Table of Contents

  **UNITED STATES SECURITIES AND EXCHANGE COMMISSION****Washington, D.C. 20549****FORM 10-K**(Mark One)   þ **ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934****For the Fiscal Year ended December 31, 2010****or**   o **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934****For the transition period from                      to                     ****Commission File No.****0-13232****Juniata Valley Financial Corp.**(Exact name of registrant as specified in its charter)   Pennsylvania 23-2235254(State or other jurisdiction of (IRS Employer Identification No.)incorporation or organization)     Bridge and Main Streets, PO Box 66  Mifflintown, PA 17059-0066(Address of principal executive offices) (Zip Code)Registrant’s telephone number, including area code: (717) 436-8211Securities registered pursuant to Section 12(b) of the Act: NoneSecurities registered pursuant to Section 12(g) of the Act: Common Stock, par value $1.00Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 ofthe Securities Act. Yes o No þIndicate by check mark if the registrant is not required to file reports pursuant to Section 13 orSection 15(d) of the Act. Yes o No þIndicate by check mark whether the Registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or suchshorter period that the registrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.Yes þ No oIndicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K isnot contained herein, and will not be contained, to the best of registrant’s knowledge, indefinitive proxy or information statements incorporated by reference in Part III of this Form 10-Kor any amendment to this Form 10-K. þIndicate by check mark whether the registrant has submitted electronically and posted on itscorporate Web site, if any, every Interactive Data File required to be submitted and postedpursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months(or for such shorter period that the registrant was required to submit and post such files).Yes o No oIndicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer or a smaller reporting company. See the definition of “large acceleratedfiler,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.       Large accelerated filer o Accelerated filer o Non-accelerated filer þ Smaller reporting company o    (Do not check if a smaller reporting company)   Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act)Yes o No þ  
 
 

Table of Contents
The aggregate market value of the voting and non-voting common equity held by non-affiliatescomputed by reference to the price at which the common equity was last sold, or the average bid andasked price of such common equity, as of the last business day of the registrant’s most recentlycompleted second fiscal quarter was $74,962,388. (1)There were 4,254,765 shares of the registrant’s common stock outstanding as of March 4, 2011.   (1) The aggregate dollar amount of the voting stock set forth equals the number of shares of theCompany’s Common Stock outstanding, reduced by the amount of Common Stock held by officers,directors, shareholders owning in excess of 10% of the Company’s Common Stock and the Company’semployee benefit plans multiplied by the last reported sale price for the Company’s Common Stock onJune 30, 2010, the last business day of the registrant’s most recently completed second fiscalquarter. The information provided shall not be construed as an admission that any officer,director or 10% shareholder of the Company, or any employee benefit plan, may be deemed anaffiliate of the Company or that such person or entity is the beneficial owner of the sharesreported as being held by such person or entity, and any such inference is hereby disclaimed.DOCUMENTS INCORPORATED BY REFERENCE(Specific sections incorporated are identified under applicable items herein)Certain portions of the Company’s Annual Report to Shareholders for the year ended December31, 2010 are incorporated by reference in Parts I and II of this Report.With the exception of the information incorporated by reference in Parts I and II of thisReport, the Company’s Annual Report to Shareholders for the year ended December 31, 2010 is not tobe deemed “filed” with the Securities and Exchange Commission for any purpose.Certain portions of the Company’s Proxy Statement to be filed in connection with its 2011Annual Meeting of Shareholders are incorporated by reference in Part III of this Report; provided,however, that any information in such Proxy Statement that is not required to be included in thisAnnual Report on Form 10-K shall not be deemed to be incorporated herein or filed for the purposesof the Securities Act of 1933 or the Securities Exchange Act of 1934.Other documents incorporated by reference are listed in the Exhibit Index.
 
 

**TABLE OF CONTENTS**
PART IITEM 1. BUSINESSITEM 1A. RISK FACTORSITEM 1B. UNRESOLVED STAFF COMMENTSITEM 2. PROPERTIESITEM 3. LEGAL PROCEEDINGSITEM 4. Removed and ReservedPART IIITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIESITEM 6. SELECTED FINANCIAL DATAITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISKITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATAITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSUREITEM 9A. CONTROLS AND PROCEDURESITEM 9B. OTHER INFORMATIONPART IIIITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCEITEM 11. EXECUTIVE COMPENSATIONITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERSITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCEITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICESPART IVITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULESSIGNATURESExhibit 10.7Exhibit 13.1Exhibit 21.1Exhibit 23.1Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2

Table of Contents
**PART I****ITEM 1. BUSINESS**OverviewJuniata Valley Financial Corp. (the “Company” or “Juniata”) is a Pennsylvania corporation that wasformed in 1983 as a result of a plan of merger and reorganization of The Juniata Valley Bank (the“Bank”). The plan was approved by the various regulatory agencies on June 7, 1983, and Juniata, aone-bank holding company, registered under the Bank Holding Company Act of 1956. The Bank is theoldest independent commercial bank in Juniata and Mifflin Counties, having originated under a statebank charter in 1867. The Company has one reportable segment, consisting of the Bank, as describedin Note 1 of Notes to Consolidated Financial Statements contained in the Company’s 2010 AnnualReport to Shareholders (“2010 Annual Report”).Nature of OperationsJuniata operates primarily in central Pennsylvania with the purpose of delivering financialservices within its local market. The Company provides retail and commercial banking servicesthrough 12 offices in the following locations: five community offices in Juniata County; fivecommunity offices in Mifflin County, as well as a financial services office; one community officein each of Perry and Huntingdon Counties; and a loan production office in Centre County. TheCompany offers a full range of consumer and commercial banking services. Consumer banking servicesinclude: Internet banking; telephone banking; ten automated teller machines; personal checkingaccounts; club accounts; checking overdraft privileges; money market deposit accounts; savingsaccounts; debit cards; certificates of deposit; individual retirement accounts; secured andunsecured lines of credit; construction and mortgage loans; and safe deposit boxes. Commercialbanking services include: low and high-volume business checking accounts; Internet accountmanagement services; ACH origination; payroll direct deposit; commercial lines of credit;commercial letters of credit; and commercial term and demand loans. Comprehensive trust, assetmanagement and estate services are provided, and the Company has a contractual arrangement with abroker-dealer to offer a full range of financial services, including annuities, mutual funds, stockand bond brokerage services and long-term care insurance to the Bank’s customers. Managementbelieves the Bank has a relatively stable deposit base with no major seasonal depositor or group ofdepositors. Most of the Company’s commercial customers are small and mid-sized businesses incentral Pennsylvania.Juniata’s loan policies are updated periodically and are presented for approval to the Board ofDirectors of the Bank. The purpose of the policies is to grant loans on a sound and collectiblebasis, to invest available funds in a safe, profitable manner, to serve the credit needs of thecommunities in Juniata’s primary market area and to ensure that all loan applicants receive fairand equal treatment in the lending process. It is the intent of the underwriting policies to seekto minimize loan losses by requiring careful investigation of the credit history of each applicant,verifying the source of repayment and the ability of the applicant to repay, securing those loansin which collateral is deemed to be required, exercising care in the documentation of theapplication, review, approval and origination process and administering a comprehensive loancollection program.The major types of investments held by Juniata consist of obligations and securities issued by U.S.Treasury or other government agencies or corporations, obligations of state and local politicalsubdivisions, mortgage-backed securities and common stock. Juniata’s investment policy directs thatinvestments be managed in a way that provides necessary funding for the Company’s liquidity needs,provides adequate collateral to pledge for public funds held and, as directed by the AssetLiability Committee, is managed to control interest rate risk. The investment policy provideslimits on types of investments owned, credit quality of investments and limitations by investmenttypes and issuer.The Company’s primary source of funds is deposits, consisting of transaction type accounts, such asdemand deposits and savings accounts, and time deposits, such as certificates of deposits. Themajority of deposits have been made by customers residing or located in Juniata’s market area. Nomaterial portion of the deposits has been obtained from a single or small group of customers, andthe Company believes thatthe loss of any customer’s deposits or a small group of customers’ deposits would not have amaterial adverse effect on the Company.
 
 

Table of Contents
Other sources of funds used by the Company include retail repurchase agreements, borrowings fromthe Federal Home Loan Bank of Pittsburgh, and lines of credit established with variouscorrespondent banks for overnight funding.CompetitionThe Bank’s service area is characterized by a high level of competition for banking business amongcommercial banks, savings and loan associations and other financial institutions located inside andoutside the Bank’s market area. The Bank actively competes with dozens of such banks andinstitutions for local consumer and commercial deposit accounts, loans and other types of bankingbusiness. Many competitors have substantially greater financial resources and larger branch systemsthan those of the Bank.In commercial transactions, the Company believes that the Bank’s legal lending limit to a singleborrower (approximately $6,626,000 as of December 31, 2010) enables it to compete effectively forthe business of small and mid-sized businesses. However, this legal lending limit is considerablylower than that of various competing institutions and thus may act as a constraint on the Bank’seffectiveness in competing for financings in excess of the limit.In consumer transactions, the Bank believes that it is able to compete on a substantially equalbasis with larger financial institutions because it offers competitive interest rates on savingsand time deposits and on loans.In competing with other banks, savings and loan associations and financial institutions, the Bankseeks to provide personalized services through management’s knowledge and awareness of its serviceareas, customers and borrowers. In management’s opinion, larger institutions often do not providesufficient attention to the retail depositors and the relatively small commercial borrowers thatcomprise the Bank’s customer base.Other competitors, including credit unions, consumer finance companies, insurance companies andmoney market mutual funds, compete with certain lending and deposit services offered by the Bank.The Bank also competes with insurance companies, investment counseling firms, mutual funds andother business firms and individuals in corporate and trust investment management services.Supervision and RegulationThe Company operates in a highly regulated industry, and thus may be affected by changes in stateand federal regulations and legislation. As a registered bank holding company under the BankHolding Company Act of 1956, as amended, the Company is subject to supervision and examination bythe Board of Governors of the Federal Reserve System and is required to file with the FederalReserve Board periodic reports and information regarding its business operations and those of theBank. In addition, under the Pennsylvania Banking Code of 1965, the Pennsylvania Department ofBanking has the authority to examine the books, records and affairs of the Company and to requireany documentation deemed necessary to ensure compliance with the Pennsylvania Banking Code.The Bank Holding Company Act requires the Company to obtain Federal Reserve Board approval before:acquiring more than five percent ownership interest in any class of the voting securities of anybank; acquiring all or substantially all of the assets of a bank; or merging or consolidating withanother bank holding company. In addition, the Act prohibits a bank holding company from acquiringthe assets, or more than five percent of the voting securities, of a bank located in another state,unless such acquisition is specifically authorized by the statutes of the state in which the bankis located.The Company is generally prohibited under the Act from engaging in, or acquiring direct or indirectownership or control of more than five percent of the voting shares of any company engaged in,nonbanking activities unless the Federal Reserve Board, by order or regulation, has found suchactivities tobe so closely related to banking or managing or controlling banks as to be a proper incidentthereto. In making such determination, the Federal Reserve Board considers whether the performanceof these activities by a bank holding company can reasonably be expected to produce benefits to thepublic that outweigh the possible adverse effects.
 
 

Table of Contents
A satisfactory safety and soundness rating, particularly with regard to capital adequacy, and asatisfactory Community Reinvestment Act rating, are generally prerequisites to obtaining federalregulatory approval to make acquisitions and open branch offices. As of December 31, 2010, the Bankwas rated “outstanding” under the Community Reinvestment Act and was a “well capitalized” bank. Aninstitution’s Community Reinvestment Act rating is considered in determining whether to grantapprovals relating to charters, branches and other deposit facilities, relocations, mergers,consolidations and acquisitions. Less than satisfactory performance may be the basis for denying anapplication.As a public company, the Company is subject to the Securities and Exchange Commission’s rules andregulations relating to periodic reporting, proxy solicitation and insider trading.There are various legal restrictions on the extent to which the Company and its non-banksubsidiaries can borrow or otherwise obtain credit from the Bank. In general, these restrictionsrequire that any such extensions of credit must be secured by designated amounts of specifiedcollateral and are limited, as to any one of the Company or such non-bank subsidiaries, to tenpercent of the lending bank’s capital stock and surplus, and as to the Company and all suchnon-bank subsidiaries in the aggregate, to 20 percent of the Bank’s capital stock and surplus.Further, the Company and the Bank are prohibited from engaging in certain tie-in arrangements inconnection with any extension of credit, lease or sale of property or furnishing of services.As a bank chartered under the laws of Pennsylvania, the Bank is subject to the regulations andsupervision of the FDIC and the Pennsylvania Department of Banking. These government agenciesconduct regular safety and soundness and compliance reviews that have resulted in satisfactoryevaluations to date. Some of the aspects of the lending and deposit business of the Bank that areregulated by these agencies include personal lending, mortgage lending and reserve requirements.*FDIC Insurance*The Federal Deposit Insurance Corporation (“FDIC”) is an independent federal agency that insuresthe deposits, up to prescribed statutory limits, of federally insured banks and savingsinstitutions and safeguards the safety and soundness of the banking and savings industries. TheFDIC previously administered two separate insurance funds, the Bank Insurance Fund (“BIF”), whichgenerally insured commercial bank and state savings bank deposits, and the Savings AssociationInsurance Fund (“SAIF”), which generally insured savings association deposits.Under the Federal Deposit Insurance Reform Act of 2005 (the “Reform Act”), (i) the BIF and the SAIFwere merged into a new combined fund, called the Deposit Insurance Fund, effective March 31, 2006,(ii) the then-current $100,000 deposit insurance coverage was indexed for inflation (withadjustments every five years, commencing January 1, 2011); and (iii) deposit insurance coverage forretirement accounts was increased to $250,000 per participant subject to adjustment for inflation.The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (“Dodd-Frank Act”)permanently raised the standard maximum deposit insurance coverage amount to $250,000 and made theincrease retroactive to January 1, 2008. This was effective immediately upon the President’ssignature on July 21, 2010. The FDIC deposit insurance coverage limit applies per depositor, perinsurance depository institution for each account ownership category. The FDIC has been givengreater latitude in setting the assessment rates for insured depository institutions which could beused to impose minimum assessments.The FDIC is authorized to set the reserve ratios for the Deposit Insurance Fund annually at between1.15% and 1.5% of estimated insured deposits. Insured depository institutions that were inexistence on December 31, 1996 and paid assessments prior to that date (or their successors) areentitled to a one-time credit against future assessments based on their past contributions to theBIF or SAIF. The Bank was able tooffset the majority of its deposit insurance premium for 2008 with the special assessment credit,and used the remainder of the credit in the first quarter of 2009.
 
 

Table of Contents
Recent bank failures significantly increased the Deposit Insurance Fund’s losses. As a result of adecline in the reserve ratio of the Deposit Insurance Fund, the FDIC Board adopted a restorationplan and also raised assessment rates. Other changes included in the Reform Act are primarilyintended to ensure that riskier institutions will bear a greater share of the proposed increase inassessments. The FDIC’s final rule raised the prior assessment rates uniformly by 7 basis pointsfor the first quarter 2009 assessment period, and rates now range from 12 to 50 basis points.Institutions in the lowest risk category, Risk Category I, pay between 12 and 14 basis points.Effective April 1, 2009, the rule widened the range of rates overall and within Risk Category I.Initial base assessment rates range between 12 and 45 basis points — 12 -16 basis points forCategory I. The initial base rates for risk categories II, III and IV were 20, 30 and 45 basispoints, respectively. For institutions in any risk category, assessment rates rose above initialrates for institutions relying significantly on secured liabilities. Assessment rates increased forinstitutions with a ratio of secured liabilities (repurchase agreements, Federal Home Loan Bankadvances, secured Federal Funds purchased and other secured borrowings) to domestic deposits ofgreater than 15%, with a maximum of 50% above the rate before such adjustment.On February 27, 2009, the FDIC also adopted an interim rule that imposed a 20 basis point specialemergency assessment as of June 30, 2009, payable on September 30, 2009. The interim rule alsopermits the Board to impose an emergency special assessment after June 30, 2009, of up to 10 basispoints, if necessary to maintain public confidence in federal deposit insurance. The Company paidthe emergency assessment of $194,000 on September 30, 2009 as well as increased regular quarterlyassessments, based upon the rates in the lowest risk category. In addition, the FDIC required allinsured institutions to prepay three years of assessments on December 30, 2009, which required theCompany to prepay approximately $1.8 million of projected fees for 2010, 2011 and 2012.Under the Reform Act, the FDIC may terminate the insurance of an institution’s deposits uponfinding that the institution has engaged in unsafe and unsound practices, is in an unsafe andunsound condition to continue operations or has violated any applicable law, regulation, rule,order or condition imposed by the FDIC. The Company does not know of any practice, condition orviolation that might lead to termination of its deposit insurance.In addition, all insured institutions of the FDIC are required to pay assessments to fund interestpayments on bonds issued by the Financing Corporation, an agency of the Federal governmentestablished to finance resolutions of insolvent thrifts. These assessments, the current quarterlyrate of which is approximately .0154 of insured deposits, will continue until the FinancingCorporation bonds mature in 2017.*Community Reinvestment Act*Under the Community Reinvestment Act, the Bank has a continuing and affirmative obligation,consistent with its safe and sound operation, to help meet the credit needs of its entirecommunity, including low and moderate income neighborhoods. However, the Community Reinvestment Actdoes not establish specific lending requirements or programs for financial institutions nor does itlimit an institution’s discretion to develop the types of products and services that it believesare best suited to its particular community. The Community Reinvestment Act also requires; **•** the applicable regulatory agency to assess an institution’s record of meeting thecredit needs of its community; **•** public disclosure of an institution’s CRA rating; and **•** that the applicable regulatory agency provides a written evaluation of an institution’sCRA performance utilizing a four-tiered descriptive rating system.The operations of the Bank are also subject to numerous Federal, state and local laws andregulations which set forth specific restrictions and procedural requirements with respect tointerest rates on loans, the extension of credit, credit practices, the disclosure of credit termsand discrimination in credit transactions. The Bank also is subject to certain limitations on theamount of cash dividends that it can pay. See Note 15of Notes to Consolidated Financial Statements, contained in the 2010 Annual Report, which isincluded in Exhibit 13 to this report and incorporated by reference in this Item 1.
 
 

Table of Contents
*Capital Regulation*The Company and the Bank are subject to risk-based and leverage capital standards by which all bankholding companies and banks are evaluated in terms of capital adequacy. The risk-based capitalstandards relate a banking company’s capital to the risk profile of its assets and require thatbank holding companies and banks must have Tier 1 capital of at least 4% of its total risk-adjustedassets, and total capital, including Tier 1 capital, equal to at least 8% of its totalrisk-adjusted assets. Tier 1 capital includes common stockholders’ equity and qualifying perpetualpreferred stock together with related surpluses and retained earnings. The remaining portion ofthis capital standard, known as Tier 2 capital, may be comprised of limited life preferred stock,qualifying subordinated debt instruments and the reserves for possible loan losses.Additionally, banking organizations must maintain a minimum leverage ratio of 3%, measured as theratio of Tier 1 capital to adjusted average assets. This 3% leverage ratio is a minimum for themost highly rated banking organizations without any supervisory, financial or operationalweaknesses or deficiencies. Other banking organizations are expected to maintain leverage capitalratios 100 to 200 basis points above such minimum, depending on their financial condition.Under the Federal Deposit Insurance Corporation Improvement Act of 1991 (the “1991 Act”), a bankholding company is required to guarantee that any “undercapitalized” (as such term is defined inthe statute) insured depository institution subsidiary will comply with the terms of any capitalrestoration plan filed by such subsidiary with its appropriate federal banking agency up to thelesser of (i) an amount equal to 5% of the institution’s total assets at the time the institutionbecame undercapitalized, or (ii) the amount which is necessary (or would have been necessary) tobring the institution into compliance with all capital standards as of the time the institutionfailed to comply with such capital restoration plan.Under Federal Reserve Board policy, the Company is expected to act as a source of financialstrength to the Bank and the First National Bank of Liverpool (“FNBL”), of which the Company owns39.16%, and to commit resources to support the Bank and FNBL, in circumstances where they might notbe in a financial position to support themselves. Consistent with the “source of strength” policyfor subsidiary banks, the Federal Reserve Board has stated that, as a matter of prudent banking, abank holding company generally should not maintain a rate of cash dividends unless its net incomeavailable to common stockholders has been sufficient to fully fund the dividends and theprospective rate of earnings retention appears to be consistent with the Company’s capital needs,asset quality and overall financial condition.See Note 15 of Notes to Consolidated Financial Statements, contained in the 2010 Annual Report andincorporated by reference in this Item 1, for a table that provides the Company’s risk basedcapital ratios and leverage ratio.Federal banking agencies have broad powers to take corrective action to resolve problems of insureddepository institutions. The extent of these powers depends upon whether the institutions inquestion are “well capitalized,” “adequately capitalized,” “under capitalized”, “significantlyundercapitalized,” or “critically undercapitalized.” As of December 31, 2010, the Bank was a“well-capitalized” bank, as defined by the FDIC.The FDIC has issued a rule that sets the capital level for each of the five capital categories bywhich banks are evaluated. A bank is deemed to be “well capitalized” if the bank has a totalrisk-based capital ratio of 10% or greater, has a Tier 1 risk-based capital ratio of 6% or greater,has a leverage ratio of 5% or greater, and is not subject to any order or final capital directiveby the FDIC to meet and maintain a specific capital level for any capital measure. A bank may bedeemed to be in a capitalization category that is lower than is indicated by its actual capitalposition if it received an unsatisfactory safety and soundness examination rating.
 
 

Table of Contents
All of the bank regulatory agencies have issued rules that amend their capital guidelines forinterest rate risk and require such agencies to consider in their evaluation of a bank’s capitaladequacy the exposure of a bank’s capital and economic value to changes in interest rates. Theserules do not establish an explicit supervisory threshold. The agencies intend, at a subsequentdate, to incorporate explicit minimum requirements for interest rate risk into their risk basedcapital standards and have proposed a supervisory model to be used together with bank internalmodels to gather data and hopefully propose at a later date explicit minimum requirements.The United States is a member of the Basel Committee on Banking Supervision (“the Basel Committee”)that provides a forum for regular international cooperation on banking supervisory matters. TheBasel Committee develops guidelines and supervisory standards and is best known for itsinternational standards on capital adequacy; the Core Principles for Effective Banking Supervisionand the Concordat on cross-border banking supervision.In December 2010, the Basel Committee released its new framework for strengthening internationalcapital and liquidity regulation, now officially identified as “Basel III”. Basel III, whenimplemented by the U.S. banking agencies and fully phased-in, will require bank holding companiesand their bank subsidiaries to maintain substantially more capital, with a greater emphasis oncommon equity.Basel III requires or permits the Federal banking agencies to adopt regulations affecting bankinginstitutions’ capital requirements in a number of respects. The U.S. banking agencies haveindicated informally that they expect to propose regulations implementing Basel III in mid-2011with final adoption of implementing regulations in mid-2012. Accordingly, the regulationsultimately applicable to the Company and the Bank may be substantially different from the Basel IIIfinal framework as published in December 2010. Requirements to maintain higher levels of capital orto maintain higher levels of liquid assets could adversely impact the Company’s operating results.While uncertainty exists with regard to the final regulations, the Company is closely monitoringtheir proposal, adoption and implementation.*Gramm-Leach-Bliley Act*On November 12, 1999, the Gramm-Leach-Bliley Act (“GLB”) was signed into law. GLB permitscommercial banks to affiliate with investment banks. It also permits bank holding companies whichelect financial holding company status to engage in any type of financial activity, includingsecurities, insurance, merchant banking/equity investment and other activities that are financialin nature. The Company has not elected financial holding company status. The merchant bankingprovisions allow a bank holding company to make a controlling investment in any kind of company,financial or commercial. These new powers allow a bank to engage in virtually every type ofactivity currently recognized as financial or incidental or complementary to a financial activity.A commercial bank that wishes to engage in these activities is required to be well capitalized,well managed and have a satisfactory or better Community Reinvestment Act rating. GLB also allowssubsidiaries of banks to engage in a broad range of financial activities that are not permitted forbanks themselves. Although the Company and the Bank have not commenced these types of activitiesto date, GLB enables them to evaluate new financial activities that would complement the productsalready offered to enhance non-interest income.*Financial Privacy*Federal banking regulators adopted rules that limit the ability of banks and other financialinstitutions to disclose non-public information about consumers to nonaffiliated third parties.These limitations require disclosure of privacy policies to consumers and, in some circumstances,allow consumers to prevent disclosure of certain personal information to a nonaffiliated thirdparty. The privacy provisions of the GLB Act affect how consumer information is transmitted throughdiversified financial companies and conveyed to outside vendors.
 
 

Table of Contents
*Anti-Money Laundering Initiatives and the USA Patriot Act*A major focus of governmental policy on financial institutions in recent years has been aimed atcombating money laundering and terrorist financing. The USA Patriot Act of 2001 (“USA Patriot Act”)substantially broadened the scope of U.S. anti-money laundering laws and regulations by imposingsignificant new compliance and due diligence obligations, creating new crimes and penalties andexpanding the extra-territorial jurisdiction of the U.S. The United States Treasury has issued a number of regulationsthat apply various requirements of the USA Patriot Act to financial institutions. These regulationsrequire financial institutions to maintain appropriate policies, procedures and controls to detect,prevent and report money laundering and terrorist financing and to verify the identity of theircustomers. Failure of a financial institution to maintain and implement adequate programs to combatmoney laundering and terrorist financing, or to comply with all of the relevant laws orregulations, could have serious legal and reputational consequences for the institution.*Office of Foreign Assets Control Regulation*The U.S. has instituted economic sanctions which affect transactions with designated foreigncountries, nationals and others. These are typically known as the “OFAC rules” because they areadministered by the Office of Foreign Assets Control of the U.S. Department of the Treasury(“OFAC”). The OFAC-administered sanctions target countries in various ways. Generally, however,they contain one or more of the following elements: (i) restrictions on trade with or investment ina sanctioned country, including prohibitions against direct or indirect imports from and exports toa sanctioned country, and prohibitions on “U.S. persons” engaging in financial transactions whichrelate to investments in, or providing investment-related advice or assistance to, a sanctionedcountry; and (ii) a blocking of assets in which the government or specially designated nationals ofthe sanctioned country have an interest, by prohibiting transfers of property subject to U.S.jurisdiction (including property in the possession or control of U.S. persons). Blocked assets(e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in anymanner without a license from OFAC. Failure to comply with these sanctions could have serious legaland reputational consequences for the institution.*Consumer Protection Statutes and Regulations*The Company is subject to many federal consumer protection statutes and regulations including theTruth in Lending Act, Truth in Savings Act, Equal Credit Opportunity Act, Fair Housing Act, RealEstate Settlement Procedures Act and Home Mortgage Disclosure Act. Among other things, these acts: **•** require banks to disclose credit terms in meaningful and consistent ways; **•** prohibit discrimination against an applicant in any consumer or business credittransaction; **•** prohibit discrimination in housing-related lending activities; **•** require banks to collect and report applicant and borrower data regarding loans forhome purchases or improvement projects; **•** require lenders to provide borrowers with information regarding the nature and cost ofreal estate settlements; **•** prohibit certain lending practices and limit escrow account amounts with respect toreal estate transactions, and; **•** prescribe possible penalties for violations of the requirements of consumer protectionstatutes and regulations.On November 17, 2009, the FRB published a final rule amending Regulation E, which implements theElectronic Fund Transfer Act. The final rule limits the ability of a financial institution toassess an overdraft fee for paying automated teller machine transactions and one-time debit cardtransactions that overdraw a customer’s account, unless the customer affirmatively consents, oropts in, to the institution’s payment of overdrafts for these transactions.On July 21, 2010, the President of the United States signed into law the Dodd-Frank Wall StreetReform and Consumer Protection Act (the “Act”). The goals of the new legislation include restoringpublic confidence in the financial system following the 2007-2008 financial and credit crises,preventing another financial crisis and allowing regulators to identify failings in the systembefore another crisis can occur. Among other things, the Act creates the Financial StabilityOversight Council, with oversight authority for monitoring and regulating systemic risk, and theBureau of Consumer Financial Protection, which will have broad regulatory and enforcement powersover consumer financial products and services. The Act also changes the responsibilities of thecurrent federal banking regulators, imposes additional corporate governance and disclosurerequirements in areas such as executive compensation and
 
 

Table of Contents
proxy access, andlimits or prohibits proprietary trading and hedge fund and private equity activities of banks. Thescope of the Act impacts many aspects of the financial services industry, and it requires thedevelopment and adoption of many implementing regulations over the next several months and years;thus, the effects of the Act on the financial services industry will depend, in large part, uponthe extent to which regulators exercise the authority granted to them under the Act and theapproaches taken in implementing regulations. The Company and the entire financial servicesindustry have begun to assess the potential impact of the Act on business and operations, but atthis early stage, the likely impact cannot be ascertained with any degree of certainty. However, itwould appear that the Company is likely to be impacted by the Act in the areas of corporategovernance, deposit insurance assessments, capital requirements and restrictions on fees that maybe charged to consumers.*Sarbanes-Oxley Act of 2002*The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate governance, accounting andreporting measures for companies, like Juniata, that have securities registered under theSecurities Exchange Act of 1934. Specifically, the Sarbanes-Oxley Act and the various regulationspromulgated under the Act, established, among other things: (i) new requirements for auditcommittees, including independence, expertise, and responsibilities; (ii) additionalresponsibilities regarding financial statements for the Chief Executive Officer and Chief FinancialOfficer of reporting companies; (iii) new standards for auditors and regulation of audits,including independence provisions that restrict non-audit services that accountants may provide totheir audit clients; (iv) increased disclosure and reporting obligations for reporting companiesand their directors and executive officers, including accelerated reporting of stock transactionsand a prohibition on trading during pension blackout periods; and (v) a range of new and increasedcivil and criminal penalties for fraud and other violations of the securities laws. In addition,Sarbanes-Oxley required stock exchanges, such as NASDAQ, to institute additional requirementsrelating to corporate governance in their listing rules.Section 404 of the Sarbanes-Oxley Act requires the Company to include in its Annual Report on Form10-K a report by management and an attestation report by the Company’s independent registeredpublic accounting firm on the adequacy of the Company’s internal control over financial reporting.Management’s internal control report must, among other things, set forth management’s assessment ofthe effectiveness of the Company’s internal control over financial reporting.*National Monetary Policy*In addition to being affected by general economic conditions, the earnings and growth of the Bankand, therefore, the earnings and growth of the Company, are affected by the policies of regulatoryauthorities, including the Federal Reserve and the FDIC. An important function of the FederalReserve is to regulate the money supply and credit conditions. Among the instruments used toimplement these objectives are open market operations in U.S. government securities, setting thediscount rate and changes in financial institution reserve requirements. These instruments are usedin varying combinations to influence overall growth and distribution of credit, bank loans,investments and deposits, and their use may also affect interest rates charged on loans or paid ondeposits.The monetary policies and regulations of the Federal Reserve have had a significant effect on theoperating results of commercial banks in the past and are expected to continue to do so in thefuture. The effects of such policies upon the future businesses, earnings and growth of theCompany cannot be predicted with certainty.EmployeesAs of December 31, 2010, the Company had a total of 119 full-time employees and 15 part-timeemployees.Additional InformationThe Company files annual, quarterly and current reports, proxy statements and other informationwith the Securities and Exchange Commission.
 
 

Table of Contents
You may read and copy any reports, statements and other information we file at the SEC’s PublicReference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. Please call the SEC at1-800-SEC-0330 for further information on the operations of the Public Reference Room. Our SECfilings are also available on the SEC’s Internet site (http://www.sec.gov).The Company’s common stock is quoted under the symbol “JUVF” on the OTC Bulletin Board, anautomated quotation service, made available through, and governed by, the NASDAQ system. You mayalso read reports, proxy statements and other information we file at the offices of the NationalAssociation of Securities Dealers, Inc., 1735 K Street, N.W., Washington, DC 20006.The Company’s Internet address is www.JVBonline.com. At that address, we make available, free ofcharge, the Company’s annual report on Form 10-K, quarterly reports on Form 10-Q, current reportson Form 8-K, proxy statements and amendments to those reports filed or furnished pursuant toSection 13(a) or 15(d) of the Exchange Act (see “Investor Information” section of website), as soonas reasonably practicable after we electronically file such material with, or furnish it to, theSEC.In addition, we will provide, at no cost, paper or electronic copies of our reports and otherfilings made with the SEC (except for exhibits). Requests should be directed to JoAnn N. McMinn,Chief Financial Officer, Juniata Valley Financial Corp., PO Box 66, Mifflintown, PA 17059.The information on the websites listed above is not and should not be considered to be part of thisannual report on Form 10-K and is not incorporated by reference in this document.
 
 

Table of Contents
**ITEM 1A. RISK FACTORS**In analyzing whether to make or to continue an investment in the Company, investors shouldconsider, among other factors, the following:**Changes in economic conditions and the composition of the Company’s loan portfolio could lead to anincrease in the allowance for loan losses, which could decrease earnings.**The Company hasestablished an allowance for loan losses which management believes to be adequate to offsetprobable losses on the Company’s existing loans. However, there is no precise method of estimatingloan losses. There can be no assurance that any future declines in real estate market conditions,general economic conditions or changes in regulatory policies will not require the Company toincrease its allowance for loan losses, which could reduce earnings.Lending money is an essential part of the banking business. Borrowers’ ability to repay loanssignificantly impacts the loan loss provision charged to earnings to fund the allowance for loanlosses. The risk of non-payment is affected by credit risks of the borrower, changes in economicand industry conditions, the duration of the loan and, in the case of a collateralized loan,uncertainties as to the future value of the collateral supporting the loan. Historically,commercial loans have presented a greater risk of non-payment than consumer loans, but recentdeclines in home values and rising unemployment rates affecting consumers’ continuing financialstability increase the risk for higher charge-offs of residential real estate loans. Theapplication of various federal and state laws, including bankruptcy and insolvency laws, may limitthe amount that can be recovered on these loans.**Declines in value may adversely impact the investment portfolio.**We reported non-cash, other-than-temporary impairment charges totaling $40,000 for the year endedDecember 31, 2010, $226,000 for the year ended December 31, 2009 and $554,000 for the year endedDecember 31, 2008, representing reductions in fair value below original cost of investments incommon stocks of 11 financial institutions. We may be required to record future impairment chargeson our investment securities if they suffer further declines in value that are consideredother-than-temporary. Considerations used to determine other-than-temporary impairment status toindividual holdings include the length of time the stock has remained in an unrealized lossposition, and the percentage of unrealized loss compared to the carrying cost of the stock,dividend reduction or suspension, market analyst reviews and expectations, and other pertinent newsthat would affect expectations for recovery or further decline.**Recently enacted financial reform legislation may have a significant impact on the Company andresults of its operations.**On July 21, 2010, the President of the United States signed into law the Dodd-Frank Wall StreetReform and Consumer Protection Act (the “Act”). The goals of the new legislation include restoringpublic confidence in the financial system following the 2007-2008 financial and credit crises,preventing another financial crisis and allowing regulators to identify failings in the systembefore another crisis can occur. Among other things, the Act creates the Financial StabilityOversight Council, with oversight authority for monitoring and regulating systemic risk, and theBureau of Consumer Financial Protection, which will have broad regulatory and enforcement powersover consumer financial products and services. The Act also changes the responsibilities of thecurrent federal banking regulators, imposes additional corporate governance and disclosurerequirements in areas such as executive compensation and proxy access, and limits or prohibitsproprietary trading and hedge fund and private equity activities of banks. The scope of the Actimpacts many aspects of the financial services industry, and it requires the development andadoption of many implementing regulations over the next several months and years; thus, the effectsof the Act on the financial services industry will depend, in large part, upon the extent to whichregulators exercise the authority granted to them under the Act and the approaches taken inimplementing regulations. The Company and the entire financial services industry have begun toassess the potential impact of the Acton business and operations, but at this early stage, the likely impact cannot be ascertained withany degree of certainty. However, it would appear that the Company is likely to be impacted by theAct in the areas of corporate governance, deposit insurance assessments, capital requirements andrestrictions on fees that may be charged to consumers.
 
 

Table of Contents
**Our deposit insurance premium could be substantially higher in the future which would have anadverse effect on our future earnings.**The Act revised the statutory authorities governing the FDIC’s management of the Deposit InsuranceFund (the “DIF”). Key requirements from the Act have resulted in the FDIC’s adoption of thefollowing proposed amendments: (1) redefined the assessment base used to calculate depositinsurance assessments to “average consolidated total assets minus average tangible equity”; (2)raised the DIF’s minimum reserve ratio to 1.35 percent and removed the upper limit on the reserveratio; (3) revised adjustments to the assessment rates by eliminating one adjustment and addinganother; and (4) revised the deposit insurance assessment rate schedules due to changes to theassessment base. Revised rate schedules and other revisions to the deposit insurance assessmentrules would become effective April 1, 2011 and would be used to calculate the June 30, 2011assessments which are due September 30, 2011. Though deposit insurance assessments maintain arisk-based approach, the FDIC’s proposed changes effective April 1, 2011, impose a more extensiverisk-based assessment system on large insured depository institutions with at least $10 billion intotal assets since they are more complex in nature and could pose greater risk. Due to the changesto the assessment base and assessment rates, as well as the DIF restoration time frame, the impacton the Company’s future deposit insurance assessments will likely result in decreased premiums infuture years.**Changes in interest rates may have an adverse effect on the Company’s profitability.**The operations of financial institutions such as the Company are dependent to a large degree on netinterest income, which is the difference between interest income from loans and investments andinterest expense on deposits and borrowings. An institution’s net interest income is significantlyaffected by market rates of interest that in turn are affected by prevailing economic conditions,by the fiscal and monetary policies of the federal government and by the policies of variousregulatory agencies. The Federal Reserve Board (“FRB”) regulates the national money supply in orderto manage recessionary and inflationary pressures. In doing so, the FRB may use techniques such asengaging in open market transactions of U.S. Government securities, changing the discount rate andchanging reserve requirements against bank deposits. The use of these techniques may also affectinterest rates charged on loans and paid on deposits. The interest rate environment, which includesboth the level of interest rates and the shape of the U.S. Treasury yield curve, has a significantimpact on net interest income. See the section entitled “Market / Interest Rate Risk” and Table 5— “Maturity Distribution” in Management’s Discussion and Analysis of Financial Condition in the2010 Annual Report, incorporated by reference in this Item 1A for a discussion of the effects onnet interest income over a twelve month period beginning on December 31, 2010 of simulated interestrate changes. Like all financial institutions, the Company’s balance sheet is affected byfluctuations in interest rates. Volatility in interest rates can also result in disintermediation,which is the flow of deposits away from financial institutions into direct investments, such as USGovernment and corporate securities and other investment vehicles, including mutual funds, which,because of the absence of federal insurance premiums and reserve requirements, generally pay higherrates of return than bank deposit products. See “Item 7: Management’s Discussion of FinancialCondition and Results of Operations” and “Item 7A: Quantitative and Qualitative Disclosure aboutMarket Risk”.**Recent negative developments in the financial services industry and U.S. and global credit marketsmay adversely impact our results of operations and our stock price.**The Company’s results of operations and financial condition are affected by conditions in thecapital markets and the economy generally. The capital and credit markets have experienced extremevolatility and disruption in recent years. The volatility and disruption in these markets haveproduced downward pressure on the market value of financial institutions and limited creditavailability to certain companies without regard to those companies’ underlying financial strength.Concerns over the availability and cost of credit and the decline in the U.S. real estate marketalso contributed to increased volatility in the capital and credit markets and diminishedexpectations for the economy. These factors precipitated the recent economic slowdown, and may havean adverse effect on the Company.
 
 

Table of Contents
Economic downturns can adversely affect the Company in a number of ways, including: **•** ***Possibly reducing the Company’s customer deposits and demand for financial products,such as loans.***The Company’s success depends significantly upon the growth in population,unemployment and income levels, deposits and housing starts in its geographic markets.Unlike large national institutions, the Company is not able to spread the risks ofunfavorable local economic conditions across a large number of diversified economies andgeographic locations. If the communities in which the Company operates do not grow, or ifprevailing economic conditions locally or nationally are unfavorable, its business couldbe adversely affected. **•** ***Potential for additional regulation***. Negative developments in the financial industryand the domestic and international credit markets, and the impact of legislation inresponse to those developments, may negatively impact the Company’s operations andfinancial performance. The Company and its subsidiaries are subject to regulation andexaminations by various regulatory authorities. New Federal or state laws and regulationsregarding lending and funding practices, capital requirements, deposit insurance premiums,other bank-focused special assessments and liquidity standards may be enacted. Bankregulatory agencies are expected to be active in responding to concerns and trendsidentified in examinations, which may result in the issuance of formal enforcement orders.**The heightened, industry-wide attention associated with the processing of residential mortgageforeclosures may adversely affect the Company’s business.**In late 2010, the media began reporting on possible processing errors and documentation problems inmortgage foreclosures at several of the nation’s largest banks and mortgage servicing businesses.As a result of the economic downturn which began in 2008 and which persists today, larger banks andmortgage servicing companies have been challenged with processing tens of thousands of foreclosuresnationwide. It has been reported that, in some foreclosures, the required procedural steps (whichoften vary by state and in some cases by local jurisdictions within a state) required to complete aforeclosure have not been followed. As a result, there were questions concerning the validity ofsome foreclosures. The foreclosure procedures used by banks and servicing companies have also comeunder scrutiny by consumer advocates, attorneys representing borrowers, the Attorneys General ineach of the 50 states and banking regulators.As a financial institution, the Company offers a variety of residential mortgage loan products.Nearly all of the mortgage loans originated by the Company are made in Pennsylvania. The Companyalso services loans owned by investors in accordance with the investors’ guidelines. A smallpercentage of the Company’s residential mortgage borrowers default on their mortgage loans. Whenthis occurs, the Company attempts to resolve the default in a way that provides the greatest returnto the Company or is in accordance with investor guidelines; typically, options are pursued thatallow the borrower to remain the owner of their home. However, when these efforts are notsuccessful, it becomes necessary for the Company to foreclose on the loan. The number ofresidential foreclosures undertaken by the Company is not substantial.**Changes in economic conditions and related uncertainties may have an adverse affect on theCompany’s profitability.**Commercial banking is affected, directly and indirectly, by local, domestic, and internationaleconomic and political conditions, and by governmental monetary and fiscal policies. Conditionssuch as inflation, recession, unemployment, volatile interest rates, tight money supply, realestate values, international conflicts and other factors beyond the Company’s control may adverselyaffect the potential profitability of the Company. Any future rises in interest rates, whileincreasing the income yield on the Company’s earnings assets, may adversely affect loan demand andthe cost of funds and, consequently, the profitability of the Company. Any future decreases ininterest rates may adversely affect the Company’s profitability because such decreases may reducethe amounts that the Company may earn on its assets. A continued recessionary climate could resultin the delinquency of outstanding loans. Management does not expect any one particular factor tohave a material effect on the Company’s results of operations. However, downtrends in severalareas, including real estate, construction and consumer spending, could have a material adverseimpact on the Company’s profitability.
 
 

Table of Contents
**The supervision and regulation to which the Company is subject can be a competitive disadvantage.**The operations of the Company and the Bank are heavily regulated and will be affected by presentand future legislation and by the policies established from time to time by various federal andstate regulatory authorities. In particular, the monetary policies of the Federal Reserve have hada significant effect on the operating results of banks in the past, and are expected to continue todo so in the future. Among the instruments of monetary policy used by the Federal Reserve toimplement its objectives are changes in the discount rate charged on bank borrowings and changes inthe reserve requirements on bank deposits. It is not possible to predict what changes, if any, willbe made to the monetary polices of the Federal Reserve or to existing federal and state legislationor the effect that such changes may have on the future business and earnings prospects of theCompany.The Company is subject to changes in federal and state tax laws as well as changes in banking andcredit regulations, accounting principles and governmental economic and monetary policies.During the past several years, significant legislative attention has been focused on the regulationand deregulation of the financial services industry. Non-bank financial institutions, such assecurities brokerage firms, insurance companies and money market funds, have been permitted toengage in activities that compete directly with traditional bank business.**The competition the Company faces is increasing and may reduce our customer base and negativelyimpact the Company’s results of operations.**There is significant competition among banks in the market areas served by the Company. Inaddition, as a result of deregulation of the financial industry, the Bank also competes with otherproviders of financial services such as savings and loan associations, credit unions, consumerfinance companies, securities firms, insurance companies, the mutual funds industry, full servicebrokerage firms and discount brokerage firms, some of which are subject to less extensiveregulations than the Company with respect to the products and services they provide. Some of theCompany’s competitors have greater resources than the Company and, as a result, may have higherlending limits and may offer other services not offered by our Company. See “Item 1: Business -Competition.”**Fluctuations in the stock market could negatively affect the value of the Company’s common stock.**The Company’s common stock is quoted under the symbol “JUVF” on the OTC Bulletin Board, anautomated quotation service, made available through, and governed by, the NASDAQ system. There canbe no assurance that a regular and active market for the Common Stock will develop in theforeseeable future. See “Item 5: Market for Registrant’s Common Equity and Related StockholderMatters and Issuer Purchases of Equity Securities.” Investors in the shares of common stock may,therefore, be required to assume the risk of their investment for an indefinite period of time.Current lack of investor confidence in large banks may keep investors away from the banking sectoras a whole, causing unjustified deterioration in the trading prices of well-capitalized communitybanks such as the Company.**“Anti-takeover” provisions may keep shareholders from receiving a premium for their shares.**The Articles of Incorporation of the Company presently contain certain provisions which may bedeemed to be “anti-takeover” in nature in that such provisions may deter, discourage or make moredifficult the assumption of control of the Company by another Company or person through a tenderoffer, merger, proxy contest or similar transaction or series of transactions. In addition,provisions of Pennsylvania law could similarly make it more difficult for a third party to acquirecontrol of the Company. The overall effects of the “anti-takeover” provisions may be to discourage,make more costly or more difficult, or prevent a future takeover offer, thereby preventingshareholders from receiving a premium for their securities in a takeover offer. These provisionsmay also increase the possibility that a future bidder for control of the Company will be requiredto act through arms-length negotiation with the Company’s Board of Directors. Copies of theArticles of Incorporation of the Company are on file with the Securities and Exchange Commissionand the Pennsylvania Secretary of State.
 
 

Table of Contents
**If the Company fails to maintain an effective system of internal controls, it may not be able toaccurately report its financial results or prevent fraud. As a result, current and potentialshareholders could lose confidence in the Company’s financial reporting, which could harm itsbusiness and the trading price of its common stock.**The Company has established a process todocument and evaluate its internal controls over financial reporting in order to satisfy therequirements of Section 404 of the Sarbanes-Oxley Act of 2002 and the related regulations, whichrequire annual management assessments of the effectiveness of the Company’s internal controls overfinancial reporting and a report by the Company’s independent auditors on the effectiveness of theCompany’s internal control. In this regard, management has dedicated internal resources, engagedoutside consultants and adopted a detailed work plan to (i) assess and document the adequacy ofinternal controls over financial reporting, (ii) take steps to improve control processes, whereappropriate, (iii) validate through testing that controls are functioning as documented and (iv)implement a continuous reporting and improvement process for internal control over financialreporting. The Company’s efforts to comply with Section 404 of the Sarbanes-Oxley Act of 2002 andthe related regulations regarding the Company’s assessment of its internal controls over financialreporting and the Company’s independent auditors’ audit of internal control are likely to continueto result in increased expenses. The Company’s management and audit committee have given theCompany’s compliance with Section 404 a high priority. The Company cannot be certain that thesemeasures will ensure that the Company implements and maintains adequate controls over its financialprocesses and reporting in the future. Any failure to implement required new or improved controls,or difficulties encountered in their implementation, could harm the Company’s operating results orcause the Company to fail to meet its reporting obligations. If the Company fails to correct anyissues in the design or operating effectiveness of internal controls over financial reporting orfails to prevent fraud, current and potential shareholders could lose confidence in the Company’sfinancial reporting, which could harm its business and the trading price of its common stock.**ITEM 1B. UNRESOLVED STAFF COMMENTS**None.**ITEM 2. PROPERTIES**The physical properties of the Company are all owned or leased by the Bank.The Bank owns and operates exclusively for banking purposes, the buildings located at: