UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT 1934 For the quarterly period ended September 30, 1999 --------------------------------- [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to -------------- -------------- Commission File Number 2-81699 ----------------------------------------- Juniata Valley Financial Corp. - ---------------------------------------------------------------- (Exact name of registrant as specified in its charter) Pennsylvania 23-2235254 - ------------------------ --------------- (State or other jurisdiction of (I.R.S.Employer incorporation or organization) Identification No.) Bridge and Main Streets, Mifflintown, Pennsylvania 17059 - -------------------------------------------------------------- (Address of principal executive offices) (Zip Code) (717) 436-8211 - ------------------------- --------------------------------------- (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Class Outstanding as of September 30, 1999 - ------------------------- ------------------------------------ Common Stock ($1.00 par value) 2,265,837 shares 2. JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY --------------------------------------------- CONSOLIDATED BALANCE SHEETS --------------------------- ASSETS ------ September 30, December 31, 1999 1998 ---------- ----------- (In thousands) (Unaudited) Cash and due from banks $ 8,399 $ 12,284 Interest-bearing deposits with banks 638 619 Federal funds sold 1,550 7,825 --------- ---------- Total cash and cash equivalents 10,587 20,728 Securities available for sale 40,476 54,720 Securities held to maturity, fair value $74,952 and $69,444 respectively 75,839 68,785 Loans receivable net of allowance for loan losses $2,498 and $2,477, respectively 195,904 189,485 Bank premises and equipment, net 3,084 2,876 Accrued interest receivable and other assets 7,971 7,263 --------- ---------- TOTAL ASSETS $ 333,861 $ 343,857 ========= ========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------- Liabilities: Deposits: Non-interest bearing deposits $ 33,745 $ 36,114 Interest bearing deposits 251,517 257,776 --------- ---------- Total deposits 285,262 293,890 Accrued interest payable and other liabilities 4,288 3,987 --------- ---------- Total liabilities 289,550 297,877 --------- ---------- Stockholders' Equity: Preferred stock, no par value; 500,000 shares authorized; no shares issued or outstanding - - Common stock, par value $1.00, per share; authorized 20,000,000 shares; issued 2,332,080 shares 2,332 2,332 Surplus 20,572 20,580 Retained earnings 23,376 22,322 Treasury stock, at cost 1999 66,243 shares; 1998 1,938 shares (2,370) (70) Accumulated other comprehensive income 401 816 --------- ---------- Total stockholders' equity 44,311 45,980 --------- ---------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 333,861 $ 343,857 ========= ========== JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY 3. --------------------------------------------- CONSOLIDATED STATEMENTS OF INCOME --------------------------------- (Unaudited) For the Quarter Ended For Nine Months Ended ---------------------- -------------------- Sept 30, Sept 30, Sept 30, Sept 30, 1999 1998 1999 1998 ---------- --------- --------- --------- (In thousands, except per share amount) INTEREST INCOME: Loans receivable $ 4,281 $ 4,333 $ 12,745 $ 13,098 Taxable securities 1,026 1,559 3,240 4,150 Tax-exempt securities 535 206 1,637 941 Other 87 165 310 542 ---------- ---------- ---------- --------- Total interest income 5,929 6,263 17,932 18,731 INTEREST EXPENSE ON DEPOSITS 2,809 3,082 8,536 9,101 ---------- ---------- ---------- --------- Net interest income 3,120 3,181 9,396 9,630 PROVISION FOR LOAN LOSSES 30 55 90 145 ---------- ---------- ---------- --------- Net interest income, after provision for loan losses 3,090 3,126 9,306 9,485 ---------- ---------- ---------- --------- OTHER INCOME: Trust department 80 78 250 210 Customer service fees 66 39 350 306 Net realized gains on sales of securities - 208 - 212 Other 117 105 247 192 ---------- ---------- ---------- --------- Total other income 263 430 847 920 ---------- ---------- ---------- --------- OTHER EXPENSES: Salaries and wages 918 883 2,749 2,495 Employee benefits 266 263 805 758 Occupancy 110 108 366 377 Equipment 230 182 682 382 Federal deposit insurance 8 8 28 25 Director compensation 71 59 213 171 Taxes, other than income 113 72 325 329 Merger - 345 - 345 Other 283 364 883 1,107 ---------- ---------- ---------- --------- Total other expenses 1,999 2,284 6,051 5,989 ---------- ---------- ---------- --------- INCOME BEFORE INCOME TAXES 1,354 1,272 4,102 4,416 FEDERAL INCOME TAXES 345 297 1,015 1,102 ---------- ---------- ---------- --------- Net income $ 1,009 $ 975 $ 3,087 $ 3,314 ========== ========== ========== ========== PER SHARE DATA: Basic earnings $ .44 $ .42 $ 1.34 $ 1.43 ========== ========== ========== ========== Weighted average number of shares outstanding 2,283,810 2,324,257 2,303,961 2,320,221 ========= ========= ========= ========= 4. JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 (Unaudited) Accumulated Other Common Retained Treasury Comprehensive Stock Surplus Earnings Stock Income Total ------ ------- -------- -------- ---------- ----- (In thousands) Balance, December 31, 1998 $ 2,332 $ 20,580 $ 22,322 $ (70) $ 816 $ 45,980 -------- Net income for the nine months ended Sept 30, 1999 - - 3,087 - - 3,087 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects - - - - (415) (415) -------- Total Comprehensive Income 2,672 -------- Treasury stock acquired - - - (2,558) - (2,558) Treasury stock issued for dividend reinvestment plan (6,277 shares) - (8) - 230 - 222 Treasury stock issued for employee stock purchase plan (753 shares) - - - 28 - 28 Cash dividends, $.88 per share - - (2,033) - - (2,033) ------ -------- ------- ------- ------- ------- Balance Sept 30, 1999 $ 2,332 $ 20,572 $ 23,376 $(2,370) $ 401 $ 44,311 ======= ======== ======== ======= ======= ======== 5. JUNIATA VALLEY FINANCIAL CORP. AND SUBSIDIARY --------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS ------------------------------------- (Unaudited) Increase (Decrease) in Cash and Cash Equivalents For the Nine Months Ended ------------------------- Sept 30, Sept 30, 1999 1998 ------------------------- (In thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 3,087 $ 3,314 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 90 145 Provision for depreciation 212 201 Net amortization on securities' premium 41 86 Net realized gains on sales of securities - (212) Deferred directors' fees and supplemental retirement plan expense 126 114 Payment of deferred compensation (128) (115) Deferred income taxes (58) (76) Increase in accrued interest receivable and other assets (288) (166) Increase (decrease) in accrued interest payable and other liabilities 146 (621) ------------ ----------- Net cash provided by operating activities 3,228 2,670 ------------ ----------- CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available for sale securities (415) (12,303) Proceeds from sales of available for sale securities - 252 Proceeds from maturities of and principal repayments on available for sale securities 14,059 22,708 Purchases of held to maturity securities (16,474) (30,088) Proceeds from maturities of and principal repayments on held to maturity securities 9,350 7,759 Net (increase) decrease in loans receivable (6,509) 978 Net purchases of bank premises and equipment (420) (425) ------------ ----------- Net cash used in investing activities (409) (11,119) ------------ ----------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits (8,627) 4,616 Cash dividends (2,033) (790) Purchase of treasury stock (2,558) - Treasury stock issued 258 254 ------------ ------ Net cash provided (used) by financing activties (12,960) 4,080 ------------ ------ Increase (decrease) in cash and cash equivalents (10,141) (4,369) CASH AND CASH EQUIVALENTS Beginning 20,728 17,666 ------------ ----------- Ending $ 10,587 $ 13,297 ============= =========== CASH PAYMENTS FOR Interest $ 8,545 $ 8,103 ============ =========== Income taxes $ 1,109 $ 1,178 ============ =========== NOTE A - Basis of Presentation The financial information includes the accounts of the Juniata Valley Financial Corp. and its wholly owned subsidiary, The Juniata Valley Bank. All significant intercompany accounts and transactions have been eliminated. The accompanying unaudited consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for fair presentation have been included. Operating results for the nine-month period ended September 30, 1999, are not necessarily indicative of the results that may be expected for the year ended December 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in Juniata Valley Financial Corp. annual report on Form 10-k for the year ended December 31, 1998. NOTE B - Accounting Standards The Financial Accounting Standards Board issued Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities", in June 1998. Statement No. 133 was amended by Statement No. 137 which deferred the effective date of Statement No. 133. The Corporation is required to adopt the Statement no later than January 1, 2001. The adoption of the Statement is not expected to have a significant impact on the financial condition or results of operations of the Corporation. NOTE C - Year 2000 The Corporation has conducted a comprehensive review of its computer systems to identify the systems that could be affected by the year 2000 issue and is developing an implementation plan to resolve any issues. The year 2000 problem is the result of computer programs being written using two digits rather than four to define the applicable year. Any of the Corporation's programs that have time-sensitive software could recognize a date using "00" as the year 1900 rather than the year 2000. This could result in a major system failure. Financial institutions are in a unique situation in that time-deposits and loans, for a number of years have had maturity dates in to the future well beyond the year 2000. The year 2000 issue is discussed weekly by senior management and monthly at Board of Director meetings. The Chairman and C.E.O. has been named as the person responsible for the year 2000 issue. Currently the Corporation has completed the testing phase of year 2000 and to date there have been no problems encountered that any remediation is necessary. The Corporation uses two major software vendors for data processing. Letters of certification have been obtained assuring that they were year 2000 compliant in 1998 and testing commenced in the fall of 1998. The vendors are still on target with these dates. The Federal Financial Institutions Examination Council have conducted special examinations to make sure that the software vendors are doing everything necessary to be in compliance with the year 2000 guidelines. The results of these examinations have been released to the Corporation for review. Because of the data processing being outsourced, the cost of the year 2000 compliance will be shared with the two data processing vendors. Because of the Bank's merger in July, 1998, it is very difficult to separate equipment costs for the merger and the cost of what was necessary for the year 2000. To date approximately $55,000 has been expended that can be attributed to year 2000. This does not include personnel cost for the ongoing testing. Approximately $70,000 to $80,000 may be needed for future remediation costs. Management does not feel this cost will materially impact the results of operations of the Corporation in 1999. Another important area is the Corporation's PC network. Testing has been performed on all PC's and the software to ensure that they are year 2000 compliant. The PC and software was tested by a third party to make recommendations for upgrading or replacing. This process was completed in June of 1998 and all additional purchases of equipment and software are validated for year 2000 so that reinfection will not occur. The Corporation has many customers and through the use of questionnaires the larger loan customers are being assessed for their potential year 2000 risk. No individual customer could materially impact the financial position of the Corporation, however the credit risk could be increased if these customers are not addressing their year 2000 problems. As a result, problem loans and losses could increase in the following years of operation for the Corporation. Due to uncertainties involved, it is not possible to quantify potential losses due to year 2000 at this time. A contingency plan to provide financial services to customers will be provided to the Corporation through the software vendors currently used. A switch to other systems could be accomplished with little to no impact to customers. Management believes they would continue to operate in the year 2000, manually if necessary, until the new systems would be in place. The manual operation would be accomplished through hiring of temporary staff until normal operations could resume. The hiring of additional staff would impact the financial results but cannot be quantified at this time. The cost of switching to the new system also cannot be quantified at this time. Management believes that adequate resources are available to fund and address the year 2000 issue. Management also believes that the costs associated with bringing the Corporation into compliance will not have a material impact on the Corporation's financial results. However, with all remediation, testing and contingency plans there is no guarantee that these steps will fully expose all failures and problems. In addition, the Corporation relies on various third party providers, such as telecommunications and utility companies, where alternative sources or arrangements are limited or unavailable. While the Corporation continues to address year 2000 issues, potential uncertainties remain. MANAGEMENT'S DISCUSSION AND ANALYSIS Forward Looking Statements: The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words "believes," "anticipates," "contemplates," "expects," and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results to differ materially from those projected. Those risks and uncertainties include changes in interest rates, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. The Corporation undertakes no obligation to publicly release the results of any revisions to those forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Financial Condition: Total assets of Juniata Valley Financial Corp. totalled $333,861,000 as of September 30, 1999, a decrease of $9,996,000 or 2.91% from December 31, 1998. The cash provided by operating activities of $3,228,000 was used to fund loan growth of $6,509,000. Loan growth was also funded by the overall decline in cash and cash equivalents of $10,141,000. Securities proceeds exceeded purchases by $6,520,000 which provided cash and updating premise and equipment used $420,000 of cash. The Bank experienced a decline in deposits of $8,627,000. Along with an $.88 per share dividend and the $2,558,000 to buy treasury stock the Bank used $12,960,000 in financing activities. There are no material loans classified for regulatory purposes as loss, doubtful, substandard or special mention which management expects to significantly impact future operating results, liquidity or capital resources. Additionally, management is not aware of any information which would give serious doubt as to the ability of its borrowers to substantially comply with their loan repayment terms. The Corporation's problem loans (i.e., 90 days past due and restructured loans) were not material for all periods presented. Management is not aware of any current recommendations of the regulatory authorities which, if implemented, would have a material effect on the Corporation's liquidity, capital resources or operations. Results of operations: Interest income decreased $334,000 or 5.33% for the quarter ended September 30, 1999 and $799,000 for nine months. The decline came from the $353,000 less in interest income on loans receivable. Interest income on taxable securities declined by $910,000 but interest income on tax free securities increased by $696,000. The decline in other interest income was due to less money in federal funds sold. Interest expense decreased $273,000 or 8.86% for the quarter and $565,000 or 6.21% for nine months. Interest income and expense for the first nine months ended September 30, 1999, versus 1998, are reflective of a decrease of both interest earning assets and interest bearing liabilities and overall lower rates offered and paid in 1999 versus 1998. This resulted in a decrease in net interest income of $234,000 or 2.43% for the nine months ended September 30, 1999. Other income has decreased $167,000 or 38.84% for the quarter in 1999 over 1998 and $73,000 or 7.93% for nine months. Gains on sales of securities that occurred during the third quarter of 1998 of $208,000, account for this decrease because there were no sales of securities in 1999. Trust department income has increased $40,000, customer service fees have increased $44,000 and other income has increased $55,000. The increase in trust department income is a result of the settlement of five estates in 1999. The increase in customer service fees is a result of higher transaction volume as opposed to an increase in fees. The other category increase can be attributed to an increase in mutual fund commissions of $39,000 and a $26,000 increase in fees earned on debit card resulting from higher transaction volume. Other expenses increased $62,000 or 1.04% for the nine months ended September 30, 1999 and decreased $285,000 or 12.48% for the quarter. During the third quarter of 1998, the Corporation recognized the $345,000 of merger expenses that did not occur in 1999. The $254,000 increase in salary and wages for the nine months ended September 30, 1999, compared to 1998, can be attributed to annual merit increases and promotions of employees. The $47,000 increase in employee benefits is primarily due to a keyman pension plan in place for 10 years that required additional funding as employees age. The $300,000 increase in equipment costs is due to increased equipment needs and maintenance after the merger between Lewistown Trust and the Corporation was consummated. All of these factors combined have contributed to a decrease in net income of $227,000 or 6.85% for the nine months ended September 30, 1999. Liquidity: The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs of the Corporation and to take advantage of income producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of the Corporation to maintain a high level of liquidity in all economic environments. Principal sources of asset liquidity are provided by securities maturing in one year or less, other short-term investments such as Federal Funds sold and cash and due from banks. Liability liquidity, which is more difficult to measure, can be met by attracting deposits and maintaining the core deposit base. Although the Bank has experienced an outflow of deposits with a decline of over eight million dollars, Management does not believe this will continue and it will not be a factor in meeting liquidity needs. The Corporation joined the Federal Home Loan Bank of Pittsburgh in August of 1993 for the purpose of providing short-term liquidity when other sources are unable to fill these needs. In view of the primary and secondary sources previously mentioned, Management believes that the Corporation's liquidity is capable of providing the funds needed to meet loan demand. Interest rate sensitivity: Interest rate sensitivity management is the responsibility of the Asset/Liability Management Committee. This process involves the development and implementation of strategies to maximize net interest margin, while minimizing the earnings risk associated with changing interest rates. The traditional gap analysis identifies the maturity and repricing terms of all assets and liabilities. As of September 30, 1999, the Corporation had a six-month negative gap of $16,344,000. Generally a liability sensitive position indicates that more liabilities than assets are expected to re-price within the time period and that falling interest rates could positively affect net interest income while rising interest rates could negatively affect net interest income. However, the traditional analysis does not accurately reflect the Bank's interest rate sensitivity since the rates on core deposits generally do not change as quickly as market rates. Historically net interest income has, in fact, not been subject to the degree of sensitivity indicated by the traditional analysis at The Juniata Valley Bank. Capital Adequacy: The Bank's regulatory capital ratios for the periods presented are as follows: Risk Weighted Assets Ratio: Actual Required Sept 30, Dec 31, Sept 30, Dec 31 1999 1998 1999 1998 TIER I 21.20% 21.16% 4.0% 4.0% TIER I & II 22.38% 22.36% 8.0% 8.0% Total Assets Leveraged Ratio: TIER I 13.11% 13.12% 4.0% 4.0% At September 30, 1999, the Corporation exceeds the regulatory requirements to be considered a "well capitalized" financial institution. Quantitative and Qualitative Disclosures About Market Risk: There have been no material changes in the Corporation's exposure to market risk. Please refer to the Annual Report on Form 10-k as of December 31, 1998. 13. Part II. Other Information Item 1. Legal Proceedings None Item 2. Changes in Securities None Item 3. Defaults Upon Senior Securities Not applicable Item 4. Submission of Matters to a Vote of Security Holders Not applicable Item 5. Other Information None Item 6. Exhibits and Reports on Form 8-K (27) Financial Data Schedule Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Juniata Valley Financial Corp. (Registrant) Date_______________________________ By_______________________________ A. Jerome Cook, Chairman Date_______________________________ By_______________________________ Linda L. Engle, Treasurer