Juniata Valley Financial (JUVF) 10-K 2007 FY Annual report

Exhibit 13.1
Excerpts from Annual Report to Shareholders
Five-Year Financial Summary - Selected Financial Data

	2007			2006			2005			2004			2003
	(In thousands of dollars, except share and per share data)
BALANCE SHEET INFORMATION
at December 31
Assets	$	420,146		$	415,931		$	410,802		$	397,074		$	387,780
Deposits		359,457			355,169			343,466			332,642			332,984
Loans, net of allowance for loan losses		295,678			303,246			295,300			276,759			249,960
Investments		73,676			65,619			77,208			84,157			103,798
Intangible assets		389			434			—			—			—
Goodwill		2,046			2,046			—			—			—
Short-term borrowings		5,431			6,112			9,801			4,716			—
Long-term debt		—			—			5,000			5,000			—
Stockholders’ equity		48,572			47,786			47,119			50,153			50,483
Number of shares outstanding *		4,409,445			4,457,934			4,503,392			4,561,258			4,569,406
Average for the year
Assets		424,847			414,048			406,706			393,554			386,574
Stockholders’ equity		47,635			47,503			48,403			48,776			47,629
Weighted average shares outstanding *		4,434,859			4,480,245			4,550,483			4,559,168			4,581,922
INCOME STATEMENT INFORMATION
Years Ended December 31
Total interest income	$	26,723		$	24,663		$	22,707		$	21,717		$	22,500
Total interest expense		11,060			10,111			8,015			6,438			7,472
Net interest income		15,663			14,552			14,692			15,279			15,028
Provision for loan losses		120			54			28			326			304
Other income		4,199			3,830			3,323			3,445			2,760
Other expenses		12,209			11,245			11,680			10,600			10,017
Income before income taxes		7,533			7,083			6,307			7,798			7,467
Federal income tax expense		2,099			2,081			1,741			1,969			1,820
Net income	$	5,434		$	5,002		$	4,566		$	5,829		$	5,647
PER SHARE DATA *
Earnings per share - basic	$	1.23		$	1.12		$	1.00		$	1.28		$	1.24
Earnings per share - diluted		1.22			1.11			1.00			1.27			1.23
Cash dividends		0.95			0.66			1.11			1.07			0.50
Book value		11.02			10.72			10.46			11.00			11.05
FINANCIAL RATIOS
Return on average assets		1.28	%		1.21	%		1.12	%		1.48	%		1.46	%
Return on average equity		11.41			10.53			9.43			11.95			11.86
Dividend payout		77.48			59.12			110.71			83.70			40.43
Average equity to average assets		11.21			11.47			11.90			12.39			12.32
Loans to deposits (year end)		82.26			85.38			85.98			83.20			75.07

* All share and per-share data have been restated for effect of the 2 for 1 stock split on October 31, 2005.

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

OVERVIEW

This discussion concerns Juniata Valley Financial Corp. (“Company” or “Juniata”) and its wholly owned subsidiary, The Juniata Valley Bank (“Bank”). The overview is intended to provide a context for the following Management’s Discussion and Analysis of Financial Condition and Results of Operations. Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this annual report. We have attempted to identify the most important matters on which our management focuses in evaluating our financial condition and operating performance and the short-term and long-term opportunities, challenges and risks (including material trends and uncertainties) which we face. We also discuss the actions we are taking to address these opportunities, challenges and risks. The Overview is not intended as a summary of, or a substitute for review of, Management’s Discussion and Analysis of Financial Condition and Results of Operations. For comparative purposes, certain amounts have been reclassified to conform to the current-year presentation. The reclassifications had no impact on net income.

FORWARD LOOKING STATEMENTS

The information contained in this Annual Report contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder) including, without limitation, statements as to future loan and deposit volumes, the allowance and provision for possible loan losses, future interest rates and their effect on the Company’s financial condition or results of operations, the classification of the Company’s investment portfolio and other statements which are not historical facts or as to trends or management’s intentions, plans, beliefs, expectations or opinions. Such forward looking statements are subject to risks and uncertainties and may be affected by various factors which may cause actual results to differ materially from those in the forward looking statements including, without limitation, the effect of economic conditions and related uncertainties, the effect of interest rates on the Company, federal and state government regulation and competition. Certain of these risks, uncertainties and other factors are discussed in this Annual Report or in the Company’s Annual Report on Form 10-K for the year ended December 31, 2007, a copy of which may be obtained from the Company upon request and without charge (except for the exhibits thereto).

Nature of Operations

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

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

Economic and Industry-Wide Factors Relevant to Juniata

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

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

Focus of Management

Management is committed to being the preeminent financial institution in its market area and measures its success by five key elements.

Customer Relationships

Juniata strives to maximize customer satisfaction. We are sensitive to the broad array of financial alternatives available to our customers from both local and global competition. We are committed to fostering a complete customer relationship and we strive to continue to provide financial products that meet the needs of both current and future customers. One element of the Company’s strategic plan is to increase the number of Bank-provided services per household.

Shareholder Satisfaction

Management believes our investors are entitled to a good return on their investment through both stock value appreciation and dividend returns. We intend to continue to seek to maximize the value of their investment through profitable balance sheet growth and core earnings results that surpass our peers.

Balance Sheet Growth

We are committed to profitable balance sheet growth. It is our goal to continue quality growth in spite of intense competition by paying careful attention to the needs of our customers. We will continue to maintain the high credit standards that have resulted in favorable comparisons to our peer group in terms of loan charge-offs and levels of non-performing loans. We believe we consistently pay fair market rates on all deposits, and have invested wisely and conservatively, in compliance with self-imposed standards, minimizing risk of asset impairment. We aspire to increase our market share within the current communities that we serve, and to expand in contiguous areas through acquisition and investment. During 2007, we began construction on a new branch office, intended to enhance the customer experience for the nearly 2,000 customers that currently bank with us in the McAlisterville area. This re-location will allow us to offer state-of-the-art technology and provide drive-through service as well as secure ATM access. As part of our strategic plan for growth, we continue to actively seek opportunities for acquisitions of branches or stakes in other financial institutions, similar to those that have occurred in recent years.

Operating Results

We strive to produce profitability ratios that exceed those of our peers. Recognizing that net interest margins have narrowed for banks in general and that they may never return to the ranges experienced in the past, we also focus on the importance of providing fee-generating services in which customers find value. Offering a broad array of services prevents us from becoming too reliant on one form of revenue. We successfully improved earnings in 2007, including an 8.6% increase in net income and a 10% increase in diluted earnings per share over 2006 results. We believe that we have positioned our balance sheet to produce improved results in 2008 and beyond.

Commitment to the Community

We are active corporate citizens of the communities we serve. Although the world of banking is ever-changing and in some cases does not even require a physical building, we believe that our community banking philosophy is still valid. Despite technological advances, banking is still a personal business, particularly in the rural areas we serve. We believe that our customers shop for services and value a relationship with an institution involved in the same community, with the same interests in its prosperity. We have a foundation and a history in each of the communities we serve. Management takes an active role in local business and industry development organizations to help attract and retain commerce in our market area. We provide businesses, large and small, with financial tools and financing needed to grow and prosper. We support charitable programs that benefit the local communities, not only with monetary contributions, but also with personal involvement by our volunteering employees.

Juniata’s Opportunities

Through market analysis, we believe that there are opportunities to enhance our sales effort in order to increase deposit market share in rural central Pennsylvania. Our strategic focus during 2008 and beyond is to increase exposure of our community banking officers in their respective service areas and attract new and increased banking relationships.

We seek to continually enhance our customer delivery system, both through technology and physical facilities. During 2007, we began construction on a new community office, at which the service for our McAlisterville area customers will be relocated. The new office will provide improved access and customer convenience. We actively seek other opportunities to expand our branch network through acquisitions. We continually examine opportunities to upgrade technology both to cater to our customers’ needs and to increase operational efficiency. We believe that it is imperative that our customers have convenient and easy access to personal financial services that match their particular lifestyle, whether it is through electronic or personal delivery.

In the current upheaval in the financial services industry, we believe an opportunity exists for banks such as ours to offer the trusted, personal service of a locally managed institution that has roots in the community reaching back 140 years.

Juniata’s Challenges

Competition

Each year, we experience more intense competition than we have ever seen in our long history. No longer is our competition limited to local community institutions or strictly to financial institutions. Our customers receive, on a daily basis, direct mail advertising from both local competition and large regional and national institutions. Attractive “loss-leader” offers are made to entice our customers to transfer all or part of their business. To meet this challenge, we stay in close contact with our customers, monitoring their satisfaction with our services through surveys, personal visits and networking in the communities we serve. We strive to meet our customers’ expectations and deliver consistent high-quality service.

Rate environment

We intend to maintain making what we believe to be rational pricing decisions for loans, deposits and non-deposit products. This strategy can be difficult to maintain, as many of our peers appear to be pricing for growth, rather than long-term profitability and stability. We believe that the result of a strategy of “growth for the sake of growth” can be seen in the current widespread sub-prime lending problems, which have had an adverse impact on the entire financial services industry. We intend to maintain our core pricing principles, which we believe protect and preserve our future as a sound community financial services provider.

Public perception

It is unknown how the public will ultimately respond to current events such as recession concerns, the general stigma created when many large, well-known and respected banks were struck with sub-prime lending problems and the recent federal economic stimulus package. All these factors will affect the behavior of consumers and businesses and the way in which money is spent, saved and invested.

Regulated Company

The Company is subject to banking regulation, as well as regulation by the Securities and Exchange Commission (SEC) and, as such, must comply with many laws, including the USA Patriot Act and the Sarbanes-Oxley Act of 2002. Management has established a Disclosure Committee for Financial Reporting, an internal group at Juniata that seeks to ensure that current and potential investors in the Company receive full and complete information concerning our financial condition. Juniata has incurred direct and indirect costs associated with compliance with the SEC’s filing and reporting requirements imposed on public companies by Sarbanes-Oxley, as well as adherence to new and existing banking regulations and stronger corporate governance requirements. It is unlikely that regulatory demands will be reduced, and management expects that more internal resources will be dedicated to meet future compliance standards.

APPLICATION OF CRITICAL ACCOUNTING POLICIES

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

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

RESULTS OF OPERATIONS

2007
Financial Performance Overview

Net income for Juniata in 2007 was $5,434,000, representing an 8.6% increase as compared to net income for 2006. Earnings per share on a fully diluted basis increased from $1.11 in 2006 to $1.22 in 2007. The net interest margin, on a fully tax-equivalent basis, increased by 26 basis points. The ratio of noninterest income to average assets increased by 11 basis points and the ratio of noninterest expense to average assets increased by 15 basis points. Five-year historical ratios are presented below.

	2007			2006			2005			2004			2003
Return on average assets		1.28	%		1.21	%		1.12	%		1.48	%		1.46	%
Return on average equity		11.41			10.53			9.43			11.95			11.86
Yield on earning assets		6.88			6.43			6.00			5.98			6.33
Cost to fund earning assets		2.85			2.63			2.12			1.77			2.10
Net interest margin (fully tax equivalent)		4.17			3.91			4.00			4.34			4.42
Noninterest income (excluding gains on sales of securities and security impairment charges) to average assets		0.99			0.88			0.77			0.78			0.71
Noninterest expense to average assets		2.87			2.72			2.87			2.69			2.59
Net noninterest expense to average assets		1.88			1.84			2.10			1.91			1.88

Key factors that defined the 2007 results were as follows:

• Interest rate environment — an increase in net interest margin despite a sustained flat/inverted yield curve

• Full-year effect of acquisitions made in 2006

• Restructured investment portfolio

• Noninterest income improvement

Details follow in the appropriate sections of this discussion.

Return on Assets (ROA) increased in 2007 to 1.28% from 1.21% in 2006, and management believes that its performance was favorable in comparison to the performance of many of its peers and competitors. Juniata strives to attain consistently high earnings levels each year by protecting the core (repeatable) earnings base with conservative growth strategies that minimize stockholder and balance-sheet risk, while serving its rural Pennsylvania customer base. This approach has helped achieve solid performances year after year. The Company considers the ROA ratio to be a key indicator of its success and constantly scrutinizes the broad categories of the income statement that impact this profitability indicator. Summarized below are the components of net income (in thousands of dollars) and the contribution of each to ROA for 2007 and 2006.

	2007						2006
				% of Average						% of Average
				Assets						Assets
Net interest income	$	15,663			3.69	%	$	14,552			3.51	%
Provision for loan losses		(120	)		(0.03	)		(54	)		(0.01	)
Trust fees		444			0.10			435			0.11
Deposit service fees		1,656			0.39			1,497			0.36
BOLI		440			0.10			433			0.10
Commissions from sales of non-deposit product		711			0.17			513			0.12
Income from unconsolidated subsidiary		192			0.05			80			0.02
Other fees		774			0.18			681			0.16
Security gains (losses)		(19	)		(0.00	)		181			0.04
Gains on sale of other assets		1			0.00			10			0.00
Total noninterest income		4,199			0.99			3,830			0.93
Employee expense		(6,592	)		(1.55	)		(6,064	)		(1.46	)
Occupancy and equipment		(1,580	)		(0.37	)		(1,424	)		(0.34	)
Data processing expense		(1,332	)		(0.31	)		(1,204	)		(0.29	)
Director compensation		(455	)		(0.11	)		(465	)		(0.11	)
Professional fees		(437	)		(0.10	)		(378	)		(0.09	)
Taxes, other than income		(546	)		(0.13	)		(505	)		(0.12	)
Intangible amortization		(45	)		(0.01	)		(15	)		(0.00	)
Other noninterest expense		(1,222	)		(0.29	)		(1,190	)		(0.29	)
Total noninterest expense		(12,209	)		(2.87	)		(11,245	)		(2.72	)
Income tax expense		(2,099	)		(0.49	)		(2,081	)		(0.50	)
Net income	$	5,434			1.28	%	$	5,002			1.21	%
Average assets	$	424,847					$	414,048

Net Interest Income

Net interest income is the amount by which interest income on earning assets exceeds interest expense on interest bearing liabilities. Net interest income is the most significant component of revenue, comprising approximately 79% of total revenues (the total of net interest income and noninterest income) for 2007. Interest spread measures the absolute difference between average rates earned and average rates paid. Because some interest earning assets are tax-exempt, an adjustment is made for analytical purposes to place all assets on a fully tax-equivalent basis. Net interest margin is the percentage of net return on average earning assets on a fully tax-equivalent basis and provides a measure of comparability of a financial institution’s performance.

Both net interest income and net interest margin are impacted by interest rate changes, changes in the relationships between various rates and changes in the composition of the average balance sheet. Additionally, product pricing, product mix and customer preferences dictate the composition of the balance sheet and the resulting net interest income. Table 1 exhibits average asset and liability balances, average interest rates and interest income and expense for the years 2007, 2006 and 2005. Table 2 further shows changes attributable to the volume and rate components of net interest income.

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

	Years Ended December 31,
	2007								2006								2005
	Average					Yield/			Average					Yield/			Average					Yield/
	Balance (1)			Interest		Rate			Balance (1)			Interest		Rate			Balance (1)			Interest		Rate
ASSETS
Interest earning assets:
Taxable loans (5)	$	294,938		$	22,638		7.68	%	$	299,488		$	21,622		7.22	%	$	285,546		$	19,608		6.87	%
Tax-exempt loans		5,669			213		3.76			4,500			146		3.24			4,781			159		3.33
Total loans		300,607			22,851		7.60			303,988			21,768		7.16			290,327			19,767		6.81
Taxable investment securities		51,746			2,438		4.71			54,198			1,975		3.64			56,966			1,872		3.29
Tax-exempt investment securities		24,040			857		3.56			19,027			659		3.46			19,800			654		3.30
Total investment securities		75,786			3,295		4.35			73,225			2,634		3.60			76,766			2,526		3.29
Interest bearing deposits		5,876			254		4.32			5,730			244		4.26			6,420			257		4.00
Federal funds sold		6,358			323		5.08			324			17		5.25			4,679			157		3.36
Total interest earning assets		388,627			26,723		6.88			383,267			24,663		6.43			378,192			22,707		6.00
Non-interest earning assets:
Cash and due from banks		9,384								9,764								9,449
Allowance for loan losses		(2,460	)							(2,761	)							(2,976	)
Premises and equipment		6,366								6,147								6,606
Other assets (7)		22,930								17,631								15,435
Total assets	$	424,847							$	414,048							$	406,706
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing demand deposits(2)	$	82,877			1,751		2.11		$	77,570			1,675		2.16		$	64,118			952		1.48
Savings deposits		35,247			556		1.58			40,031			629		1.57			44,638			692		1.55
Time deposits		199,239			8,437		4.23			187,283			7,168		3.83			185,615			6,022		3.24
Other, including short-term borrowings, long-term debt and other interest bearing liabilities		7,804			316		4.05			14,822			639		4.31			11,765			349		2.97
Total interest bearing liabilities		325,167			11,060		3.40			319,706			10,111		3.16			306,136			8,015		2.62
Non-interest bearing liabilities:
Demand deposits		45,433								41,587								47,208
Other		6,612								5,252								4,959
Stockholders’ equity		47,635								47,503								48,403
Total liabilities and stockholders’ equity	$	424,847							$	414,048							$	406,706
Net interest income				$	15,663							$	14,552							$	14,692
Net margin on interest earning assets(3)							4.03	%							3.80	%							3.88	%
Net interest income and margin - Tax equivalent basis (4)				$	16,214		4.17	%				$	14,967		3.91	%				$	15,111		4.00	%

Notes:
(1)	Average balances were calculated using a daily average.
(2)	Includes Super Now and money market accounts.
(3)	Net margin on interest earning assets is net interest income divided by average interest earning assets.
(4)	Interest on obligations of states and municipalities is not subject to federal income tax. In order to make the net yield comparable on a fully taxable basis, a tax equivalent adjustment is applied against the tax-exempt income utilizing a federal tax rate of 34%.

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

	2007 Compared to 2006									2006 Compared to 2005
	Increase (Decrease) Due To (6)									Increase (Decrease) Due To (6)
	Volume			Rate			Total			Volume			Rate			Total
ASSETS
Interest earning assets:
Taxable loans (5)	$	(335	)	$	1,351		$	1,016		$	986		$	1,028		$	2,014
Tax-exempt loans		42			25			67			(9	)		(4	)		(13	)
Total loans		(293	)		1,376			1,083			977			1,024			2,001
Taxable investment securities		(93	)		556			463			(93	)		196			103
Tax-exempt investment securities		178			20			198			(26	)		31			5
Total investment securities		85			576			661			(119	)		227			108
Interest bearing deposits		7			3			10			(29	)		16			(13	)
Federal funds sold		307			(1	)		306			(197	)		57			(140	)
Total interest earning assets		106			1,954			2,060			632			1,324			1,956
LIABILITIES AND STOCKHOLDERS’ EQUITY
Interest bearing liabilities:
Interest bearing demand deposits (2)		115			(39	)		76			227			496			723
Savings deposits		(77	)		4			(73	)		(72	)		9			(63	)
Time deposits		482			787			1,269			54			1,092			1,146
Other, including short-term borrowings, long-term debt and other interest bearing liabilities		(286	)		(37	)		(323	)		106			184			290
Total interest bearing liabilities		234			715			949			315			1,781			2,096
Net interest income	$	(128	)	$	1,239		$	1,111		$	317		$	(457	)	$	(140	)

(5)	Non-accruing loans are included in the above table until they are charged off.
(6)	The change in interest due to rate and volume has been allocated to volume and rate changes in proportion to the relationship of the absolute dollar amounts of the change in each.
(7)	Includes gross unrealized gains (losses) on securities available for sale: $(127) in 2007, $(495) in 2006 and $(137) in 2005.

On average, total loans outstanding in 2007 decreased from 2006 by 1.1%, to $300,607,000. Average yields on loans increased by 44 basis points in 2007 when compared to 2006. As shown in the preceding Rate — Volume Analysis of Net Interest Income Table 2, the decrease in volume reduced interest income by approximately $293,000, and the increase in yield added $1,376,000, cumulating an increase in interest recorded on loans of $1,083,000. The yield increase was largely due to the difference in market rates at the times variable rate loans re-priced during 2007 as compared to original booking and last re-priced rates.

During 2007, most of the investment portfolio was restructured, as a total of $55,371,000 matured, was sold or was called. Proceeds from these events as well as other excess funds available were reinvested into a re-structured portfolio with improved yields and laddered maturities. Yields on the investment securities portfolio increased by 75 basis points, to 4.35% in 2007, as compared to 3.60% in 2006. Yield improvements added $576,000 to interest income. Average balances of investment securities increased by $2,561,000, as deposit growth outpaced loan growth, which added $85,000 to interest income.

In total, yield on earning assets in 2007 was 6.88% as compared to 6.43% in 2006, an increase of 45 basis points. On a fully tax equivalent basis, yield increased from 6.54% in 2006 to 7.02% in 2007.

The elimination of short-term borrowings and long-term debt had a material impact on the cost of interest bearing liabilities. In 2007, interest-bearing liabilities consisted entirely of internally-priced deposit products, as compared to 2006, when nearly 5% of interest-bearing liabilities consisted of externally borrowed funds. If the same level of external funding had been used in 2007 as in 2006, the total cost of interest-bearing liabilities would have been in the range of 3.47%, and would have decreased the net interest margin by 7 basis points.

Total growth on average of interest bearing liabilities was $5,461,000. Within the categories of interest bearing liabilities, deposits increased on average by $12,479,000 and borrowings decreased by $7,018,000 on average. Changes in these balances resulted in $234,000 in additional interest expense in 2007 as compared to 2006, while increases in interest rates accounted for $715,000 in added interest expense. Noninterest bearing liabilities used to fund earning assets included demand deposits, which increased $3,846,000 on average. The percentage of interest earning assets funded by noninterest bearing liabilities was approximately 16% in 2007 and 2006. The total cost to fund earning assets (computed by dividing the total interest expense by the total average earning assets) in 2007 was 2.85%, as compared to 2.63% in 2006.

Net interest income was $15,663,000 for 2007, an increase of $1,111,000 when compared to 2006. The overall increase in net interest income was the net result of an increase due to rate changes of $1,239,000 offset by the reduction due to volume changes of $128,000.

Provision for Loan Losses

Juniata’s provision for loan losses is determined as a result of an analysis of the adequacy level of the allowance for loan losses. In order to closely reflect the potential losses within the current loan portfolio based upon current information known, the Company carries no unsupported allowance. An analysis was performed following the process described in “Application of Critical Accounting Policies” earlier in this discussion and it was determined that a provision of $120,000 was appropriate for 2007; an increase of $66,000 when compared to 2006 when the total loan loss provision was $54,000. In 2007, net charge-offs exceeded the provision by $250,000. The Bank recorded charge-offs of $122,000 in 2007 and $150,000 in each of the years 2006 and 2005 related to one commercial loan that was subject to bankruptcy liquidation. This loan was fully charged-off as of December 31 2007. In 2007, we charged off $180,000 of the remaining loan balances related to two relationships.

Noninterest Income

The Company remains committed to providing excellent customer service and products that fill the financial needs of our communities. We believe that our responsiveness to customers’ needs surpasses that of our competitors and measure our success by the customer acceptance of fee-based services. A complete upgrade of the Company’s web site has allowed us to provide our customers with the convenience of expanded Internet banking. Technology advances have also helped us to better protect our customers against Internet hackers that attempt to defraud both the Bank and our customers. We provide alternative investment opportunities through an arrangement with a broker

dealer, and have increased the number of representatives on staff for this service. This investment alternative is in addition to the quality trust services that have traditionally been offered by the Bank. Assets under management in our trust department have increased to just under $100 million.

Customer service fees on deposits increased 10.6% in 2007 as compared to 2006, primarily a result of our popular Platinum Overdraft product. The increase in commissions from sales of non-deposit products of $198,000, or 38.6%, in 2007 over 2006 demonstrates the ongoing success of our alternative investment division. Total fees for trust services increased by 2.0%, as fees from estate settlements increased from 2006 by $17,000 and non-estate fees decreased by $8,000. Some of the variance in fees from estate settlements occurs because estate settlements occur sporadically and are not necessarily consistent year to year. Non-estate fees are repeatable revenues that generally increase as market values of trust assets under management increase and as new relationships are established.

In the third quarter of 2006, the Company purchased 39.16% of the stock of another banking institution. The investment is accounted for through the equity method and, as such, 39.16% of the income of the banking institution is recorded by Juniata as noninterest income. As a result of this investment, $192,000 was recorded as income in 2007, compared to $80,000 in 2006. Earnings on bank-owned life insurance and annuities increased in 2007 by $7,000, or 1.6%, as cash values of the contracts increased. Other noninterest income, which increased by $93,000, or 13.7%, was assisted by increases in fees collected for various services.

As a percentage of average assets, non-interest income (excluding securities gains and impairment charges) was 0.99% in 2007 as compared to 0.88% in 2006.

In 2007, net gains from the sale of investment securities were $14,000, a decrease of $167,000 in comparison to 2006. Management considers multiple factors when selling investment securities; therefore, income from this activity can fluctuate from year to year, and may not be consistent in the future. Juniata generally sells only equity securities that have appreciated in value since their purchase or when an equity security is in danger of impairment. Equity securities are considered for sale primarily when there is market appreciation available or when there is no longer a business reason to hold the stock. Occasionally, a loss may be recognized on debt and equity securities if permanent or other-than-temporary impairment is deemed to have occurred. In 2007, there was an impairment charge of $33,000 recorded relating to an investment in the common stock of one financial services company. This company was subsequently acquired by a larger bank holding company, with settlement expected in the first half of 2008. At that time, we expect to recover nearly the full amount of the impairment charge taken in 2007.

Noninterest Expense

Management strives to control noninterest expense where possible in order to achieve maximum operating results. In 2007, total non-interest expense increased by $964,000, or 8.6%. Of the increase, $127,000 was attributable to the increase in expense associated with the full year of staffing and operation of a branch acquired in September of 2006. Excluding the effect of the newest branch, the increase in noninterest expense would have been 7.4%.

Employee compensation expense increased by $544,000, or 11.8%, in 2007 as compared to 2006, primarily due to the expense related to incentive bonus plans (approximately $148,000), the full-year costs of staffing the newest branch (approximately $140,000) and increased payments to commission-based employees ($88,000). Employee benefit expense was reduced in 2007 as a result of a reduction in the net periodic expense for the Company’s pension plan.

Expenses relating to occupancy and equipment increased 10.9% and 11.0%, respectively in 2007 as compared to 2006. Excluding expenses in the occupancy and equipment categories for the branch acquired late in 2006, the increases would have been 7.2% and 8.7%, respectively. The increased costs related to higher heating and rental expense, as well as depreciation for purchased equipment. Data processing costs increased by 10.6% as a result of increased electronic banking activity. Professional fees were higher in 2007 by 15.6%, due to the use of consultants during the year. Other noninterest expense increased by 2.7% in 2007 over 2006, due to increases in charitable contributions and the amortization of new core deposit intangible.

As a percentage of average assets, noninterest expense was 2.87% in 2007 as compared to 2.72% in 2006.

Income Taxes

Income tax expense for 2007 amounted to $2,099,000 compared to $2,081,000 in 2006. The effective tax rate was 27.9% in 2007 versus 29.4% in 2006, due to Juniata’s tax favored income being higher in 2007 as compared to 2006. Average tax-exempt investments and loans as a percentage of average assets were 7.0%, 5.7% and 6.0% in 2007, 2006 and 2005, respectively. Tax-exempt income as a percentage of income before tax was 14.2%, 11.3% and 12.9% in 2007, 2006 and 2005, respectively. See Note 14 of Notes to Consolidated Financial Statements for further information on income taxes.

Net Income

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

	2007			2006			2005
Net income	$	5,434		$	5,002		$	4,566
Return on average assets		1.28	%		1.21	%		1.12	%
Return on average equity		11.41	%		10.53	%		9.43	%

Outlook for 2008

Looking forward to 2008, our focus continues to be directed to our business development plan. Although the interest rate environment and the general state of the economy are uncertain, we believe that we can grow the balance sheet profitably. Competition and the interest rate environment may slow desired deposit growth and alternative sources may be utilized to fund our expected loan demand. We will be adding new fee-generating strategies to further serve our customer base and strive to continue to minimize costs where possible. Plans for 2008 include some technology upgrades to enhance efficiencies in the back-room support functions and strategies are being considered to make our services available to a larger geographic area through sales efforts and physical expansion. As a follow-up to our website upgrade in 2007, our plans include the enhancement of our electronic bill-pay service to include bill presentment. New software geared to improve the loan origination process by improving the application and documentation procedures will increase back-room efficiencies and reduce the time needed to approve and fund loans. New teamwork strategies are being implemented to more closely align our community office managers and lenders to more effectively develop customer relationships. We plan to provide our business customers with the option to use our remote deposit capture capabilities. We anticipate the opening of our new, re-located McAlisterville office in May 2008, with state-of-the art equipment and furnishings. Our alternative investment division staff has been increased to meet the need in our market area.

2006
Financial Performance Overview

Net income for Juniata in 2006 was $5,002,000, representing a 9.5% increase as compared to its performance in 2005. Earnings per share on a fully diluted basis increased from $1.00 in 2005 to $1.11 in 2006. It is important to note that some of the improvement over 2005’s results is reflected in the return to a more normal level of noninterest expense in 2006. Earnings for the year ended December 31, 2005 included employee severance and unusually high professional fees related to initial compliance with the provisions of the Sarbanes-Oxley Act of 2002. Although the Company experienced compression in its net interest income due to the sustained flat/inverted yield curve, the fully tax-equivalent net interest margin declined by only nine basis points while the ratio of noninterest income as a percentage of average assets improved by 11 basis points and the ratio of noninterest expense to average assets improved by 15 basis points.

Key factors that defined the 2006 results were as follows:

• Interest rate environment — sustained flat/inverted yield curve

• Acquisition activity

• Sustained loan quality

• Noninterest income improvement

• Ongoing expense control

Details follow in the appropriate sections of this discussion.

Return on Assets (ROA) increased in 2006 to 1.21% from 1.12% in 2005, and management believes that its performance was favorable in comparison to the performance of many of its peers and competitors. Summarized below are the components of net income (in thousands of dollars) and the contribution of each to ROA for 2006 and 2005.

	2006						2005
				% of Average						% of Average
				Assets						Assets
Net interest income	$	14,552			3.51	%	$	14,692			3.61	%
Provision for loan losses		(54	)		(0.01	)		(28	)		(0.01	)
Trust fees		435			0.11			374			0.09
Deposit service fees		1,497			0.36			1,390			0.34
BOLI		433			0.10			364			0.09
Commissions from sales of non-deposit products		513			0.12			426			0.10
Income from unconsolidated subsidiary		80			0.02			—			0.00
Other fees		681			0.16			592			0.15
Security gains (losses)		181			0.04			175			0.04
Gains on sale of other assets		10			0.00			2			0.00
Total noninterest income		3,830			0.93			3,323			0.82
Employee expense		(6,064	)		(1.46	)		(5,757	)		(1.42	)
Employee severance		—			—			(284	)		(0.07	)
Occupancy and equipment		(1,424	)		(0.34	)		(1,413	)		(0.35	)
Data processing expense		(1,204	)		(0.29	)		(1,224	)		(0.30	)
Director compensation		(465	)		(0.11	)		(476	)		(0.12	)
Professional fees		(378	)		(0.09	)		(788	)		(0.19	)
Taxes, other than income		(505	)		(0.12	)		(519	)		(0.13	)
Intangible amortization		(15	)		(0.00	)		—			0.00
Other noninterest expense		(1,190	)		(0.29	)		(1,219	)		(0.30	)
Total noninterest expense		(11,245	)		(2.72	)		(11,680	)		(2.87	)
Income tax expense		(2,081	)		(0.50	)		(1,741	)		(0.43	)
Net income	$	5,002			1.21	%	$	4,566			1.12	%
Average assets	$	414,048					$	406,706

Net Interest Income

On average, total loans outstanding in 2006 increased over 2005 by 4.7%, to $303,988,000. Average yields on loans increased by 35 basis points in 2006 when compared to 2005. As shown in the Rate — Volume Analysis of Net Interest Income Table 2, the increase in volume added approximately $977,000 to interest income, and the increase in yield added $1,024,000, cumulating an increase in interest recorded on loans of $2,001,000. The yield increase was largely due to the difference in market rates at the times variable rate loans re-priced during 2006 as compared to original booking rates.

Yields on the investment securities portfolio increased by 31 basis points to 3.60% in 2006 as compared to 3.29% in 2005, as proceeds from scheduled maturities during 2006 were reinvested at higher rates. Average balances of investment securities dropped by $3,541,000, as some of the proceeds from maturing investments were needed to fund more profitable loan growth.

In total, yield on earning assets in 2006 was 6.43% as compared to 6.00% in 2005, an increase of 43 basis points. On a fully tax equivalent basis, yield increased from 6.12% in 2005 to 6.54% in 2006.

While the yield on interest earning assets grew by 43 basis points in 2006, the cost of interest bearing liabilities grew by 54 basis points. Total growth on average of interest bearing liabilities was $13,570,000, of which $3,057,000 were borrowings. Changes in these balances resulted in $315,000 in additional interest expense in 2006 as compared to 2005, while increases in interest rates accounted for $1,781,000 in added interest expense. Noninterest bearing liabilities used to fund earning assets included demand deposits, which decreased $5,621,000 on average as many of these funds shifted to interest-bearing transaction accounts. As a result, the percentage of interest earning assets

funded by noninterest bearing liabilities decreased from 19% in 2005 to 17% in 2006. The total cost to fund earning assets in 2006 was 2.63%, as compared to 2.12% in 2005.

Net interest income was $14,552,000 for 2006, a decrease of $140,000 when compared to 2005. The overall decrease in net interest income was the net result of a reduction due to rate changes of $457,000 offset by the increase due to volume changes of $317,000.

Provision for Loan Losses

An analysis was performed following the process described in “Application of Critical Accounting Policies” earlier in this discussion, and it was determined that a provision of $54,000 was sufficient for 2006, an increase of $26,000 when compared to 2005 when the total loan loss provision was $28,000. In 2006, net charge-offs exceeded the provision by $277,000. Most significantly, the Bank recorded a charge-off of $150,000 for a commercial loan subject to bankruptcy liquidation.

Noninterest Income

Customer service fees on deposits increased 7.7% in 2006 as compared to 2005, primarily a result of our Platinum Overdraft product. Total fees for trust services increased by 16.3%, as fees from estate settlements increased from 2005 by $51,000 and non-estate fees increased by $10,000. Some of the variance in fees from estate settlements occurs because estate settlements occur sporadically and are not necessarily consistent year to year. Non-estate fees are repeatable revenues that generally increase as market values of trust assets under management increase and as new relationships are established. Increases in commissions from sales of annuities and mutual funds of $87,000, or 20.4%, in 2006 over 2005 demonstrates the success of our alternative investment division.

In the third quarter of 2006, the Company purchased 39.16% of the stock of another banking institution. The investment is accounted for through the equity method and, as such, 39.16% of the income of the banking institution is recorded by Juniata as noninterest income. As a result of this investment, $80,000 was recorded as income in 2006. Earnings on bank-owned life insurance and annuities increased in 2006 by $69,000, or 19.0%, as cash values of the contracts increased. Other noninterest income, which increased by $89,000, or 15.0%, was assisted by increases in fees collected for various services.

As a percentage of average assets, non-interest income (excluding securities gains) was 0.88% in 2006 as compared to 0.77% in 2005.

In 2006, net gains from the sale of investment securities, at $181,000, increased by $6,000 in comparison to 2005.

Noninterest Expense

From time to time, non-recurring events offset earnings, and in 2005, our results were offset by one-time expenses. The cost of compliance with the Sarbanes-Oxley Act of 2002 and employee severance expense increased noninterest expense by approximately $729,000 in 2005.

Employee compensation expense increased by 7.2% in 2006 as compared to 2005, primarily due to the expense related to incentive bonus plans and the adoption of FAS No. 123(R), requiring expensing of stock options. Participants earned no incentive bonus for 2005. Normal salary expense increased due to the addition of personnel to staff the new community office acquired in the third quarter of 2006. Employee benefit expense was unchanged in 2006 as costs to provide medical and other benefits to employees decreased slightly, offsetting the increase in payroll taxes for increased staffing. In 2005, the Company incurred one-time employee severance expense of $284,000; during 2006, there was no such event.

Professional fees, which include legal, accounting and consulting activity, decreased by $410,000 in 2006 as compared to 2005. During 2005, there were professional fees of $445,000 specifically related to an interim audit and assistance in becoming fully compliant with the provisions of the Sarbanes-Oxley Act of 2002. Most of these services were not repeated in 2006. Expenses relating to occupancy, equipment, data processing, taxes other than income tax and other noninterest expense did not differ significantly in 2006 from 2005.

As a percentage of average assets, noninterest expense was 2.72% in 2006 as compared to 2.87% in 2005, indicating success in management’s effort to minimize controllable noninterest expenses.

Income Taxes

Income tax expense for 2006 amounted to $2,081,000 compared to $1,741,000 in 2005. The effective tax rate was 29.4% in 2006 versus 27.6% in 2005, due to Juniata’s tax exempt income being lower in 2006 as compared to 2005. Average tax-exempt investments and loans as a percentage of average assets were 5.7%, 6.0% and 7.2% in 2006, 2005 and 2004, respectively. Tax-exempt income as a percentage of income before tax was 11.3%, 12.9% and 12.2% in 2006, 2005 and 2004, respectively. See Note 14 of Notes to Consolidated Financial Statements for further information on income taxes.

Net Income

For comparative purposes, the following table sets forth earnings, in thousands of dollars, and selected earnings ratios for the three years ending on December 31, 2006.

	2006			2005			2004
Net income	$	5,002		$	4,566		$	5,829
Return on average assets		1.21	%		1.12	%		1.48	%
Return on average equity		10.53	%		9.43	%		11.95	%

FINANCIAL CONDITION

Balance Sheet Summary

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

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

	2007									2006										2005
	Average			Increase(Decrease)						Average			Increase(Decrease)							Average
	Balance			Amount			%			Balance			Amount				%			Balance
Funding Uses:
Loans:
Commercial	$	83,539		$	(3,704	)		(4.2	%)	$	87,243		$	1,956				2.3	%	$	85,287
Tax-exempt loans		5,669			1,169			26.0			4,500			(281	)			(5.9	)		4,781
Mortgage		135,974			(2,449	)		(1.8	)		138,423			3,566				2.6			134,857
Consumer, including Home Equity		75,425			1,603			2.2			73,822			8,420				12.9			65,402
Securities		51,746			(2,452	)		(4.5	)		54,198			(2,768	)			(4.9	)		56,966
Tax-exempt securities		24,040			5,013			26.3			19,027			(773	)			(3.9	)		19,800
Interest bearing deposits		5,876			146			2.5			5,730			(690	)			(10.7	)		6,420
Federal funds sold		6,358			6,034			1,862.3			324			(4,355	)			(93.1	)		4,679
Total interest earning assets		388,627			5,360			1.4			383,267			5,075				1.3			378,192
Investment in unconsolidated subsidiary		2,905			2,025			230.1			880			880		��		—			—
Bank-owned life insurance and annuities		11,444			675			6.3			10,769			147				1.4			10,622
Goodwill and intangible assets		2,459			1,679			215.3			780			780				—			—
Other non-interest earning assets		21,999			391			1.8			21,608			604				2.9			21,004
Unrealized gains (losses) on securities		(127	)		368			(74.3	)		(495	)		(359	)			264.0			(136	)
Less: Allowance for loan losses		(2,460	)		301			(10.9	)		(2,761	)		215				(7.2	)		(2,976	)
Total uses	$	424,847		$	10,799			2.6	%	$	414,048		$	7,342				1.8	%	$	406,706
Funding Sources:
Interest bearing demand deposits	$	82,877		$	5,307			6.8	%	$	77,570		$	13,452				21.0	%	$	64,118
Savings deposits		35,247			(4,784	)		(12.0	)		40,031			(4,607	)			(10.3	)		44,638
Time deposits under $100,000		163,788			9,481			6.1			154,307			8,871				6.1			145,436
Time deposits over $100,000		35,451			2,475			7.5			32,976			(7,203	)			(17.9	)		40,179
Repurchase agreements		6,822			1,294			23.4			5,528			(88	)			(1.6	)		5,616
Short-term borrowings		15			(5,389	)		(99.7	)		5,404			5,025				1,325.9			379
Long-term debt		—			(3,014	)		(100.0	)		3,014			(1,986	)			(39.7	)		5,000
Other interest bearing liabilities		967			91			10.4			876			106				13.8			770
Total interest bearing liabilities		325,167			5,461			1.7			319,706			13,570				4.4			306,136
Demand deposits		45,433			3,846			9.2			41,587			(5,621	)			(11.9	)		47,208
Other liabilities		6,612			1,360			25.9			5,252			293				5.9			4,959
Shareholders’ equity		47,635			132			0.3			47,503			(900	)			(1.9	)		48,403
Total sources	$	424,847		$	10,799			2.6	%	$	414,048		$	7,342				1.8	%	$	406,706

Overall, total assets increased by $10,799,000, or 2.6% on average, for the year 2007 compared to 2006, following an increase of $7,342,000, or 1.8% in 2006 over average assets in 2005. The ratio of average earning assets to total assets was 91% and 93%, respectively, in the last two years, while the ratio of average interest-bearing liabilities to total assets remained at approximately 77% in both 2007 and 2006. Although Juniata’s investment in its

unconsolidated subsidiary and its bank owned life insurance and annuities are not classified as interest-earning assets, income is derived directly from those assets. As a percentage of assets, these instruments have represented 3.4% and 2.8% of total average assets in 2007 and 2006, respectively. During the first three quarters of 2006, the Company relied heavily on short-term borrowings and high-balance, non-core time deposits to fund loan demand. In the fourth quarter of 2006, the Company completed two acquisitions. With the purchase of a branch office, the Company acquired loans of $3,810,000, assumed deposits of $20,090,000 and added $2,495,000 of intangible assets (including goodwill) to the balance sheet. Net cash received from the branch acquisition of approximately $13,000,000 was used to acquire an interest of 39.16% of another financial institution and to repay all short and long-term borrowings late in 2006. In 2007, the full effect of these transactions became apparent, as short and long-term borrowings decreased from 2.6% of average interest bearing liabilities in 2006 to a minimal amount in 2007. More detailed discussion of Juniata’s earning assets and interest bearing liabilities will follow in sections titled “Loans”, “Investments”, “Deposits” and “Market Risk”.

Loans

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

	December 31,
	2007			2006			2005			2004			2003
Commercial, financial and agricultural	$	28,842		$	23,341		$	21,661		$	23,301		$	25,885
Real estate - commercial		29,021			29,492			27,588			25,068			20,614
Real estate - construction		27,223			29,489			28,323			24,968			14,324
Real estate - mortgage		127,324			132,572			135,992			132,243			119,678
Home equity		63,960			67,842			62,288			54,249			50,706
Obligations of states and political subdivisions		6,593			5,129			4,827			4,294			4,577
Personal		15,319			18,545			18,498			17,735			21,435
Unearned interest		(282	)		(592	)		(1,114	)		(2,110	)		(4,439	)
Total	$	298,000		$	305,818		$	298,063		$	279,748		$	252,780

From year-end 2006 to year-end 2007, total loans outstanding, net of unearned interest, decreased by $7,818,000, following an increase of $7,755,000 in 2006 when compared to year-end 2005. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years.

	2007			2006			2005
Beginning balance	$	305,818		$	298,063		$	279,748
New loans, net of repayments		(7,051	)		4,916			18,569
Loans acquired in branch purchase		—			3,810			—
Loans charged off		(418	)		(307	)		(279	)
Loans transferred to other real estate owned and other adjustments to carrying value		(349	)		(664	)		25
Net change		(7,818	)		7,755			18,315
Ending balance	$	298,000		$	305,818		$	298,063

The loan portfolio was comprised of approximately 69% consumer loans and 31% commercial loans (including construction) on December 31, 2007 as compared to 72% consumer loans and 28% commercial loans on December 31, 2006. The highest loan concentration by activity type was property development, followed by the trucking industry and car dealerships, each accounting for less than 2.5% of the portfolio. Management believes that these small concentrations pose no significant risk. See Note 5 of Notes to Consolidated Financial Statements.

As can be seen in Table 3, commercial and mortgage loans decreased on average in 2007, with the greatest decrease, 4.2%, in commercial loans. This decrease was due to several large commercial loan balances being repaid in full during the year. Management believes that the dip in outstanding loan balances in 2007 is cyclical, and believes that

Juniata is likely to experience growth in high quality loans again in 2008. While stringent credit standards remain in place, new teamwork strategies are being implemented to closely align lenders and community office managers’ efforts to more effectively develop referrals and existing customer relationships. Continued emphasis will be placed on responsiveness and personal attention given to customers, which we believe differentiates the Bank from its competition. Nearly all commercial loans and most residential mortgage loans are either variable or adjustable rate loans, while other consumer loans generally have fixed rates for the duration of the loan. Juniata’s lending strategy stresses quality growth, diversified by product. A standardized credit policy is in place throughout the Company, and a special credit committee of the Board of Directors reviews and approves all loan requests for amounts that exceed management’s approval levels. The Company makes credit judgments based on a customer’s existing debt obligations, ability to pay and general economic trends.

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

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

The allowance for loan losses has been established in order to absorb probable losses on existing loans. An annual provision or credit is charged to earnings to maintain the allowance at adequate levels. Charge-offs and recoveries are recorded as adjustments to the allowance. The allowance for loan losses at December 31, 2007 was 0.78% of total loans, net of unearned interest, as compared to 0.84% of total loans, net of unearned interest, at the end of 2006. The allowance decreased $250,000 when compared to December 31, 2006. Net charge-offs for 2007 and 2006 were 0.12% and 0.09% of average loans, respectively.

At December 31, 2007, non-performing loans (as defined in Table 4), as a percentage of the allowance for loan losses, were 36.0% as compared to 56.5% at December 31, 2006. Of the $837,000 of non-performing loans at December 31, 2007, $813,000 was collateralized with real estate, $8,000 with other assets and $16,000 were unsecured.

Non-performing loans were 0.28% of loans as of December 31, 2007, and 0.48% of loans as of December 31, 2006. The decrease in nonperforming loans in 2007 was primarily due to the elimination of loans on nonaccrual status. Of the $1,240,000 of loans in nonaccrual status as of December 31, 2006, all principal, except for $122,000, was collected during 2007.

Table 4
Non-Performing Loans

	December 31,
	2007		2006		2005		2004		2003
	(In thousands)
Nonaccrual loans	$	—	$	1,240	$	1,515	$	—	$	—
Accruing loans past due 90 days or more		837		214		724		365		584
Restructured loans		—		—		—		—		—
Total non-performing loans	$	837	$	1,454	$	2,239	$	365	$	584

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. It is the Company’s policy to continue to accrue interest on loans over 90 days past due as long as they are (1) guaranteed or well secured and (2) there is an effective means of collection. When a loan is placed on non-accrual status, all unpaid interest credited to income in the current year is reversed against current period income and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectability of

principal. Generally, accruals are resumed on loans only when the obligation is brought fully current with respect to interest and principal, has performed in accordance with the contractual terms for a reasonable period of time and the ultimate collectability of the total contractual principal and interest is no longer in doubt.

Allowance for Loan Losses

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

Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio. The Bank’s methodology for maintaining the allowance is highly structured and consists of several key elements:

• Historical trends: Historical net charge-offs are computed as a percentage of average loans, by loan type. This percentage is applied to the ending period balance of the loan type to determine the amount to be included in the allowance to cover charge-off probability;

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

• General economic environment: Current economic factors and business trends relative to specific types of loans are assessed. Juniata’s lending is concentrated within central Pennsylvania and, accordingly, the loan portfolio quality is dependent upon localized economic factors such as: unemployment rates, commercial real estate vacancy rates, consumer delinquency trends and residential housing appreciation rates. Generally, the local unemployment rate consistently slightly exceeds the national and state statistics. Additionally, some of the larger employers in the local market area are experiencing some financial stress that has resulted in loss of jobs in the last two years. Fuel cost escalation has put profit pressure on trucking firms and increased cost of employer-provided medical insurance has added to the profit pressures of employers in general; and

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

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

o Changes in loan volumes;

o Changes in experience, ability and depth of management; and

o External factors, such as legal and regulatory requirements.

Individual credits are selected throughout the year for detailed loan reviews, which are utilized by management to assess the risk in the portfolio and the adequacy of the allowance. Due to the nature of commercial lending, evaluation of the adequacy of the allowance as it relates to these loan types is often based more upon specific credit review, with consideration given to the potential impairment of certain credits and historical charge-off percentages, adjusted for general economic conditions and other inherent risk factors. The allowance not specifically allocated to individual credits is generally determined by analyzing potential exposure and other qualitative factors that could negatively impact the adequacy of the allowance. Loans not individually evaluated for impairment are grouped by pools with similar risk characteristics and the related historical charge-off percentages are adjusted to reflect current inherent risk factors, such as unemployment, overall economic conditions, concentrations of credit, loan growth, classified and impaired loan trends, staffing adherence to lending policies and loss trends.

Conversely, due to the homogeneous nature of the real estate and installment portfolios, the portions of the allowance allocated to those portfolios are primarily based on prior charge-off history of each portfolio, adjusted for general economic conditions and other inherent risk factors.

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

A summary of the transactions in the allowance for loan losses for the last five years (in thousands) is shown below. The Bank recorded charge-offs of $122,000 in 2007 and $150,000 in each of the years 2006 and 2005 for a commercial loan that was subject to bankruptcy liquidation. This loan has been fully charged off as of December 31 2007. In 2007, we charged off $180,000 of the remaining loan balances related to two relationships.

	Years ended December 31,
	2007			2006			2005			2004			2003
Balance of allowance - beginning of period	$	2,572		$	2,763		$	2,989		$	2,820		$	2,731
Loans charged off:
Commercial, financial and agricultural		291			159			171			43			78
Real estate - commercial		—			—			—			—			—
Real estate - construction		—			—			30			—			—
Real estate - mortgage		66			19			3			10			50
Personal		61			129			75			122			107
Total charge-offs		418			307			279			175			235
Recoveries of loans previously charged off:
Commercial, financial and agricultural		8			5			6			1			2
Real estate - commercial		—			—			—			—			—
Real estate - construction		—			—			5			—			—
Real estate - mortgage		8			—			—			2			1
Personal		32			25			14			15			17
Total recoveries		48			30			25			18			20
Net charge-offs		370			277			254			157			215
Provision for loan losses		120			54			28			326			304
Branch acquisition loan loss reserve					32			—			—			—
Balance of allowance - end of period	$	2,322		$	2,572		$	2,763		$	2,989		$	2,820
Ratio of net charge-offs during period to average loans outstanding		0.12	%		0.09	%		0.09	%		0.06	%		0.09	%

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

	Allocation of the Allowance for Loan Losses (in thousands)
	2007		2006		2005		2004		2003
Commercial	$	660	$	864	$	956	$	1,087	$	1,055
Real estate		933		1,011		1,112		602		548
Consumer		729		697		695		1,002		963
Unallocated		—		—		—		298		254
Total allowance for loan losses	$	2,322	$	2,572	$	2,763	$	2,989	$	2,820

	Percent of Loan Type to Total Loans
	2007			2006			2005			2004			2003
Commercial		11.9	%		9.3	%		8.9	%		9.9	%		12.1	%
Real estate		83.0	%		84.6	%		84.9	%		83.8	%		79.5	%
Consumer		5.1	%		6.1	%		6.2	%		6.3	%		8.5	%
		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

Investments

Total investments, defined to include all interest earning assets except loans (i.e. investment securities available for sale (at market value), investment securities held to maturity, federal funds sold, interest bearing deposits, Federal Home Loan Bank stock and other interest-earning assets) totaled $81,946,000 on December 31, 2007, representing an increase of $15,025,000 when compared to year-end 2006. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years.

	2007			2006			2005
Beginning balance	$	66,921		$	77,274		$	88,224
Purchases of investment securities		63,295			19,281			17,073
Sales and maturities of investment securities		(55,357	)		(30,871	)		(21,696	)
Impairment charge		(33	)		—			—
Adjustment in market value of AFS securities		372			414			(1,044	)
Amortization/Accretion		(104	)		(133	)		(209	)
Federal Home Loan Bank stock, net change		19			(280	)		27
Federal funds sold, net change		6,300			1,200			(3,900	)
Interest bearing deposits with others, net change		533			36			(1,201	)
Net change		15,025			(10,353	)		(10,950	)
Ending balance	$	81,946		$	66,921		$	77,274

On average, investments increased by $8,741,000, or 11.0%, during 2007, after decreasing by $8,586,000, or 9.8%, during 2006. The increase in 2007 was due to the growth in average deposits exceeding the loan growth on average, by $19,706,000. The decrease in 2006 was directly related to the need to use cash proceeds from the maturities and sales of investments to fund loans, since deposit growth (exclusive of deposits assumed with the branch purchase) did not keep pace with the loan demand.

The investment area is managed according to internally established guidelines and quality standards. Juniata segregates its investment securities portfolio into two classifications: those held to maturity and those available for sale. Juniata classifies all new marketable investment securities as available for sale, and currently holds no securities in the held to maturity classification. At December 31, 2007, the market value of the entire securities portfolio was greater than amortized cost by $196,000 as compared to December 31, 2006, when market value was lower than amortized cost by $197,000. The weighted average maturity of the investment portfolio was 3 years and 3 months as of December 31, 2007 as compared to 2 years and 8 months at the end of 2006. The weighted average maturity has remained short in order to achieve a desired level of liquidity. Table 5, “Maturity Distribution”, in this Management’s Discussion and Analysis of Financial Condition shows the remaining maturity or earliest possible repricing for investment securities. The following table sets forth the maturities of securities (in thousands) at December 31, 2007 and the weighted average yields of such securities by contractual maturities or call dates. Yields on obligations of states and public subdivisions are presented on a tax-equivalent basis.

	December 31, 2007
			Weighted
Securities	Carrying		Average
Type and maturity	Value		Yield
U.S. Treasury securities and obligations of U.S. Government agencies and corporations
Within one year	$	3,680		4.38	%
After one year but within five years		17,115		5.08	%
After five years but within ten years		6,021		5.27	%
After ten years		—
		26,816		5.03	%
Obligations of state and political subdivisions
Within one year		11,616		5.70	%
After one year but within five years		17,903		5.93	%
After five years but within ten years		6,288		5.73	%
After ten years		—
		35,807		5.82	%
Mortgage-backed securities
Within one year		360		4.00	%
After one year but within five years		288		4.97	%
After five years but within ten years		2,283		5.35	%
After ten years		—
		2,931		5.14	%
Equity securities		1,502
	$	67,056

Bank Owned Life Insurance and Annuities

The Company periodically insures the lives of certain bank officers in order to provide split-dollar life insurance benefits to some key officers and to offset the cost of providing post-retirement benefits through non-qualified plans. Some annuities are also owned to provide cash streams that match certain post-retirement liabilities. During 2007, three new life insurance policies were purchased. See Note 7 of Notes to Consolidated Financial Statements. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years.

	2007			2006			2005
Beginning balance	$	11,017		$	10,647		$	10,464
Bank-owned life insurance		1,365			446			263
Annuities		(38	)		(76	)		(80	)
Net change		1,327			370			183
Ending balance	$	12,344		$	11,017		$	10,647

Investment in Unconsolidated Subsidiary

In the third quarter of 2006, the Company invested in The First National Bank of Liverpool (FNBL), Liverpool, PA, by purchasing 39.16% of its outstanding common stock. This investment is accounted for under the equity method of accounting, and was carried at $2,972,000 as of December 31, 2007, of which $1,963,000 represents the underlying equity in net assets of FNBL. The difference between the investment carrying amount and the amount of the underlying equity, $1,009,000, is considered to be goodwill and is evaluated quarterly for impairment. Any loss in value of the investment that is other than a temporary decline 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 that would justify the carrying amount of the investment. The carrying amount at December 31, 2007 represented an increase of $80,000 when compared to

December 31, 2006. In connection with this investment, two representatives of Juniata serve on the Board of Directors of FNBL.

Goodwill and Intangible Assets

In the third quarter of 2006, the Company completed its acquisition of a branch office in Richfield, PA. Completing this purchase was in line with a strategic goal of the Company to expand its base into contiguous market areas within rural Pennsylvania. Included in the purchase price of the branch was goodwill of $2,046,000. Additionally, core deposit intangible was acquired and had carrying values of $389,000 and $434,000, as of December 31, 2007 and December 31, 2006, respectively. The core deposit intangible is being amortized over a ten-year period on a straight-line basis. Goodwill is not being amortized, but is measured annually for impairment.

Deferred Taxes

The Company accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carry forwards, if applicable. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. Management has determined that there was no need for a valuation allowance for deferred taxes as of December 31, 2007 and 2006. As of December 31, 2007 and 2006, the Company recorded a net deferred tax asset of $1,935,000 and $2,378,000, respectively, which was carried as a non-interest earning asset. The decrease of $443,000 was primarily the result of the minimum pension liability in 2007 reducing the deferred tax asset by $136,000, the increase in deferred tax liability associated with the market value of investment securities available for sale of $126,000, and the reduction in the deferred tax asset for the loan loss allowance of $96,000. The remainder of the difference was due to the various other changes in gross temporary tax differences. See Note 14 of Notes to Consolidated Financial Statements.

Other Non-Interest Earning Assets

Other non-interest earning assets on average increased $391,000, or 1.8%, in 2007, after an increase of $604,000, or 2.9%, in 2006. The following table summarizes the components of the non-interest earning asset category, and how the ending balances (in thousands) changed annually in each of the last three years. The increase in premises and equipment of $730,000 was due primarily to the construction of a new office, which had yet to be completed on December 31, 2007. The increase in premises and equipment in 2006 was primarily due to the building and equipment acquired through the purchase of a branch in the third quarter of 2006. The primary reason for the change in “Other receivables and prepaid expenses” in 2006 was due to the recording of a receivable of $1,000,000 for the proceeds of a matured investment security as of December 31, 2006. At December 31, 2007, there were no such transactions.

	2007			2006		2005
Beginning balance	$	29,375		$	27,581	$	21,627
Cash and due from banks		(4,222	)		103		5,640
Premises and equipment, net		730			331		(591	)
Other real estate owned		154			133		(111	)
Other receivables and prepaid expenses		(1,266	)		1,227		1,016
Net change		(4,604	)		1,794		5,954
Ending balance	$	24,771		$	29,375	$	27,581

Deposits

For the year 2007, total deposits increased $4,288,000. From year-end 2005 to year-end 2006, total deposits increased by $11,702,000. The following table summarizes how the ending balances (in thousands) changed annually in each of the last three years.

	2007		2006		2005
Beginning balance	$	355,169	$	343,467	$	332,642

							Acquired in
				Other			branch
				changes			purchase
Demand deposits		5,926			(4,457	)		1,245		(1,418	)
Interest bearing demand deposits		(365	)		3,469			3,195		10,480
Savings deposits		(2,340	)		(8,855	)		1,369		64
Time deposits, $100,000 and greater		(1,724	)		(3,975	)		2,376		1,384
Time deposits, other		2,791			5,430			11,905		315
Net change		4,288			(8,388	)		20,090		10,825
Ending balance	$	359,457		$	355,169				$	343,467

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

Changes in Deposits
(Dollars in thousands)

	2007								2006								2005
	Average		Increase(Decrease)						Average		Increase(Decrease)						Average
	Balance		Amount			%			Balance		Amount			%			Balance
Interest bearing demand deposits	$	82,877	$	5,307			6.8	%	$	77,570	$	13,452			21.0	%	$	64,118
Savings deposits		35,247		(4,784	)		(12.0	)		40,031		(4,607	)		(10.3	)		44,638
Demand deposits		45,433		3,846			9.2			41,587		(5,621	)		(11.9	)		47,208
Total core (transaction) accounts		163,557		4,369			2.7			159,188		3,224			2.1			155,964
Time deposits, $100,000 and greater		35,451		2,475			7.5			32,976		(7,203	)		(17.9	)		40,179
Time deposits, other		163,788		9,481			6.1			154,307		8,871			6.1			145,436
Total time deposits		199,239		11,956			6.4			187,283		1,668			0.9			185,615
Total deposits	$	362,796	$	16,325			4.7	%	$	346,471	$	4,892			1.4	%	$	341,579

Average deposits increased $16,325,000, or 4.7%, to $362,796,000 in 2007 as compared to an increase in 2006 of $4,892,000, or 1.4%, to $346,471,000. With the exception of savings deposits, each of the categories of deposits increased in 2007, as was expected, as a result of the branch acquisition late in 2006. Otherwise, modest deposit growth was realized, as the competition for deposits was intense in the flat to inverted yield curve environment that was sustained throughout the year. Exclusive of the deposits assumed in the branch acquisition, average deposits would have remained at approximately the same levels in 2006 as in 2005. It is important to note that there was a managed decrease of $7,203,000 in average balances of time deposits of $100,000 or greater. These higher-costing, more volatile deposits are used as funding vehicles when core deposit growth is not sufficient to support the demand for loans, and when the time deposit rates are favorable to borrowing rates. When maintaining these types of non-core deposits becomes unprofitable (when these deposits result in excess funding, and rates needed to maintain these deposits exceed the rate the Company earns on the excess funds), they are no longer used. These types of deposits were not used for the last quarter of 2006 or for the full year of 2007. We seek to make additional prudent

acquisitions in an attempt to gain core deposit market share, as competitive pressures in the sustained flat-to-inverted yield curve environment have made it difficult to achieve profitable organic deposit growth.

In the past several years, the banking industry in general has experienced limited deposit growth because of competition in the marketplace from many sources, including competitors using the Internet to obtain funding, as well as mutual funds and other investment options that directly compete with traditional banking products. In keeping with our desire to provide our customers a full array of financial services “within our own walls,” we supplement the services traditionally offered by our Trust Department by staffing our community offices with alternative investment consultants that are licensed and trained to sell variable and fixed rate annuities, mutual funds, stock brokerage services and long-term care insurance. Although the sale of these products can reduce the Bank’s deposit levels, these products can result in satisfied customers and increases in non-interest fee income. Fee income from the sale of alternative investments (primarily annuities and mutual funds) was $711,000 in 2007, an increase of $198,000, or 39%, over 2006. In 2006, the increase in this category of fee income was 20% over levels earned in 2005, as well.

We believe that our customers continue to value the safety of insured deposits and the local familiarity that the Bank continues to offer; these factors appear to be primary considerations for the majority of our customers. In 2006, as rates increased, customers invested in time deposits and reduced holdings in lower-yielding core accounts. In particular, traditional statement savings account balances declined substantially. As the differences in savings rates and time deposit rates became significant, many savings depositors decided to transfer their balances to higher-yielding time deposit or money market transaction accounts. In 2007, the Federal Funds target rate remained at 5.25%, where it had been since July 2006, until October. During the fourth quarter, that rate dropped by 100 basis points, to 4.25%, by the end of the year. Our depositors responded to the rate environment by keeping their maturities relatively short. Of the $202,004,000 in time deposits at December 31, 2007, 67% were scheduled to mature within one year.

The consumer continues to have a need for transaction accounts, and the Bank is continuing to focus on that need in order to build deposit relationships. Our products are geared toward low-cost convenience and ease for the customer. The Company’s strategy is to aggressively seek to grow customer relationships by increasing the number of services per household, resulting in attracting more of the deposit (and loan) market share. Additionally, in 2008 we plan to offer enhanced services, such as remote deposit capture for commercial customers, in order to grow those types of relationships as well.

Other Interest Bearing Liabilities

As mentioned in the discussion concerning deposits, the need to supplement deposits to provide cash to meet loan demand was significant during 2005 and most of 2006. However, the acquisition of a branch office, where deposits exceeded loans, late in the third quarter of 2006, provided funding that eliminated the need for borrowing. Juniata’s average balances for all borrowings increased by 26% in 2006 over 2005, but decreased by 47.3% in 2007 as compared to 2006.

Changes in Borrowings
(Dollars in thousands)

	2007								2006								2005
	Average		Increase(Decrease)						Average		Increase(Decrease)						Average
	Balance		Amount			%			Balance		Amount			%			Balance
Repurchase agreeements	$	6,822	$	1,294			23.4	%	$	5,528	$	(88	)		(1.6	)%	$	5,616
Short-term borrowings		15		(5,389	)		(99.7	)		5,404		5,025			1,325.9			379
Long-term debt		—		(3,014	)		(100.0	)		3,014		(1,986	)		(39.7	)		5,000
Other interest bearing liabilities		967		91			10.4			876		106			13.8			770
	$	7,804	$	(7,018	)		(47.3	)%	$	14,822	$	3,057			26.0	%	$	11,765

Pension Plans

The Company provides pension benefits to substantially all of its employees through its noncontributory pension plan. To participate in the plan, an employee must reach the age of 21 and work 1,000 hours per year. Benefits are provided based upon an employee’s years of service and compensation. FAS No. 87 gives guidance on the allowable pension expense that is recognized in any given year. Management must make subjective assumptions relating to amounts and rates that are inherently uncertain. Please refer to Note 18 of Notes to Consolidated Financial Statements.

On August 21, 2007, the Board of Directors approved a proposal to close the defined benefit retirement plan to new entrants as of January 1, 2008. The Board also approved changes to the Corporation’s defined contribution plan as of January 1, 2008 that allow for employer contributions.

Stockholders’ Equity

Total stockholders’ equity increased by $786,000 in 2007, an increase of 1.6%, while net income increased by 8.6%. The modest increase in stockholders’ equity in comparison to net income resulted from stock repurchases and a relatively high dividend payout. Management’s goal was to increase return on average equity, through a systematic Board-approved stock repurchase program. In addition to the success in repurchasing over 51,000 shares during the year, the dividend payout ratio was 77%. Return on average equity increased by 8.4%, to 11.41%, in 2007 from 10.53% in 2006. The following table summarizes how the components of equity (in thousands) changed annually in each of the last three years.

	2007			2006			2005
Beginning balance	$	47,786		$	47,119		$	50,153
Net income		5,434			5,002			4,566
Dividends		(4,210	)		(2,957	)		(5,046	)
Stock-based compensation		43			39			—
Repurchase of stock, net of re-issuance		(1,022	)		(1,013	)		(1,446	)
Net change in unrealized security gains (losses)		260			274			(804	)
Net change in minimum pension liability		281			(678	)		(304	)
Net change		786			667			(3,034	)
Ending balance	$	48,572		$	47,786		$	47,119

On average, stockholders’ equity in 2007 was $47,635,000, as compared to $47,503,000 in 2006. At December 31, 2007, Juniata held 336,381 shares of stock in treasury at a cost of $6,669,000 as compared to 287,892 in 2006 at a cost of $5,652,000. These increases are a result of the stock repurchase program in effect during 2006 and 2007 (see Note 15 of Notes to Consolidated Financial Statements).

The Company periodically repurchases shares of its common stock under the share repurchase program approved by the Board of Directors. Repurchases have typically been through open market transactions and have complied with all regulatory restrictions on the timing and amount of such repurchases. Shares repurchased have been added to treasury stock and accounted for at cost. These shares may be periodically reissued for stock option exercises, employee stock purchase plan purchases and to fulfill dividend reinvestment program needs. During 2007, 51,175 shares were repurchased in conjunction with the current program. Remaining shares authorized for repurchase were 91,491 as of December 31, 2007.

In 2007, Juniata increased its regular dividend by 6.1%, to $0.70 per common share. Per share common regular dividends in prior years were $0.66 and $0.61 in 2006 and 2005, respectively. Additionally, a special dividend of $0.25 was paid to shareholders in 2007. No special dividend was paid in 2006, but in 2005, a $0.50 special dividend was paid. (See Note 15 of Notes to Consolidated Financial Statements regarding restrictions on dividends from the Bank to the Company.) In January 2008, the Board of Directors declared a dividend of $0.18 per share for the first quarter of 2008 to stockholders of record on February 15, 2008, payable on March 1, 2008.

Juniata’s book value per share at December 31, 2007 was $11.02, as compared to $10.72 and $10.46 at December 31, 2006 and 2005, respectively. Juniata’s average equity to assets ratio for 2007, 2006 and 2005 was 11.21%, 11.47% and 11.90%, respectively. Refer also to the Capital Risk section in the Asset / Liability management discussion that follows.

Asset / Liability Management Objectives

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

• Liquidity Risk

• Capital Risk

• Market / Interest Rate Risk

• Investment Portfolio Risk

• Economic Risk

Liquidity Risk

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

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

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

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

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

provides access to the liability and off-balance sheet sides of the balance sheet for funding. An active knowledge of debt funding sources is important to liquidity adequacy.

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

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

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

Juniata is a member of the Federal Home Loan Bank (FHLB) of Pittsburgh, which provides short-term liquidity. The Bank uses this vehicle to satisfy temporary funding needs throughout the year, but had no overnight advances under this arrangement as of December 31, 2007.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank of Pittsburgh is $193,933,000, with no borrowings outstanding as of December 31, 2007. In order to borrow an amount in excess of $21,900,000, the FHLB would require the Bank to purchase additional Federal Home Loan Bank Stock. The Federal Home Loan Bank is a source of both short-term and long-term funding. The Bank must maintain sufficient qualifying collateral, as defined, to secure all outstanding advances. A $5,000,000 long-term note payable to the Federal Home Loan Bank was repaid on its maturity date of August 9, 2006. That note carried a fixed rate of interest of 2.86%. It is not anticipated at this time that new long-term funding will be needed during 2008.

Juniata needs liquid resources available to fulfill contractual obligations that require future cash payments. The table below summarizes significant obligations to third parties, by type, that are fixed and determined at December 31, 2007.

Presented below are the significant contractual obligations of the Company as of December 31, 2007 (in thousands of dollars). Further discussion of the nature of each obligation is included in the referenced note to the consolidated financial statements.

Contractual Obligations

					Payments Due by Period
							One to		Three to		More than
	Note				One Year		Three		Five		Five
	Reference		Total		or Less		Years		Years		Years
Certificates of deposits		11	$	202,004	$	135,166	$	55,229	$	11,609	$	—
Federal Funds borrowed and security repurchase agreements		12		5,431		5,431		—		—		—
Long-term debt		12		—		—		—		—		—
Operating lease obligations		13		503		101		205		155		42
Other long-term liabilities
Employee pension		18		3,553		308		641		687		1,917
3rd party data processor contract		22		510		204		306		—		—
Supplemental retirement and deferred compensation		18		4,407		457		948		738		2,264
			$	216,408	$	141,667	$	57,329	$	13,189	$	4,223

Capital Risk

The Company maintains sufficient core capital to protect depositors and stockholders and to take advantage of business opportunities while ensuring that it has resources to absorb the risks inherent in the business. Federal banking regulators have established capital adequacy requirements for banks and bank holding companies based on risk factors, which require more capital backing for assets with higher potential credit risk than assets with lower credit risk. All banks and bank holding companies are required to have a minimum of 4% of risk adjusted assets in Tier I capital and 8% of risk adjusted assets in Total capital (Tier I and Tier II capital). As of December 31, 2007 and 2006, Juniata’s Tier I capital ratio was 17.53% and 16.24%, respectively, and its Total capital ratio was 18.41% and 17.18%, respectively. Additionally, banking organizations must maintain a minimum Tier I capital to total average asset (leverage) ratio of 3%. This 3% leverage ratio is a minimum for the top-rated banking organizations without any supervisory, financial or operational weaknesses or deficiencies. Other banking organizations are required to maintain leverage capital ratios 100 to 200 basis points above the minimum depending on their financial condition. At December 31, 2007 and 2006, Juniata’s leverage ratio was 11.06% and 11.27%, respectively, with a required leverage ratio of 4% (see Note 15 of Notes to the Consolidated Financial Statements).

Market / Interest Rate Risk

Market risk is the risk of loss arising from changes in the fair value of financial instruments due to changes in interest rates, currency exchange rates, commodity prices or equity prices. The Company’s market risk is composed primarily of interest rate risk. The process by which financial institutions manage their interest rate risk is called asset/liability management. The primary objective of Juniata’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. Thus the goal of interest rate risk management is to maintain a balance between risk and reward such that net interest income is maximized while risk is maintained at a tolerable level.

Management endeavors to control the exposure to changes in interest rates by understanding, reviewing and making decisions based on its risk position. The asset/liability management committee is responsible for these decisions. The Company primarily uses the securities portfolio and FHLB advances to manage its interest rate risk position. Additionally, pricing, promotion and product development activities are directed in an effort to emphasize the loan and deposit term or repricing characteristics that best meet current interest rate risk objectives. Hedging instruments are not used.

The committee operates under management policies defining guidelines and limits on the level of risk. These policies are monitored and approved by the Board of Directors. 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 December 31, 2007, the model disseminated data into appropriate repricing buckets, based upon the static position at that time. The interest-earning assets and interest-bearing liabilities were assigned a multiplier to simulate how much that particular balance sheet item would re-price when interest rates change. Finally, the estimated timing effect of rate changes is applied, and the net interest income effect is determined on a static basis (as if no other factors were present). As the table below indicates, based upon rate shock simulations on a static basis, the Company appears to be in a neutral position, which is very slightly asset sensitive. Over a one-year period, the effect of a 100 and 200 basis point rate increase would add only about $15,000 and $29,000, respectively, to net interest income. Conversely, the effect of a 100 and 200 basis point decline would result in lower net interest income by approximately the same amounts. The modeling process is continued by further estimating the impact that imbedded options and probable internal strategies may have in the changing-rate environment. Examples of imbedded options are floor and ceiling features in adjustable rate mortgages and call features on securities in the investment portfolio. Probable internal strategies would include loan and deposit pricing methodologies employed to mitigate the negative effects that certain rate environments could have on the net interest margin. For example, rate changes on certain core transaction deposits may be more likely to occur in a declining rate environment than in a rising rate environment. Applying the likely results of all known imbedded options and likely internal pricing strategies to the simulation produces quite different results from the static position assumptions. The Company becomes liability sensitive in a declining rate environment and asset sensitive in the rising rate scenario. Over a one-year period, the effect a 100 and 200 basis point rate increase would

add about $52,000 and $134,000, respectively, to net interest income. The effect of a 100 and 200 basis point decline would likewise result in higher net interest income by approximately $262,000 and $556,000, respectively. Juniata’s rate risk policies provide for maximum limits on net interest income that can be at risk for 100 through 200 basis point changes in interest rates.

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

	Change in Net			Change in Net
	Interest Income			Interest Income
Change in	Due to Interest			Due to		Total Change in
Interest Rates	Rate Risk			Imbedded		Net Interest
(Basis Points)	(Static)			Options		Income
200	$	29		$	105	$	134
100		15			37		52
0		—			—		—
-100		(15	)		277		262
-200		(29	)		585		556

Table 5, presented below, illustrates the maturity distribution of the Company’s interest-sensitive assets and liabilities as of December 31, 2007. Earliest re-pricing opportunities for variable and adjustable rate products and scheduled maturities for fixed rate products have been placed in the appropriate column to compute the cumulative sensitivity ratio (ratio of interest-earning assets to interest-bearing liabilities). Through one year, the cumulative sensitivity ratio is 0.83, indicating a well-matched balance sheet, with a minor amount of risk when measured on a static basis.

Table 5
MATURITY DISTRIBUTION
AS OF DECEMBER 31, 2007
(In thousands)
Remaining Maturity / Earliest Possible Repricing

			Over Three			Over Six			Over One
	Three		Months But			Months But			Year But			Over
	Months		Within Six			Within One			Within Five			Five
	or Less		Months			Year			Years			Years		Total
Interest Earning Assets
Interest bearing deposits	$	770	$	200		$	—		$	5,325		$	—	$	6,295
Federal funds sold		7,500		—			—			—			—		7,500
Investment securities:
U.S. Treasury securities and obligations of U.S. Government agencies and corporations		374		2,641			665			17,115			6,021		26,816
Obligations of state and political subdivisions		9,070		655			531			19,263			6,288		35,807
Mortgage-backed securities		360		—			—			288			2,283		2,931
Stocks		—		—			—			—			1,502		1,502
Loans:
Commercial, financial, and agricultural		24,871		8			139			3,498			326		28,842
Real estate - commercial		24,436		—			—			4,585			—		29,021
Real estate - construction		27,223		—			—			—			—		27,223
Real estate - mortgage		12,131		12,150			24,274			43,158			35,611		127,324
Home equity (net of unearned discount)		8,857		89			319			8,792			45,621		63,678
Personal		678		93			371			9,893			4,284		15,319
Obligations of state and political subdivisions		40		2			—			962			5,589		6,593
Total Interest Earning Assets		116,310		15,838			26,299			112,879			107,525		378,851
Interest Bearing Liabilities												��
Demand deposits		36,978		748			2,993			10,475			23,627		74,821
Savings deposits		6,775		339			1,355			4,743			20,665		33,877
Certificates of deposit over $100,000		7,225		6,711			8,650			13,722			—		36,308
Time deposits		34,711		31,786			46,083			53,116			—		165,696
Securities sold under agreements to repurchase		5,431		—			—			—			—		5,431
Short-term borrowings		—		—			—			—			—		—
Long-term debt		—		—			—			—			—		—
Other interest bearing liabilities		1,037		—			—			—			—		1,037
Total Interest Bearing Liabilities		92,157		39,584			59,081			82,056			44,292		317,170
Gap	$	24,153	$	(23,746	)	$	(32,782	)	$	30,823		$	63,233	$	61,681
Cumulative Gap	$	24,153	$	407		$	(32,375	)	$	(1,552	)	$	61,681
Cumulative sensitivity ratio		1.26		1.00			0.83			0.99			1.19
Commercial, financial and agricultural loans maturing after one year with:
Fixed interest rates									$	3,498		$	326	$	3,824
Variable interest rates										—			—		—
Total									$	3,498		$	326	$	3,824

Investment Portfolio Risk

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

recognized. The test revealed that, as of December 31, 2007, the risk-based capital ratio would remain adequate under these scenarios.

Economic Risk

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

Off-Balance Sheet Arrangements

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

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

The Company had outstanding loan origination commitments aggregating $35,827,000 and $37,627,000 at December 31, 2007 and 2006, respectively. In addition, the Company had $15,544,000 and $10,975,000 outstanding in unused lines of credit commitments extended to its customers at December 31, 2007 and 2006, respectively.

Letters of credit are instruments issued by the Company that guarantee the beneficiary payment by the Bank in the event of default by the Company’s customer in the non-performance of an obligation or service. Most letters of credit are extended for one-year periods. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary. The amount of the liability as of December 31, 2007 and 2006 for guarantees under letters of credit issued is not material.

The maximum undiscounted exposure related to these commitments at December 31, 2007 was $718,000, and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $2,562,000.

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

Effects of Inflation

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

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

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

The management of the Company is responsible for establishing and maintaining effective disclosure controls and procedures, as defined under Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934. As of December 31, 2007, an evaluation was performed under the supervision and with the participation of Management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, management concluded that disclosure controls and procedures as of December 31, 2007 were effective in ensuring material information required to be disclosed in this Annual Report on Form 10-K was recorded, processed, summarized and reported on a timely basis. Additionally, there were no changes in the Company’s internal control over financial reporting.

Management’s responsibilities related to establishing and maintaining effective disclosure controls and procedures include maintaining effective internal control over financial reporting that are designed to produce reliable financial statements in accordance with accounting principles generally accepted in the United States of America. As disclosed in the Report on Management’s Assessment of Internal Control Over Financial Reporting, Management assessed the Company’s system of internal control over financial reporting as of December 31, 2007 and 2006, in relation to criteria for effective internal control over financial reporting as described in “Internal Control – Integrated Framework,” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, Management believes that, as of December 31, 2007, its system of internal control over financial reporting met those criteria and is effective.

/s/ Francis J. Evanitsky
Francis J. Evanitsky, President and Chief Executive Officer

/s/ JoAnn N. McMinn
JoAnn N. McMinn, Chief Financial Officer

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

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

     We have audited Juniata Valley Financial Corp. and its wholly-owned subsidiary’s The Juniata Valley Bank, (the “Company”) internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.

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

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

     Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to

- 2 -

the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

     In our opinion, the Company, maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”).

     We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Juniata Valley Financial Corp. and its wholly-owned subsidiary, The Juniata Valley Bank as of December 31, 2007 and 2006 and the related consolidated statements of income, stockholders’ equity and cash flows for each of the years in the three-year period ended December 31, 2007, and our report dated March 13, 2008 expressed an unqualified opinion.

/s/ Beard Miller Company LLP
Beard Miller Company LLP
Lancaster, Pennsylvania
March 13, 2008

Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

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

     We have audited the accompanying consolidated balance sheets of Juniata Valley Financial Corp. and its wholly-owned subsidiary, The Juniata Valley Bank, (the “Company”) as of December 31, 2007 and 2006, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2007. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

     In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Juniata Valley Financial Corp. and its wholly-owned subsidiary, The Juniata Valley Bank, as of December 31, 2007 and 2006 and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America.

     As discussed in Note 18 to the consolidated financial statements, the Company changed its method of accounting for Defined Benefit, Pension, and other post retirement plans in 2006.

     As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for share-based payments in 2006.

     We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2007, based on criteria established inInternal Control-Integrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) and our report dated March 13, 2008 expressed an unqualified opinion.

Beard Miller Company LLP
Lancaster, Pennsylvania

March 13, 2008

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

	December 31,			December 31,
	2007			2006
ASSETS
Cash and due from banks	$	12,254		$	16,476
Interest bearing deposits with banks		770			102
Federal funds sold		7,500			1,200
Cash and cash equivalents		20,524			17,778
Interest bearing time deposits with banks		5,525			5,660
Securities available for sale		67,056			56,383
Securities held to maturity, fair value of $0 and $2,480, respectively		—			2,500
Restricted investment in Federal Home Loan Bank (FHLB) stock		1,095			1,076
Investment in unconsolidated subsidiary		2,972			2,892
Total loans, net of unearned interest		298,000			305,818
Less: Allowance for loan losses		(2,322	)		(2,572	)
Total loans, net of allowance for loan losses		295,678			303,246
Premises and equipment, net		7,272			6,542
Bank owned life insurance and annuities		12,344			11,017
Core deposit intangible		389			434
Goodwill		2,046			2,046
Accrued interest receivable and other assets		5,245			6,357
Total assets	$	420,146		$	415,931
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits:
Non-interest bearing	$	48,755		$	42,829
Interest bearing		310,702			312,340
Total deposits		359,457			355,169
Securities sold under agreements to repurchase		5,431			6,112
Other interest bearing liabilities		1,037			927
Accrued interest payable and other liabilities		5,649			5,937
Total liabilities		371,574			368,145
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 -
4,409,445 shares at December 31, 2007;
4,457,934 shares at December 31, 2006		4,746			4,746
Surplus		18,297			18,259
Retained earnings		32,755			31,531
Accumulated other comprehensive loss		(557	)		(1,098	)
Cost of common stock in Treasury:
336,381 shares at December 31, 2007;
287,892 shares at December 31, 2006		(6,669	)		(5,652	)
Total stockholders’ equity		48,572			47,786
Total liabilities and stockholders’ equity	$	420,146		$	415,931

See Notes to Consolidated Financial Statements

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

	Years Ended December 31,
	2007			2006		2005
Interest income:
Loans, including fees	$	22,851		$	21,768	$	19,767
Taxable securities		2,438			1,975		1,872
Tax-exempt securities		857			659		654
Other interest income		577			261		414
Total interest income		26,723			24,663		22,707
Interest expense:
Deposits		10,744			9,472		7,666
Securities sold under agreements to repurchase		276			246		167
Short-term borrowings		1			275		14
Long-term debt		—			88		148
Other interest bearing liabilities		39			30		20
Total interest expense		11,060			10,111		8,015
Net interest income		15,663			14,552		14,692
Provision for loan losses		120			54		28
Net interest income after provision for loan losses		15,543			14,498		14,664
Noninterest income:
Trust fees		444			435		374
Customer service fees		1,656			1,497		1,390
Earnings on bank owned life insurance and annuities		440			433		364
Commissions from sales of non-deposit products		711			513		426
Income from unconsolidated subsidiary		192			80		—
Securities impairment charge		(33	)		—		—
Gain on sales of securities		14			181		175
Gain on sales of other assets		1			10		2
Other noninterest income		774			681		592
Total noninterest income		4,199			3,830		3,323
Noninterest expense:
Employee compensation expense		5,137			4,593		4,285
Employee benefits		1,455			1,471		1,472
Employee severance expense		—			—		284
Occupancy		892			804		821
Equipment		688			620		592
Data processing expense		1,332			1,204		1,224
Director compensation		455			465		476
Professional fees		437			378		788
Taxes, other than income		546			505		519
Intangible amortization		45			15		—
Other noninterest expense		1,222			1,190		1,219
Total noninterest expense		12,209			11,245		11,680
Income before income taxes		7,533			7,083		6,307
Provision for income taxes		2,099			2,081		1,741
Net income	$	5,434		$	5,002	$	4,566
Earnings per share
Basic	$	1.23		$	1.12	$	1.00
Diluted	$	1.22		$	1.11	$	1.00
Cash dividends declared per share	$	0.95		$	0.66	$	1.11
Weighted average basic shares outstanding		4,434,859			4,480,245		4,550,483
Weighted average diluted shares outstanding		4,444,466			4,492,552		4,568,098

See Notes to Consolidated Financial Statements

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

	Years Ended December 31, 2007, 2006 and 2005
	Number											Accumulated
	of											Other						Total
	Shares			Common					Retained			Comprehensive			Treasury			Stockholders’
	Outstanding			Stock		Surplus			Earnings			(Loss) Income			Stock			Equity
Balance at December 31, 2004		2,280,629		$	2,373	$	20,386		$	29,966		$	414		$	(2,986	)	$	50,153
Comprehensive income:
Net income										4,566									4,566
Change in unrealized gains (losses) on securities available for sale, net of reclassifica- tion adjustment and tax effects													(804	)					(804	)
Minimum pension liability, net of tax effects													(304	)					(304	)
Total comprehensive income																			3,458
Cash dividends at $1.11 per share										(5,046	)								(5,046	)
Purchase of treasury stock, at cost		(62,907	)													(2,242	)		(2,242	)
Treasury stock issued for dividend reinvestment plan		20,434					171									480			651
Treasury stock issued for stock option and stock purchase plans		5,464					(7	)								152			145
Stock issued pursuant to 2 for 1 stock split effective October 31, 2005		2,259,772			2,373		(2,373	)											—
Balance at December 31, 2005		4,503,392			4,746		18,177			29,486			(694	)		(4,596	)		47,119
Comprehensive income:
Net income										5,002									5,002
Change in unrealized losses on securities available for sale, net of reclassifica- tion adjustment and tax effects													274						274
Minimum pension liability, net of tax effects													85						85
Total comprehensive income																			5,361
Cumulative effect of change in accounting for pension and other post-retirement benefits, net of tax of $393													(763	)					(763	)
Cash dividends at $0.66 per share										(2,957	)								(2,957	)
Stock-based compensation expense							39												39
Purchase of treasury stock, at cost		(58,082	)													(1,302	)		(1,302	)
Treasury stock issued for dividend reinvestment plan		8,147					37									159			196
Treasury stock issued for stock option and stock purchase plans		4,477					6									87			93
Balance at December 31, 2006		4,457,934			4,746		18,259			31,531			(1,098	)		(5,652	)		47,786
Comprehensive income:
Net income										5,434									5,434
Change in unrealized losses on securities available for sale, net of reclassifica- tion adjustment and tax effects													260						260
Defined benefit retirement plan adjustments, net of tax effects													281						281
Total comprehensive income																			5,975
Cash dividends at $0.95 per share										(4,210	)								(4,210	)
Stock-based compensation expense							43												43
Purchase of treasury stock, at cost		(51,175	)													(1,069	)		(1,069	)
Treasury stock issued for stock option and stock purchase plans		2,686					(5	)								52			47
Balance at December 31, 2007		4,409,445		$	4,746	$	18,297		$	32,755		$	(557	)	$	(6,669	)	$	48,572

See Notes to Consolidated Financial Statements

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

	Years Ended December 31,
	2007			2006			2005
Operating activities :
Net income	$	5,434		$	5,002		$	4,566
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		120			54			28
Provision for depreciation		653			594			590
Net amortization of securities premiums		104			133			209
Amortization of core deposit intangible		45			15			—
Security impairment charge		33			—			—
Net realized gains on sales of securities		(14	)		(181	)		(175	)
Earnings on bank owned life insurance and annuities		(440	)		(433	)		(364	)
Deferred income tax expense (credit)		94			40			(134	)
Equity in earnings of unconsolidated subsidiary, net of dividends of $126 and $0		(66	)		(80	)		—
Stock-based compensation expense		43			39			—
Decrease (increase) in accrued interest receivable and other assets		901			(80	)		372
Increase in accrued interest payable and other liabilities		248			258			76
Net cash provided by operating activities		7,155			5,361			5,168
Investing activities:
Purchases of:
Securities available for sale		(59,340	)		(14,181	)		(12,673	)
Securities held to maturity		(3,955	)		(5,100	)		(4,400	)
FHLB stock		(197	)		(827	)		(896	)
Premises and equipment		(1,383	)		(786	)		(255	)
Bank owned life insurance and annuities		(963	)		(106	)		(63	)
Investment in unconsolidated subsidiary		—			(2,812	)		—
Proceeds from:
Sales of securities available for sale		585			364			414
Maturities of and principal repayments on:
Securities available for sale		48,331			24,588			15,882
Securities held to maturity		6,455			5,100			5,400
Redemption of FHLB stock		178			1,107			869
Bank owned life insurance and annuities		76			169			244
Sale of other real estate owned		243			624			—
Net decrease in interest bearing time deposits		135			—			1,100
Net cash received from branch acquisition		—			13,801			—
Net (increase) decrease in loans receivable		7,051			(4,916	)		(18,569	)
Net cash (used in) provided by investing activities		(2,784	)		17,025			(12,947	)
Financing activities:
Net increase (decrease) in deposits		4,288			(8,388	)		10,825
Net (decrease) increase in short-term borrowings and securities sold under agreements to repurchase		(681	)		(3,689	)		5,085
Long-term debt repayment		—			(5,000	)		—
Cash dividends		(4,210	)		(2,957	)		(5,046	)
Purchase of treasury stock		(1,069	)		(1,302	)		(2,242	)
Treasury stock issued for dividend reinvestment and employee stock purchase plans		47			289			796
Net cash (used in) provided by financing activities		(1,625	)		(21,047	)		9,418
Net increase in cash and cash equivalents		2,746			1,339			1,639
Cash and cash equivalents at beginning of year		17,778			16,439			14,800
Cash and cash equivalents at end of year	$	20,524		$	17,778		$	16,439
Supplemental information:
Interest paid	$	11,060		$	9,858		$	7,861
Income taxes paid		1,885			1,930			1,851
Supplemental schedule of noncash investing and financing activities:
Transfer of loans to other real estate owned	$	397		$	757		$	—
Transfer of fixed asset to other assets		—			—			256

See Notes to Consolidated Financial Statements

JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 2007, 2006 AND 2005

Nature Of Operations

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

1. Summary of Significant Accounting Policies

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

Principles of consolidation

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

Use of estimates

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

Basis of presentation

Certain amounts previously reported have been reclassified to conform to the financial statement presentation for 2007. The reclassification had no effect on net income. Except for             shares outstanding in the Consolidated Statement of Stockholders’ Equity, all share and related price and dividend amounts presented herein have been restated to reflect the two-for-one stock split that occurred on October 31, 2005.

Significant group concentrations of credit risk

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

As of December 31, 2007, there were no concentrations of credit to any particular industry equaling 10% or more of total outstanding loans. The Bank’s business activities are geographically concentrated in the counties of Juniata, Mifflin, Perry, Huntingdon, Centre, Franklin and Snyder, Pennsylvania. The Bank has a diversified loan portfolio; however, a substantial portion of its debtors’ ability to honor their obligations is dependent upon the economy in central Pennsylvania.

Cash and cash equivalents

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

Interest bearing time deposits with banks

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

Securities

Securities classified as available for sale, which include marketable investment securities, are stated at fair value, with the unrealized gains and losses, net of tax, reported as a component of comprehensive income, until realized. Securities classified as available for sale are those securities that the Company intends to hold for an indefinite period of time but not necessarily to maturity. Any decision to sell a security classified as available for sale would be based on various factors, including significant movement in interest rates, changes in maturity mix of the Company’s assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Investment securities for which management has the positive intent and ability to hold the security to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions are classified as held to maturity and are stated at cost, adjusted for amortization of premium and accretion of discount computed by the interest method over their contractual lives. Interest and dividends on investment securities available for sale and held to maturity are recognized as income when earned. Premiums and discounts are recognized in interest income using the interest method over the terms of the securities. Gains or losses on the disposition of securities available for sale are based on the net proceeds and the adjusted carrying amount of the securities sold, determined on a specific identification basis.

The Company’s policy requires quarterly reviews of impaired securities. This review includes analyzing the length of time and the extent to which the fair value has been less than cost; the financial condition and near-term prospects of the issuer, including any specific events which may influence the operations of the issuer and the intent and ability of the Company to hold its investment for a period of time sufficient to allow for any anticipated recovery in market value. Declines in fair value of impaired securities below their cost that are deemed to be other-than-temporary are reflected in earnings as realized losses.

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

Restricted Investment in Federal Home Loan Bank Stock

The Bank owns restricted stock investments in the Federal Home Loan Bank. Federal law requires a member institution of the Federal Home Loan Bank to hold stock according to a predetermined formula. The stock is carried at cost.

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at the principal amounts outstanding, net of unearned income and the allowance for loan losses. Interest income on all loans, other than nonaccrual loans, is accrued over the term of the loans based on the amount of principal outstanding. Unearned income is amortized to income over the life of the loans, using the interest method.

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. It is the Company’s policy to continue to accrue interest on loans over 90 days past due as long as they are (1) guaranteed or well secured and (2) there is an effective means of collection. When a loan is placed on non-accrual status, all unpaid interest credited to income in the current year is reversed against current period income and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on nonaccrual loans generally is either applied against principal or reported as interest income, according to management’s judgment as to the collectibility 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 collectibility of the total contractual principal and interest is no longer in doubt.

The Company’s intent is to hold loans in the portfolio until maturity. At the time the Company’s intent is no longer to hold loans to maturity based on asset/liability management practices, the Corporation transfers loans from portfolio to held for sale at the lower of cost or market. 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.

Allowance for loan losses

The allowance for loan losses is established through provisions for loan losses charged against income. 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 are considered for charge-off when:

(1)	principal or interest has been in default for 120 days or more and for which no payment has been received during the previous four months,
(2)	all collateral securing the loan has been liquidated and a deficiency balance remains,
(3)	a bankruptcy notice is received for an unsecured loan, or
(4)	the loan is deemed to be uncollectible for any other reason.

The allowance for loan losses is maintained at a level considered adequate to offset probable losses on the Company’s existing loans. 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.

The allowance consists of specific and general components. The specific component relates to loans that are classified as doubtful, substandard or special mention. For such loans that are also 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 general component covers non-classified loans and is based on historical loss experience adjusted for qualitative factors. Prior to 2005, an unallocated component was maintained to cover uncertainties that could affect management’s estimate of probable losses. The unallocated component of the allowance reflected the margin of imprecision inherent in the underlying assumptions used in the methodologies for estimating specific and general losses in the portfolio.

A 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. 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.

Large groups of smaller balance homogeneous loans are collectively evaluated for impairment. Accordingly, the Bank does not separately identify individual consumer and residential loans for impairment disclosures, unless such loans are subject to a restructuring agreement.

Other real estate owned

Assets acquired in settlement of mortgage loan indebtedness are recorded as other real estate owned (OREO) and are included in other assets at fair value less estimated costs to sell. Costs to maintain the assets and subsequent gains and losses attributable to their disposal are included in other income and other expenses as realized. No depreciation or amortization expense is recognized. At December 31, 2007 and 2006, the carrying value of other real estate owned was $311,000 and $157,000, respectively.

Business combinations

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

Goodwill and other intangible assets

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

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

Premises and equipment and depreciation

Premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally using the straight-line method over the estimated useful lives of the related assets, which range from 3 to 10 years for furniture and equipment and 25 to 50 years for buildings. Expenditures for maintenance and repairs are charged against income as incurred. Costs of major additions and improvements are capitalized. (See Note 8).

Trust assets and revenues

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

Bank owned life insurance and annuities

The cash surrender value of bank owned life insurance and annuities is carried as an asset, and changes in cash surrender value are recorded as non-interest income. (See Note 7).

Income taxes

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

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

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

Advertising

The Company follows the policy of charging costs of advertising to expense as incurred. Advertising expenses were $152,000, $198,000 and $257,000 in 2007, 2006 and 2005, respectively.

Off-balance sheet financial instruments

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

Transfer of financial assets

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

Stock-based compensation

The Company has a stock-based employee compensation plan. Prior to January 1, 2006, the Company accounted for this plan under the recognition and measurement provisions of APB Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations, as permitted by FASB Statement No. 123, “Accounting for Stock-Based Compensation”. No stock-based employee compensation cost was recognized in the Consolidated Statements of Income for the periods reported prior to January 1, 2006, as all options granted under this plan had an exercise price equal to the market value of the underlying common stock on the date of grant. Effective January 1, 2006, the Company adopted the fair value recognition provisions of FASB Statement No. 123(R), “Share-Based Payment”, using the modified-prospective-transition method. Under that transition method, compensation cost recognized in 2006 includes: (a) compensation cost for all share-based payments granted prior to, but not yet vested as of January 1, 2006, based on the grant date fair value estimated in accordance with the original provisions of Statement 123, and (b) compensation cost for all share-based payments granted subsequent to January 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of Statement 123(R). Results for prior periods have not been restated.

As a result of adopting Statement 123(R) on January 1, 2006, the Company’s income before taxes and net income for the year ended December 31, 2007 and 2006 are $43,000 and $39,000 lower, respectively, than if it had continued to account for share-based compensation under Opinion 25. If the Company had not adopted Statement 123(R), diluted earnings per share for 2007 and 2006 would have been $0.01 higher. Basic earnings per share would have been unaffected for 2007, but $.01 higher in 2006.

Prior to the adoption of Statement 123(R), the Company presented all tax benefits of deductions resulting from the exercise of stock options as operating cash flows in the Consolidated Statements of Cash Flows. Statement 123(R) requires the cash flows resulting from the tax benefits resulting from tax deductions in excess of the compensation cost recognized for the options (excess tax benefits) to be classified as financing cash flows. There were no such tax benefits in 2007 or 2006.

The following table illustrates the effect on net income and earnings per share if the Company had applied the fair value recognition provisions of Statement 123 to options granted under the Company’s stock option plan in prior periods presented. For purposes of this pro forma disclosure, the value of the options is estimated using a Black-Scholes option-pricing formula and amortized to expense over the options’ vesting periods (in thousands, except per share data).

	2005
Net income, as reported	$	4,566
Total stock-based employee compensation expense (net of tax) determined under fair value based method for all awards		(21	)
Pro forma net income	$	4,545
Basic earnings per share
As reported	$	1.00
Pro forma		1.00
Diluted earnings per share
As reported	$	1.00
Pro forma		1.00

These computations were derived using the Black-Scholes option-pricing model. The following weighted average assumptions were used to value options granted in current and prior periods presented.

	2007			2006			2005
Expected life of options	7 years			7 years			7 years
Risk-free interest rate		4.47	%		4.74	%		4.40	%
Expected volatility		19.98	%		20.50	%		21.13	%
Expected dividend yield		3.20	%		2.99	%		3.20	%

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

Segment reporting

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

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

2. Recent Accounting Pronouncements

FASB Statement No. 141 (R) “Business Combinations” was issued in December of 2007. This Statement establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any noncontrolling interest in the acquiree. The Statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statements to evaluate the nature and financial effects of the business combination. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. This new pronouncement will impact the Company’s accounting for business combinations beginning January 1, 2009.

FASB Statement No. 160 “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51” was issued in December of 2007. This Statement establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance will become effective as of the beginning of a company’s fiscal year beginning after December 15, 2008. The Company believes that this new pronouncement will not have a material impact on the Company’s consolidated financial statements in future periods.

Staff Accounting Bulletin No. 109 (SAB 109), “Written Loan Commitments Recorded at Fair Value Through Earnings” expresses the views of the staff regarding written loan commitments that are accounted for at fair value through earnings under generally accepted accounting principles. To make the staff’s views consistent with current authoritative accounting guidance, the SAB revises and rescinds portions of SAB No. 105, “Application of Accounting Principles to Loan Commitments.”  Specifically, the SAB revises the SEC staff’s views on incorporating expected net future cash flows related to loan servicing activities in the fair value measurement of a written loan commitment. The SAB retains the staff’s views on incorporating expected net future cash flows related to internally-developed intangible assets in the fair value measurement of a written loan commitment. The staff expects registrants to apply the views in Question 1 of SAB 109 on a prospective basis to derivative loan commitments issued or modified in fiscal quarters

beginning after December 15, 2007. The Company does not expect SAB 109 to have a material impact on its consolidated financial statements.

In June 2007, the Emerging Issues Task Force (EITF) reached a consensus on Issue No. 06-11, “Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards” (“EITF 06-11”). EITF 06-11 states that an entity should recognize a realized tax benefit associated with dividends on nonvested equity shares, nonvested equity share units and outstanding equity share options charged to retained earnings as an increase in additional paid in capital. The amount recognized in additional paid in capital should be included in the pool of excess tax benefits available to absorb potential future tax deficiencies on share-based payment awards. EITF 06-11 should be applied prospectively to income tax benefits of dividends on equity-classified share-based payment awards that are declared in fiscal years beginning after December 15, 2007. The Company expects that EITF 06-11 will not have a material impact on its consolidated results of operations and financial condition.

In September 2006, the FASB issued FAS Statement No. 157,Fair Value Measurements, which defines fair value, establishes a framework for measuring fair value under GAAP, and expands disclosures about fair value measurements. FAS Statement No. 157 applies to other accounting pronouncements that require or permit fair value measurements. The new guidance is effective for financial statements issued for fiscal years beginning after November 15, 2007, and for interim periods within those fiscal years. In December 2007, the FASB issued proposed FASB Staff Position (FSP) 157-b, “Effective Date of FASB Statement No. 157,” that would permit a one-year deferral in applying the measurement provisions of Statement No. 157 to non-financial assets and non-financial liabilities (non-financial items) that are not recognized or disclosed at fair value in an entity’s financial statements on a recurring basis (at least annually). Therefore, if the change in fair value of a non-financial item is not required to be recognized or disclosed in the financial statements on an annual basis or more frequently, the effective date of application of Statement 157 to that item is deferred until fiscal years beginning after November 15, 2008 and interim periods within those fiscal years. This deferral does not apply, however, to an entity that applies Statement 157 in interim or annual financial statements before proposed FSP 157-b is finalized. The Company is currently evaluating the impact, if any, that the adoption of FSP 157-b will have on the Company’s consolidated results of operations and financial condition.

In June 2006, the Emerging Issues Task Force (EITF) released Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (EITF 06-4). This EITF consensus opinion was ratified by the FASB on September 20, 2006. EITF 06-4 requires employers who have entered into a split-dollar life insurance arrangement with an employee that extends to post-retirement periods, to recognize a liability and related compensation costs in accordance with FAS No. 106,Accounting for Post Retirement Benefit Obligationsor Accounting Principles Board Opinion No. 12, “Omnibus Opinion.” The effective date of EITF No. 06-4 is for fiscal years beginning after December 15, 2007, and the opinion may be adopted through either a cumulative effect adjustment to retained earnings at the beginning of the year of adoption, or through retrospective application to prior periods. The Company has split-dollar life insurance arrangements and has assessed the impact the adoption of the standard will have on the Company’s consolidated results of operations and financial position. It has been determined that the Company will recognize its liability and related compensation costs in accordance with APB Opinion No. 12. A cumulative effect reduction to retained earnings will be made on January 1, 2008, of approximately $317,000. The impact to pre-tax earnings in 2008 is expected to be a decrease of approximately $93,000.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115.” SFAS No. 159 permits entities to choose to measure many financial instruments and certain other items at fair value. Unrealized gains and losses on items for which the fair value option has been elected will be recognized in earnings at each subsequent reporting date. SFAS No. 159 is effective for our Company January 1, 2008. The Company is currently evaluating the impact that the adoption of FAS No. 159 will have on the Company’s consolidated results of operations and financial condition.

In June 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), Accounting for Uncertainty in Income Taxes. FIN 48 is an interpretation of FAS No. 109, Accounting for Income Taxes, and it seeks to reduce the diversity in practice associated with certain aspects of measurement and recognition in accounting for income taxes. In addition, FIN 48 requires expanded disclosure with respect to the uncertainty in income taxes and is effective for fiscal years beginning January 1, 2007. Adoption of this standard had no material effect on the Corporation’s consolidated results of operations and financial condition.

In May 2007, the FASB issued FASB Staff Position (“FSP”) FIN 48-1, “Definition of Settlement in FASB Interpretation No. 48” (FSP FIN 48-1). FSP FIN 48-1 provides guidance on how to determine whether a tax position is effectively settled for the purpose of recognizing previously unrecognized tax benefits. FSP FIN 48-1 is effective retroactively to January 1, 2007. The implementation of this standard did not have a material impact on our consolidated financial position or results of operations.

In February 2007, the FASB issued FASB Staff Position (FSP) FAS 158-1, “Conforming Amendments to the Illustrations in FASB Statements No. 87, No. 88, and No 106 and to the Related Staff Implementation Guides.” This FSP makes conforming amendments to other FASB statements and staff implementation guides and provides technical corrections to SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.” The conforming amendments in this FSP were applied upon adoption of SFAS No. 158. Our adoption of FSP FAS 158-1 did not have a material impact on the Company’s consolidated results of operations and financial condition.

3.Restrictions on Cash and Due From Banks

The Company’s banking subsidiary is required to maintain cash reserve balances with the Federal Reserve Bank. The total required reserve balances were $1,091,000 and $1,030,000 as of December 31, 2007 and 2006, respectively.

4.Securities

The amortized cost and fair value of securities as of December 31, 2007 and 2006, by contractual maturity, are shown below (in thousands). Expected maturities may differ from contractual maturities because the securities may be called or prepaid with or without prepayment penalties.

	December 31, 2007
Securities Available for Sale					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
Within one year	$	3,676	$	3,680	$	9	$	(5	)
After one year but within five years		16,960		17,115		158		(3	)
After five years but within ten years		6,000		6,021		22		(1	)
		26,636		26,816		189		(9	)
Obligations of state and political subdivisions
Within one year		11,620		11,616		1		(5	)
After one year but within five years		17,730		17,903		176		(3	)
After five years but within ten years		6,217		6,288		71
		35,567		35,807		248		(8	)
Mortgage-backed securities		2,918		2,931		33		(20	)
Equity securities		1,739		1,502		108		(345	)
Total	$	66,860	$	67,056	$	578	$	(382	)

	December 31, 2006
Securities Available for Sale					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
Within one year	$	20,403	$	20,213	$	—	$	(190	)
After one year but within five years		13,305		13,211		36		(130	)
After five years but within ten years		1,000		1,001		1		—
		34,708		34,425		37		(320	)
Obligations of state and political subdivisions
Within one year		7,192		7,199		10		(3	)
After one year but within five years		4,590		4,526		—		(64	)
After five years but within ten years		4,552		4,541		1		(12	)
		16,334		16,266		11		(79	)
Mortgage-backed securities		4,531		4,482		8		(57	)
Equity securities		987		1,210		223		—
Total	$	56,560	$	56,383	$	279	$	(456	)

Securities Held to Maturity					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
Within one year	$	2,500	$	2,480	$	—	$	(20	)

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 $31,348,000, $38,760,000 and $34,806,000 at December 31, 2007, 2006 and 2005, respectively.

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

	Years Ended December 31,
	2007			2006		2005
Gross proceeds from sales of securities	$	585		$	364	$	414
Securities available for sale:
Gross realized gains	$	—		$	172	$	175
Gross realized losses		(9	)		—		—
Gross gains from business combinations		23			9		—

In accordance with the disclosure requirements of EITF 03-01, the following table shows gross unrealized losses and fair value, aggregated by category and length of time that individual securities have been in a continuous unrealized loss position, at December 31, 2007 (in thousands):

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations	$	1,998	$	(2	)	$	1,568	$	(7	)	$	3,566	$	(9	)
Obligations of state and political subdivisions		1,114		(1	)		2,298		(7	)		3,412		(8	)
Mortgage-backed securities		—		—			1,144		(20	)		1,144		(20	)
Debt securities		3,112		(3	)		5,010		(34	)		8,122		(37	)
Equity securities		948		(345	)		—		—			948		(345	)
Total temporarily impaired securities	$	4,060	$	(348	)	$	5,010	$	(34	)	$	9,070	$	(382	)

The unrealized losses noted above are considered to be temporary impairments. Decline in the value of these debt securities is due only to interest rate fluctuations, rather than erosion of quality. As a result, the payment of contractual cash flows, including principal repayment, is not at risk. As management has the intent and ability to hold these investments until market recovery or maturity, none of the debt securities are deemed to be other-than-temporarily impaired.

Equity securities owned by the Corporation consist of common stock of various financial services providers that have traditionally been high-performing stocks. As a result of recent market volatility in financial stocks from news of sub-prime lending problems, the fair value of 15 of the stocks held are “under water” as of December 31, 2007, and as such, are considered to be impaired. The Company does not invest in bank stocks with the intent to sell them for a profit in the near-term. We invest in those bank stocks that we believe have potential to appreciate in value over the long-term, while providing for a reasonable dividend yield. We also buy and hold stocks of the companies that we believe have potential to be an acquirer or to be acquired, providing additional value.

Stocks can be cyclical and will experience some down periods. Historically, bank stocks have sustained cyclical losses, followed by periods of substantial gains. Therefore, we believe that both unrealized losses and gains are likely to be temporary, when observing performance in the banking sector. We do not believe that there is enough concrete data available yet, and there may not be for several more quarters, to support a decision to write down any of our equity investments. Based on these circumstances and our ability and intent to hold our equity investments for a reasonable period of time sufficient for a recovery of fair value, we did not consider these investments to be other-than temporarily impaired at December 31, 2007.

There are three debt securities that has had unrealized losses for less than 12 months. These securities have maturity dates ranging from December 2011 to December 2014. These securities each represent approximately 1.7% of the total debt securities amortized cost as of December 31, 2007. A total of 14 debt securities have had unrealized losses for 12 months or longer as of December 31, 2007. These securities have maturity dates ranging from March 2008 to March 2015. The unrealized loss position for each security ranges from 0.24% to 1.6% of the securities amortized cost as of December 31, 2007.

The following table shows gross unrealized losses and fair value, aggregated by category and length of time that individual securities had been in a continuous unrealized loss position, at December 31, 2006 (in thousands):

	Less Than 12 Months					12 Months or More					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Treasury securities and obligations of U.S. Government agencies and corporations	$	2,498	$	(2	)	$	27,988	$	(318	)	$	30,486	$	(320	)
Obligations of state and political subdivisions		7,910		(18	)		4,243		(61	)		12,153		(79	)
Mortgage-backed securities		37		(1	)		1,955		(56	)		1,992		(57	)
Debt securities		10,445		(21	)		34,186		(435	)		44,631		(456	)
Total temporarily impaired securities	$	10,445	$	(21	)	$	34,186	$	(435	)	$	44,631	$	(456	)

5. LOANS

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

	December 31,
	2007			2006
Commercial, financial and agricultural	$	28,842		$	23,341
Real estate - commercial		29,021			29,492
Real estate - construction		27,223			29,489
Real estate - mortgage		127,324			132,572
Home equity		63,960			67,842
Obligations of states and political subdivisions		6,593			5,129
Personal		15,319			18,545
Unearned interest		(282	)		(592	)
Total	$	298,000		$	305,818

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

	December 31,
	2007		2006
Nonaccrual loans	$	—	$	1,240
Accruing loans past due 90 days or more		837		214
Restructured loans		—		—
Total non-performing loans	$	837	$	1,454

Interest income not recorded on nonaccrual loans was $67,000, $44,000 and $64,000 in 2007, 2006 and 2005, respectively .

The aggregate amount of demand deposits that have been reclassified as loan balances at December 31, 2007 and 2006 are $54,000 and $62,000, respectively.

Pledged Loans

The Bank must maintain sufficient qualifying collateral with the Federal Home Loan Bank (FHLB), in order to secure all loans and credit products. Therefore, a Master Collateral Agreement has been entered into which pledges all mortgage related assets as collateral for future borrowings. Mortgage related assets could include loans or investments. As of December 31, 2007, the amount of loans included in qualifying collateral was $167,967,000, for a collateral value of $139,110,000.

6. Allowance For Loan Losses

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

A summary of the transactions in the allowance for loan losses for the last three years (in thousands) is shown below. The Bank recorded charge-offs of $122,000 in 2007 and $150,000 in each of the years 2006 and 2005 for a commercial loan that was subject to bankruptcy liquidation. This loan has been fully charged off as of December 31 2007. In 2007, we charged off $180,000 of the remaining loan balances related to two relationships.

	Years Ended December 31,
	2007			2006			2005
Balance of allowance - beginning of period	$	2,572		$	2,763		$	2,989
Loans charged off:
Commercial, financial and agricultural		291			159			171
Real estate - commercial		—			—			—
Real estate - construction		—			—			30
Real estate - mortgage		66			19			3
Personal		61			129			75
Total charge-offs		418			307			279
Recoveries of loans previously charged off:
Commercial, financial and agricultural		8			5			6
Real estate - commercial		—			—			—
Real estate - construction		—			—			5
Real estate - mortgage		8			—			—
Personal		32			25			14
Total recoveries		48			30			25
Net charge-offs		370			277			254
Provision for loan losses		120			54			28
Branch acquisition loan loss reserve		—			32			—
Balance of allowance - end of period	$	2,322		$	2,572		$	2,763
Ratio of net charge-offs during period to average loans outstanding		0.12	%		0.09	%		0.09	%

The Bank has certain loans in its portfolio that are considered to be impaired in accordance with FAS No. 114, as amended by FAS No. 118. It is the policy of the Company to recognize income on impaired loans that have been transferred to nonaccrual status on a cash basis, only to the extent that it exceeds principal balance recovery. Until an impaired loan is placed on nonaccrual status, income is recognized on the accrual basis. Following is a summary of impaired loan data as of the date of each balance sheet presented (in thousands).

	December 31,
	2007		2006
Impaired loans:
Recorded investment at period end	$	88	$	1,331
Impaired loan balance for which:
There is a related allowance		—		568
There is no related allowance		88		763
Related allowance on impaired loans		—		120

	Years Ended December 31,
	2007		2006		2005
Average recorded investment in impaired loans	$	846	$	1,628	$	2,041
Interest income recognized (on a cash basis)		19		45		58

7. Bank Owned Life Insurance and Annuities

The Company holds bank-owned life insurance (BOLI), deferred annuities and payout annuities with a combined cash value of $12,344,000 and $11,017,000 at December 31, 2007 and 2006, respectively. As annuitants retire, the deferred annuities are converted to payout annuities to create payment streams that match certain post-retirement liabilities. The cash surrender value on the BOLI and annuities increased by $1,327,000, $370,000 and $364,000 in 2007, 2006 and 2005, respectively, from earnings recorded as non-interest income and from premium payments, net of cash payments received. Premiums for new policies in 2007 were $853,000 and premiums on existing policies were $109,000. Payments from the annuities in 2007 were $77,000 and earnings on the policies were $440,000. The contracts are owned by the Bank in various insurance companies. The credit rate on the policies varies annually based on the insurance companies’ investment portfolio returns in their general fund and market conditions. Cash value of BOLI an annuities at the end of each year consisted of the following (in thousands):

	December 31,
	2007		2006
Life insurance	$	11,879	$	10,515
Deferred annuities		230		204
Payout Annuities		235		298
	$	12,344	$	11,017

8. Premises And Equipment

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

	December 31,
	2007			2006
Land	$	864		$	864
Buildings and improvements		8,234			7,099
Furniture, computer software and equipment		4,684			4,463
		13,782			12,426
Less: accumulated depreciation		(6,510	)		(5,884	)
	$	7,272		$	6,542

Depreciation expense on premises and equipment charged to operations was $653,000 in 2007, $594,000 in 2006 and $590,000 in 2005.

9. Acquisition

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

Included in the purchase price of the branch was goodwill and core deposit intangible of $2,046,000 and $449,000, respectively. The core deposit intangible is being amortized over a ten-year period on a straight line basis. The goodwill is not amortized, but is measured annually for impairment. Core deposit intangible amortization expense of $45,000 and $15,000 was recorded in 2007 and 2006, respectively. Intangible amortization expense projected for the succeeding five years beginning in 2008 is estimated to be $45,000 per year and $164,000 in total for years after 2012.

The following table summarizes the estimated fair value (in thousands) of the net liabilities assumed:

Assets:
Cash	$	261
Premises and equipment		139
Loans		3,810
Core deposit intangible		449
Goodwill		2,046
Other assets		9
Total assets		6,714
Liabilities:
Deposits		20,090
Other liabilities		164
Total liabilities		20,254
Net liabilities assumed	$	13,540

10. Investment in Unconsolidated Subsidiary

On September 1, 2006, the Company invested in The First National Bank of Liverpool (FNBL), Liverpool, PA, by purchasing 39.16% of its outstanding common stock. This investment is accounted for under the equity method of accounting, as defined in Accounting Principles Board Opinion No. 18. The investment is being carried at $2,972,000 as of December 31, 2007, of which $1,963,000 represents the underlying equity in net assets of FNBL. The difference between the investment carrying amount and the amount of the underlying equity, $1,009,000, is considered to be goodwill and is evaluated quarterly for impairment. A loss in value of the investment which is other than a temporary decline will be recognized. Evidence of a loss in value might include, but would not necessarily be limited to, absence of an ability to recover the carrying amount of the investment or inability of FNBL to sustain an earnings capacity which would justify the carrying amount of the investment.

11. Deposits

Deposits consist of the following (in thousands):

	December 31,
	2007		2006
Demand, non-interest bearing	$	48,755	$	42,829
NOW and Money Market		74,821		75,186
Savings		33,877		36,217
Time deposits, $100,000 or more		36,308		38,032
Other time deposits		165,696		162,905
	$	359,457	$	355,169

Aggregate amount of scheduled maturities of time deposits as of December 31, 2007 include the following (in thousands):

	Time Deposits
Maturing in:	$100,000 or more		Other
2008	$	22,586	$	112,580
2009		5,469		25,050
2010		6,250		18,460
2011		468		4,805
2012		1,535		4,801
	$	36,308	$	165,696

12. Borrowings

Borrowings consist of the following (dollars in thousands):

	December 31, 2007					December 31, 2006					December 31, 2005					For the year 2007
																		Average
	Outstanding					Outstanding					Outstanding					Average		Weighted
	Balance		Rate			Balance		Rate			Balance		Rate			Balance		Rate
Securities sold under agreements to repurchase	$	5,431		3.01	%	$	6,112		4.54	%	$	4,201		3.60	%	$	6,822		4.05	%
Short-term borrowings - Federal Home Loan Bank overnight advances		—					—					5,600		4.25	%		15		4.93	%
Long-term debt - Note payable to Federal Home Loan Bank		—					—					5,000		2.86	%		—
	$	5,431		3.01	%	$	6,112		4.54	%	$	14,801		3.60	%	$	6,837		4.05	%

The maximum balance of short-term borrowings on any one day during 2007 was $1,750,000.

The Bank has repurchase agreements with several of its depositors, under which customers’ funds are invested daily into an interest bearing account. These funds are carried by the Company as short-term debt. It is the Company’s policy to have repurchase agreements collateralized 100% by U.S. Government securities. As of December 31, 2007, the securities that serve as collateral for securities sold under agreements to repurchase had a fair value of $10,907,000. The interest rate paid on these funds is variable and subject to change daily.

The Bank has entered into an agreement under which it can borrow up to $10,000,000 from the Federal Home Loan Bank. There were no borrowings under this agreement as of December 31, 2007. There is no expiration date on the current agreement.

The Bank’s maximum borrowing capacity with the Federal Home Loan Bank of Pittsburgh is $193,933,000, with no outstanding balance as of December 31, 2007. In order to borrow an amount in excess of $21,900,000, the FHLB would require the Bank to purchase additional Federal Home Loan Bank Stock. The Federal Home Loan Bank is a source of both short-term and long-term funding. The Bank must maintain sufficient qualifying collateral, as defined, to secure all outstanding advances. A long-term note payable to the Federal Home Loan Bank was outstanding as of December 31, 2005, but matured and was repaid August 9, 2006. While the loan was outstanding, it carried a fixed rate of interest of 2.86%.

13. Operating Lease Obligations

The Company has entered into a number of arrangements that are classified as operating leases. The operating leases are for several branch and office locations. The majority of the branch and office location leases are renewable at the Company’s option. Future minimum lease commitments are based on current rental payments. Rental expense charged to operations, including license fees for branch offices, was $103,000, $94,000 and $94,000 in 2007, 2006 and 2005, respectively.

The following is a summary of future minimum rental payments for the next five years required under operating leases that have initial or remaining noncancellable lease terms in excess of one year as of December 31, 2007 (in thousands):

Years ending December 31,
2008	$	101
2009		102
2010		103
2011		97
2012		58
2013 and beyond		42
Total minimum payments required	$	503

14. Income Taxes

The components of income tax expense for the three years ended December 31, 2007 were (in thousands):

	2007		2006		2005
Current tax expense	$	2,005	$	2,041	$	1,875
Deferred tax (credit) expense		94		40		(134	)
Total tax expense	$	2,099	$	2,081	$	1,741

Income tax expense related to realized securities gains was $5,000 in 2007, $62,000 in 2006 and $60,000 in 2005.

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

	Years Ended December 31,
	2007			2006			2005
Income before income taxes	$	7,533		$	7,083		$	6,307
Effective tax rate		34.0	%		34.0	%		34.0	%
Federal tax at statutory rate		2,561			2,408			2,144
Tax-exempt interest		(298	)		(233	)		(242	)
Net earnings on BOLI		(141	)		(123	)		(124	)
Life insurance proceeds		—			—			(21	)
Dividend from unconsolidated subsidiary		(34	)		—			—
Stock-based compensation		15			13			—
Other permanent differences		(4	)		16			(16	)
Total tax expense	$	2,099		$	2,081		$	1,741
Effective tax rate		27.9	%		29.4	%		27.6	%

Deductible temporary differences and taxable temporary differences gave rise to a net deferred tax asset for the Company as of December 31, 2007 and 2006. The components giving rise to the net deferred tax asset are detailed below (in thousands):

	December 31,
	2007			2006
Deferred Tax Assets
Allowance for loan losses	$	652		$	748
Deferred directors’ compensation		705			711
Employee and director benefits		720			697
Qualified pension liability		319			455
Accrued employee severance		—			32
Unrealized losses on securities available for sale		—			60
Other		63			73
Total deferred tax assets		2,459			2,776
Deferred Tax Liabilities
Depreciation		(209	)		(231	)
Equity income from unconsolidated subsidiary		(50	)		(27	)
Prepaid expense		(91	)		(105	)
Unrealized gains on securities available for sale		(66	)		—
Annuity earnings		(46	)		(20	)
Goodwill		(62	)		(15	)
Total deferred tax liabilities		(524	)		(398	)
Net deferred tax asset included in other assets	$	1,935		$	2,378

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

Effective January 1, 2007, the Company adopted the provisions of FASB Interpretation No 48, “Accounting for Uncertainty in Income Taxes.” The Interpretation provides clarification on accounting for uncertainty in income taxes recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” The Interpretation prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return, and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. As a result of the Company’s evaluation of the implementation of FIN 48, no significant income tax uncertainties were identified. Therefore, the Company recognized no adjustment for unrecognized income tax benefits for the year ended December 31, 2007. Our policy is to recognize interest and penalties on unrecognized tax benefits in income taxes expense in the Consolidated Statements of Income.

Years that remain open for potential review by the Internal Revenue Service are 2004 through 2006.

15.Stockholders’ Equity and Regulatory Matters

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

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

The Company has a dividend reinvestment and stock purchase plan. Under this plan, additional shares of Juniata Valley Financial Corp. stock may be purchased at the prevailing market prices with reinvested dividends and voluntary cash payments, within limits. To the extent that shares are not available in the open market, the Company has reserved common stock to be issued under the plan. As of October 2005, any adjustment in capitalization of the Company resulted in a proportionate adjustment to the reserve for this plan. At December 31, 2007, 141,887 shares were available for issuance under the Dividend Reinvestment Plan.

In the fourth quarter of 2005 the Board declared a two-for-one stock split, effective October 31, 2005. As a result of the split, 2,372,913 common shares were issued.

The Company periodically repurchases shares of its common stock under the share repurchase program approved by the Board of Directors. In the fourth quarter of 2005, the Board updated the share repurchase program, authorizing management to buy back up to an additional 200,000 shares of its common stock. Repurchases have typically been through open market transactions and have complied with all regulatory restrictions on the timing and amount of such repurchases. Shares repurchased have been added to treasury stock and accounted for at cost. These shares may be reissued for stock option exercises, employee stock purchase plan purchases and to fulfill dividend reinvestment program needs. During 2007, 51,175 shares were repurchased in conjunction with this program. Remaining shares authorized in the program were 91,491 as of December 31, 2007.

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

Quantitative measures established by regulation to ensure capital adequacy require the Company and the Bank to each maintain minimum amounts and ratios (set forth in the table below) of Total and Tier I capital (as defined in the regulations) to risk-weighted assets (as defined in the regulations), and Tier I capital (as defined in the regulations) to average assets (as defined in the regulations). Management believes, as of December 31, 2007 and 2006, that the Company and the Bank meet all capital adequacy requirements to which they were subject.

As of December 31, 2007, the most recent notification from the regulatory banking agencies categorized the the Bank as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, the Bank must maintain minimum Total risk-based, Tier I risk-based and Tier I leverage ratios as set forth in the table. To the knowledge of management, there are no conditions or events since these notifications that have changed the institutions’ category.

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

Juniata Valley Financial Corp. (Consolidated)

						Minimum Requirement
						For Capital
	Actual					Adequacy		Purposes
	Amount		Ratio			Amount		Ratio
As of December 31, 2007:
Total Capital	$	49,080		18.41	%	$	21,328		8.00	%
(to Risk Weighted Assets)
Tier 1 Capital		46,721		17.53	%		10,664		4.00	%
(to Risk Weighted Assets)
Tier 1 Capital		46,721		11.06	%		16,896		4.00	%
(to Average Assets)
As of December 31, 2006:
Total Capital	$	49,076		17.18	%	$	22,853		8.00	%
(to Risk Weighted Assets)
Tier 1 Capital		46,404		16.24	%		11,427		4.00	%
(to Risk Weighted Assets)
Tier 1 Capital		46,404		11.27	%		16,463		4.00	%
(to Average Assets)

The Juniata Valley Bank

											Minimum Regulatory
											Requirements to be
						Minimum Requirement					“Well Capitalized”
						For Capital					under Prompt
	Actual					Adequacy		Purposes			Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
As of December 31, 2007:
Total Capital	$	41,032		15.62	%	$	21,015		8.00	%	$	26,269		10.00	%
(to Risk Weighted Assets)
Tier 1 Capital		38,673		14.72	%		10,508		4.00	%		15,761		6.00	%
(to Risk Weighted Assets)
Tier 1 Capital		38,673		9.25	%		16,730		4.00	%		20,913		5.00	%
(to Average Assets)
As of December 31, 2006:
Total Capital	$	40,929		14.51	%	$	22,563		8.00	%	$	28,204		10.00	%
(to Risk Weighted Assets)
Tier 1 Capital		38,285		13.57	%		11,282		4.00	%		16,922		6.00	%
(to Risk Weighted Assets)
Tier 1 Capital		38,285		9.35	%		16,381		4.00	%		20,477		5.00	%
(to Average Assets)

Certain restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. At December 31, 2007, $29,081,000 of undistributed earnings of the Bank, included in the consolidated stockholders’ equity, was available for distribution to the Company as dividends without prior regulatory approval, subject to regulatory capital requirements above.

16. Calculation Of Earnings Per Share

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

	Years Ended December 31,
	2007		2006		2005
	(Amounts, except earnings per share, in thousands)
Net income	$	5,434	$	5,002	$	4,566
Weighted-average common shares outstanding		4,435		4,480		4,550
Basic earnings per share	$	1.23	$	1.12	$	1.00
Weighted-average common shares outstanding		4,435		4,480		4,550
Common stock equivalents due to effect of stock options		9		12		18
Total weighted-average common shares and equivalents		4,444		4,492		4,568
Diluted earnings per share	$	1.22	$	1.11	$	1.00

As of December 31, 2007 and 2006, there were 20,796 and 9,916 anti-dilutive stock options outstanding, respectively. There were no outstanding anti-dilutive stock options as of December 31, 2005.

17. Comprehensive Income

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

	Year ended December 31, 2007
	Before			Tax (Expense)
	Tax			or			Net-of-Tax
	Amount			Benefit			Amount
Net income	$	7,533		$	(2,099	)	$	5,434
Other comprehensive income (loss):
Unrealized gains on available for sale securities :
Unrealized holding gains arising during the period		353			(120	)		233
Unrealized holding gains from unconsolidated subsidiary		14			—			14
Less reclassification adjustment for:
gains included in net income		(14	)		5			(9	)
securities impairment charge		33			(11	)		22
Unrecognized pension net gain		374			(127	)		247
Amortization of pension prior service cost		(2	)		—			(2	)
Amortization of pension net actuarial loss		54			(18	)		36
Other comprehensive income		812			(271	)		541
Total comprehensive income	$	8,345		$	(2,370	)	$	5,975

	Year ended December 31, 2006
	Before			Tax (Expense)
	Tax			or			Net-of-Tax
	Amount			Benefit			Amount
Net income	$	7,083		$	(2,081	)	$	5,002
Other comprehensive income (loss):
Unrealized gains on available for sale securities :
Unrealized holding gains arising during the period		595			(202	)		393
Less reclassification adjustment for gains included in net income		(181	)		62			(119	)
Minimum pension liability		129			(44	)		85
Other comprehensive income		543			(184	)		359
Total comprehensive income	$	7,626		$	(2,265	)	$	5,361

	Year ended December 31, 2005
	Before			Tax (Expense)
	Tax			or			Net-of-Tax
	Amount			Benefit			Amount
Net income	$	6,307		$	(1,741	)	$	4,566
Other comprehensive income (loss):
Unrealized losses on available for sale securities :
Unrealized holding losses arising during the period		(1,045	)		357			(688	)
Less reclassification adjustment for gains included in net income		(175	)		59			(116	)
Minimum pension liability		(461	)		157			(304	)
Other comprehensive loss		(1,681	)		573			(1,108	)
Total comprehensive income	$	4,626		$	(1,168	)	$	3,458

18. Employee Benefit Plans

Stock Compensation Plan

Under the 2000 Incentive Stock Option Plan (“the Plan”), options may be granted to officers and key employees of the Company. The Plan provides that the option price per share shall not be less than the fair market value of the stock on the day the option is granted, but in no event less than the par value of such stock. Options granted are exercisable no earlier than one year after the grant and expire ten years after the date of the grant.

The Plan is administered by a committee of the Board of Directors, whose members are not eligible to receive options under the Plan. The Committee determines, among other things, which officers and key employees will receive options, the number of shares to be subject to each option, the option price and the duration of the option. Options vest over three to five years and are exercisable at the grant price, which is at least the fair market value of the stock on the grant date. These options are scheduled to expire through October 16, 2017. The aggregate number of shares that may be issued upon the exercise of options under the Plan is 440,000 shares, with 353,263 shares available for grant as of December 31, 2007. The Plan’s options outstanding at December 31, 2007 have exercise prices between $14.10 and $24.00, with a weighted average exercise price of $18.31 and a weighted average remaining contractual life of 6.86 years.

As of December 31, 2007, there was $114,000 of total unrecognized compensation cost related to nonvested share-based compensation arrangements granted under the Plan. That cost is expected to be recognized through 2012.

Cash received from option exercises under the Plan for the years ended December 31, 2007, 2006 and 2005 was $28,000, $11,000, and $64,000, respectively.

A summary of the status of the Plan as of December 31, 2007, 2006 and 2005, and changes during the years ending on those dates is presented below:

	2007					2006					2005
				Weighted Average					Weighted Average					Weighted Average
	Shares			Exercise Price		Shares			Exercise Price		Shares			Exercise Price
Outstanding at beginning of year		65,746		$	17.83		57,983		$	17.25		55,362		$	15.49
Granted		15,513			20.05		10,880			21.00		10,953			24.00
Exercised		(1,747	)		15.77		(750	)		14.18		(4,528	)		14.24
Forfeited		—					(2,367	)		19.40		(3,804	)		14.60
Outstanding at end of year		79,512		$	18.31		65,746		$	17.83		57,983		$	17.25
Options exercisable at year-end		49,035		$	16.79		40,735		$	15.90		30,726		$	14.94
Weighted-average fair value of of options granted during the year	$	3.92				$	4.50				$	4.74
Intrinsic value of options exercised during the year	$	9,058				$	5,159				$	41,647

The following table summarizes characteristics of stock options as of December 31, 2007:

			Outstanding						Exercisable
					Contractual		Average				Average
	Exercise				Average Life		Exercise				Exercise
Grant Date	Price		Shares		(Years)		Price		Shares		Price
11/20/2001	$	14.10		10,813		3.51	$	14.10		10,813	$	14.10
11/19/2002		14.25		11,570		4.67		14.25		11,570		14.25
11/18/2003		15.13		12,094		5.89		15.13		11,029		15.13
11/15/2004		20.25		8,380		6.88		20.25		7,138		20.25
10/18/2005		24.00		10,262		7.54		24.00		5,549		24.00
10/17/2006		21.00		10,880		8.80		21.00		2,936		21.00
10/16/2007		20.05		15,513		9.80		20.05		—		20.05

Defined Benefit Retirement Plan

The Company sponsors a defined benefit retirement plan covering substantially all of its employees. The benefits are based on years of service and the employees’ compensation. The Company’s funding policy is to contribute annually no more than the maximum amount that can be deducted for federal income tax purposes. Contributions are intended to provide not only for benefits attributed to service to date but also for those expected to be earned in the future. The Company expects to contribute $200,000 to the defined benefit plan in 2008.

On December 31, 2006, the Company adopted FAS No. 158. FAS No. 158 required the Company to recognize the funded status (i.e. the difference between the fair value of plan assets and the projected benefit obligations) of its benefit plans in the December 31, 2006 Consolidated Balance Sheet, with a corresponding adjustment to accumulated other comprehensive income, net of tax. The net adjustment to accumulated other comprehensive income at adoption of $1,156,000 ($763,000, net of tax) represents the net unrecognized actuarial losses and unrecognized prior service costs. The effects of adopting the provisions of FAS No. 158 on the Company’s consolidated financial statement at December 31, 2006, are presented in the following table (in thousands).

	Increase
	(Decrease)
Accrued pension liability	$	1,156
Deferred tax asset		393
Accumulated other comprehensive loss		763

Management expects that approximately $225,000 will be recorded as net periodic expense for the defined benefit plan and amortized out of accumulated other comprehensive income in 2008.

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

	Years ended December 31,
	2007			2006
Change in projected benefit obligation (PBO)
PBO at beginning of year	$	6,881		$	6,503
Service cost		281			296
Interest cost		387			366
Actuarial gain		(248	)		(23	)
Benefits paid		(260	)		(261	)
PBO at end of year	$	7,041		$	6,881
Change in plan assets
Fair value of plan assets at beginning of year	$	5,543		$	5,076
Actual return on plan assets, net of expenses		519			428
Employer contribution		300			300
Benefits paid		(260	)		(261	)
Fair value of plan assets at end of year	$	6,102		$	5,543
Reconciliation of funded status to net amount recognized
Funded status		(939	)		(1,338	)
Unrecognized net actuarial loss		1,071			1,500
Unrecognized transition asset		(10	)		(12	)
Minimum pension liability		(1,061	)		(332	)
Adjustment to accumulated other comprehensive income as a result of adoption of FAS No. 158		—			(1,156	)
Accrued benefit cost	$	(939	)	$	(1,338	)
Accumulated benefit obligation	$	5,793		$	5,725

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

	2007			2006			2005
Service cost during the year	$	281		$	296		$	287
Interest cost on projected benefit obligation		387			366			346
Expected return on plan assets		(392	)		(359	)		(335	)
Net amortization		(2	)		(2	)		(2	)
Recognized net actuarial loss		54			75			94
Net periodic benefit cost	$	328		$	376		$	390

Assumptions used to determine benefit obligations were:

	2007			2006			2005
Discount rate		6.25	%		5.75	%		5.75	%
Rate of compensation increase		4.25			3.75			3.75

Assumptions used to determine the net periodic benefit cost were:

	2007			2006			2005
Discount rate		5.75	%		5.75	%		5.75	%
Expected long-term return on plan assets		7.00			7.00			7.00
Rate of compensation increase		3.75			3.75			3.75

The investment strategy and investment policy for the retirement plan is 50% equity and 50% fixed income. The asset allocation as of December 31, 2007 is approximately 53% equities and 47% fixed income investments.

Future expected benefit payments (in thousands):

2008	2009	2010	2011	2012	2013-2017
$308	$308	$333	$338	$349	$1,917

Employee Stock Purchase Plan

The Company has an Employee Stock Purchase Plan under which employees, through payroll deductions, are able to purchase shares of stock annually. The option price of the stock purchases shall be between 85% and 100% of the fair market value of the stock on the commencement date as determined annually by the Board of Directors. The maximum number of shares which employees may purchase under the Plan is 250,000; however, the annual issuance of shares shall not exceed 5,000 shares plus any unissued shares from prior offerings. In 2007, 2006 and 2005, 939, 3,727 and 2,200 shares, respectively, were issued under this plan. At December 31, 2007, 202,162 shares were reserved for issuance under the Employee Stock Purchase Plan.

Supplemental Retirement Plans

The Company has non-qualified supplemental retirement and split-dollar life insurance plans for directors and key employees. At December 31, 2007 and 2006, the present value of the future liability was $1,153,000 and $1,202,000, respectively. For the years ended December 31, 2007, 2006 and 2005, $127,000, $145,000 and $188,000, respectively, was charged to expense in connection with these plans. The Company offsets the cost of these plans through the purchase of bank-owned life insurance and annuities. See Note 7.

Deferred Compensation Plans

The Company has entered into deferred compensation agreements with certain directors to provide each director an additional retirement benefit, or to provide their beneficiary a benefit in the event of pre-retirement death. At December 31, 2007 and 2006, the present value of the future liability was $2,075,000 and $2,091,000, respectively. For the years ended December 31, 2007, 2006 and 2005, $152,000, $151,000 and $152,000, respectively, was charged to expense in connection with these plans. The Company offsets the cost of these plans through the purchase of bank-owned life insurance. See Note 7.

Salary Continuation Plans

The Company has non-qualified salary continuation plans for key employees. At December 31, 2007 and 2006, the present value of the future liability was $966 ,000 and $848,000, respectively. For the years ended December 31, 2007, 2006 and 2005, $131,000, $140,000 and $82,000, respectively, was charged to expense in connection with these plans. The Company offsets the cost of these plans through the purchase of bank-owned life insurance. See Note 7.

19. Fair Value of Financial Instruments

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

The following information should not be interpreted as an estimate of the fair value of the entire Company since a fair value calculation is provided only for a limited portion of the Company’s assets and liabilities. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Company’s disclosures and those of other companies may not be meaningful.

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

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

Securities - - The fair value of investment securities is determined by reference to quoted market prices or dealer quotes.

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

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

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.

Financial Instruments
(in thousands)

	December 31, 2007						December 31, 2006
	Carrying			Fair			Carrying			Fair
	Value			Value			Value			Value
Financial assets:
Cash and due from banks	$	12,254		$	12,254		$	16,476		$	16,476
Interest bearing deposits with banks		770			770			102			102
Federal funds sold		7,500			7,500			1,200			1,200
Interest bearing time deposits with banks		5,525			5,515			5,660			5,598
Securities		67,056			67,056			58,883			58,863
Restricted investment in FHLB stock		1,095			1,095			1,076			1,076
Total loans, net of unearned interest		298,000			302,157			305,818			305,233
Allowance for loan losses		(2,322	)		(2,322	)		(2,572	)		(2,572	)
Accrued interest receivable		2,247			2,247			2,040			2,040
Financial liabilities:
Non-interest bearing deposits		48,755			48,755			42,829			42,829
Interest bearing deposits		310,702			307,960			312,340			310,297
Securities sold under agreements to repurchase		5,431			5,431			6,112			6,112
Other interest bearing liabilities		1,037			1,037			927			927
Accrued interest payable		999			999			999			999
Off-balance sheet financial instruments:
Commitments to extend credit		—			—			—			—
Letters of credit		—			—			—			—

20. Financial Instruments With Off-Balance Sheet Risk

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

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

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

	December 31,
	2007		2006
Commitments to grant loans	$	35,827	$	37,627
Unfunded commitments under lines of credit		15,544		10,975
Outstanding letters of credit		718		859

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

Outstanding letters of credit are instruments issued by the Bank that guarantee the beneficiary payment by the Bank in the event of default by the Bank’s customer in the non-performance of an obligation or service. Most letters of credit are extended for one year periods. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Bank holds collateral supporting those commitments for which collateral is deemed necessary. The amount of the liability as of December 31, 2007 and 2006 for guarantees under letters of credit issued is not material.

The maximum undiscounted exposure related to these guarantees at December 31, 2007 was $718,000, and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure was $2,562,000.

21. Related-Party Transactions

The Bank has granted loans to certain of its executive officers, directors and their related interests. These loans were made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with unrelated persons, and in the opinion of management, do not involve more than normal risk of collection. The aggregate dollar amount of these loans was $2,125,000 and $1,602,000 at December 31, 2007 and 2006, respectively. During 2007, $2,002,000 of new loans were made and repayments totaled $1,479,000. None of these loans were past due, in non-accrual status or restructured at December 31, 2007.

22. Commitments And Contingent Liabilities

In 2005, the Company extended an agreement to obtain data processing services from an outside service bureau through June 2010. The agreement provides for termination penalties if the Company cancels it prior to the end of the commitment period. If the contract would have been canceled as of December 31, 2007, termination penalties of approximately $510,000 would have been assessed.

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

23. Subsequent Events

In January 2008, the Board of Directors declared a dividend of $0.18 per share for the first quarter of 2008 to shareholders of record on February 15, payable on March 1, 2008.

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

CONDENSED BALANCE SHEETS
(in thousands)

	December 31,
	2007		2006
ASSETS:
Cash	$	235	$	337
Interest bearing deposits with banks		355		490
Cash and cash equivalents		590		827
Investment in bank subsidiary		40,725		39,673
Investment in unconsolidated subsidiary		2,972		2,892
Investment securities available for sale		4,053		3,947
Other assets		275		522
TOTAL ASSETS	$	48,615	$	47,861
LIABILITIES:
Income tax payable	$	9	$	73
Accounts payable and other liabilities		34		2
STOCKHOLDERS’ EQUITY		48,572		47,786
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	48,615	$	47,861

CONDENSED STATEMENTS OF INCOME
(in thousands)

	Years ended December 31,
	2007		2006			2005
INCOME:
Interest on deposits with banks	$	17	$	18		$	18
Interest and dividends on investment securities available for sale		168		152			134
Dividends from bank subsidiary		4,968		7,031			7,380
Income from unconsolidated subsidiary		192		80			—
Gain on the sale of investment securities		—		77			45
TOTAL INCOME		5,345		7,358			7,577
EXPENSE:
Non-interest expense		153		109			169
TOTAL EXPENSE		153		109			169
INCOME BEFORE INCOME TAXES AND EQUITY IN UNDISTRIBUTED NET INCOME OF SUBSIDIARY		5,192		7,249			7,408
Income tax		32		68			8
		5,160		7,181			7,400
(Excess) deficient distributed net income of subsidiary		274		(2,179	)		(2,834	)
NET INCOME	$	5,434	$	5,002		$	4,566

CONDENSED
STATEMENTS OF CASH FLOWS
(in thousands)

	Years ended December 31,
	2007			2006			2005
Cash flows from operating activities:
Net income	$	5,434		$	5,002		$	4,566
Adjustments to reconcile net income to net cash provided by operating activities:
Distributions in excess of (below) (undistributed) net income of subsidiary		(274	)		2,179			2,834
Realized gains on sales of investment securities		—			(77	)		(45	)
Income from unconsolidated subsidiary, net of dividends of $126 and $0		(66	)		(80	)		—
Decrease (increase) in interest and other assets		355			(180	)		(267	)
(Decrease) increase in taxes payable		(64	)		68			44
Increase (decrease) in accounts payable and other liabilities		32			2			(35	)
Net cash provided by operating activities		5,417			6,914			7,097
Cash flows from investing activities:
Purchases of available for sale securities		(762	)		(134	)		(489	)
Proceeds from the sale of available for sale securities		—			137			79
Proceeds from the maturity of available for sale investment securities		340			—			—
Investment in unconsolidated subsidiary		—			(2,812	)		—
Net cash used in investing activities		(422	)		(2,809	)		(410	)
Cash flows from financing activities:
Cash dividends		(4,210	)		(2,957	)		(5,046	)
Purchase of treasury stock		(1,069	)		(1,302	)		(2,242	)
Treasury stock issued for dividend reinvestment and employee stock purchase plan		47			289			796
Net cash used in financing activities		(5,232	)		(3,970	)		(6,492	)
Net (decrease) increase in cash and cash equivalents		(237	)		135			195
Cash and cash equivalents at beginning of year		827			692			497
Cash and cash equivalents at end of year	$	590		$	827		$	692

25. Quarterly Results Of Operations (Unaudited)

The unaudited quarterly results of operations for the years ended December 31, 2007 and 2006 follow (in thousands, except per-share data):

	2007 Quarter ended
	March 31		June 30		September 30		December 31
Total interest income	$	6,447	$	6,704	$	6,798	$	6,774
Total interest expense		2,668		2,776		2,860		2,756
Net interest income		3,779		3,928		3,938		4,018
Provision for loan losses		67		23		—		30
Gains from the sale of assets		12		9		45		9
Other income		1,026		972		1,065		1,061
Other expense		2,968		3,072		3,091		3,078
Income before income taxes		1,782		1,814		1,957		1,980
Income tax expense		503		500		538		558
Net income	$	1,279	$	1,314	$	1,419	$	1,422
Per-share data:
Basic earnings	$	.29	$	.30	$	.32	$	.32
Diluted earnings		.29		.30		.32		.32
Cash dividends		.17		.42		.18		.18

	2006 Quarter ended
	March 31		June 30		September 30		December 31
Total interest income	$	5,924	$	6,086	$	6,232	$	6,421
Total interest expense		2,333		2,483		2,606		2,689
Net interest income		3,591		3,603		3,626		3,732
Provision for loan losses		30		30		29		(35	)
Gains from the sale of assets		80		10		28		126
Other income		790		891		939		966
Other expense		2,744		2,767		2,839		2,895
Income before income taxes		1,687		1,707		1,725		1,964
Income tax expense		483		487		494		617
Net income	$	1,204	$	1,220	$	1,231	$	1,347
Per-share data:
Basic earnings	$	.27	$	.27	$	.27	$	.30
Diluted earnings		.27		.27		.27		.30
Cash dividends		.16		.16		.17		.17

Common Stock Market Prices and Dividends

The common stock of Juniata Valley Financial Corp. is quoted under the symbol “JUVF.OB” on the over-the-counter (“OTC”) Electronic Bulletin Board, a regulated electronic quotation service made available through, and governed by, the NASDAQ system. As of December 31, 2007, the number of stockholders of record of the Company’s common stock was 1,811.

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

	2007
Quarter Ended	High		Low		Dividends Declared
March 31	$	21.50	$	20.85	$	0.17
June 30		23.00		20.00		0.42
September 30		23.75		20.05		0.18
December 31		21.25		20.00		0.18

	2006
Quarter Ended	High		Low		Dividends Declared
March 31	$	24.50	$	23.50	$	0.16
June 30		24.00		22.60		0.16
September 30		23.50		21.00		0.17
December 31		21.35		21.00		0.17

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

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

Corporate Information

Corporate Headquarters

Juniata Valley Financial Corp.

Bridge and Main Streets

P.O. Box 66

Mifflintown, PA 17059

(717) 436-8211

JVBonline.com

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

Information Availability

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

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

Additionally, a copy of the Company’s Annual Report to the SEC on Form 10-K for the year ended December 31, 2007 will be supplied without charge (except for exhibits) upon written request. Please direct all inquiries to Ms. JoAnn McMinn, as detailed above.

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

Ms. Judy Robinson
The Juniata Valley Bank
P.O. Box 66
Mifflintown, PA 17059

Investment Considerations

In analyzing whether to make, or to continue, an investment in Juniata Valley Financial Corp., investors should consider, among other factors, the information contained in this Annual Report and certain investment considerations and other information more fully described in our Annual Report on Form 10-K for the year ended December 31, 2007, a copy of which can be obtained as described above.

Registrar and Transfer Agent

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

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

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

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

Annual Meeting of Shareholders

The Annual Meeting of Shareholders of Juniata Valley Financial Corp. will be held at 10:30 a.m., on Tuesday, May 20, 2007 at the Quality Inn Suites, 13015 Ferguson Valley Road, Burnham, Pennsylvania.