UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2001 Commission File Number 0-13232 JUNIATA VALLEY FINANCIAL CORP. ------------------------------ (Exact name of registrant as specified in its charter) Pennsylvania 23-2235254 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Bridge & Main Streets, PO Box 66, Mifflintown, PA 17059-0066 -------------------------------------------------------------------- (Address or principal executive offices) (Zip Code) Registrant's telephone number, including area code: (717) 436-8211 -------------- SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT: Common Stock, Par Value $1.00 Per Share --------------------------------------- (Title of Class) 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. Yes X No --- --- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ( ) The aggregate market value of the voting stock held by non-affiliates of the Registrant as of January 31, 2002. Common Stock, $1.00 Par Value - $66,241,800 ------------------------------------------- Indicate the number of shares outstanding of each issuer's classes of common stock, as of January 31, 2002. Common Stock, $1.00 Par Value 2,349,000 --------------------------------------- DOCUMENTS INCORPORATED BY REFERENCE: Portions of the Annual Report to Shareholders for the year ended December 31, 2001, are incorporated by reference into Parts I, II and III. Portions of the Proxy Statement for the Annual Meeting of Shareholders to be held April 16, 2002, are incorporated by reference into Part III. PART I ITEM 1. BUSINESS Incorporated by reference are the data appearing on Pages 7 through 14 of the 2001 Annual Report. ITEM 2. PROPERTIES The physical properties of the Corporation are all owned or leased by the Bank. The Bank owns the buildings located at: Bridge and Main Streets, Mifflintown, Pennsylvania (its corporate headquarters); Butcher Shop Road, Mifflintown, Pennsylvania (financial center); 301 Market Street, Port Royal, Pennsylvania; corner of Main and School Streets, McAlisterville, Pennsylvania; Four North Market Street, Millerstown, Pennsylvania; Main Street, Blairs Mills, Pennsylvania; Monument Square, Lewistown, Pennsylvania; Route 322 Reedsville, Pennsylvania; 100 East Market Street, Lewistown, Pennsylvania; 100 West Water Street, Lewistown, Pennsylvania; 302 South Logan Boulevard, Burnham, Pennsylvania. In addition thereto, the Bank leases three offices. One, in the Shopping Plaza located on Legislative Route 31, Mifflintown, Pennsylvania, which lease with extension expires in 2007. One is located in the Wal-Mart Supercenter, Lewistown, Pennsylvania, which expires in October 2006, and one is a loan production office located at 1525 Science Street, State College, Pennsylvania, which renews month to month. All of the buildings used by the Bank are freestanding and are used exclusively for banking purposes. ITEM 3. LEGAL PROCEEDINGS The nature of the Corporation's and Bank's business, at times, generates litigation involving matters arising in the ordinary course of business. However, in the opinion of management of the Corporation, there are no proceedings pending to which the Bank is a party or to which its property is subject, which, if determined adversely to the Bank, would be material in relation to the Bank's financial condition, nor are there any proceedings pending other than ordinary routine litigation incident to the business of the Bank. In addition, no material proceedings are pending or are known to be threatened or contemplated against the Bank by government authorities or others. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None PART II ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS Incorporated by reference are the data appearing on page 2 of the 2001 Annual Report. ITEM 6. SELECTED FINANCIAL DATA Incorporated by reference are the data appearing on Page 16 of the 2001 Annual Report. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Incorporated by reference are the data appearing on Pages 17 through 32 of the 2001 Annual Report. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Incorporated by reference are the data under the caption "Market Rate Risk" appearing on Pages 27 through 30 of the 2001 Annual Report. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Incorporated by reference are the financial statements and notes on Pages 33 through 55 of the 2001 Annual Report and the Quarterly Results of Operations on Page 15 of the 2001 Annual Report. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference is information appearing under the captions "Election of Directors of JVF" and "Management of JVF and the Bank" in the Proxy Statement. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference in the proxy statement under the caption "Remuneration of Executive Officers". ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference is the following information contained in the Proxy Statement filed under the captions "Election of Directors of JVF" and "Management of JVF and the Bank". ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Incorporated by reference is the information pertaining to transactions with directors and officers of the Bank within the footnote "Transactions with Executive Officers and Directors: on Page 50 of the 2001 Annual Report. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) 1. Financial Statements The Consolidated Financial Statements of Juniata Valley Financial Corp., as included in the 2001 Annual Report to Shareholders, are incorporated in this report by reference. 2. All schedules are omitted because they are not applicable, the data is not significant, or the required information is shown in the financial statements or the notes thereto. (b) Reports on Form 8-K None. (c) Exhibits (13) Annual Report to Shareholders (21) Subsidiaries of the Registrant - As of the date of this report Juniata Valley Bank is the only subsidiary of the Registrant. (23) Consent of Beard Miller Company L.L.P., Independent Auditors SIGNATURES Pursuant to the requirements of Section 13 or 15 (d) 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: March 19, 2002 By _____________________________ Francis J. Evanitsky Director, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated. ------------------------- ------------------------- Ronald H. Witherite Joe E. Benner Vice Chairman, Secretary Director Date: March 19, 2002 Date: March 19, 2002 ------------------------- ------------------------- Jan G. Snedeker A. Jerome Cook Director Director Date: March 19, 2002 Date: March 19, 2002 ------------------------- ------------------------- Don E. Haubert Martin L. Dreibelbis Director Chairman Date: March 19, 2002 Date: March 19, 2002 ------------------------- ------------------------- John A. Renninger Dale G. Nace Director Director Date: March 19, 2002 Date: March 19, 2002 ------------------------- ------------------------- Francis J. Evanitsky Harold B. Shearer President & CEO Director Date: March 19, 2002 Date: March 19, 2002 ------------------------- ------------------------- Philip E. Gingrich Jr. Charles L. Hershberger Director Director Date: March 19, 2002 Date: March 19, 2002 ------------------------- ------------------------- Marshall L. Hartman Robert K. Metz, Jr. Director Director Date: March 19, 2002 Date: March 19, 2002 ------------------------- ------------------------- Timothy I. Havice Richard M. Scanlon, DMD Director Director Date: March 19, 2002 Date: March 19, 2002 ------------------------- Linda L. Engle Chief Financial Officer Chief Accounting Officer Date: March 19, 2002 JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK DECEMBER 31, 2001 MISSION STATEMENT The Juniata Valley Bank, as an independent community bank, will endeavor to identify customers' financial needs and exceed their expectations in delivering quality products and services at a fair price to assure shareholders an above average return and employees competitive salaries and benefits. The business of the bank will be conducted with integrity and responsiveness to the communities served. CONTENTS Page Stock, Dividend and Broker Information------------------------------------------------------------ 2 Letter to Shareholders---------------------------------------------------------------------------- 3 Corporation Officers and Directors---------------------------------------------------------------- 4 Advisory Board Members---------------------------------------------------------------------------- 5 Bank Officers------------------------------------------------------------------------------------- 6 Business--------------------------------------------------------------------------------------7 - 15 Financial Highlights------------------------------------------------------------------------------16 Management's Discussion and Analysis of Financial Condition and Results of Operations--------17 - 32 Report of Independent Auditors--------------------------------------------------------------------33 Financial Statements: Consolidated Balance Sheets--------------------------------------------------------------------34 Consolidated Statements of Income--------------------------------------------------------------35 Consolidated Statements of Stockholders' Equity------------------------------------------------36 Consolidated Statements of Cash Flows----------------------------------------------------------37 Notes to Consolidated Financial Statements------------------------------------------------38 - 55 STOCK, DIVIDEND AND BROKER INFORMATION Common stock issued by Juniata Valley Financial Corp. is quoted under the symbol "JUVF" on the over-the-counter ("OTC") Electronic Bulletin Board, an automated quotation service, made available through, and governed by, the NASDAQ system. Prices presented in the table below are bid prices between broker-dealers which do not include retail mark-ups or mark-downs or any commission to the broker-dealer. The published bid prices do not necessarily reflect prices in actual transactions. Cash dividends paid for 2001 and 2000 are provided in the table below. 2001 Dividends Quarter High Low per share 2001 2000 ---- ---- Dividends Dividends Quarter High Low per share Quarter High Low per share - ------- ---- --- --------- ------- ---- --- --------- First $23.17 $22.72 First $30.00 $28.12 $.45 Second 26.75 23.17 $.39 Second 28.12 24.75 .37 Third 28.90 26.75 Third 24.75 23.40 Fourth 29.00 28.10 .41 Fourth 23.40 22.50 .39 For further information, we refer you to: Ferris Baker Watts, Inc. 100 Light Street Baltimore, MD 21202 (800) 638-7411 F.J. Morrissey & Co., Inc. 1700 Market St., Suite 1420 Philadelphia, PA 19103-3913 (800) 842-8928 Ryan, Beck & Co. 150 Monument Road, Suite 106 Bala Cynwyd, PA 19004 (800) 223-8969 Janney, Montgomery, Scott, Inc. 48 E. Market St., P.O. Box 2246 York, PA 17405-2246 (717) 845-5611 DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN Information regarding the Corporation's Dividend Reinvestment and Stock Purchase Plan may be obtained by calling (717) 436-8211 or by writing to: Ms. Linda L. Engle Juniata Valley Financial Corp. P.O. Box 66 Mifflintown, PA 17059 DIVIDEND DIRECT DEPOSIT PROGRAM Juniata Valley Financial Corp. now offers a dividend direct deposit program whereby shareholders with registered stock in their own names may choose to have their dividends deposited directly into the bank account of their choice on dividend payment date. Information concerning this optional program is available by calling (717) 436-8211 or writing to: Ms. Linda L. Engle Juniata Valley Financial Corp. P.O. Box 66 Mifflintown, PA 17059 - -2- [JUNIATA VALLEY LETTERHEAD GRAPHIC OMITTED] To Our Shareholders, An uncertain economy, a volatile stock market, eleven short term interest rate reductions, and the horrific events of September 11 were just some of the challenges faced by our industry in the year 2001. In addition to these challenges, the year also provided your Bank with the opportunity to continue to develop our goal of becoming a one stop provider of financial services. The development of a new deposit product, enhancements to existing products, and the overwhelming success of our alternative investment program are just a few examples of our improvement in our quest to become a one stop provider of financial services. In September we installed our seventh ATM. This ATM is a drive-up ATM located at our Mt. View Office. This machine provides our customers access to cash at a very convenient location. Initial usage results at this machine during the 4th quarter of 2001 were very encouraging. In November we opened a Loan Production Office in State College. We have an opportunity to grow our loan portfolio as well as increase our non-interest income by generating good quality loans that correspond to the lending policies and practices of the Bank. Again, the initial results of this venture are very encouraging. The year 2001 marked improved performance over 2000 for the Juniata Valley Financial Corp. As a result of improvement in other income, net income increased 5.8% to $4,642,000 from $4,387,000. Increases in other income were realized by increased income from the Trust Division, service fees, bank-owned life insurance, and in certain non-recurring items included in the other income category. Total assets increased 6.5% to $356,757,000 from $334,914,000, an increase of $21,843,000. Fueled in part by the uncertain economy, and the volatile stock market, deposits increased 6.4% to $305,468,000 from $287,220,000. Although 2001 was a turbulent year, the Bank showed a modest loan growth of 3.7%. This increase brought loan outstandings to a record level of $227,998,000 from $219,819,000. As a result of the growth in loans, deposits, and continued improvement in our other income categories, earnings per share increased 8.3% from $1.81 in 2000 to $1.96 in 2001. Additionally, return on average assets (ROAA) improved from 1.31% in 2000 to 1.33% in 2001, and return on average equity (ROAE) improved from 10.42% in 2000 to 10.47% in 2001. We would like to take this opportunity to thank John M. "Jack" Wilson for his years of dedicated service to the Bank. Mr. Wilson retired as a director in October 2001. His loyalty and commitment will be missed. As always, we would like to thank you, our shareholders, for your continued loyalty and support. Further, we want to assure you that the officers, directors and employees will continue to work diligently to ensure that the Juniata Valley Financial Corp. continues to be a quality financial institution. Sincerely, /s/ Francis J. Evanitsky ------------------------------------ Francis J. Evanitsky President and CEO -3- JUNIATA VALLEY FINANCIAL CORP. OFFICERS MARTIN L. DREIBELBIS RONALD H. WITHERITE Chairman Vice Chairman, Secretary FRANCIS J. EVANITSKY LINDA L. ENGLE President Treasurer DIRECTORS JOE E. BENNER ROBERT K. METZ, JR. Owner, Benner Automotive Retired President, Metz Poultry Farms, Inc. A. JEROME COOK DALE G. NACE Retired President, The Juniata Valley Bank Owner, Glenn Nace Plumbing & Heating; GlenDale Storage MARTIN L. DREIBELBIS Chairman, Self-Employed, Petroleum Consultant JOHN A. RENNINGER President, A. D. Renninger FRANCIS J. EVANITSKY Lumber Company President & CEO, The Juniata Valley Bank RICHARD M. SCANLON, DMD PHILIP E. GINGERICH, JR. Self-Employed, Dentist President, Central Insurers Group, Inc. HAROLD B. SHEARER MARSHALL L. HARTMAN Retired, Self-employed, Farmer Owner, Traditions, Ltd. JAN G. SNEDEKER DON E. HAUBERT President, Snedeker Oil Co., Inc. President, Haubert Homes, Inc. RONALD H. WITHERITE TIMOTHY I. HAVICE Owner, Ron's Fruit Market, Inc. Owner, T.I. Havice, Developer CHARLES L. HERSHBERGER President, Hoenstine Funeral Homes, Inc. NOTE: Above Directors also comprise the Board of Directors for The Juniata Valley Bank - -4- ADVISORY BOARD MEMBERS MILLERSTOWN OFFICE MONUMENT SQUARE /WAL-MART OFFICES R. Franklin Campbell William H. Bradford Lowell R. Frantz, C.L.U. William R. Carter Gregory J. Gordon Lee Ellen Foose Gerald M. Lyter Sharon Havice James A. Witmer Harry F. Stimely Gary G. Wright Frank A. Zampelli PORT ROYAL OFFICE GARDENVIEW OFFICE Kim Bomberger David B. Esh Larry B. Cottrill, Jr. M. Randall French Richard J. Junk H. Ross Harshbarger N. Jeffrey Leonard Donald R. Hartzler Dennis A. Long Jerry L. Wagner MCALISTERVILLE OFFICE MARKET STREET/WATER STREET OFFICES Mark Apple George W. Anderson M. Richard Dimm Catherine J. Laub Clair Ehrenzeller Susan M. McCartney Samuel E. Knouse J. Neal Shawver Joseph D. Ritzman Steve R. Watson Richard J. Sankey BLAIRS MILLS OFFICE BURNHAM OFFICE Robert G. Allison Mark S. Elsesser Wayde H. Cisney Daniel B. Firth William R. Goshorn Leann M. Fisher C. Roger Searer David E. Walker Clair L. Yohn -5- THE JUNIATA VALLEY BANK OFFICERS A Wholly-Owned Subsidiary of Juniata Valley Financial Corp. MIFFLINTOWN OFFICE Francis J. Evanitsky-----------------------------------------President & C.E.O. Linda L. Engle---------------------------------Executive Vice President, C.F.O. Betty D. Ryan--------------------------Vice President, Community Office Manager Lou Ann Wilson-------------------------------Vice President, Compliance Officer Paul M. Lipka-----------------------Assistant Vice President, Marketing Officer Judy R. Robinson--------------------------------------------Executive Secretary ADMINISTRATION Donald L. Musser---------Sr. Vice President, Community Banking Division Manager Pamela S. Eberman--------------------Sr. Vice President, Human Resource Manager CONTROLLER Kristi J. Burdge-----------------------------------------------------Controller Anna Mae Peoples---------------------------Vice President, Assistant Controller LOANS Edward L. Kauffman--------------------Sr. Vice President, Loan Division Manager Robert G. Dillon------------Vice President, Sr. Loan Officer/Collection Manager Scott E. Nace-----------------------Vice President, Loan Administration Manager David A. Pecht-----------------------Vice President, Secondary Mortgage Manager Kurt L. McKinney, Jr.-----------Vice President, Sr. Loan Officer Market Manager R. Jack Morgan-----------------------------------------------------Loan Officer John B. Zavacky-------------------------------------Loan Administration Officer OPERATIONS Judy R. Aumiller----------------Sr. Vice President, Operations Division Manager Kathy D. Hutchinson-------------Vice President, Data/Deposit Operations Manager Deborah A. Sheaffer--------------------------Vice President, Operations Officer Sherise Pelizzari------------------Assistant Vice President, Operations Manager S. Marlene Hubler-----------------------------------Computer Operations Manager TRUST James C. Dillman---------------------Sr. Vice President, Trust Division Manager Cynthia L. Williams------------------------------ Vice President, Trust Officer BLAIRS MILLS OFFICE C. Roger Searer------------------------Vice President, Community Office Manager Wanda K. Rowles----------------------------------------Customer Service Officer BURNHAM OFFICE Leann M. Fisher------------------------Vice President, Community Office Manager GARDENVIEW OFFICE M. Randall French----------------------Vice President, Community Office Manager Christine L. Searer------------------------------------Customer Service Officer MARKET STREET OFFICE J. Neal Shawver------------------------Vice President, Community Office Manager Susan C. Mayer-----------------------------------------Customer Service Officer Winston L. Libby-------------------------------------Financial Services Officer MCALISTERVILLE OFFICE Joseph D. Ritzman----------------------Vice President, Community Office Manager Leslie A. Miller---------------------------------------Customer Service Officer MILLERSTOWN OFFICE James A. Witmer------------------------Vice President, Community Office Manager Barbara I. Seaman--------------------------------------Customer Service Officer MONUMENT SQUARE OFFICE Lee Ellen Foose------------------------Vice President, Community Office Manager Suzanne Booher-----------------------------------------Customer Service Officer MOUNTAIN VIEW OFFICE Brenda A. Brubaker-------------------------------------Community Office Manager PORT ROYAL OFFICE Larry B. Cottrill, Jr.-----------------Vice President, Community Office Manager Lona Rae Hawthorne-------------------------------------Customer Service Officer WAL-MART SUPERCENTER OFFICE Christine L. Weyer-------------------------------------Community Office Manager Tammy L. Miller----------------------------------------Customer Service Officer WATER STREET OFFICE Catherine J. Laub----------------------Vice President, Community Office Manager - -6- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK BUSINESS DESCRIPTION OF BUSINESS On April 19,1983, the shareholders of The Juniata Valley Bank (The Bank) approved a plan of merger and reorganization. The plan was approved by the various regulatory agencies on June 7, 1983 and the Juniata Valley Financial Corp., a one bank holding company, registered under the Bank Holding Company Act of 1956, as amended, was organized. The Bank is the oldest independent commercial bank in Juniata and Mifflin County having originated under a state bank charter in 1867. The Juniata Valley Bank operates twelve branch banking offices, two trust service offices, and one loan production office. At December 31, 2001, the Bank had 135 full-time equivalent employees. The Bank is engaged in commercial banking and trust business as authorized by the Pennsylvania Banking Code of 1965. This includes accepting time and demand deposits, making secured and unsecured commercial and consumer loans, financing commercial transactions, making construction and mortgage loans, and administering corporate, pension and personal trust services. The Bank provides its services to individuals, corporations, partnerships, associations, municipalities and other governmental bodies. As of December 31, 2001, the Bank had four offices in Juniata County, one office in Perry County, six offices in Mifflin County, one office in Huntingdon County, and a loan production office in Centre County. COMPETITION The Bank's principal market area includes all of Mifflin and Juniata Counties, and portions of Perry, Huntingdon, Centre, Franklin and Snyder Counties. There are 15 commercial banks which are headquartered or have branch offices located within the Bank's market area which the Bank considers its primary competitors. Of the 15 commercial banks with operations in the Bank's market area, the Bank ranked third in assets as of December 31, 2001. Additionally, the Bank has been subjected to competition from non-bank firms, such as credit unions, brokerage firms, insurance companies, mutual fund companies, consumer finance and credit card firms, retail and manufacturing conglomerates, and other firms providing financial services and credit to customers. Although many non-bank industries now offer services traditionally provided only by banks, banks are constrained by costly regulations and time-worn laws to compete effectively against non-bank providers of financial services. However, the Bank strives to remain competitive with respect to interest rates, service fees and service quality in order to achieve continued growth and success in its market. The Bank also continues to develop and strengthen its strong ties to the communities it serves, relying on the unique and strong relationship that a community bank has with its customers and community by providing excellent, personal customer service. The deposit base of The Juniata Valley Bank is such that the loss of one depositor or a related group of depositors would not have a dramatically adverse effect on the Bank's business. In addition, the loan portfolio is very well diversified, so that one industry or group or related industries does not comprise a material portion of total loans outstanding. The Bank's business is not seasonal, nor does it have any risks attendant to foreign sources. SUPERVISION AND REGULATION Juniata Valley Financial Corp. operates in a highly regulated industry, and thus may be affected by changes in state and federal regulations and legislation. As a registered bank holding company under the Bank Holding Company Act of 1956, as amended (the Act), the Corporation is subject to supervision and examination by the Board of Governors of the Federal Reserve System and is required to file with the Federal Reserve Board quarterly reports and information regarding its business operations and those of its subsidiary. The Act requires the Corporation to obtain Federal Reserve approval before: acquiring more than five percent ownership interest in any class of the voting securities of any bank; acquiring all or substantially all of the assets of a bank; or, merging or consolidating with another bank holding company. In addition, the Act prohibits a bank holding company from acquiring the assets, or more than five percent of the voting securities, of a bank located in another state, unless such acquisition is specifically authorized by the statutes of the state in which the bank is located. New banking legislation passed in November of 1999, modifies the 43-year old Bank Holding Company Act of 1956 to permit a Bank Holding Company that owns a commercial bank to engage in any type of financial activity. The commercial bank has to be well-capitalized, well-managed and CRA-rated satisfactory or better. Financial activities include securities, insurance, merchant banking/equity investment, financial in nature, and complimentary activities. -7- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK BUSINESS SUPERVISION AND REGULATION (CONTINUED) The deposits of The Juniata Valley Bank are insured by the Bank Insurance Fund of the Federal Deposit Insurance Corporation (FDIC). Consequently, the Bank is subject to regulations and reviews under the provisions of the Federal Deposit Insurance Act, but the primary regulatory body is the Pennsylvania Department of Banking. The Pennsylvania Department of Banking conducts regular reviews which have resulted in satisfactory evaluations to date. In 1991, the Federal Deposit Insurance Corporation Act (FDICIA) was signed into law. FDICIA established five different levels of capitalization of financial institutions, with prompt corrective actions and significant operational restrictions imposed on institutions that are capital deficient. The five categories are: well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized. To be considered well capitalized, an institution must have a total risk-based capital ratio of at least 10%, a Tier I risk based capital ratio of at least 6%, a leverage capital ratio of 5% and must not be subject to any order or directive requiring the institution to improve its capital level. An institution falls within the adequately capitalized category if it has a total risk-based capital ratio of at least 8%, a Tier I risk-based capital ratio of at least 4%, and a leverage capital ratio of at least 4%. Institutions with lower capital levels are deemed to be undercapitalized, significantly undercapitalized, or critically undercapitalized, depending on their actual capital levels. The following table sets forth the computation of the Bank's regulatory capital ratios. The Bank exceeded the minimum capital levels of the well capitalized category. The Corporation's ratios were not materially different from those of the Bank. December 31, ------------ 2001 2000 1999 ---- ---- ---- Risk-weighted assets ratio: Tier I 18.46% 18.46% 19.59% Total 19.56% 19.59% 20.76% Total assets leverage ratio: Tier I 11.98% 12.30% 12.33% SECURITIES PORTFOLIO The following table sets forth the carrying amount of securities at the dates indicated: December 31, ------------ 2001 2000 1999 ---- ---- ---- (In Thousands) Available for sale securities (at fair value): U.S. Treasury and other U.S. government obligations $30,960 $ 6,035 $ 6,441 States and political subdivisions 15,691 15,341 23,448 Other corporate 3,116 5,042 5,992 Mortgage-backed 3,951 5,823 7,244 Equity 945 905 800 ------- ------- -------- 54,663 33,146 43,925 ------- ------- -------- Held to maturity securities (at amortized cost): U.S. Treasury and other U.S. government obligations 3,461 13,071 14,448 States and political subdivisions 26,742 27,201 30,223 Other corporate 8,409 10,968 14,879 ------- ------- -------- 38,612 51,240 59,550 ------- ------- -------- Total securities $93,275 $84,386 $103,475 ======= ======= ======== - -8- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK BUSINESS SECURITIES PORTFOLIO (CONTINUED) The following table sets forth the maturities of securities at December 31, 2001 and the weighted average yields of such securities by contractual maturities or call dates. Yields on obligations of state and political subdivisions are not presented on a tax equivalent basis. Mortgage-backed securities with contractual maturities after ten years from December 31, 2001, feature regular repayments of principal and average lives of three to five years. Maturing -------- After One After Five But Within But Within After Within One Year Five Years Ten Years Ten Years Amount Yield Amount Yield Amount Yield Amount Yield ------ ----- ------ ----- ------ ----- ------ ----- (In Thousands) Available for sale: U.S. Treasury and other U.S. government agencies $ 614 6.39% $27,307 5.09% $3,013 5.76% $ 26 4.69% State and political subdivisions 5,864 4.81 6,026 4.40 3,551 3.66 250 6.50 Other corporate 1,041 6.77 2,075 6.13 -- -- -- -- Mortgage-backed -- -- 12 8.80 96 7.74 3,843 7.03 ------- ------- ------ ------ 7,519 35,420 6,660 4,119 ------- ------- ------ ------ Held to maturity: U.S. Treasury and other U.S. government agencies -- -- 3,461 5.40 -- -- -- -- State and political subdivisions 5,794 4.13 20,681 3.99 -- -- 267 4.25 Other corporate 2,557 6.11 5,352 5.91 -- -- 500 5.90 ------- ------- ------ ------ 8,351 29,494 -- 767 ------- ------- ------ ------ Total $15,870 $64,914 $6,660 $4,886 ======= ======= ====== ====== Securities classified as available for sale are those debt securities that the Bank intends to hold for an indefinite period of time, but not necessarily to maturity. Securities available for sale are carried at fair value. Unrealized gains or losses are reported in other comprehensive income, net of the related deferred tax effect. Securities classified as held to maturity are those debt securities the Bank has both the intent and ability to hold to maturity. These securities are carried at cost adjusted for amortization of premium and accretion of discount. -9- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK BUSINESS LOAN PORTFOLIO The highest loan concentration by activity type continues to be the trucking industry. The percentage of these loans to total loans was approximately four percent at the latest review. This industry services many other industries and no potential significant risk is evident. As with any lending activity, potential risk exists. Loans in the commercial, financial and industrial category have remained relatively constant as a percentage of total loans. The Bank prudently evaluates loans in this category and generally secures such lending with collateral consisting of real and/or tangible personal property. All lending is granted on a variable rate basis except consumer loans which are fixed rate. Consumer loans, consisting of approximately twenty-three percent of total loans, average a three to four year repayment period and are fixed at such a rate that rate sensitivity is considered to be limited. The following table shows the Bank's loan distribution at the end of each of the last five years: December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In Thousands) Commercial, financial and agricultural $ 24,548 $ 23,327 $ 18,784 $ 15,047 $ 16,110 Real estate mortgage 151,369 142,897 139,163 133,047 142,216 Consumer (less unearned discount) 51,733 52,991 46,419 41,049 32,428 All other 2,874 3,101 2,456 2,819 2,945 -------- -------- -------- -------- -------- Total loans $230,524 $222,316 $206,822 $191,962 $193,699 ======== ======== ======== ======== ======== This table shows the maturity of loans (excluding residential mortgages of 1-4 family residences and consumer loans) outstanding as of December 31, 2001. Maturing Maturing Maturing During From 2003 After 2002 Thru 2006 2005 Total ---- --------- ---- ----- (In Thousands) Commercial, agricultural and financial $ 24,548 $ -- $ -- $ 24,548 All other 2,874 -- -- 2,874 -------- -------- -------- -------- Total loans $ 27,422 $ -- $ -- $ 27,422 ======== ======== ======== ======== - -10- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK BUSINESS NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS The following table summarizes the Bank's nonaccrual, past due and restructured loans: December 31, ------------ 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In Thousands) Average loans outstanding $223,487 $212,270 $193,305 $189,778 $186,510 ======== ======== ======== ======== ======== Nonaccrual loans $ 934 $ 364 $ 164 $ -- $ 239 Accruing loans past due 90 days or more 811 440 262 386 395 Restructured loans -- -- -- -- 173 -------- -------- -------- -------- -------- Total $ 1,745 $ 804 $ 426 $ 386 $ 807 ======== ======== ======== ======== ======== Ratio of non-performing loans to average loans outstanding .78% .39% .22% .20% .43% Information with respect to nonaccrual and restructured loans at December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In Thousands) Nonaccrual loans $ 934 $ 364 $ 164 $ -- $ 239 Restructured loans -- -- -- -- 173 Interest income that would have been recorded under original terms 84 38 16 -- 20 Interest income recorded during the period -- -- -- -- 24 Commitments to lend additional funds -- -- -- -- -- A loan is generally considered impaired when it is probable the Bank will be unable to collect all contractual principal and interest payments due in accordance with the terms of the loan agreement. The accrual of interest is discontinued when the contractual payment of principal and interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed 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 judgement as to the collectibility of principal. Generally, loans are restored to accrual status when the obligation is brought current, 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. -11- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK BUSINESS SUMMARY OF LOAN LOSS EXPERIENCE The following table summarizes the Bank's loan loss experience for each of the five years ended December 31, 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In Thousands) Average loans outstanding $223,487 $212,270 $193,305 $189,778 $186,510 ======== ======== ======== ======== ======== Allowance for loan loss at January 1 $ 2,497 $ 2,486 $ 2,477 $ 2,390 $ 2,350 Losses charged to allowance Commercial 58 155 2 37 60 Real estate 51 -- 27 13 12 Consumer 128 89 100 93 161 -------- -------- -------- -------- -------- 237 244 129 143 233 -------- -------- -------- -------- -------- Recoveries credited to allowance Commercial 2 13 -- 1 17 Real estate 19 -- -- -- -- Consumer 5 12 18 19 36 -------- -------- -------- -------- -------- 26 25 18 20 53 -------- -------- -------- -------- -------- Net charge-offs 211 219 111 123 180 Provision for possible loan losses 240 230 120 210 220 -------- -------- -------- -------- -------- Allowance for loan losses at December 31 $ 2,526 $ 2,497 $ 2,486 $ 2,477 $ 2,390 ======== ======== ======== ======== ======== Ratio of net charge-offs to average loans outstanding .09% .10% .06% .06% .10% The amount charged to operations and the related balance in the allowance for loan losses is based upon periodic evaluations of the loan portfolio by management. These evaluations consider several factors including, but not limited to, general economic conditions, loan portfolio composition, prior loan loss experience and management's estimate of future potential losses. Management maintains an allowance for loan losses that it considers adequate based on the evaluation process that it performs on a quarterly basis. As part of this process, management considers it appropriate to maintain a portion of the allowance that is based on credit quality trends, loan volume, current economic trends and other uncertainties. This portion of the allowance for loan losses is reflected as the unallocated portion in the table below that indicates the distribution of the allowance as of the end of each of the last five years. 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- (In Thousands) % OF % of % of % of % of AMOUNT LOAN Amount Loan Amount Loan Amount Loan Amount Loan ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- Commercial $ 970 11.9% $ 670 12.4% $ 577 10.3% $ 537 9.3% $ 482 9.9% Real estate 747 65.7 472 64.3 468 67.3 483 69.3 483 73.4 Consumer 656 22.4 770 23.3 750 22.4 741 21.4 694 16.7 Unallocated 153 -- 585 -- 691 -- 716 -- 731 -- ------ ---- ------ ---- ------ ---- ------ ---- ------ ---- Total $2,526 100% $2,497 100% $2,486 100% $2,477 100% $2,390 100% ====== ==== ====== ==== ====== ==== ====== ==== ====== ==== - -12- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK BUSINESS SUMMARY OF LOAN LOSS EXPERIENCE (CONTINUED) While loans secured by real estate mortgages comprise greater than 65% of the total loan portfolio, historically these accounts have resulted in marginal loss. Therefore management's evaluation of the loan portfolio indicates a relatively low allocation of the allowance for this category of loans. In addition to management's regular reviews, the results of normal examination of the loan portfolio by representatives of regulatory agencies are also considered in determining the level at which the allowance should be maintained. There are no material loans classified for regulatory purposes as loss, doubtful, substandard or special mention which management expects to impact future operating results, liquidity or capital resources. Additionally, management is not aware of any information that would give serious doubt as to the ability of its borrowers to substantially comply with loan repayment terms. Highly leveraged transactions (HLTS) generally include loans and commitments made in connection with recapitalizations, acquisitions and leveraged buyouts, and result in the borrowers debt-to-total assets ratio exceeding 75%. The Bank has no loans at December 31, 2001, that qualified as HLTS. -13- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK BUSINESS DEPOSITS The average daily amount of deposits and rates paid on such deposits is summarized for December 31, in the following table: 2001 2000 1999 ---- ---- ---- AMOUNT RATE Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- (In Thousands) Non-interest bearing demand $ 36,623 $ 34,827 $ 34,728 Interest bearing demand 50,056 2.36% 46,221 2.95% 46,212 2.67% Savings deposits 31,204 2.44 31,033 2.67 33,494 2.72 Time deposits 181,085 5.51 175,535 5.52 175,455 5.24 ------- ------- ------- Total $298,968 $287,616 $289,889 ======== ======== ======== As of December 31, 2001, certificates of deposit outstanding in an individual amount of $100,000 or more totalled $31,271,000. The maturity of these certificates of deposits is as follows: Over 3 Over 6 3 months through 6 through 12 Over 12 or less months months months ------- ------ ------ ------ (In Thousands) $10,504 $3,617 $4,299 $12,851 ======= ====== ====== ======= - -14- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK BUSINESS QUARTERLY RESULTS OF OPERATIONS Three Months Ended March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- (In Thousands, except per share data) FOR THE YEAR 2001 Interest income $6,311 $6,172 $6,192 $5,966 Interest expense (3,073) (3,073) (3,029) (2,754) ------ ------ ------ ------ Net interest income 3,238 3,099 3,163 3,212 Provision for loan losses (60) (60) (60) (60) Other income 366 563 509 756 Other expenses (2,160) (2,145) (2,138) (2,153) ------ ------ ------ ------ Income before income taxes 1,384 1,457 1,474 1,755 Income taxes (294) (297) (352) (485) ------ ------ ------ ------ Net income $1,090 $1,160 $1,122 $1,270 ====== ====== ====== ====== Per-share data: Basic and diluted earnings $ .46 $ .49 $ .47 $ .54 Cash dividends -- .39 -- .41 Three Months Ended March 31 June 30 Sept. 30 Dec. 31 -------- ------- -------- ------- (In Thousands, except per share data) FOR THE YEAR 2000 Interest income $ 5,946 $ 6,094 $ 6,288 $ 6,351 Interest expense (2,785) (2,880) (3,064) (3,151) ------ ------ ------ ------ Net interest income 3,161 3,214 3,224 3,200 Provision for loan losses (45) (45) (45) (95) Other income 330 339 304 404 Other expenses (2,058) (2,023) (2,025) (2,078) ------ ------ ------ ------ Income before income taxes 1,388 1,485 1,458 1,431 Income taxes (360) (376) (336) (303) ------ ------ ------ ------ Net income $ 1,028 $ 1,109 $ 1,122 $ 1,128 ======= ======= ======= ======= Per-share data: Basic and diluted earnings $ .42 $ .46 $ .47 $ .46 Cash dividends .45 .37 -- .39 -15- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY THE JUNIATA VALLEY BANK FIVE YEAR FINANCIAL HIGHLIGHTS O SELECTED FINANCIAL DATA 2001 2000 1999 1998 1997 ---- ---- ---- ---- ---- BALANCE SHEET DATA (In Thousands) Assets $356,757 $334,914 $336,119 $343,857 $332,440 Deposits 305,468 287,221 283,350 293,890 285,138 Loans receivable, net 227,998 219,819 204,336 189,485 191,309 Securities 98,073 85,571 104,650 123,505 113,757 Stockholders' equity 45,326 43,082 43,255 45,980 42,695 Average equity 44,348 42,106 44,526 44,448 41,449 Average assets 348,331 334,685 339,364 338,295 327,068 EARNINGS DATA (In Thousands) Interest income $ 24,641 $ 24,679 $ 23,858 $ 24,864 $ 24,317 Interest expense 11,929 11,880 11,354 12,136 11,862 -------- -------- -------- -------- -------- Net interest income 12,712 12,799 12,504 12,728 12,455 Provision for loan losses 240 230 120 210 220 -------- -------- -------- -------- -------- Net interest income after provision for loan losses 12,472 12,569 12,384 12,518 12,235 Other income 2,194 1,377 1,286 1,182 1,273 Other expenses 8,596 8,184 8,032 7,986 7,531 -------- -------- -------- -------- -------- Income before income taxes 6,070 5,762 5,638 5,714 5,977 Federal income taxes 1,428 1,375 1,360 1,313 1,405 -------- -------- -------- -------- -------- Net income $ 4,642 $ 4,387 $ 4,278 $ 4,401 $ 4,572 ======== ======== ======== ======== ======== RATIOS Return on average assets 1.33% 1.31% 1.26% 1.30% 1.40% Return on average equity 10.47 10.42 9.61 9.90 11.03 Equity to assets (year end) 12.71 12.86 12.87 13.37 12.84 Loans to deposits (year end) 74.64 76.53 72.11 64.47 67.09 Dividend payout (percentage of income) 40.78 66.90 68.61 37.99 32.68 PER SHARE DATA Basic and diluted earnings 1.96 1.81 1.70 1.72 1.79 Cash dividends .80 1.21 1.16 .67 .60 Book value 19.28 19.90 19.35 19.73 18.43 Average shares outstanding 2,368,923 2,420,966 2,519,801 2,553,913 2,560,911 Approximate number of stockholders 1,719 1,725 1,696 1,607 1,603 - -16- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- FINANCIAL CONDITION - -------------------------------------------------------------------------------- SOURCES AND USES OF FUNDS TRENDS 2001 2000 1999 AVERAGE Increase (Decrease) Average Increase (Decrease) Average BALANCE Amount % Balance Amount % Balance ------- ------ --- ------- ------ --- ------- (Thousands of Dollars) Funding uses: Interest earning assets: Loans: Commercial $ 66,587 $ 1,843 2.85% $ 64,744 $ 6,058 10.32% $ 58,686 Mortgage 106,611 6,818 6.83 99,793 7,841 8.53 91,952 Consumer 50,289 2,556 5.35 47,733 5,066 11.87 42,667 -------- ------- -------- -------- -------- 223,487 11,217 5.28 212,270 18,965 9.81 193,305 Less: Allowance for loan losses (2,518) 1 .04 (2,519) (27) 1.08 (2,492) -------- ------- -------- -------- -------- 220,969 11,218 5.35 209,751 18,938 9.92 190,813 Interest bearing deposits with banks 1,114 442 65.77 672 5 .75 667 Securities 86,520 (12,276) (12.43) 98,796 (22,581) (18.60) 121,377 Funds sold 10,240 6,670 186.83 3,570 (1,985) (35.73) 5,555 -------- ------- -------- -------- -------- 97,874 (5,164) (5.01) 103,038 (24,561) (19.25) 127,599 Total interest earning assets 318,843 6,054 1.94 312,789 (5,623) 1.77 318,412 Other assets 29,488 7,592 34.67 21,896 944 4.51 20,952 -------- ------- -------- -------- -------- Total uses $348,331 $13,646 4.08 $334,685 $ (4,679) 1.38 $339,364 ======== ======= ======== ======== ======== Funding sources: Deposits: Demand $ 36,623 $ 1,796 5.16 $ 34,827 $ 99 .29 $ 34,728 Interest bearing demand 50,056 3,835 8.30 46,221 9 .02 46,212 Savings 31,204 171 .55 31,033 (2,461) 7.35 33,494 Time under $100,000 149,814 (612) (.41) 150,426 (49) (.03) 150,475 -------- ------- -------- -------- -------- Total core deposits 267,697 5,190 1.98 262,507 (2,402) (.91) 264,909 Time over $100,000 31,271 6,162 24.54 25,109 129 .52 24,980 -------- ------- -------- -------- -------- Total deposits 298,968 11,352 3.95 287,616 (2,273) (.78) 289,889 Other liabilities 4,994 31 .62 4,963 301 6.46 4,662 Short-term borrowings 21 21 100.00 -- (287) (100.00) 287 Stockholders' equity 44,348 2,242 5.32 42,106 (2,420) (5.44) 44,526 -------- ------- -------- -------- -------- Total sources $348,331 $13,646 4.08 $334,685 $ (4,679) (1.38) $339,364 ======== ======= ======== ======== ======== This discussion concerns Juniata Valley Financial Corp. (Corporation) and its wholly owned subsidiary The Juniata Valley Bank (Bank). The purpose is to focus on information concerning the Corporation financial condition and results of operations which is not readily apparent from the consolidated financial statements. In order to obtain a clear understanding of this discussion, the reader should reference the consolidated financial statements, the notes to the statements, and other financial information presented in this Annual Report. -17- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- FINANCIAL CONDITION (CONTINUED) - -------------------------------------------------------------------------------- FORWARD-LOOKING STATEMENTS The information contained in this Annual Report contains forward-looking statements (as defined in the Securities Exchange Act of 1934), including without limitation, statements as to the future loan and deposit volumes, the allowance and provision for possible loan losses, future interest rates and their effect on the Corporation's financial condition or results of operations, the classification of the 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 these forward-looking statements including without limitation, the effect of economic conditions and related uncertainties, the effect of interest rates on the Corporation, federal and state government regulation and competition. Certain of these risks, uncertainties and other factors are discussed in this Annual Report or on Form 10-K for the year ended December 31, 2001, a copy of which may be obtained from the Corporation upon request without charge. OVERVIEW The Corporation functions as a financial intermediary and therefore its financial condition is analyzed in terms of changes in its sources and uses of funds. Table 1 presents daily average balances, the dollar change, and percentage change for the past two years. This table is referenced for the discussion in this section. The Corporation's average assets experienced an increase during 2001, reaching the level of $348,331,000 an increase of $13,646,000 or 4.08% compared to 2000. From 1999 to 2000 the Corporation experienced a decline in assets of $4,679,000. The Corporation experienced an increase in average balances of loans of $11,218,000 or 5.28% from 2000 to 2001. This increase was not as large as the increase in 2000 over 1999 when loans grew by $18,938,000 or 9.81%. The decline in the average balance of securities of $12,276,000 or 12.43% was used to fund these loans. This occurred because normal funding sources in the way of average balances of core deposits increased by $5,190,000 or 1.98% from 2000 to 2001 but it was not enough to keep pace with loan demand. Securities declined from 1999 to 2000 by $22,581,000 or 18.60%. In 2001 as securities matured or were called, money was placed in overnight Federal Funds until loans closed or an appropriate investment security could be purchased. That is why Funds sold increased $6,670,000 or 186.83%. Other assets increased because of a $5,000,000 bank-owned life insurance purchase in the first quarter of 2001. The cash surrender value of this instrument is included in other assets and revenues generated are included in other income. The Corporation's funding sources have increased from 2000 to 2001 by $11,352,000 or 3.95%. Whereas, there was a decline from 1999 to 2000 of $2,273,000 or .78%. Core deposits grew by $5,190,000 in 2001 over 2000 with the largest growth coming in the interest-bearing demand deposits. Core deposits declined in 2000 over 1999 by $2,402,000. The largest decline came from savings deposits. Time deposits over $100,000 grew by $6,162,000 in 2001. In 2000 these time deposits grew by $129,000. The intense competition from banks and nonbanks in the market area was apparent in 2001 which lead to a decline in market share. - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- [NET INCOME GRAPHIC OMITTED] Juniata Valley Financial Corp. reported net income for 2001 of $4,642,000 which was $255,000 or 5.81% more than the $4,387,000 reported in 2000 and $364,000 or 8.51% more than the $4,278,000 reported in 1999. Basic and diluted earnings per share were $1.96 in 2001. This is an increase of $.15 from 2000 and an increase of $.26 over 1999. This increase in earnings per share is a result of both increased income but also a decline in weighted shares outstanding due to the stock repurchase program. - -18- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- The two most widely recognized performance ratios within the financial services industry are the return on average equity and return on average assets. The return on average equity ratio presents the net income to average equity maintained throughout the year. The return on average equity was 10.47% in 2001, compared to 10.42% in 2000 and 9.61% in 1999. [RETURN ON AVERAGE EQUITY GRAPHIC OMITTED] [REETURN ON AVERAGE ASSETS GRAPHIC OMITTED] Return on average assets presents the income for the year compared to the average assets maintained throughout the year. The return on average assets was 1.33% in 2001 compared to 1.31% in 2000 and 1.26% in 1999. In the spring of 2001 the Board of Directors declared a 10% stock dividend. Per share data has been adjusted in prior years to reflect this event. On a per share basis $.80 was paid in 2001 down 33.88% from the $1.21 paid in 2000 and down 31.03% from the $1.16 paid in 1999. The increase of cash dividends in 2000 and 1999 was to help increase the return on equity ratio by returning cash value to stockholders. The Board of Directors declared a $.45 special dividend to be paid in the spring of 1999 and 2000. [CASH DIVIDENDS PER SHARE GRAPHIC OMITTED] [ASSETS GRAPHIC OMITTED] The Corporation had an increase in total assets of $21,843,000 or 6.52% at December 31, 2001. Assets for the year ended December 31, 2001, were $356,757,000 compared to assets of $334,914,000 at December 31, 2000. -19- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- The Juniata Valley Bank's allowance for loan losses was $2,526,000 in 2001, $2,497,000 in 2000 and $2,486,000 in 1999. The provision provided in each of those years was $240,000 in 2001, $230,000 in 2000 and $120,000 in 1999. The provision for loan losses exceeded net charge-offs by 13.74%, 5.02%, and 8.11% in 2001, 2000 and 1999, respectively. In 2001 net charge-offs were .09% of average loans outstanding. In 2000 and 1999 net charge-offs were .10% and .06%, respectively of average loans outstanding each year. Other income increased $817,000 or 59.33% from 2000 to 2001. From 1999 to 2000 the increase was $91,000 or 7.08%. The trust department income increased $48,000 in 2001 over 2000 and $12,000 in 2000 over 1999. This was a result of increased estate settlements both in number and size. Customer service fees increased $76,000 for 2001 compared to 2000 and $57,000 for 2000 compared to 1999. The increases in customer service fees can be attributed to an increase in volume and not as a result of increased fees. Because there were no realized gains on the sale of securities in 2001, this created a decrease of $5,000 in 2001 over 2000 and a decrease of $39,000 occurred in net realized gains on sales of securities in 2000 over 1999. The securities were sold in the fourth quarter of 1999 and were reflective of the higher interest rate environment during this time period. Income on life insurance increased by $287,000 in 2001 over 2000. The income on life insurance for 2000 and 1999 was the same. The increase in income on life insurance is from a new bank-owned life insurance plan put into place in 2001 that covers Directors retirement and key employees that are not covered by another plan. The plan also offers life insurance for Director's and key employees. The other income increased in 2001 over 2000 by $411,000. This increase can be attributed to $266,000 in a settlement of a long-standing litigation process in which the Bank was the plaintiff. The Bank also experienced an increase of $107,000 in alternative investment commissions. The increase in 2000 over 1999 was $61,000. This increase can be attributed to a $30,000 transfer agent fee and $20,000 interchange fee on debit cards. Both increases in 2000 can be attributed to increased usage as opposed to increased fees. The management of The Juniata Valley Bank seeks product and service improvements that both strengthen existing customer relationships and help attract new ones. During 1997, sales of mutual funds were introduced through a joint marketing arrangement with T.H.E. Financial for those customers desiring this type of alternative investment. Fee income derived from the sale of this product in 2001 was $187,000. Other expenses increased $412,000 or 5.03% over 2000, compared to an increase of $152,000 from 1999 to 2000. Salaries and wages decreased $72,000 from 2000 to 2001. This compares to a decrease of $19,000 from 1999 to 2000. An early retirement option was given and six employees took advantage of it in September 2000. Employee benefits decreased $67,000 from 2001 to 2000. From 1999 to 2000 the Bank experienced an increase of $116,000. This was due to price changes of benefits provided as opposed to changed benefits. Occupancy expense increased by $77,000 and can be attributed in the Bank's new operations' center in 2001 over 2000. Occupancy expense was virtually unchanged between 1999 and 2000. Equipment expense increased $229,000 in 2001. The increase was $42,000 in 2000 over 1999. The increases in equipment expenses are a direct result of increased technology being offered and additional equipment needed to offer the technology. Directors' compensation increased by $90,000 which was a result of the new retirement plan put in place in 2001. Directors' expense declined $50,000 in 2000 over 1999 because of deferred compensation arrangements reaching maturity. Taxes, other than income is an increase in the Pennsylvania shares tax of $20,000 in 2001 over 2000 and $27,000 from 1999 to 2000. The $135,000 increase in 2001 over 2000 in other expenses can be attributed to $68,000 paid for outsourcing the internal audit, compliance, and loan review function, $42,000 increase in postage, and $25,000 for redesigning the wage and salary administration. The $37,000 increase in other expenses for the year 2000 can be attributed to an increase in postage. On November 12, 1999, The Gramm-Leach-Bliley Act was signed into law. The Act permits commercial banks to affiliate with investment banks. It permits bank holding companies to engage in any type of financial activity which includes, securities, insurance, merchant banking/equity investment, financial in nature, and complimentary activities. The merchant banking provisions will 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 of activity currently recognized as financial or incidental or complementary to a financial activity. The commercial bank has to be well-capitalized, well-managed and CRA-rated satisfactory or better. The Act also allows subsidiaries of banks to engage in a broad range of financial activities that are not permitted for banks themselves. In light of this new legislation, The Corporation and The Juniata Valley Bank will evaluate new financial activities that would complement the products already offered to enhance non-interest income. - -20- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- NET INTEREST INCOME - -------------------------------------------------------------------------------- Net interest income is the most significant contributor to the Corporation's net income. During 2001, net interest income decreased .68% to $12,712,000 compared to an increase of 2.36% from 1999 to 2000. Table 3 shows the interest income, interest expense and net interest income with the percentage change between the years. Table 2 presents average balances, interest income and expense and yields earned or paid. This table summarizes the components of the net interest income growth. Interest earning assets increased $6,053,000 or 1.92% in 2001. In 2000 over 1999 there was a decrease of $5,596,000. The largest contributor to interest income is loans. The yield on loans has declined from 2000 to 2001 by .16%. From 1999 to 2000 the rate increased .20%. The yield on taxable securities decreased .26% in 2001 and the yield on tax free securities decreased .12%. In 2000 the yield on taxable securities increased .05% and tax free securities decreased .10%. Federal funds sold had a decrease of 4.24% in 2001 over 2000 while the Corporation had an increase of 2.43% from 1999 to 2000. The overall yield on these interest earning assets for 2001 was a decrease of .16%. This followed an increase of .40% from 1999 to 2000. Interest bearing liabilities increased $9,577,000 or 3.79% for 2001. There was a decrease of $2,659,000 from 1999 to 2000. Time deposits increased by $5,550,000 from 2000 to 2001 and demand deposits bearing interest increased $3,835,000. Rates paid decreased by .15% in 2001. There was an increase in rates paid from 1999 to 2000 of .26%. The Corporation's net spread was 3.12% in 2001 down slightly from the 3.13% in 2000 but more than the 2.99% in 1999. Interest spread measures the absolute difference between average rates earned and average rates paid while net interest margin reflects the relationship of interest income to earning assets versus interest expense to earning assets. The Corporation's net interest margin was 3.96% for 2001 compared to 4.06% in 2000 and 3.89% in 1999. From Table 4 it can be seen that the decreases in net interest income of $87,000 during 2001 were affected by increases in volume of $303,000 however, and not surprisingly decreases in rates which declined by $390,000. Volume increased while rates decreased on interest income which is the same scenario with interest expense in 2001. Loans added $1,005,000 in volume but had a $340,000 decrease in rates. Securities had both a decrease in volume and rate. Interest expense experienced a small increase in volume in all categories and a small decline in rates in all categories also. In 2000 an increase in net interest income was also due to an increase in volume and a decrease in rates. Interest income had both an increase in volume and rate while interest expense experienced a decrease in volume and an increase in rates. -21- - -------------------------------------------------------------------------------- TABLE 2 - ANALYSIS OF NET INTEREST INCOME - -------------------------------------------------------------------------------- Table 2 presents average balances, interest income and expense and the yields earned or paid on these assets and liabilities. Yields on tax exempt securities are not presented on a tax equivalent basis. Nonaccrual loans and unrealized gains on securities are included in "Other assets" under "Noninterest earning assets". 2001 INTEREST AVERAGE INCOME AVERAGE BALANCES (EXPENSE) YIELD/RATE -------- --------- ---------- (IN THOUSANDS) INTEREST EARNING ASSETS Interest bearing deposits in other banks $ 1,114 $ 53 4.76% Securities (taxable) 44,691 2,692 6.02 Securities (tax exempt) 41,829 1,555 3.72 Federal funds sold 10,240 412 4.02 Loans 223,487 19,929 8.92 -------- --------- Total interest earning assets 321,361 24,641 7.67 ---- NON-INTEREST EARNING ASSETS Cash and due from banks 9,596 Other assets 19,892 Less: allowance for loan losses (2,518) -------- Total assets $348,331 ======== INTEREST BEARING LIABILITIES Demand deposits bearing interest $ 50,056 (1,183) 2.36% Savings deposits 31,204 (760) 2.44 Time deposits 181,085 (9,985) 5.51 Short-term borrowings 21 (1) 4.76 -------- --------- Total interest bearing liabilities 262,366 (11,929) 4.55 --------- ---- NON-INTEREST BEARING LIABILITIES Demand deposits 36,623 Other liabilities 4,994 STOCKHOLDERS' EQUITY 44,348 -------- Total liabilities and stockholders' equity $348,331 ======== NET INTEREST INCOME/SPREAD $ 12,712 3.12% ======== ==== MARGIN ANALYSIS Interest income/ earning assets 7.67% Interest expense/earning assets 3.71 ---- Net interest margin 3.96% ==== - -22- - -------------------------------------------------------------------------------- TABLE 2 (CONTINUED) - -------------------------------------------------------------------------------- 2000 1999 Interest Interest Average Income Average Average Income Average Balances (Expense) Yield/Rate Balances (Expense) Yield/Rate -------- --------- ---------- -------- --------- ---------- (In Thousands) (In Thousands) $ 672 $ 48 7.14% $ 667 $ 44 6.60% 52,339 3,287 6.28 66,942 4,171 6.23 46,457 1,785 3.84 54,435 2,147 3.94 3,570 295 8.26 5,555 324 5.83 212,270 19,264 9.08 193,305 17,172 8.88 -------- -------- -------- -------- 315,308 24,679 7.83 320,904 23,858 7.43 ---- ---- 9,243 9,209 12,653 11,743 (2,519) (2,492) -------- -------- $334,685 $339,364 ======== ======== $ 46,221 (1,363) 2.95% $ 46,212 (1,233) 2.67% 31,033 (828) 2.67 33,494 (912) 2.72 175,535 (9,689) 5.52 175,455 (9,194) 5.24 -- -- -- 287 (15) 5.23 -------- -------- -------- -------- 252,789 (11,880) 4.70 255,448 (11,354) 4.44 -------- ---- -------- ---- 34,827 34,728 4,963 4,662 42,106 44,526 ------ ------ $334,685 $339,364 ======== ======== $ 12,799 3.13% $ 12,504 2.99% ======== ==== ======== ==== 7.83% 7.43% 3.77 3.54 ---- ---- 4.06% 3.89% ==== ==== -23- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- TABLE 3 --- NET INTEREST INCOME - -------------------------------------------------------------------------------- Net interest income, defined as interest income less interest expense, is shown in the following table: 2001 % Change 2000 % Change 1999 ---- -------- ---- -------- ---- (In Thousands) Interest income $24,641 (.15)% $24,679 3.44% $23,858 Interest expense 11,929 .41 11,880 4.63 11,354 ------- ------- ------- Net interest income $12,712 (.68) $12,799 2.36 $12,504 ======= ======= ======= - -------------------------------------------------------------------------------- TABLE 4 - RATE-VOLUME ANALYSIS OF NET INTEREST INCOME - -------------------------------------------------------------------------------- Table 4 attributes increases and decreases in components of net interest income either to changes in average volume or to changes in average rates for interest earning assets and interest bearing liabilities. Numerous and simultaneous balance and rate changes occur during the year. The acmount of change that is not due solely to volume or tate is allocated roportionally to both. 2001/2000 Increase (Decrease) 2000/1999 Increase (Decrease) Due to Change in Due to Change in Volume Rate Net Volume Rate Net ------ ---- --- ------ ---- --- Interest bearing deposits in other banks $ 25 $ (20) $ 5 $ -- $ 4 $ 4 Securities (taxable) (465) (130) (595) (931) 47 (884) Securities (tax free) (173) (57) (230) (487) 125 (362) Federal funds sold 329 (212) 117 (63) 34 (29) Loans 1,005 (340) 665 2,188 (96) 2,092 ------ ----- ------ ------ ----- ------ Interest income 721 (759) (38) 707 114 821 ------ ----- ------ ------ ----- ------ Demand deposits bearing interest 107 (287) (180) -- 130 130 Savings deposits 4 (72) (68) (67) (17) (84) Time deposits 306 (10) 296 4 491 495 Short-term borrowings 1 -- 1 (15) -- (15) ------ ----- ------ ------ ----- ------ Interest expense 418 (369) 49 (78) 604 526 ------ ----- ------ ------ ----- ------ Increase (decrease) in net interest income $ 303 $(390) $ (87) $ 785 $(490) $ 295 ====== ===== ===== ====== ===== ====== - -------------------------------------------------------------------------------- LOAN PORTFOLIO - -------------------------------------------------------------------------------- [NET LOANS GRAPHIC OMITTED] At December 31, 2001, net loans increased $8,179,000 or 3.72% over 2000. This follows an increase in 2000 over 1999 in net loans of $15,483,000 or 7.58%. The loan to deposit ratio fluctuated throughout 2001; monthly averages were at a low in December of 72.2% and a high in January of 76.8%. Residential mortgages increased by $5,242,000 or 4.59% from 2000 to 2001. Residential mortgages increased by $3,619,000 from 1999 to 2000. Real estate loans still remain a very attractive option due to the tax deductibility of mortgage interest. Commercial real estate loans grew by $3,230,000 or 11.27% in 2001 over 2000. Commercial real estate loans increased by $115,000 from 1999 to 2000. Consumer loans decreased $1,517,000 or 2.41% in 2001 over 2000. This follows a year with an increase of $8,581,000 from 1999 to 2000. - -24- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- LOAN PORTFOLIO (CONTINUED) - -------------------------------------------------------------------------------- In spite of the slow economy and increasing credit problems nationwide, the Corporation continued its excellent charge-off record (charge-offs, net of recoveries) during 2001. For the year, the net charge-offs were $211,000 or .09% of average loans outstanding. The increase in 2000 was due to a growing loan portfolio and not as a result of relaxation of underwriting standards. This compares with $219,000 or .10% for 2000 and $111,000 or .06% for 1999. The allowance for loan losses is based upon quarterly loan portfolio reviews by management and a committee of the Board. The purpose of the review is to assess loan quality, identify impaired loans, analyze delinquencies, ascertain loan growth, evaluate potential charge-offs and recoveries and assess general economic conditions in the market served. Commercial and real estate loans are rated periodically by loan review personnel. Consumer and residential real estate loans are generally reviewed in the aggregate as they are of relative small dollar size and homogeneous in nature. In addition to economic conditions, loan portfolio diversification, delinquency, and historic loss experience, consideration is also given to examinations performed by the regulatory authorities. To determine the allowance and corresponding provision, the amount required for specific allocation is first determined. For all types of commercial and construction loans, this amount is based upon specific borrower data determined by reviewing non-performing, delinquent, or potentially troubled credits. In addition, a general allocation is also determined using the same criteria applied to the total commercial portfolio excluding the specific allocation. Consumer and residential real estate allowances, which may include specific allocations, generally are based upon recent charge-off and delinquency history, other known trends, and expected losses over the remaining lives of these loans, as well as the condition of local, regional, and national economies. The unallocated portion of the allowance is the amount which, when added to these allocated amounts, brings the total to the amount deemed adequate by management at that time. This unallocated portion is available to absorb losses sustained anywhere within the portfolio. Determining the level of the allowance for possible loan losses at any given period is difficult, particularly during deteriorating or uncertain economic periods. Management must make estimates using assumptions and information which is often subjective and changing rapidly. The review of the loan portfolio is a continuing event in light of a changing economy and the dynamics of the banking and regulatory environment. It is Management's opinion that the allowance for loan losses for 2001 of $2,526,000 or 1.11% of outstanding loans is adequate to meet any foreseeable loan loss contingency. This is lower than the 1.14% for 2000 and the 1.22% for 1999. At December 31, 2001 and 2000, total non-performing loans were $1,745,000 and $804,000, respectively; non-performing loans as a percentage of the allowance for loan losses were 69.08% and 32.20%, respectively. The increase in 2001 was due mainly from a single credit which the Corporation anticipates no loss to occur. In addition, regulatory authorities, as an integral part of their examinations, periodically review the allowance for possible loan losses. They may require additions to allowances based upon their judgements about information available to them at the time of their examination. It is the policy of the Corporation not to renegotiate the terms of a loan simply because of a delinquency status. Rather a loan is transferred to non-accrual status if it is not well secured and in process of collection and is delinquent in payment of either principal or interest beyond 90 days. Interest income received on non-accruing loans in 2001 and 2000 was $0. Real estate acquired through foreclosure is carried at the lower of the recorded amount of the loan for which the foreclosed property served as collateral or the fair market value of the property as determined by a current appraisal less estimated costs to sell (fair value). Prior to foreclosure, the recorded amount of the loan is reduced, if necessary, to fair value by charging the allowance for loan losses. Subsequent to foreclosure, gains or losses on the sale of real estate acquired through foreclosure are recorded in operating income and any losses determined as a result of periodic valuations are charged to other operating expense. Loans with principal and/or interest delinquent 90 days or more which are still accruing interest were $811,000 at December 31, 2001 up from the $440,000 at December 31, 2000. Although the economy has stabilized since September 11, 2001, there is still uncertainty locally for large employers. This may adversely affect certain borrowers and may cause additional loans to become past due beyond 89 days or to be placed on non-accrual status because of uncertainty of receiving full payments of either principal or interest on these loans. Potential problem loans consist of loans which are performing but for which credit problems have caused the Corporation to place them on its internally monitored loan list. At December 31, 2001, such loans amounted to $680,000. Depending upon the state of the economy and the impact thereon to these borrowers, as well as future events such as regulatory examination assessment, these losses and others not currently so identified could be classified as non-performing assets in the future. -25- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- LIQUIDITY AND INTEREST RATE RISK MANAGEMENT - -------------------------------------------------------------------------------- The goals of the Corporation's asset/liability management function, are to ensure adequate liquidity and to maintain an appropriate balance between the relative rate sensitivity of interest earning assets and interest bearing liabilities. Liquidity management encompasses the ability to meet ongoing cash flow requirements of customers, who, as depositors, may want to withdraw funds or who, as borrowers, need credit availability. Interest rate sensitivity management attempts to prove stable net interest margins through changing interest rate environments and thereby achieve consistent growth in net interest income. Liquidity management is influenced by several key elements, including asset quality and the maturity structure of assets and liabilities. The single most important source of liquidity for the Corporation is a strong, stable core deposit base. This funding source has exhibited steady growth over the years and consists of deposits from customers with long-standing relationships. In 2001 the Corporation funded approximately 77% of its assets with core deposits acquired in local communities. This core deposit base, combined with stockholders' equity, funded almost 90% of average assets in 2001 and provides a substantial and highly stable source of liquidity. Principal sources of asset liquidity are provided by held to maturity securities maturing in one year or less, available for sale securities, and other short term investments such as federal funds sold and cash and due from banks. At December 31, 2001, these liquid assets amounted to $76,472,000 compared to liquid assets at December 31, 2000, of $55,014,000. Liquidity is also provided by scheduled and unscheduled principal repayments of loans. The Corporation joined the Federal Home Loan Bank (FHLB) of Pittsburgh in August of 1993 for the purpose of providing short term liquidity when other sources are unable to fill these needs. The Corporation has a short term line of credit of $10,000,000. Outstanding balances under this agreement were $1,275,000 at December 31, 2001. At December 31, 2000, the amount borrowed was $0. The Bank has a maximum borrowing capacity of $124,238,000 with the FHLB which is collateralized by qualifying assets of the Bank. Liability liquidity, which is more difficult to measure, can be met by attracting deposits and maintaining the core deposit base. The Corporation's ability to attract deposits depends primarily on several factors including sales efforts, competitive interest rates, and other conditions which help maintain consumer confidence in the stability of the financial institution. This confidence is evaluated by such factors as profitability, capitalization and overall financial condition. The Corporation's primary funding requirement is loan demand. From the statement of cash flows in 2001 loan demand increased by $8,419,000. This was easily funded by the deposit growth of $18,248,000. - -------------------------------------------------------------------------------- REGULATORY MATTERS - -------------------------------------------------------------------------------- The Juniata Valley Bank is subject to periodic examinations by one or more of the various regulatory agencies. During 2001 an examination was conducted by the Commonwealth of Pennsylvania, Department of Banking. This examination included but was not limited to, procedures designed to review lending practices, credit quality, liquidity, operations and capital adequacy. No comments were received from this regulatory body which would have a material effect on the Corporation's liquidity, capital resources or operations. In July of 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations" and Statement No. 142, "Goodwill and Other Intangible Assets". Statement No. 141 requires all business combinations to be accounted for using the purchase method of accounting as use of the pooling-of-interests method is prohibited. In addition, this statement requires that negative goodwill that exists after the basis of certain acquired assets is reduced to zero should be recognized as an extraordinary gain. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. - -26- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- REGULATORY MATTERS (CONTINUED) - -------------------------------------------------------------------------------- Statement No. 142 prescribes that goodwill associated with a business combination and intangible assets with an indefinite useful life should not be amortized but should be tested for impairment at least annually. The Statement requires intangibles that are separable from goodwill and that have a determinable useful life to be amortized over the determinable useful life. The provisions of this Statement became effective for the Bank in January of 2002 and require that goodwill and other intangible assets arising from acquisitions completed before July 1, 2001 should be accounted for in accordance with the provisions of this Statement. In June of 2001, the Financial Accounting Standards Board issued Statement 143, "Accounting for Asset Retirement Obligations", which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement will become effective for the Bank on January 1, 2003. The Financial Accounting Standards Board issued Statement No. 144, "Accounting for the Impairment of Disposal of Long-Lived Assets", in August 2001. This Statement supersedes Statement No. 121 of the same name and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the disposal of a segment of a business". This Statement also amends ARB 51, "Consolidated Financial Statements". The provisions of this Statement became effective for the Bank on January 1, 2002. Adoption of these Statements is not expected to have a material impact on the Bank's financial condition or results of operations. - -------------------------------------------------------------------------------- MARKET RATE RISK - -------------------------------------------------------------------------------- The operations of the Corporation are subject to risk resulting from interest rate fluctuations to the extent that there is a difference between the amount of the Corporation's interest earning assets and the amount of interest bearing liabilities that are prepaid/withdrawn, mature or re-price in specified periods. The principal objective of the Corporation's asset/liability management activities is to provide consistently higher levels of net interest income while maintaining acceptable levels of interest rate and liquidity risk and facilitating the funding needs of the Corporation. The Corporation utilizes an interest rate sensitivity model as the primary quantitative tool in measuring the amount of interest rate risk that is present. The operations of the Corporation do not subject it to foreign currency exchange or commodity price risk. Also the Corporation does not utilize interest rate swaps, caps or other hedging transactions. The Corporation uses several tools to measure and evaluate interest rate risk. Table 5 provides information about the Corporation's financial instruments that are sensitive to changes in interest rates. For securities, loans and deposits, the table presents principal cash flows and related weighted average interest rates by maturity dates. The Corporation has no market risk sensitive instruments entered into for trading purposes. Another tool for analyzing interest rate risk is financial simulation modeling which captures the impact of not only changing interest rates but also other sources of cash flow variability including loan and securities prepayments, loan repricing, and deposit pricing. Financial simulation modeling forecasts both net interest income and the economic value of liabilities. The Corporation regularly measures the effects of an up or down 200-basis point "rate shock" which is deemed to represent the outside limits of any reasonably probable movement in market interest rates during a one-year time frame. As indicated in Table 6, the financial simulation analysis revealed that projected net interest income over a one-year time period is positively affected by higher market interest rates, while the economic value of equity is adversely affected by higher interest rates. In a lower interest rate environment the opposite is presented projected net interest income is adversely affected by and economic value of equity is favorably affected. Computations of the projected effects of hypothetical interest rate changes are based on many assumptions, including relative levels of market interest rates and loan prepayments. Certain shortcomings are inherent in the computation of discounted present value and, if key relationships do not unfold as assumed, actual values may differ from those presented. Further, the computations do not contemplate certain actions management could undertake in response to changes in market interest rates. -27- - -------------------------------------------------------------------------------- TABLE 5 - INTEREST RATE SENSITIVITY PRINCIPAL AMOUNT BY EXPECTED MATURITY/AVERAGE INTEREST RATE - -------------------------------------------------------------------------------- 2002 2003 2004 ---- ---- ---- DECEMBER 31, 2001 (Dollars in Thousands) Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- ASSETS Interest bearing and time deposits $ 2,217 2.96% $ 1,400 3.66% $ 60 4.41% Federal funds sold -- -- -- -- -- -- Available for sale securities 7,519 5.21 10,284 5.92 9,112 5.18 Held to maturity securities 8,351 4.74 10,624 5.12 17,409 4.53 Loans Commercial 24,548 8.56 -- -- -- -- Consumer 11,799 8.72 9,435 9.33 7,387 9.03 Real estate mortgage 135,815 7.87 876 7.79 922 7.78 LIABILITIES Interest bearing demand deposits 51,769 2.36 -- -- -- -- Savings deposits 32,281 2.44 -- -- -- -- Certificates of deposit 112,800 4.73 47,917 5.18 11,163 4.83 - -------------------------------------------------------------------------------- 2001 2002 2003 ---- ---- ---- DECEMBER 31, 2000 (Dollars in Thousands) Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- ASSETS Interest bearing deposits $ 676 5.65% -- -- -- -- Federal funds sold 4,400 6.44 -- -- -- -- Available for sale securities 10,171 5.59 $ 7,487 5.74% $ 3,750 5.68% Held to maturity securities 4,986 5.63 4,582 5.79 9,207 4.95 Loans Commercial 23,327 9.36 -- -- -- -- Consumer 12,287 9.37 8,557 9.22 7,105 9.55 Real estate mortgage 129,819 8.11 930 8.13 961 8.13 LIABILITIES Interest bearing demand deposits 47,220 2.95 -- -- -- -- Savings deposits 29,191 2.67 -- -- -- -- Certificates of deposit 108,609 5.71 38,396 6.12 21,480 6.00 - -28- - -------------------------------------------------------------------------------- TABLE 5 (CONTINUED) - -------------------------------------------------------------------------------- Fair Value 2005 2006 Thereafter Total December ---- ---- ---------- ----- 31, 2001 (Dollars in Thousands) --------- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- -- -- -- -- -- -- $ 3,677 $ 3,677 -- -- -- -- -- -- -- -- 8,476 5.67 6,932 6.01 11,315 5.39 53,638 54,663 500 6.00 961 3.50 767 5.33 38,612 39,435 -- -- -- -- -- -- 24,548 $ 24,548 $ 4,949 8.79% $ 3,271 8.78% $15,240 8.89% 52,081 52,283 983 7.77 1,045 7.76 11,728 7.59 151,369 151,620 -- -- -- -- -- -- 51,769 51,769 -- -- -- -- -- -- 32,281 32,281 5,050 5.82 6,399 5.14 -- -- 183,329 186,842 - -------------------------------------------------------------------------------- Fair Value 2004 2005 Thereafter Total December ---- ---- ---------- ----- 31, 2000 (Dollars in Thousands) --------- Amount Rate Amount Rate Amount Rate ------ ---- ------ ---- ------ ---- -- -- -- -- -- -- $ 676 $ 676 -- -- -- -- -- -- 4,400 4,400 $ 2,372 6.12% $ 1,763 6.15% $ 8,233 6.31% 32,591 33,146 18,031 4.42 13,659 4.37 775 5.31 51,240 50,967 -- -- -- -- -- -- 23,327 23,327 5,156 9.45 3,138 9.45 17,352 9.48 53,595 53,535 962 8.11 1,952 8.06 8,273 8.15 142,897 141,833 -- -- -- -- -- -- 47,220 47,220 -- -- -- -- -- -- 29,191 29,191 5,415 5.37 3,016 6.13 -- -- 176,916 177,656 -29- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- TABLE 6 - SENSITIVITY TO CHANGE IN MARKET INTEREST RATES - -------------------------------------------------------------------------------- Interest Rate Scenarios ----------------------- -200 bps -100 bps +100 bps +200 bps -------- -------- -------- -------- DECEMBER 31, 2001 (In Thousands) Prospective one-year net interest income: Projected $12,390 $12,551 $12,804 $12,896 Percent change (2.53)% (1.27)% .72% 1.45% Economic value of portfolio equity: Projected 47,820 46,573 43,544 41,763 Percent change 5.50% 2.75% (3.93)% (7.86)% Interest Rate Scenarios ----------------------- -200 bps -100 bps +100 bps +200 bps -------- -------- -------- -------- DECEMBER 31, 2000 (In Thousands) Prospective one-year net interest income: Projected $12,205 $12,527 $13,049 $13,299 Percent change (4.64)% (2.13)% 1.95% 3.91% Economic value of portfolio equity: Projected 43,582 43,332 42,810 42,488 Percent change 1.16% .58% (.63)% (1.38)% Key assumptions: 1. Residential mortgage loans and mortgage-backed securities prepay at rate-sensitive speeds consistent with observed historical prepayment speeds for pools of residential mortgages. 2. Variable rate loans and variable rate liabilities reprice in accordance with their contractual terms, if any. Rate changes for adjustable rate mortgages are constrained by their contractual caps and floors. 3. Interest-bearing nonmaturity deposits reprice in response to different interest rate scenarios consistent with the Corporation's historical rate relationships to market interest rates. 4. Interest rate scenarios assume a three month ramp in the term structure of interest rates. - -30- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- CAPITAL - -------------------------------------------------------------------------------- On March 20, 2001, the Board of Directors of the Juniata Valley Financial Corp. declared a 10% stock dividend to shareholders payable on April 27, 2001. 182,210 shares were issued from treasury stock and 32,320 shares were issued from authorized and unissued. At this same meeting the Board of Directors authorized the repurchase of 100,000 shares outstanding of common stock. As of December 1, 2001, 8,929 shares were repurchased with 91,071 shares remaining. Shares are also reissued for the dividend reinvestment plan as well as the employee stock purchase plan. At December 31, 2001 and 2000 treasury stock was 21,934 and 167,110 shares, respectively at a cost of $623,000 and $5,132,000. The Corporation maintains a strong capital base to take advantage of business opportunities while ensuring that it has resources to absorb the risks inherent in the business. The federal banking regulators have established capital adequacy requirements for banks and bank holding companies by using risk-based capital framework and by monitoring compliance with minimum leverage guidelines. These guidelines are based on "risk adjusted" factors, which means assets with potentially higher credit risk will require more capital backing than assets with lower credit risk. The FDIC classified capital into two tiers, referred to as Tier I and Tier II. Tier I capital consists of common stockholders' equity (excluding the net unrealized appreciation on securities available for sale), noncumulative and cumulative (bank holding companies only) perpetual stock, and minority interests less goodwill. Tier II capital consists of allowance for loan and lease losses, perpetual preferred stock (not included in Tier I), hybrid capital instruments, term subordinated debt, and intermediate-term preferred stock. Since December 31, 1992, all banks have been required to meet a minimum ratio of 8.00% and qualifying total capital to risk adjusted total assets with at least 4% Tier I capital and 8% of risk-adjusted assets in total capital. As indicated on the schedule following this discussion, the Tier I risk-based capital ratio was 18.46% and Tier II risk-based capital ratio was 19.56% at December 31, 2001. The Bank's capital ratios are well above the current minimum ratio requirement set forth by federal banking regulators. In addition to risk-based requirements, the Federal Reserve Board has established minimum leverage guidelines for bank holding companies. For most banks, the minimum leverage rate is 3% plus an additional cushion of 100 to 200 basis points depending on risk profiles and other factors. As of December 31, 2001, the leverage ratio was 11.98%. [STOCKHOLDERS' EQUITY GRAPHIC OMITTED] CAPITAL ANALYSIS December 31, ------------ 2001 2000 1999 ---- ---- ---- (Thousands of Dollars) Tier I Common stockholders' equity (excluding unrealized gains/losses on securities) $ 42,515 $ 40,999 $ 41,833 Tier II Allowable portion of allowance for loan losses 2,526 2,497 2,486 -------- -------- -------- Risk-based capital $ 45,041 $ 43,496 $ 44,319 ======== ======== ======== Risk adjusted assets (including off-balance-sheet exposures) $230,325 $222,052 $213,490 ======== ======== ======== Tier I risk-based capital ratio 18.46% 18.46% 19.59% Total risk-based capital ratio 19.56% 19.59% 20.76% Leverage ratio 11.98% 12.30% 12.33% -31- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) - -------------------------------------------------------------------------------- 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 will usually 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 conditions. It is difficult to predict what will happen in 2002 because of many uncertainties surrounding the economy. However, the Corporation's management and Board of Directors are looking forward to meeting the challenges a changing economy can present. The Corporation's commitment to providing quality banking services for the communities it serves will continue through 2002. This community-based strategy gives management the opportunity to recognize steady growth in our consumer, mortgage and commercial loans as well as in our core deposit base. The Corporation's strong capital and earnings potential provide the solid foundation needed to excel in the ever-changing banking industry. Management feels it is positioned to handle changes in the economic environment in 2002 through effective asset/liability management. Juniata Valley Financial Corp. is committed to providing stockholders with an attractive return on their investment. - -------------------------------------------------------------------------------- FEDERAL INCOME TAXES - -------------------------------------------------------------------------------- The provision for income taxes for 2001 was $1,428,000 compared to $1,375,000 in 2000 and $1,360,000 in 1999. The effective tax rate, which is the ratio of income tax expense to income before income taxes, was 23.53% in 2001, a decrease from the 23.86% in 2000 and 24.12% in 1999. The tax rate for all periods was less than the statutory rate of 34% due to tax exempt securities and loan income and tax free earnings on the bank-owned life insurance. Please refer to the Notes to the Consolidated Financial Statements "Income Taxes" for further analysis of federal income tax expense. - -32- {LETTERHEAD GRAPHIC OMITTED] INDEPENDENT AUDITOR'S REPORT To 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, as of December 31, 2001 and 2000, and the related consolidated statements of income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 2001. These financial statements are the responsibility of the Corporation's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States of America. /s/ Beard Miller Company LLP Harrisburg, Pennsylvania January 18, 2002 -33- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK CONSOLIDATED BALANCE SHEETS ASSETS ------ December 31, ------------ 2001 2000 ---- ---- (In Thousands, Except Share Data) Assets: Cash and due from banks $ 11,571 $ 10,621 Interest bearing deposits with banks 87 676 Federal funds sold -- 4,400 -------- -------- Cash and cash equivalents 11,658 15,697 Interest bearing time deposits with banks 3,590 -- Securities available for sale 54,663 33,146 Securities held to maturity, fair value 2001 $39,435; 2000 $50,967 38,612 51,240 Federal Home Loan Bank stock 1,208 1,185 Loans receivable, net of allowance for loan losses 2001 $2,526; 2000 $2,497 227,998 219,819 Bank premises and equipment, net 6,068 5,992 Accrued interest receivable and other assets 12,960 7,835 -------- -------- Total assets $356,757 $334,914 ======== ======== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Liabilities: Deposits: Non-interest bearing $ 38,089 $ 33,893 Interest bearing 267,379 253,327 -------- -------- Total deposits 305,468 287,220 Short-term borrowings 1,275 Accrued interest payable and other liabilities 4,688 4,612 -------- -------- Total liabilities 311,431 291,832 -------- -------- 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 2001 2,372,934 shares; 2000 2,332,058 shares 2,373 2,332 Surplus 20,221 20,398 Retained earnings 22,679 25,117 Accumulated other comprehensive income 676 367 Treasury stock, at cost 2001 21,934 shares; 2000 167,110 shares (623) (5,132) -------- -------- Total stockholders' equity 45,326 43,082 -------- -------- Total liabilities and stockholders' equity $356,757 $334,914 ======== ======== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -34- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK CONSOLIDATED STATEMENTS OF INCOME Years Ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- (In Thousands, Except Per Share Data) Interest income: Loans receivable, including fees $19,929 $19,264 $17,172 Taxable securities 2,692 3,287 4,171 Tax-exempt securities 1,555 1,785 2,147 Other 465 343 368 ------- ------- ------- Total interest income 24,641 24,679 23,858 ------- ------- ------- Interest expense: Deposits 11,928 11,880 11,339 Short-term borrowings 1 -- 15 ------- ------- ------- Total interest expense 11,929 11,880 11,354 ------- ------- ------- Net interest income 12,712 12,799 12,504 Provision for loan losses 240 230 120 ------- ------- ------- Net interest income after provision for loan losses 12,472 12,569 12,384 ------- ------- ------- Other income: Trust department 435 387 375 Customer service fees 627 551 494 Net realized gains on sales of securities -- 5 44 Income on life insurance 362 75 75 Other 770 359 298 ------- ------- ------- Total other income 2,194 1,377 1,286 ------- ------- ------- Other expenses: Salaries and wages 3,496 3,568 3,587 Employee benefits 1,109 1,176 1,060 Occupancy 575 498 499 Equipment 1,204 975 933 Director compensation 361 271 321 Taxes, other than income 485 465 438 Other 1,366 1,231 1,194 ------- ------- ------- Total other expenses 8,596 8,184 8,032 ------- ------- ------- Income before income taxes 6,070 5,762 5,638 Federal income taxes 1,428 1,375 1,360 ------- ------- ------- Net income $ 4,642 $ 4,387 $ 4,278 ======= ======= ======= Per share data: Basic and diluted earnings $ 1.96 $ 1.81 $ 1.70 ======= ======= ======= Cash dividends $ 0.80 $ 1.21 $ 1.16 ======= ======= ======= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -35- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY Years Ended December 31, 2001, 2000 and 1999 -------------------------------------------- Accumulated Other Common Retained Comprehensive Treasury Stock Surplus Earnings Income Stock Total ----- ------- -------- ------ ----- ----- (In Thousands) Balance, December 31, 1998 $2,332 $20,580 $22,322 $ 816 $ (70) $45,980 ------- Comprehensive income: Net income -- -- 4,278 -- -- 4,278 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- (714) -- (714) ------- Total comprehensive income 3,564 ------- Cash dividends declared -- -- (2,935) -- -- (2,935) Treasury stock issued under dividend reinvestment plan -- (21) -- -- 462 441 Treasury stock issued under employee stock purchase plan -- -- -- -- 28 28 Treasury stock acquired -- -- -- -- (3,823) (3,823) ------ ------- ------- ----- ------- ------- Balance, December 31, 1999 2,332 20,559 23,665 102 (3,403) 43,255 ------- Comprehensive income: Net income -- -- 4,387 -- -- 4,387 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- 265 -- 265 ------- Total comprehensive income 4,652 ------- Cash dividends declared -- -- (2,935) -- -- (2,935) Treasury stock issued under dividend reinvestment plan -- (161) -- -- 546 385 Treasury stock issued under employee stock purchase plan -- -- -- -- 1 1 Treasury stock acquired -- -- -- -- (2,276) (2,276) ------ ------- ------- ----- ------- ------- Balance, December 31, 2000 2,332 20,398 25,117 367 (5,132) 43,082 ------- Comprehensive income: Net income -- -- 4,642 -- -- 4,642 Change in unrealized gains (losses) on securities available for sale, net of reclassification adjustment and tax effects -- -- -- 309 -- 309 ------- Total comprehensive income 4,951 ------- Stock issued under dividend reinvestment plan 7 166 -- -- -- 173 Cash dividends declared -- -- (1,893) -- -- (1,893) 10% common stock dividend 32 (373) (5,187) -- 5,517 (11) Stock issued under employee stock purchase plan 2 30 -- -- -- 32 Treasury stock issued under dividend reinvestment plan -- -- -- -- 181 181 Treasury stock acquired -- -- -- -- (1,189) (1,189) ------ ------- ------- ----- ------- ------- BALANCE, DECEMBER 31, 2001 $2,373 $20,221 $22,679 $ 676 $ (623) $45,326 ====== ======= ======= ===== ======= ======= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - -36- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,642 $ 4,387 $ 4,278 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 240 230 120 Provision for depreciation 396 323 291 Net amortization of securities' premiums 177 158 89 Net realized gains on sales of securities -- (5) (44) Deferred compensation plans' expense 528 378 421 Payment of deferred compensation (252) (199) (174) Deferred income taxes (103) (110) (57) (Increase) decrease in accrued interest receivable and other assets 196 (11) (7) Increase (decrease) in accrued interest payable and other liabilities (199) 158 241 Increase in investment life insurance (377) (119) (96) ------- ------- ------- Net cash provided by operating activities 5,248 5,190 5,062 ------- ------- ------- CASH FLOWS FROM INVESTING ACTIVITIES Net increase in interest bearing time deposits (3,590) -- -- Purchases of available for sale securities (40,760) (1,141) (470) Purchase of FHLB stock (23) (10) (415) Proceeds from sales of available for sale securities -- 10 2,195 Proceeds from maturities of and principal repayments on available for sale securities 19,629 12,274 18,066 Purchases of held to maturity securities (961) (701) (16,474) Proceeds from maturities of and principal repayments on held to maturity securities 13,494 8,895 14,684 Net increase in loans receivable (8,419) (15,712) (14,971) Purchase of investment in life insurance (5,000) -- -- Net purchases of bank premises and equipment (473) (2,887) (842) ------- ------- ------- Net cash provided by (used in) investing activities (26,103) 728 1,773 ------- ------- ------- CASH FLOWS FROM FINANCING ACTIVITIES Net increase (decrease) in deposits 18,248 3,870 (10,540) Net increase (decrease) in short-term borrowings 1,275 (5,300) 5,300 Cash dividends and cash paid for fractional shares (1,904) (2,935) (2,935) Purchase of treasury stock (1,189) (2,276) (3,823) Treasury stock issued 181 386 469 Stock issued for dividend reinvestment and employee stock purchase plan 205 -- -- ------- ------- ------- Net cash provided by (used in) financing activities 16,816 (6,255) (11,529) ------- ------- ------- Decrease in cash and cash equivalents (4,039) (337) (4,694) Cash and cash equivalents: Beginning 15,697 16,034 20,728 ------- ------- ------- Ending $11,658 $15,697 $16,034 ======= ======= ======= Supplementary cash flows information: Interest paid $11,967 $11,843 $11,397 ======= ======= ======= Income taxes paid $ 1,470 $ 1,520 $ 1,460 ======= ======= ======= SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. -37- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Principles of consolidation: The accompanying consolidated financial statements include the accounts of Juniata Valley Financial Corp. (the Corporation), a bank holding company, and its wholly-owned subsidiary, The Juniata Valley Bank (the Bank). All significant intercompany accounts and transactions have been eliminated. Nature of operations: The Bank operates under a state bank charter and provides full banking services, including trust services. As a state bank, the Bank is subject to regulation of 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. The area served by the Bank is principally the counties of Juniata, Mifflin, Perry, Huntingdon, Centre, Franklin and Snyder, Pennsylvania. Estimates: The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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. Presentation of cash flows: 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. Interest bearing time deposits with banks: Interest bearing deposits with banks consists of certificates of deposits in other banks with maturities within one year to three years. Securities: Securities classified as available for sale are those debt securities that the Corporation 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 movements in interest rates, changes in the maturity mix of the Bank's assets and liabilities, liquidity needs, regulatory capital considerations and other similar factors. Securities available for sale are carried at fair value. Unrealized gains and losses are reported in other comprehensive income, net of the related deferred tax effect. Realized gains or losses, determined on the basis of the cost of specific securities sold, are included in earnings. Premiums and discounts are recognized in interest income using the interest method over the period to maturity. Securities classified as held to maturity are those debt securities the Corporation has both the intent and ability to hold to maturity regardless of changes in market conditions, liquidity needs or changes in general economic conditions. These securities are carried at cost adjusted for amortization of premium and accretion of discount, computed by the interest method over the period to maturity. Management determines the appropriate classification of debt securities at the time of purchase and re-evaluates such designation as of each balance sheet date. Federal law requires a member institution of the Federal Home Loan Bank system to hold stock of its district Federal Home Loan Bank according to a predetermined formula. The stock is carried at cost. Loans receivable: Loans receivable that management has the intent and ability to hold for the foreseeable future or until maturity or payoff are stated at their outstanding unpaid principal balances, net of unearned discount and an allowance for loan losses. Interest income is accrued on the unpaid principal balance. Unearned discount on discounted loans is amortized to income over the life of the loans, using the interest method. - -38- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Loans receivable (continued): The accrual of interest is generally discontinued when the contractual payment of principal or interest has become 90 days past due or management has serious doubts about further collectibility of principal or interest, even though the loan is currently performing. A loan may remain on accrual status if it is in the process of collection and is either guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid interest credited to income in the current year is reversed 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, loans are restored to accrual status when the obligation is brought current, 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. 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. The allowance for loan losses is maintained at a level considered adequate to provide for losses that can be reasonably anticipated. 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 change, including the amounts and timing of future cash flows expected to be received on impaired loans. 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 loan 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. Bank premises and equipment: Bank premises and equipment are stated at cost less accumulated depreciation. Depreciation is computed principally on the straight-line method over the estimated useful lives of the related assets. Foreclosed real estate: Foreclosed assets, which are recorded in other assets, include properties acquired through foreclosure or in full or partial satisfaction of the related loan. Foreclosed assets are initially recorded at fair value, net of estimated selling costs, at the date of foreclosure. After foreclosure, valuations are periodically performed by management and the real estate is carried at the lower of carrying amount or fair value, less estimated costs to sell. Revenue and expenses from operations and changes in the valuation allowance are included in other expenses. -39- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income taxes: Deferred taxes are provided on the liability method whereby deferred tax assets are recognized for deductible temporary differences and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences between the reported amounts of assets and liabilities in the financial statements and their tax basis. 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. The Corporation and its subsidiary file a consolidated federal income tax return. Advertising: Advertising costs are expensed as incurred. 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 in the balance sheet when they are funded. Earnings per common share: Basic earnings per share represents income available to common shareholders divided by the weighted average number of common shares outstanding during the period, as adjusted for the stock dividend. Diluted earnings per share reflects additional common shares that would have been outstanding if dilutive potential common shares had been issued, as well as any adjustment to income that would result from the assumed issuance. Potential common shares that may be issued by the Corporation relate solely to outstanding stock options and are determined using the treasury stock method. For the year ended December 31, 2001, outstanding options did not have a dilutive impact on earnings per share. The weighted average number of common shares outstanding was 2,368,923, 2,420,966 and 2,519,801 in 2001, 2000 and 1999, respectively. Comprehensive income: Accounting principles generally 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 balance sheet, such items, along with net income, are components of comprehensive income. The components of other comprehensive income (loss) and related tax effects are as follows: Years Ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- (In Thousands) Unrealized holding gains (losses) on available for sale securities $470 $405 $(1,008) Reclassification adjustment for gains realized in income -- (5) (44) ---- ---- ------- Net unrealized gains (losses) 470 400 (1,052) Tax effect 161 135 (338) ---- ---- ------- Net of tax amount $309 $265 $ (714) ==== ==== ======= - -40- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Reclassifications: Certain amounts in the 2000 and 1999 financial statements have been reclassified to conform with the 2001 presentation format. Such reclassifications had no impact on the Corporations' net income. Segment reporting: The Bank 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 Bank 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 Bank. As such, discrete financial information is not available and segment reporting would not be meaningful. New accounting standards: In July of 2001, the Financial Accounting Standards Board issued Statement No. 141, "Business Combinations," and Statement No. 142, "Goodwill and Other Intangible Assets." Statement No. 141 requires all business combinations to be accounted for using the purchase method of accounting as use of the pooling-of-interests method is prohibited. In addition, this Statement requires that negative goodwill that exists after the basis of certain acquired assets is reduced to zero should be recognized as an extraordinary gain. The provisions of this Statement apply to all business combinations initiated after June 30, 2001. Statement No. 142 prescribes that goodwill associated with a business combination and intangible assets with an indefinite useful life should not be amortized but should be tested for impairment at least annually. The Statement requires intangibles that are separable from goodwill and that have a determinable useful life to be amortized over the determinable useful life. The provisions of this Statement became effective for the Bank in January 2002 and require that goodwill and other intangible assets arising from acquisitions completed before July 1, 2001 be accounted for in accordance with the provisions of this Statement. In June of 2001, the Financial Accounting Standards Board issued Statement 143, "Accounting for Asset Retirement Obligations," which addresses the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. This Statement will become effective for the Bank on January 1, 2003. In August of 2001, the Financial Accounting Standards Board issued Statement 144, "Accounting for the Impairment of or Disposal of Long-Lived Assets." This Statement supersedes FASB Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," and the accounting and reporting provisions of APB Opinion No. 30, "Reporting the Results of Operations - Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions for the Disposal of a Segment of a Business." This Statement also amends ARB No. 51, "Consolidated Financial Statements." The provisons of this Statement became effective for the Bank on January 1, 2002. Adoption of these Statements did not have or is not expected to have a material impact on the Corporation's financial condition or results of operations. RESTRICTIONS ON CASH AND DUE FROM BANK BALANCES The Bank is required to maintain reserve balances with the Federal Reserve Bank. The average reserve balances for 2001 and 2000 approximated $3,468,000 and $2,228,000, respectively. -41- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SECURITIES The amortized cost and fair value of securities at December 31 were as follows: Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ---- ----- ------ ----- (In Thousands) AVAILABLE FOR SALE SECURITIES: DECEMBER 31, 2001: U.S. Treasury securities $ 1,508 $ 37 $ -- $ 1,545 U.S. Government and agency obligations 29,153 353 (91) 29,415 Obligations of states and political subdivisions 15,603 134 (46) 15,691 Corporate and other debt securities 2,992 124 -- 3,116 Mortgage-backed securities 3,846 105 -- 3,951 Equity securities 536 409 -- 945 ------- ------ ----- ------- $53,638 $1,162 $(137) $54,663 ======= ====== ===== ======= DECEMBER 31, 2000: U.S. Treasury securities $ 750 $ 7 $ -- $ 757 U.S. Government and agency obligations 5,287 10 (19) 5,278 Obligations of states and political subdivisions 15,265 76 -- 15,341 Corporate and other debt securities 5,030 20 (8) 5,042 Mortgage-backed securities 5,726 101 (4) 5,823 Equity securities 533 403 (31) 905 ------- ------ ----- ------- $32,591 $ 617 $ (62) $33,146 ======= ====== ===== ======= HELD TO MATURITY SECURITIES: DECEMBER 31, 2001: U.S. Treasury securities $ 961 $ -- $ (2) $ 959 U.S. Government and agency obligations 2,500 76 -- 2,576 Obligations of states and political subdivisions 26,742 500 (2) 27,240 Corporate and other debt securities 8,409 251 -- 8,660 ------- ------ ----- ------- $38,612 $ 827 $ (4) $39,435 ======= ====== ===== ======= DECEMBER 31, 2000: U.S. Treasury securities $ 999 $ -- $ (1) $ 998 U.S. Government and agency obligations 12,072 4 (51) 12,025 Obligations of states and political subdivisions 27,201 16 (170) 27,047 Corporate and other debt securities 10,968 3 (74) 10,897 ------- ------ ----- ------- $51,240 $ 23 $(296) $50,967 ======= ====== ===== ======= - -42- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS SECURITIES (CONTINUED) The amortized cost and fair value of securities as of December 31, 2001, by contractual maturity or call date, are shown below. Expected maturities may differ from contractual maturities or call dates because the securities may be called or prepaid with or without call or prepayment penalties. AVAILABLE FOR SALE HELD TO MATURITY ------------------ ---------------- AMORTIZED FAIR AMORTIZED FIAR COST VALUE COST VALUE ---- ----- ---- ----- (IN THOUSANDS) Due in one year or less $ 7,407 $ 7,519 $ 8,351 $ 8,475 Due after one year through five years 34,975 35,408 29,494 30,178 Due after five years through ten years 6,598 6,564 -- -- Due after ten years 276 276 767 782 Mortgage-backed securities 3,846 3,951 -- -- Equity securities 536 945 -- -- ------- ------- ------- ------- $56,638 $54,663 $38,612 $39,435 ======= ======= ======= ======= Gross gains of $-0-, $5,000, and $44,000 were realized on sales of securities available for sale in 2001, 2000 and 1999, respectively. Securities with a fair value of $14,813,000 and $16,406,000 at December 31, 2001 and 2000, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. -43- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES Loans are comprised of the following: December 31, ------------ 2001 2000 ---- ---- (In Thousands) Commercial, agricultural and financial $ 24,548 $ 23,327 Real estate mortgages: Residential 119,476 114,234 Commercial 31,893 28,663 Consumer 61,480 62,997 Other 2,874 3,101 -------- --------- 240,271 232,322 Unearned discount on loans (9,747) (10,006) Allowance for loan losses (2,526) (2,497) -------- --------- $227,998 $219,819 ======== ======== The following table presents changes in the allowance for loan losses: Years Ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- (In Thousands) Balance, beginning $2,497 $2,486 $2,477 Provision for loan losses 240 230 120 Recoveries 26 25 18 Loans charged off (237) (244) (129) ------ ------ ------ Balance, ending $2,526 $2,497 $2,486 ====== ====== ====== The recorded investment in impaired loans not requiring an allowance for loan losses was $582,000 and $-0- at December 31, 2001 and 2000, respectively. There were no impaired loans requiring an allowance for loan losses at December 31, 2001 and 2000. For the years ended December 31, 2001, 2000 and 1999, the average recorded investment in these impaired loans was $582,000, $-0- and $-0-, respectively, and no interest income was recognized on impaired loans in 2001, 2000 and 1999. - -44- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS BANK PREMISES AND EQUIPMENT The major components of bank premises and equipment are as follows: December 31, ------------ 2001 2000 ---- ---- (In Thousands) Land and improvements $ 686 $ 686 Buildings and improvements 6,354 6,238 Furniture and equipment 3,000 2,700 -------- -------- 10,040 9,624 Accumulated depreciation (3,972) (3,632) -------- -------- $ 6,068 $ 5,992 ======== ======== DEPOSITS The composition of deposits is as follows: December 31, ------------ 2001 2000 ---- ---- (In Thousands) Demand, non-interest bearing $ 38,089 $ 33,893 NOW and Money Market 51,769 47,220 Savings 32,281 29,191 Time, $100,000 or more 31,271 25,102 Other time 152,058 151,814 -------- -------- $305,468 $287,220 ======== ======== At December 31, 2001, the scheduled maturities of time deposits are as follows (in thousands): 2002 $112,300 2003 47,917 2004 11,163 2005 5,050 2006 6,899 -------- $183,329 ======== BORROWINGS The Bank has entered into an agreement whereby it can borrow up to $10,000,000 from the Federal Home Loan Bank (FHLB). Outstanding balances under this agreement were $1,275,000 and $-0- as of December 31, 2001 and 2000, respectively. The agreement expires in March 2002 and the interest rate was 1.88% and 6.63% at December 31, 2001 and 2000, respectively. The Bank has a maximum borrowing capacity of $124,238,000 with the FHLB which is collateralized by qualifying assets of the Bank. -45- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REGULATORY MATTERS AND STOCKHOLDERS' EQUITY The Corporation and the Bank are subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet the 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 Corporation's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Corporation and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance sheet items as calculated under regulatory accounting practices. The 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 maintenance of minimum amounts and ratios (set forth below) of total and Tier l capital (as defined in the regulations) to risk-weighted assets and of Tier l capital to average assets. Management believes, as of December 31, 2001, that the Corporation and the Bank meet all capital adequacy requirements to which they are subject. As of December 31, 2001, the most recent notification from the Commonwealth of Pennsylvania, Department of Banking categorized the Bank as well capitalized under the regulatory framework for prompt corrective action. There are no conditions or events since that notification that management believes have changed the Bank's category. The Bank's actual capital ratios and the minimum ratios required for capital adequacy purposes and to be well capitalized under the prompt corrective action provisions are presented below. The Corporation's ratios were not materially different from those of the Bank. To Be Well For Capital Capitalized Under Adequacy Prompt Corrective Actual Purposes Action Provisions ------ -------- ----------------- Amount Ratio Amount Ratio Amount Ratio ------ ----- ------ ----- ------ ----- (Dollar Amounts in Thousands) AS OF DECEMBER 31, 2001: Total capital (to risk-weighted assets) $45,041 19.56% *$18,426 *8.00% *$23,033 *10.00% Tier I capital (to risk-weighted assets) 42,515 18.46 * 9,213 *4.00 * 13,820 * 6.00 Tier I capital (to average assets) 42,515 11.98 * 14,190 *4.00 * 17,738 * 5.00 AS OF DECEMBER 31, 2000: Total capital (to risk-weighted assets) $43,496 19.59% *$17,764 *8.00% *$22,205 *10.00% Tier l capital (to risk-weighted assets) 40,999 18.46 * 8,882 *4.00 * 13,323 * 6.00 Tier l capital (to average assets) 40,999 12.30 * 13,332 *4.00 * 16,664 * 5.00 * = greater than or equal to Certain restrictions exist regarding the ability of the Bank to transfer funds to the Corporation in the form of cash dividends, loans or advances. At December 31, 2001, $30,595,000 of undistributed earnings of the Bank, included in the consolidated stockholders' equity, was available for distribution to the Corporation as dividends without prior regulatory approval. 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 Corporation's common stock at $23.86 as adjusted for the stock dividend 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 Corporation has a dividend reinvestment and stock purchase plan. Under the Plan, additional shares of Juniata Valley Financial Corp. may be purchased at the prevailing market prices with reinvested dividends and voluntary cash payments. To the extent that shares are not available in the open market, the Corporation has reserved 100,000 shares of common stock to be issued under the plan. At December 31, 2001, 88,846 shares were available for issuance under the Dividend Reinvestment Plan. - -46- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EMPLOYEE BENEFITS Stock option plans: Under the 2000 Incentive Stock Option Plan, 220,000 shares of common stock, as adjusted for the stock dividend, were reserved for issuance upon the exercise of options granted or available for grant to officers and key employees of the Corporation. 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 six months after the grant and expire ten years after the date of the grant. Stock option transactions under the Plan were as follows: 2001 ---- Weighted- Average Options Exercise Price ------- -------------- Outstanding at beginning of year -- $ -- Granted 7,982 28.20 ----- ----- Outstanding at end of year 7,982 $28.20 ===== ====== Exercisable at December 31, 2001 -- $ -- ===== ====== The weighted-average remaining contractual life of these options is approximately ten years. The Corporation applies Accounting Principles Board Opinion 25, "Accounting for Stock Issued to Employees" (APB 25), and related Interpretations in accounting for options granted under the Plan. Accordingly, no compensation expense has been recognized for the stock options granted. Had compensation expense for the Corporation's stock option plans been determined based on the fair value at the grant date for awards under the plan consistent with the method prescribed by FASB Statement No. 123, the Corporation's net income would have been adjusted to the pro forma amounts indicated below for the year ended December 31, 2001 (in thousands, except per share amount): Net income: As reported $4,642 Pro forma 4,641 Basic and diluted earnings per share: As reported $ 1.96 Pro forma 1.96 The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model, with the following assumptions for 2001: risk-free interest rate of 4.7%, volatility of .22, dividend yield of 4.0% and an expected life of seven years. The fair value of options granted in 201 was $5.16. -47- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EMPLOYEE BENEFITS (CONTINUED) Defined benefit retirement plan: The Corporation has a defined benefit retirement plan covering substantially all of its employees. The benefits are based on years of service and the employees' compensation. The Corporation's funding policy is to contribute annually 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. Information pertaining to the activity in the Plan is as follows: Years Ended December 31, 2001 2000 ---- ---- (In Thousands) Change in benefit obligation: Benefit obligation at beginning of year $3,561 $3,174 Service cost 167 177 Interest cost 253 242 Actuarial (gain) loss (192) 47 Benefits paid (132) (79) ------ ------ Benefit obligation at end of year 3,657 3,561 ------ ------ Change in plan assets: Fair value of plan assets at beginning of year 3,189 2,932 Actual return on plan assets 176 107 Employer contribution 204 229 Benefits paid (132) (79) ------ ------ Fair value of plan assets at end of year 3,437 3,189 ------ ------ Funded status (220) (372) Unrecognized net actuarial gain (loss) (49) 95 Unrecognized net transition asset (21) (22) ------ ------ Accrued benefit cost $ (290) $ (299) ====== ====== Pension expense included the following components for the years ended December 31: 2001 2000 1999 ---- ---- ---- (In Thousands) Service cost, benefits earned during the year $ 167 $ 177 $ 162 Interest cost on projected benefit obligation 248 239 212 Expected return on plan assets (239) (219) (202) Net amortization (2) (2) (2) ------ ------ ------ $ 174 $ 195 $ 170 ====== ====== ====== Assumptions used in the accounting were: 2001 2000 1999 ---- ---- ---- Discount rates 7.5% 7.5% 7.5% Rates of increase in compensation levels 4.0 4.0 4.0 Expected long-term rate of return on assets 7.5 7.5 7.5 - -48- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS EMPLOYEE BENEFITS (CONTINUED) Supplemental retirement plans: The Corporation has non-qualified supplemental retirement and split-dollar life insurance plans for directors and key employees. At December 31, 2001 and 2000, the present value of the future liability was $1,123,000 and $1,065,000, respectively. The Corporation has funded these plans through the purchase of annuities and life insurance policies, which have an aggregate cash surrender value of $2,733,000 and $970,000 at December 31, 2001 and 2000, respectively. For the years ended December 31, 2001, 2000 and 1999, $188,000, $147,000 and $152,000, respectively, was charged to expense in connection with these plans. Deferred compensation plan: The Corporation 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, 2001 and 2000, the present value of the future liability was $1,769,000 and $1,678,000, respectively. To fund the benefits under these agreements, the Corporation is the owner and beneficiary of life insurance policies on the lives of certain directors. The policies had an aggregate cash surrender value of $1,376,000 and $1,246,000 at December 31, 2001 and 2000, respectively. For the years ended December 31, 2001, 2000 and 1999, $213,000, $157,000 and $201,000, respectively, was charged to expense in connection with this plan. Employee Stock Purchase Plan: The Corporation 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 100,000; however, the annual issuance of shares shall not exceed 5,000 shares plus any unissued shares from prior offerings. In 2001, 2000 and 1999, 1,500, 39 and 753 shares, respectively, were issued under the Plan. At December 31, 2001, 94,900 shares were reserved for issuance under the Plan. Salary continuation plans: The Corporation has a non-qualified Salary Continuation Plan for key employees. At December 31, 2001 and 2000, the present value of the future liability was $342,000 and $215,000, respectively. The Corporation has funded these plans through the purchase of life insurance policies which have an aggregate cash surrender value of $5,000,000 and $1,463,000 at December 31, 2001 and 2000, respectively. For the years ended December 31, 2001, 2000 and 1999, $127,000, $74,000 and $68,000, respectively, was charged to expense in connection with these plans. -49- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INCOME TAXES The provision for federal income taxes consists of the following: Years Ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- (In Thousands) Current $1,531 $1,485 $1,417 Deferred (103) (110) (57) ------ ------ ------ $1,428 $1,375 $1,360 ====== ====== ====== A reconciliation of the statutory income tax expense computed at 34% to the income tax expense included in the statements of income is as follows: Years Ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- (In Thousands) Federal income tax at statutory rate $2,064 $1,959 $1,917 Tax-exempt interest (583) (656) (775) Disallowance of interest expense 96 110 123 Income on life insurance (128) (41) (33) Other (21) 3 128 ------ ------ ------ $1,428 $1,375 $1,360 ====== ====== ====== The income tax provision includes $-0-, $2,000, and $15,000 in 2001, 2000 and 1999, respectively, of income tax related to realized gains on sales of securities. The net deferred tax asset in the accompanying balance sheets includes the following amounts of deferred tax assets and liabilities: December 31, ------------ 2001 2000 ---- ---- (In Thousands) Deferred tax assets: Allowance for loan losses $ 732 $ 722 Deferred directors' fees 601 571 Pension liabilities 588 536 ------ ------ Total deferred tax assets 1,921 1,829 ------ ------ Deferred tax liabilities: Bank premises and equipment (104) (105) Securities accretion (17) (27) Unrealized gains on securities available for sale (348) (187) ------ ------ Total deferred tax liabilities (469) (319) ------ ------ Net deferred tax asset $1,452 $1,510 ====== ====== TRANSACTIONS WITH EXECUTIVE OFFICERS AND DIRECTORS The Bank has had banking transactions in the ordinary course of business with its executive officers, directors, and their related interests on the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions with others. At December 31, 2001 and 2000, these persons were indebted to the Bank for loans totaling $1,887,000 and $1,335,000 respectively. During 2001, loans totaling $1,886,000 were disbursed and loan repayments totaled $1,334,000. - -50- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS COMMITMENTS The Bank rents equipment and branch offices under operating leases that expire through 2007. Equipment and servicing fees were $654,000, $484,000 and $485,000 for the years ended December 31, 2001, 2000 and 1999, respectively. Rent expense, including the license fee for the branch offices was $55,000, $53,000 and $53,000 in 2001, 2000 and 1999, respectively. Minimum future payments under all noncancellable lease and service agreements as of December 31, 2001 are as follows (in thousands): 2002 $ 264 2003 265 2004 266 2005 266 2006 262 Thereafter 33 ------ $1,356 ====== FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK The Bank 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 include commitments to extend credit and letters of credit. Those instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in the balance sheet. The Bank's exposure to credit loss in the event of nonperformance 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 commitments and conditional obligations as it does for on-balance sheet instruments. A summary of the Bank's financial instrument commitments is as follows: December 31, ------------ 2001 2000 ---- ---- (In Thousands) Commitments to grant loans $ 2,915 $ 2,514 Unfunded commitments under lines of credit 31,230 22,994 Outstanding letters of credit 765 610 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. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Bank evaluates each customer's credit worthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Bank upon extension of credit, is based on management's credit evaluation. Collateral held varies but may include personal or commercial real estate, accounts receivable, inventory and equipment. Outstanding letters of credit written are conditional commitments issued by the Bank to guarantee the performance of a customer to a third party. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. CONCENTRATION OF CREDIT RISK The Bank grants commercial, residential and consumer loans to customers primarily located in the counties of Juniata, Mifflin, Perry, Huntingdon, Centre, Franklin and Snyder, Pennsylvania. The concentrations of credit by type of loan are set forth in the note, "Loans Receivable and Allowance for Loan Losses". Although the Bank has a diversified loan portfolio, its debtors' ability to honor their contracts is influenced by the region's economy. -51- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS Management uses its best judgment in estimating the fair value of the Corporation'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 Corporation could have realized in a sales transaction 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 Corporation since a fair value calculation is only provided for a limited portion of the Corporation's assets. Due to a wide range of valuation techniques and the degree of subjectivity used in making the estimates, comparisons between the Corporation's disclosures and those of other companies may not be meaningful. The following methods and assumptions were used to estimate the fair values of the Bank's financial instruments at December 31, 2001 and 2000: o For cash, cash equivalents, interest bearing demand deposits in other banks and federal funds sold, the carrying amount is a reasonable estimate of fair value. o For interest bearing time deposits with banks, the carrying amount is a reasonable estimate of face value. o For securities, fair values are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable securities. o For Federal Home Loan Bank stock, the carrying amount is a reasonable estimate of fair value. o For variable-rate loans that reprice frequently and which entail no significant changes in credit risk, fair values are based on carrying values. All commercial loans and substantially all 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 using discounted cash flow analyses, at interest rates currently offered for loans with similar terms to borrowers of similar credit quality. o Fair values for demand deposits, savings accounts and certain money market deposits are, by definition, equal to the amount payable on demand at the reporting date (i.e., their carrying amounts). Fair values of fixed-maturity certificates of deposit are estimated using a discounted cash flow calculation that applies interest rates currently being offered on certificates to a schedule of aggregated expected monthly maturity of deposits. o For short-term borrowings, the carrying amount is a reasonable estimate of fair value. o For accrued interest receivable and accrued interest payable, the carrying amount is a reasonable estimate of fair value. o 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. - -52- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The estimated fair values of the Corporation's financial instruments are as follows: December 31, 2001 2000 ---- ---- CARRYING FAIR Carrying Fair AMOUNT VALUE Amount Value ------ ----- ------ ----- (In Thousands) Financial assets: Cash and due from banks $ 11,571 $ 11,571 $ 10,621 $ 10,621 Interest bearing deposits with banks 87 87 676 676 Interest bearing time deposits with banks 3,590 3,590 -- -- Federal funds sold -- -- 4,400 4,400 Securities 93,275 94,098 84,386 84,113 Federal Home Loan Bank stock 1,208 1,208 1,185 1,185 Loans receivable, net of allowance 227,998 228,451 219,819 218,695 Accrued interest receivable 2,047 2,047 2,177 2,177 Financial liabilities: Deposits 305,468 308,981 287,220 287,960 Short-term borrowings 1,275 1,275 -- -- Accrued interest payable 950 950 988 988 Off-balance sheet financial instruments: Commitments to extend credit -- -- -- -- Standby letters of credit -- -- -- -- -53- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PARENT COMPANY ONLY FINANCIAL INFORMATION BALANCE SHEETS December 31, ------------ 2001 2000 ---- ---- ASSETS (In Thousands) Cash $ 7 $ 2 Interest-bearing deposits with banks 490 490 ------- ------- Cash and cash equivalents 497 492 Investment in Bank subsidiary 43,138 41,348 Securities available for sale 1,692 1,235 Other 26 16 ------- ------- $45,353 $43,091 ======= ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities, other $ 27 $ 9 Stockholders' equity 45,326 43,082 ------- ------- $45,353 $43,091 ======= ======= STATEMENTS OF INCOME Years Ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- (In Thousands) Dividends from Bank subsidiary $ 3,090 $ 5,212 $6,758 Interest income 102 74 51 Other expenses (66) (72) (30) ------- ------- ------ Income before equity in undistributed net income of subsidiary 3,126 5,214 6,779 Equity in (excess of) undistributed net income of Bank subsidiary 1,516 (827) (2,501) ------- ------- ------ Net income $ 4,642 $ 4,387 $4,278 ======= ======= ====== - -54- JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY, THE JUNIATA VALLEY BANK NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PARENT COMPANY ONLY FINANCIAL INFORMATION (CONTINUED) STATEMENTS OF CASH FLOWS Years Ended December 31, ------------------------ 2001 2000 1999 ---- ---- ---- (In Thousands) CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 4,642 $ 4,387 $4,278 Adjustments to reconcile net income to net cash provided by operating activities: Distributions in excess of (undistributed) net income of Bank subsidiary (1,516) 827 2,501 (Increase) decrease in other assets (10) 42 (22) Increase (decrease) in other liabilities 18 7 -- ------- ------- ------ Net cash provided by operating activities 3,134 5,263 6,757 ------- ------- ------ CASH FLOWS FROM INVESTING ACTIVITIES Purchases of available for sale securities (622) (640) (470) Proceeds from maturities of available for sale securities 200 200 -- ------- ------- ------ Net cash used in investing activities (422) (440) (470) ------- ------- ------ CASH FLOWS FROM FINANCING ACTIVITIES Dividends paid and cash paid in lieu of fractional shares (1,904) (2,935) (2,935) Purchase of treasury stock (1,189) (2,276) (3,823) Treasury stock issued 181 386 469 Stock issued under employee stock purchase plan 32 -- -- Stock issued under dividend reinvestment plan 173 -- -- ------- ------- ------ Net cash used in financing activities (2,707) (4,825) (6,289) ------- ------- ------ Increase (decrease) in cash and cash equivalents 5 (2) (2) Cash and cash equivalents: Beginning 492 494 496 ------- ------- ------ Ending $ 497 $ 492 $ 494 ======= ======= ====== -55- AVAILABILITY OF FORM 10-K A copy of the Corporation's Annual Report on Form 10-K as filed with the Securities and Exchange Commission will be available without charge upon written request. This request should be addressed to: Ms. Linda Engle Juniata Valley Financial Corp. P.O. Box 66 Mifflintown, PA 17059 Pursuant to Part 350 to FDIC's Annual Disclosure Regulation, Juniata Valley Financial Corp. will make available to you upon request, financial information about this Bank. The purpose of this regulation is to facilitate more informed decision making by you, our shareholders, by providing statements containing financial information for the last two years. Please contact: Ms. Judy Robinson The Juniata Valley Bank P.O. Box 66 Mifflintown, PA 17059