, providing for a slightly lower amount of non-taxable interest income.

~~Comparison of the Nine Months Ended September 30, 2010 and 2009~~

~~Operations Overview:~~

Net income for the first nine months of 2010 was $3,611,000, a decrease of $252,000, or 6.5%, compared to the same period in 2009. Basic and diluted earnings per share were $0.84 in the first nine months of 2010, compared to $0.89 in the first nine months of 2009. Annualized return on average equity for the first nine months of 2010 was 9.50%, compared to the prior year’s ratio for the same period of 10.48%. For the year-to-date period ended September 30, annualized return on average assets was 1.10% in 2010, versus 1.18% in 2009. The decrease in net income was primarily a result of the increase in ~~the provision for loan losses, a decrease in customer service fees collected and some items recorded in 2009 that affected comparability between the two periods.~~

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

Nine Months Ended
September 30,
2010 2009
Return on average assets (annualized) 1.10 % 1.18 %
Return on average equity (annualized) 9.50 % 10.48 %
Average equity to average assets 11.53 % 11.30 %

Non-interest income, excluding securities gains and impairment charges, as a percentage of average assets (annualized) 0.91 % 1.02 %
Non-interest expense as a percentage of average assets (annualized) 2.91 % 2.91 %

~~There were several items that impact comparability when making comparisons~~other noninterest expense of the two periods. Charges to earnings for equity securities deemed to be other-than-temporarily impaired and gains on the sale of properties occurred in the first nine months of 2010 and 2009, with the charge in 2010 being $186,000 less than in 2009. Additionally in 2009, noninterest income$57,000 was recorded for Pennsylvania sales tax refunds and for deferred fees earned on the sale of credit life insurance. In the area of non-interest expense, in 2009, a special assessment was charged to banks by the FDIC.

~~The discussion that follows further explains these and other changes in the components of net income when comparing the year-to-date results of operations for 2010 and 2009.~~

~~Net Interest Income:~~

~~Net interest income was $12,064,000 for the first nine months of 2010, as compared to $12,005,000 in the same period in 2009.~~

Interest on loans decreased $915,000, or 5.8%, in the first nine months of 2010 as compared to the same period in 2009. An average weighted interest rate decrease of 38 basis points, and a decrease of $972,000 in the average balance of the loan portfolio, were responsible for lower interest income in comparison to the 2009 period.

Interest earned on investment securities and money market investments decreased $354,000 in the first nine months of 2010 as compared to 2009, with average balances increasing $5,485,000 during the period. The yield on money market investments (federal funds and interest bearing deposits) decreased by 122 basis points in the first nine months of 2010 as compared to the first nine months of 2009,primarily due to the ~~reduction in balances~~costs associated with maintaining foreclosed assets, such as legal fees and ~~rates in interest bearing deposits. Likewise, the overall pre-tax yield on the investment securities portfolio decreased during that same timeframe by 65 basis points.~~

Average interest-bearing deposits and securities sold under agreements to repurchase increased by $2,531,000, while average non-interest bearing deposits grew by $3,989,000, when comparing the first nine months of 2010 to the same period in 2009. This change in the mix of deposits, in addition to the sustained low rate environment, contributed to a reduction in the cost to fund earning assets, which was reduced by 56 basis points, to 1.43%, in the first nine months of 2010.

Total average earning assets during the first nine months of 2010 were $399,869,000, compared to $395,356,000 during the first nine months of 2009, yielding 5.45% in 2010 versus 5.94% in 2009. Funding costs for the earning assets were 1.43% and 1.89% for the nine months ended September 30, 2010 and 2009, respectively. Net interest margin on a fully tax-equivalent basis for the first nine months of 2010 was 4.22%. For the same period in 2009, the fully-tax equivalent net interest margin was 4.24%.

~~Provision for Loan Losses:~~

In the first nine months of 2010, the provision made for loan losses was $637,000. Management regularly reviews the adequacy of the loan loss reserve and makes assessments as to specific loan impairment, historical charge-off expectations, general economic conditions in the Bank’s market area, specific loan quality and other factors. In the first nine months of 2009, a loan loss provision of $377,000 was recorded. The increase in the provision in the 2010 period resulted from the reduction in the value of collateral supporting several impaired loans.

~~Non-interest income:~~

Non-interest income in the first nine months of 2010 was $2,983,000, compared to $3,103,000 in the first nine months of 2009, a decrease of $120,000. As mentioned in the overview above, there were several items that impact comparability on non-interest income when making comparisons of the two periods. The following table quantifies the impact of these items.

Year-to-date through September 30,
Non-interest income (in thousands) 2010 2009
Securities other-than-temporary impairment charge $ (40 ) $ (226 )
Gains on the sale of securities 31 —
Gains on the sale of OREO 36 —
Refund of overcharged PA sales tax from years 2004-2006 — 40
Prior period income from credit-life insurance sales — 323

Total positive impact on non-interest income $ 27 $ 137

In the nine months ended in September 2010, management identified other-than-temporary impairment on one equity in the Corporation’s common stock portfolio and, accordingly, an impairment charge to earnings of $40,000 was recorded. During the same period in 2009, management similarly identified other-than-temporary impairment on two equities in the Corporation’s common stock portfolio, resulting in an impairment charge to earnings of $226,000. The Corporation recognized no gains or losses from the sales or calls of securities during the first half of 2009, while a net gain of $31,000 was recorded in the first nine months of 2010. Sales of properties carried as otherdelinquent real estate generated net gains of $36,000 in the first nine months of 2010, as compared to a net gain of zero during the same period one year earlier. As a result of petitions to the state of Pennsylvania disputing certain charges for state sales tax over the periods of 2004 through 2006, the Corporation received a refund of $40,000 in the first half of 2009. Included also in non-interest income in the first nine months of 2009 was an adjustment of $323,000, representing previously unrecorded fees earned in prior periods from the sales of insurance policies on loans. The adjustment was deemed by management to be immaterial to the consolidated financial statements in all prior periods and therefore required no prior period restatement of earnings. These types of transactions generally do not occur on a regular basis as part of recurring operating income. In the aggregate, the positive impact of these transactions on non-interest income was $110,000 greater in the first nine months of 2009 than in the same period in 2010.

Trust fees earned in the first nine months of 2010 were $47,000 higher than those earned in the first nine months of 2009, primarily due to estate fees earned. Fees for customer service on deposit accounts in the first nine months of 2010 decreased compared to the same period in 2009 by $131,000, or 10.6%, due to reduced activity in the overdraft protection product, brought about in part by a change in regulation that modified the conditions under which overdraft fees are assessed. At $301,000, commissions from the sale of non-deposit products were 7.1% less than the $324,000 in commissions earned in 2009. Income from bank owned life insurance and annuities increased in the first nine months of 2010 compared to the first nine months of 2009 by $45,000, or 12.9%, as a result of carrier diversification. Income from our unconsolidated subsidiary was $179,000, representing earnings recorded under the equity method of accounting for the ownership of 39.16% of the First National Bank of Liverpool during the first nine months of 2010, a 22.6% increase over the previous year’s same period.

As a percentage of average assets, annualized non-interest income, exclusive of net gains on the sale of securities and impairment charge, was 0.91% in the first nine months of 2010 as compared to 1.02% in the same period of 2009. If the items impacting comparability were excluded from the computation, the ratios would be 0.90% in 2010 and 0.91% in 2009.

~~Non-interest expense:~~

Total non-interest expense increased $92,000, or 1.0%, in the first nine months of 2010 as compared to 2009. The calculation of the regular deposit insurance premium was revised in June of 2009 and the rate was increased, creating a negative variance of $103,000 in the first nine months of 2010 versus the first nine months of 2009. In addition to the increase in the regular premium, in June of 2009, a one-time special deposit insurance assessment by the FDIC of $194,000 was recorded. All financial institutions insured by the FDIC incurred the cost of a special assessment at that time based upon each banks insurance risk. This special assessment has not been repeated in 2010, and therefore, FDIC insurance expense through September 2010 was $91,000 lower than during the 2009 period.

Employee compensation and benefits costs increased by $63,000, or 1.2%, in first nine months of 2010 compared to the first nine months of 2009, primarily due to an increase in part time salaries and medical insurance costs. Other notable changes in non-interest expense in the comparable periods included increases of $27,000 in costs to maintain foreclosed assets and $43,000 in charitable donations.taxes.

As a percentage of average assets, annualized non-interest expense was 2.91% in the first ~~nine months~~quarter of ~~both~~2011 as compared to 2.88% in the same period of 2010, ~~and 2009.~~an increase of 3 basis points.

Provision for income taxes:

Income tax expense in the first ~~nine months~~quarter of ~~2010~~2011 was ~~$161,000,~~$23,000, or ~~11.9%~~5.7%, ~~less~~higher than in the same time period in ~~2009.~~2010. The effective tax rate in ~~2010~~the first quarter of 2011 was ~~24.9%~~25.5% versus ~~26.0%~~25.2% in ~~2009. The ratio of tax-free interest-earning assets to total assets increased in 2010, providing for a lesser amount of non-taxable interest income.~~2010.

Liquidity:

The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs of the Corporation and to take advantage of income producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of the Corporation to maintain a high level of liquidity in all economic environments. Principal sources of asset liquidity are provided by securities maturing in one year or less, other short-term investments such as federal funds sold and cash and due from banks. Liability liquidity, which is more difficult to measure, can be met by attracting deposits and maintaining the core deposit base. The Corporation is a member of the Federal Home Loan Bank of Pittsburgh for the purpose of providing short-term liquidity when other sources are unable to fill these needs. During the first ~~nine~~three months of ~~2010, the average balance of short-term~~2011, there were no borrowings from the Federal Home Loan ~~Bank was $208,000, with none outstanding on September 30, 2010.~~Bank. As of ~~September 30, 2010,~~March 31, 2011, the Corporation had no long-term debt and had unused borrowing capacity with the Federal Home Loan Bank of ~~$150~~$158 million.

Funding derived from securities sold under agreements to repurchase (accounted for as collateralized financing transactions) is available through corporate cash management accounts for business customers. This product gives the Corporation the ability to pay interest on corporate checking accounts.

In view of the sources previously mentioned, management believes that the Corporation’s liquidity is capable of providing the funds needed to meet loan demand.

Off-Balance Sheet Arrangements:

The Corporation’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk, credit risk, and interest rate risk. These commitments consist mainly of loans approved but not yet funded, unused lines of credit and letters of credit issued using the same credit standards as on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the commitment terms. Letters of credit are conditional commitments issued to guarantee the financial performance obligation of a customer to a third party. Unused commitments and letters of credit at ~~September 30, 2010~~March 31, 2011 were ~~$21,185,000~~$22,382,000 and ~~$968,000,~~$835,000, respectively. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation. Management believes that any amounts actually drawn upon can be funded in the normal course of operations. The Corporation has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.

Interest Rate Sensitivity:

Interest rate sensitivity management is the responsibility of the Asset/Liability Management Committee. This process involves the development and implementation of strategies to maximize net interest margin, while minimizing the earnings risk associated with changing interest rates. Traditional gap analysis identifies the maturity and re-pricing terms of all assets and liabilities. A simulation analysis is used to assess earnings and capital at risk from movements in interest rates. See Item 3 for a description of the complete simulation process and results.

Capital Adequacy:

Bank regulatory authorities in the United States issue risk-based capital standards. These capital standards relate a banking ~~Corporation’s~~company’s capital to the risk profile of its assets and provide the basis by which all banking companies and banks are evaluated in terms of capital adequacy. The risk-based capital standards require all banks to have Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at least 8% of risk-adjusted assets. Tier 1 capital includes common stockholders’ equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Total capital is comprised of Tier 1 capital, limited life preferred stock, qualifying debt instruments, and the reserves for possible loan losses. Banking regulators have also issued leverage ratio requirements. The leverage ratio requirement is measured as the ratio of Tier 1 capital to adjusted average assets. At ~~September 30, 2010,~~March 31, 2011, the Bank exceeded the regulatory requirements to be considered a “well capitalized” financial institution, i.e., a leverage ratio exceeding 5%, Tier 1 capital exceeding 6% and total capital exceeding 10%.


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

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

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

Recent declines and volatility in the values of financial institution stocks have significantly reduced the likelihood of realizing significant gains in the near-term. Although the Corporation has realized occasional gains from this portfolio in the past, the primary objective of the portfolio is to achieve value appreciation in the long term while earning consistent attractive after-tax yields from dividends. The carrying value of the financial institutions stocks accounted for 0.2% of the Corporation’s total assets as of ~~September 30, 2010.~~March 31, 2011. Management performs an impairment analysis on the entire investment portfolio, including the financial institutions stocks, on a quarterly basis. As of ~~September 30, 2010,~~March 31, 2011, no “other-than-temporary” impairment was ~~identified and recorded on one stock.~~identified. There is no assurance that further declines in market values of the common stock portfolio in the future will not result in “other-than-temporary” impairment charges, depending upon facts and circumstances present.

The equity investments in the Corporation’s portfolio had an adjusted cost basis of approximately $935,000 and a fair value of ~~$835,000~~$983,000 at ~~September 30, 2010.~~March 31, 2011. Net unrealized ~~losses~~gains in this portfolio were approximately ~~$100,000~~$49,000 at ~~September 30, 2010.~~March 31, 2011.

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

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

The primary objective of the Corporation’s asset-liability management process is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure profitability. A simulation analysis is used to assess earnings and capital at risk from movements in interest rates. The model considers three major factors of (1) volume differences, (2) repricing differences, and (3) timing in its income simulation. As of the most recent model run, data was disseminated into appropriate repricing buckets, based upon the static position at that time. The interest-earning assets and interest-bearing liabilities were assigned a multiplier to simulate how much that particular balance sheet item would re-price when interest rates change. Finally, the estimated timing effect of rate changes is applied, and the net interest income effect is determined on a static basis (as if no other factors were present). As the table below indicates, based upon rate shock simulations on a static basis, the Corporation’s balance sheet is relatively rate-neutral as rates ~~would change downward.~~decline. Each 100 basis point increase results in approximately ~~$129,000~~$351,000 decline in net interest income in the static environment. This negative effect of rising rates is offset to a large degree by the positive effect of imbedded options that include loans floating ~~off~~above their floors and likely internal deposit pricing strategies. After applying the effects of options, over a one-year period, the net effect of an immediate 100, 200, 300 and 400 basis point rate increase would change net interest income by ~~$(67,000)~~$(27,000), ~~$(23,000)~~$(25,000), ~~$65,000~~$(856,000) and ~~$155,000,~~$(906,000), respectively. Rate shock modeling was done for a declining rate of 25 basis points only, as the federal funds target rate currently is between zero and 0.25%. As the table below indicates, the net effect of interest rate risk on net interest income is essentially neutral in a rising rate ~~environment.~~environment through a 200 basis point increase. Juniata’s rate risk policies provide for maximum limits on net interest income that can be at risk for 100 through 400 basis point changes in interest rates.


Item 4.		~~Item 4.~~ Controls and Procedures

Disclosure Controls and Procedures

As of ~~September 30, 2010,~~March 31, 2011, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”), Rule 13a-15(e). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote.

Attached as Exhibits 31 and 32 to this quarterly report are certifications of the Chief Executive Officer and the Chief Financial Officer required in accordance with Rule 13a-14(a) of the Exchange Act. This portion of the Corporation’s quarterly report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.

Changes in Internal Control Over Financial Reporting

There were no significant changes in the Corporation’s internal control over financial reporting since December 31, ~~2009.~~2010.

PART II — OTHER INFORMATION

~~Item 1.~~
Item 1. LEGAL PROCEEDINGS

In the opinion of management of the Corporation, there are no legal proceedings pending to which the Corporation or its subsidiary is a party or to which its ~~subsidiary is a party or to which their~~ property is subject, which, if determined adversely to the Corporation or its subsidiary, would be material in relation to the Corporation’s or its subsidiary’s financial condition. There are no proceedings pending other than ordinary routine litigation incident to the business of the Corporation or its subsidiary. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Corporation or its subsidiary by government authorities.

~~Item 1A.~~
Item 1A. RISK FACTORS

~~In addition to the risk factors that were disclosed in the Annual Report on Form 10-K as of December 31, 2009, the Corporation has added the following.~~

~~Recently enacted financial reform legislation may have a significant impact on the Corporation and results of its Operation.~~

On July 21, 2010, the President of the United States signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Act”). The goals of the new legislation include restoring public confidence in the financial system following the 2007-2008 financial and credit crises, preventing another financial crisis and allowing regulators to identify failings in the system before another crisis can occur. Among other things, the Act creates the Financial Stability Oversight Council, with oversight authority for monitoring and regulating systemic risk, and the Bureau of Consumer Financial Protection, which will have broad regulatory and enforcement powers over consumer financial products and services. The Act also changes the responsibilities of the current federal banking regulators, imposes additional corporate governance and disclosure requirements in areas such as executive compensation and proxy access, and limits or prohibits proprietary trading and hedge fund and private equity activities of banks. The scope of the Act impacts many aspects of the financial services industry, and it requires the development and adoption of many implementing regulations over the next several months and years; thus, the effects of the 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 Act and the approaches taken in implementing regulations. The Corporation and the entire financial services industry have begun to assess the potential impact of the Act on business and operations, but at this early stage, the likely impact cannot be ascertained with any degree of certainty. However, it would appear that the Corporation is likely to be impacted by the Act in the areas of corporate governance, deposit insurance assessments, capital requirements and restrictions on fees that may be charged to consumers.
There have been no material changes to the risk factors that were disclosed in the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2010.

2931

~~Mortgage foreclosure practices and procedures in our industry have come under public and regulatory scrutiny.~~

Recently, the media began reporting on possible documentation and procedural problems with respect to mortgage foreclosures at several of the nation’s largest banks and mortgage servicing businesses. As a result of the economic downturn which began in 2008 and which persists today, larger banks and mortgage servicing companies have been processing a large number of foreclosures nationwide. It has been reported that, in some foreclosures, the required procedural steps (which often vary by state and in some cases by local jurisdictions within a state) required to complete a foreclosure have not been followed. As a result, questions have been raised concerning the validity of some foreclosures. The foreclosure procedures used by banks and servicing companies have also come under scrutiny by consumer advocates, attorneys representing borrowers, federal and state government officials and banking regulators.

As a financial institution, Juniata offers residential mortgage loans. A small percentage of Juniata’s borrowers default on their mortgage loans. When a default occurs, Juniata attempts to resolve the default in a way that provides the greatest return to Juniata, which is typically achieved by pursuing options that allow the borrower to remain as the owner of the home. However, when these efforts are not successful, it becomes necessary for Juniata to foreclose on the loan. Unlike larger banks and mortgage servicers, however, Juniata analyzes whether foreclosure is necessary on a case-by-case basis and the number of residential foreclosures undertaken by Juniata is not substantial. Juniata is not aware of any material deficiencies with respect to its foreclosure procedures.

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

~~The following table provides information on repurchases by the Corporation of its common stock in each month of the quarter ended September 30, 2010:~~
The following table provides information on repurchases by the Corporation of its common stock in each month of the quarter ended March 31, 2011:

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

July 1–31, 2010 — $ — — 147,836
August 1–31, 2010 — — — 147,836
September 1–30, 2010 8,300 17.50 8,300 139,536

Totals 8,300 8,300 139,536

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

January 1-31, 2011 — $ — — 122,036
February 1-28, 2011 3,000 16.95 3,000 119,036
March 1-31, 2011 16,500 16.95 16,500 102,536

Totals 19,500 19,500 102,536


(1)		On March 23, 2001, the Corporation announced plans to buy back 100,000 (200,000 on a post-split basis) shares of its common stock. There is no expiration date to this buyback plan, but subsequent to the initial plan, the Board of Directors authorized the repurchase of 400,000 additional shares in 2005 and then authorized 200,000 additional shares in September of 2008. As of ~~November 8, 2010,~~May 9, 2011, the number of shares that may yet be purchased under the program was ~~139,536.~~102,536. No repurchase plan or program expired during the period covered by the table. The Corporation has no stock repurchase plan or program that it has determined to terminate prior to expiration or under which it does not intend to make further purchases.


PART I — FINANCIAL INFORMATION

Item 1. Financial Statements

Consolidated Statements of Financial Condition as of ~~September 30, 2010~~March 31, 2011 and December 31, ~~2009~~2010 (Unaudited)			3

Consolidated Statements of Income for the Three ~~and Nine~~ Months Ended ~~September 30,~~March 31, 2011 and 2010 ~~and 2009~~ (Unaudited)			4

Consolidated Statements of Changes in Stockholders’ Equity for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2011 and 2010 ~~and 2009~~ (Unaudited)			5

Consolidated Statements of Cash Flows for the ~~Nine~~Three Months Ended ~~September 30,~~March 31, 2011 and 2010 ~~and 2009~~ (Unaudited)			6

Notes to Consolidated Financial Statements			7

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			1924

Item 3. Quantitative and Qualitative Disclosures about Market Risk			2729

Item 4. Controls and Procedures			2831

PART II — OTHER INFORMATION

Item 1. Legal Proceedings			2931

Item 1A. Risk Factors			2931

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			3032

Item 3. Defaults upon Senior Securities			3132

Item 4. (Removed and Reserved)			3132

Item 5. Other Information			3132

Item 6. Exhibits			3132

Signatures			3133

Exhibit 31.1
Exhibit 31.2
Exhibit 32.1
Exhibit 32.2


	9/30/2010			12/31/2009			3/31/2011			12/31/2010
Unrealized gains on available for sale securities	$	954		$	776		$	280		$	399
Unrecognized expense for defined benefit pension		(1,518	)		(1,581	)		(1,838	)		(1,864	)

Accumulated other comprehensive loss	$	(564	)	$	(805	)	$	(1,558	)	$	(1,465	)


	September 30,		December 31,		Change						March 31,		December 31,		Change
	2010		2009		$			%			2011		2010		$			%
Deposits:
Demand, non-interest bearing	$	53,886	$	55,030	$	(1,144	)		(2.1	%)	$	62,219	$	60,696	$	1,523			2.5	%
NOW and money market		78,452		75,766		2,686			3.5	%		88,761		81,378		7,383			9.1	%
Savings		47,631		42,536		5,095			12.0	%		49,161		47,112		2,049			4.3	%
Time deposits, $100,000 and more		37,020		38,453		(1,433	)		(3.7	%)		35,669		34,099		1,570			4.6	%
Other time deposits		155,559		165,612		(10,053	)		(6.1	%)		150,607		153,505		(2,898	)		(1.9	%)


Total deposits	$	372,548	$	377,397	$	(4,849	)		(1.3	%)	$	386,417	$	376,790	$	9,627			2.6	%


	September 30,		December 31,		Change						March 31,		December 31,		Change
	2010		2009		$			%			2011		2010		$			%
Loans:
Commercial, financial and agricultural	$	35,203	$	33,783	$	1,420			4.2	%	$	37,660	$	32,841	$	4,819			14.7	%
Real estate — commercial		42,533		39,299		3,234			8.2	%		43,610		44,185		(575	)		(1.3	%)
Real estate — construction		10,777		24,578		(13,801	)		(56.2	%)		12,096		11,028		1,068			9.7	%
Real estate — mortgage		144,969		135,854		9,115			6.7	%		139,282		142,608		(3,326	)		(2.3	%)
Home equity		48,169		52,893		(4,724	)		(8.9	%)		43,866		46,325		(2,459	)		(5.3	%)
Obligations of states and political subdivisions		12,910		13,553		(643	)		(4.7	%)
Obligations of states and political
subdivisions												12,692		10,960		1,732			15.8	%
Personal		9,699		11,670		(1,971	)		(16.9	%)		8,244		10,155		(1,911	)		(18.8	%)

Total loans	$	304,260	$	311,630	$	(7,370	)		(2.4	%)	$	297,450	$	298,102	$	(652	)		(0.2	%)


	Periods Ended September 30,						Periods Ended March 31,
	2010			2009			2011			2010
Balance of allowance — January 1	$	2,719		$	2,610		$	2,824		$	2,719

Loans charged off		(556	)		(391	)		(20	)		(145	)

Recoveries of loans previously charged off		11			9			9			4


Net charge-offs		(545	)		(382	)		(11	)		(141	)
Provision for loan losses		637			377			88			285

Balance of allowance — end of period	$	2,811		$	2,605		$	2,901		$	2,863


Ratio of net charge-offs during period to average loans outstanding		0.18	%		0.12	%		0.004	%		0.045	%


	Three Months		Three Months
	Ended		Ended
(Amounts, except earnings per share, in thousands)	March 31, 2011		March 31, 2010
Net income	$	1,239	$	1,188
Weighted-average common shares outstanding		4,256		4,330

Basic earnings per share	$	0.29	$	0.27


Weighted-average common shares outstanding		4,256		4,330
Common stock equivalents due to effect of stock options		3		4

Total weighted-average common shares and equivalents		4,259		4,334

Diluted earnings per share	$	0.29	$	0.27


	Nine Months		Nine Months
	Ended		Ended
	September 30, 2010		September 30, 2009
Net income	$	3,611	$	3,863

Weighted-average common shares outstanding		4,307		4,341


Basic earnings per share	$	0.84	$	0.89


Weighted-average common shares outstanding		4,307		4,341

Common stock equivalents due to effect of stock options		4		4


Total weighted-average common shares and equivalents		4,311		4,345


Diluted earnings per share	$	0.84	$	0.89


	Three Months Ended						Year-to-Date Through						Three Months Ended
	September 30,						September 30,						March 31,
	2010			2009			2010			2009

(Dollars in thousands)													2011			2010
Components of net periodic pension cost
Service cost	$	47		$	47		$	140		$	141		$	48		$	46
Interest cost		118			112			354			336			120			118
Expected return on plan assets		(144	)		(116	)		(431	)		(346	)		(158	)		(142	)
Additional recognized amounts		32			40			96			120			38			31


Net periodic pension cost	$	53		$	83		$	159		$	251		$	48		$	53


	Unrealized Losses at December 31, 2009															Unrealized Losses at December 31, 2010
	Less Than 12 Months					12 Months or More					Total					Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations	$	10,897	$	(84	)	$	—	$	—		$	10,897	$	(84	)	$	17,859	$	(259	)	$	—	$	—		$	17,859	$	(259	)
Obligations of state and political subdivisions		2,532		(8	)		—		—			2,532		(8	)		9,719		(304	)		881		(4	)		10,600		(308	)

Debt securities		13,429		(92	)		—		—			13,429		(92	)		27,578		(563	)		881		(4	)		28,459		(567	)

Equity securities		140		(23	)		496		(145	)		636		(168	)		389		(5	)		270		(75	)		659		(80	)


Total temporarily impaired securities	$	13,569	$	(115	)	$	496	$	(145	)	$	14,065	$	(260	)	$	27,967	$	(568	)	$	1,151	$	(79	)	$	29,118	$	(647	)


			Special
As of March 31, 2011	Pass		Mention		Substandard		Doubtful		Total

Commercial financial and agricultural	$	34,612	$	2,160	$	583	$	305	$	37,660
Real estate — commercial		31,121		10,392		2,097		—		43,610
Real estate — construction		8,948		2,298		250		600		12,096
Real estate — mortgage		126,634		7,072		4,162		1,414		139,282
Home equity		43,524		342		—		—		43,866
Obligations of states and political subdivisions		12,692		—		—		—		12,692
Personal		8,143		99		2		—		8,244

Total	$	265,674	$	22,363	$	7,094	$	2,319	$	297,450


			Special
As of December 31, 2010	Pass		Mention		Substandard		Doubtful		Total

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

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


			Unpaid				Average
As of March 31, 2011	Recorded		Principal		Related		Recorded		Interest Income
Impaired loans	Investment		Balance		Allowance		Investment		Recognized⁽¹⁾
With no related allowance recorded:
Commercial financial and agricultural	$	288	$	288	$	—	$	288	$	5
Real estate — commercial		4,425		4,425		—		4,728		53

With an allowance recorded:
Real estate — commercial		2,136		2,136		570		2,137		3

Total:
Commercial financial and agricultural		288		288		—		288		5
Real estate — commercial		6,561		6,561		570		6,865		56

	$	6,849	$	6,849	$	570	$	7,153	$	61


	March 31, 2011		December 31, 2010
Nonaccrual loans:
Commercial financial and agricultural	$	600	$	784
Real estate — commercial		240		240
Real estate — construction		913		850
Real estate — mortgage		3,655		3,564
Home equity		472		524
Obligations of states and political subdivisions		—		—
Personal		6		2

Total	$	5,886	$	5,964


													Loans Past
													Due greater
	30-59 Days		60-89 Days		Greater than		Total Past						than 90 Days
As of March 31, 2011	Past Due		Past Due		90 Days		Due		Current		Total Loans		and Accruing

Commercial financial and agricultural	$	72	$	172	$	600	$	844	$	36,816	$	37,660	$	—
Real estate — commercial		436		1,284		240		1,960		41,650		43,610		—
Real estate — construction		—		—		913		913		11,183		12,096		—
Real estate — mortgage		3,017		914		3,520		7,451		131,831		139,282		255
Home equity		733		46		469		1,248		42,618		43,866		158
Obligations of states and political subdivisions		—		—		—		—		12,692		12,692		—
Personal		89		33		11		133		8,111		8,244		5

Total	$	4,347	$	2,449	$	5,753	$	12,549	$	284,901	$	297,450	$	418


														Obligations of
	Commercial,													states and
	financial and			Real estate -		Real estate -		Real estate -						political
As of March 31, 2011	agricultural			commercial		construction		mortgage			Home equity			subdivisions		Personal			Total
Allowance for loan losses:
Beginning Balance, January 1, 2011	$	283		$	875	$	93	$	1,098		$	391		$	—	$	84		$	2,824
Charge-offs		(4	)		—		—		(16	)		—			—		—			(20	)
Recoveries		—			—		—		—			—			—		9			9
Provisions		70			26		17		13			(19	)		—		(19	)		88

Ending balance	$	349		$	901	$	110	$	1,095		$	372		$	—	$	74		$	2,901

Ending balance: individually evaluated for impairment	$	—		$	570	$	—	$	—		$	—		$	—	$	—		$	570
Ending balance: collectively evaluted for impairment	$	349		$	331	$	110	$	1,095		$	372		$	—	$	74		$	2,331

Loans, net of unearned interest:
Ending balance	$	37,660		$	43,610	$	12,096	$	139,282		$	43,866		$	12,692	$	8,244		$	297,450

Ending balance: individually evaluted for impairment	$	288		$	6,561	$	—	$	—		$	—		$	—	$	—		$	6,849
Ending balance: collectively evaluated for impairment	$	37,372		$	37,049	$	12,096	$	139,282		$	43,866		$	12,692	$	8,244		$	290,601

														Obligations of
	Commercial,													states and
	financial and			Real estate -		Real estate -		Real estate -						political
As of December 31, 2010	agricultural			commercial		construction		mortgage			Home equity			subdivisions		Personal			Total
Allowance for loan losses:
Ending balance	$	283		$	875	$	93	$	1,098		$	391		$	—	$	84		$	2,824

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

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

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


(Dollar amounts in thousands)	September 30, 2010			December 31, 2009			March 31, 2011			December 31, 2010
Non-performing loans
Nonaccrual loans	$	5,650		$	2,629		$	5,886		$	5,964
Accruing loans past due 90 days or more		682			1,369			418			1,007
Restructured loans		—			—			—			—


Total	$	6,332		$	3,998		$	6,304		$	6,971


Average loans outstanding	$	309,257		$	310,813		$	296,257		$	307,228

Ratio of non-performing loans to average loans outstanding		2.05	%		1.29	%		2.13	%		2.27	%


	Year-to-date through September 30,
Non-interest income (in thousands)	2010			2009
Securities other-than-temporary impairment charge	$	(40	)	$	(226	)
Gains on the sale of securities		31			—
Gains on the sale of OREO		36			—
Refund of overcharged PA sales tax from years 2004-2006		—			40
Prior period income from credit-life insurance sales		—			323

Total positive impact on non-interest income	$	27		$	137


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

400	$	(516	)	$	671		$	155		$	(1,404	)	$	498		$	(906	)
300		(386	)		451			65			(1,053	)		197			(856	)
200		(257	)		234			(23	)		(702	)		677			(25	)
100		(129	)		62			(67	)		(351	)		324			(27	)
0		—			—			—			—			—			—
-25		33			(35	)		(2	)		87			(47	)		40


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


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

July 1–31, 2010		—	$	—		—		147,836
August 1–31, 2010		—		—		—		147,836
September 1–30, 2010		8,300		17.50		8,300		139,536


Totals		8,300				8,300		139,536


3.1		—	Amended and Restated Articles of Incorporation (incorporated by reference to Exhibit 4.1 to the Corporation’s Form S-3 Registration Statement No. 333-129023 filed with the SEC on October 14, 2005)

3.2		—	Bylaws (incorporated by reference to Exhibit 3.2 to the Corporation’s report on Form 8-K filed with the SEC on December 21, 2007)

10.1		—	2004 Executive Annual Incentive Plan (incorporated by reference to Exhibit 10.15 to the Corporation’s report on Form 10-K filed with the SEC on March 16, 2005)

10.2	—	Exhibits A-B to 2004 Executive Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to the Corporation’s report on Form 8-K filed with the SEC on March ~~19, 2010)~~9, 2011)

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

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

32.1		—	Section 1350 Certification of President and Chief Executive Officer

32.2		—	Section 1350 Certification of Chief Financial Officer


	Juniata Valley Financial Corp. (Registrant)
Date ~~11-08-2010~~05-09-2011	~~By:~~By	/s/ Marcie A. Barber
		Marcie A. Barber, President and
		Chief Executive Officer (Principal Executive Officer)

Date ~~11-08-2010~~05-09-2011	~~By:~~By	/s/ JoAnn N. McMinn
		JoAnn N. McMinn, Chief Financial ~~Officer,~~
		~~Principal~~Officer (Principal Accounting Officer and Principal Financial Officer )