JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
DECEMBER 31, 2003
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------------------------------------------------------3-4
Corporation Officers and Directors--------------------------------------------5
Advisory Board Members--------------------------------------------------------6
Bank Officers-----------------------------------------------------------------7
Business-------------------------------------------------------------------8-16
Financial Highlights---------------------------------------------------------17
Management's Discussion and Analysis of Financial Condition and
Results of Operations ----------------------------------------------------18-38
Report of Independent Auditors ----------------------------------------------39
Financial Statements:
Consolidated Balance Sheets ---------------------------------------------40
Consolidated Statements of Income ---------------------------------------41
Consolidated Statements of Stockholders' Equity -------------------------42
Consolidated Statements of Cash Flows -----------------------------------43
Notes to Consolidated Financial Statements ---------------------------44-63
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 2003 and 2002 are provided in the
table below.
2003 2002
---- ----
Dividends Dividends
Quarter High Low per share Quarter High Low per share
- ------- ---- --- --------- ------- ---- --- ---------
First $30.75 $29.00 First $28.75 $28.20
Second 30.75 29.65 $.47 Second 28.60 28.30 $.43
Third 30.60 30.00 Third 28.90 28.45
Fourth 34.50 30.25 .53 Fourth 29.25 28.50 .45
For further information, we refer you to:
Ferris, Baker Watts Inc. Boenning & Scattergood, Inc.
100 Light Street 1700 Market St., Suite 1420
Baltimore, MD 21202 Philadelphia, PA 19103-3913
(800) 638-7411 (800) 842-8928
Ryan Beck & Co., Inc. Janney Montgomery Scott LLC
150 Monument Road, Suite 106 48 E. Market St., P.O. Box 2246
Bala Cynwyd, PA 19004 York, PA 17405-2246
(800) 223-8969 (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 FINANCIAL CORP. GRAPHIC OMITTED]
POST OFFICE BOX 66
TELEPHONE (717) 436-8211
Dear Shareholder:
It is with a great deal of pleasure that we present, on behalf of our
entire Team, the 2003 Annual Report of the Juniata Valley Financial Corp. for
your review.
This letter will highlight key elements of the success of your Bank in
2003. In addition to reporting the financial results, a meaningful measure of
your Bank's success, there are other aspects of our performance that are worthy
of mention.
In our ongoing quest to become a one stop provider of financial
services, early in 2003 we began to expand our focus in our Trust and Investment
Management Division. Our expanded focus allows us to place more emphasis on
Investment Management as an enhancement to our Trust & Investment Management
Division's goals and objectives. We are now in a position to offer a broader
array of products and services in pension plans, 401k plans, profit sharing
plans, IRAs and Investment Management. In 2003 this expanded focus has enabled
us to increase our Trust assets under management to $61,736,000, on an
investment cost basis, an increase of 9.27%.
During 2003 we expanded and remodeled our Water Street Office. We
converted this facility from an unattractive, inefficient community office to a
very attractive, efficient, customer friendly community office that will serve
us well for years to come. The acceptance and operating results of this
rejuvenated facility so far are very encouraging.
In our ongoing effort to improve the appearance of our community
offices, we demolished the vacant facility adjacent to our office in Port Royal.
While we still have some work to be completed on that site, the result has
significantly improved the appearance of our office, and downtown Port Royal.
In late spring we began the installation of our Wide Area Network and
ultimately the installation of our Automated Teller System and the upgrade to
our Relationship Management System. We devoted a great deal of time and effort
to the development, training and implementation of these new systems. As in any
new system there is a learning curve. As we move along the learning curve, we
will become more familiar with these systems which will enable us to utilize
them to their fullest.
In addition to the above mentioned activities, 2003 was a very
successful year from a financial standpoint for your Bank. Net income of the
Corporation grew 12.60% to $5,647,000 in 2003, from $5,015,000 in 2002. Earnings
per share increased by 14.88% to $2.47 per share from $2.15 per share. Net
income benefited from our ongoing attempt to improve non interest income. While
net interest income grew 6.05%, non interest income increased by 37.04%. This
substantial improvement in non interest income was a result of 21.24% increase
in revenue from our Trust and Investment Management Division, and a 65.50%
revenue increase from our Alternative Investment Program. Additionally, there
was an 18.32% increase in revenue from Bank Owned Life Insurance. Other sources
of non interest income increases were service fees, as well as nonrecurring
items in the other income category.
-3-
The Corporation ended 2003 with total assets of $387,780,000 versus
$375,735,000 in 2002. Net loans outstanding reached an all time high of
$249,960,000 as of year end 2003 compared to $235,497,000 in 2002, an increase
of 6.14%. This is a respectable increase given the economic climate in our
market place as well as the mortgage refinancing boom that occurred in 2003.
The two most commonly used financial measurements in the banking
industry showed a nice improvement in 2003. Return on Average Assets (ROAA)
increased from 1.37% in 2002 to 1.46% in 2003. Return on Average Equity (ROAE)
improved from 10.85% in 2002 to 11.86% in 2003.
Finally, as a result of the above mentioned financial performance, the
market value of our stock increased significantly, closing 2003 at $34.50 per
share. When taking into consideration the appreciation in value, the 13.64%
increase in dividends paid in 2003, the total return on our stock for 2003
amounted to 21.36%.
For over 136 years, your Bank has worked very hard to improve its
products and service to justify your trust. We do not take your trust in us for
granted, and we realize that we must always work to improve all aspects of our
service to you. With that in mind, 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,
[SIGNATURE GRAPHIC OMITTED]
Francis J. Evanitsky
President & CEO
- -4-
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/Operator, Glenn Nace, Inc.
MARTIN L. DREIBELBIS JOHN A. RENNINGER
Chairman, Self-Employed, Petroleum Consultant Retired President, A. D. Renninger
Lumber Company
FRANCIS J. EVANITSKY
President & CEO, The Juniata Valley Bank RICHARD M. SCANLON, DMD
Self-Employed, Dentist
PHILIP E. GINGERICH, JR.
President, Central Insurers Group, Inc. HAROLD B. SHEARER
Retired, Self-employed, Farmer
MARSHALL L. HARTMAN
Owner, Traditions, Ltd. JAN G. SNEDEKER
President & Chairman of the Board,
DON E. HAUBERT 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, Stonewall Equity, Inc.
NOTE: Above Directors also comprise the Board of Directors for The Juniata Valley Bank
-5-
ADVISORY BOARD MEMBERS
MILLERSTOWN OFFICE MONUMENT SQUARE/WAL-MART OFFICES
R. Franklin Campbell William R. Carter
Lowell R. Frantz, C.L.U. Lee Ellen Foose
Gregory J. Gordon Sharon Havice
Gerald M. Lyter Nancy S. Reinke
James A. Witmer Frank A. Zampelli
Gary G. Wright
PORT ROYAL OFFICE GARDENVIEW OFFICE
Kim E. Bomberger David B. Esh
Larry B. Cottrill, Jr. M. Randall French
Robert D. Hower H. Ross Harshbarger
Richard J. Junk Donald R. Hartzler
N. Jeffrey Leonard Jerry L. Wagner
Dennis A. Long
McALISTERVILLE OFFICE MARKET STREET/WATER STREET OFFICES
Mark D. Apple George W. Anderson
M. Richard Dimm Catherine J. Laub
Steve D. 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
William R. Goshorn Daniel B. Firth
Carl F. Jaymes Leann M. Fisher
Wayne S. McCoy David E. Walker
- -6-
THE JUNIATA VALLEY BANK OFFICERS
A Wholly-Owned Subsidiary of Juniata Valley Financial Corp.
EXECUTIVE
Francis J. Evanitsky---------------------------------------President & C.E.O.
Linda L. Engle-------------------------------Executive Vice President, C.F.O.
Judy E. Robinson------------------------------------------Executive Secretary
ADMINISTRATION
Donald L. Musser--------------Sr. Vice President, Facilities/Security Manager
Pamela S. Eberman------------------Sr. Vice President, Human Resource Manager
Lou Ann Wilson-----------------------------Vice President, Compliance Officer
Thomas L. Parrish------Sr. Vice President, Community Banking Division Manager
ACCOUNTING
Kristi J. Burdge---------------------------------------------Staff Accountant
Anna Mae Peoples------------------------Vice President, Accounting Specialist
LOANS
Edward L. Kauffman------------------Sr. Vice President, Loan Division Manager
Robert G. Dillon---------Vice President, Sr. Loan Officer/Collections Manager
Scott E. Nace---------------------Vice President, Loan Administration Manager
David A. Pecht--------------Vice President, Secondary Mortgage Market Manager
Kurt L. McKinney, Jr.------------------------Vice President, Sr. Loan Officer
R. Jack Morgan---------------------------------------------------Loan Officer
Penny L. Adams---------------------------------------------------Loan Officer
OPERATIONS
Judy R. Aumiller---Sr. Vice President, Operations Technology Division Manager
Kathy D. Hutchinson--------Vice President, Data/Operations/Technology Manager
Deborah A. Sheaffer------------------------Vice President, Money Desk Manager
Sherise Y. Pelizzari-------------Assistant Vice President, Operations Manager
S. Marlene Hubler---------------------------------Computer Operations Manager
TRUST & INVESTMENT MANAGEMENT
William L. Barnett----Sr. Vice President, Trust & Investment Division Manager
James C. Dillman------------------------Sr. Vice President, Sr. Trust Officer
Cynthia L. Williams-----------------------------Vice President, Trust Officer
BLAIRS MILLS OFFICE
Wayne S. McCoy---------------------------------------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
Winston L. Libby-----------------------------------Financial Services Officer
McALISTERVILLE OFFICE
Joseph D. Ritzman--------------------Vice President, Community Office Manager
Leslie A. Miller-------------------------------------Customer Service Officer
MIFFLINTOWN OFFICE
Betty D. Ryan------------------------Vice President, Community Office Manager
Malcolm R. Parks-----------------------------------Financial Services 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 E. 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 OFFICE
Christine L. Weyer-----------------------------------Community Office Manager
Denise M. Rothrock-----------------------------------Customer Service Officer
WATER STREET OFFICE
Catherine J. Laub--------------------Vice President, Community Office Manager
-7-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
COMPANY OVERVIEW
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.
NATURE OF OPERATIONS
Juniata Valley Financial Corp. (Corporation) operates primarily in central
Pennsylvania, with the purpose of delivering financial services within its local
market. The Corporation provides retail and commercial banking services through
12 offices. Four community offices are located in Juniata County, six community
offices are located in Mifflin County, one community office in each of Perry and
Huntingdon County, and a loan production office in Centre County. The
Corporation offers a full range of consumer and commercial services. Consumer
services include Internet and telephone banking, an automated teller machine
network, personal checking accounts, debit cards, certificates of deposit, club
accounts, secured and unsecured installment loans, construction, and mortgage
loans, safe deposit boxes, overdraft checking protection, and IRA accounts.
Commercial banking services include small and high-volume business checking
accounts, online account management services, ACH origination, payroll direct
deposit, commercial lines of credit and term loans. The Corporation also
provides a variety of trust and asset management services and has staff
contracted with a broker-dealer to allow them to offer annuities, mutual funds,
stock and bond-brokerage services, and long-term care insurance. Management
believes it has a relatively stable deposit base with no major seasonal
depositor or group of depositors. Most of the Corporation's commercial customers
are small and mid-sized businesses in central Pennsylvania.
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, modified 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, wellmanaged and CRA-rated satisfactory or better.
Financial activities include securities, insurance, merchant banking/ equity
investment, financial in nature, and complimentary activities.
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.
- -8-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
SUPERVISION AND REGULATION (CONTINUED)
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,
------------
2003 2002 2001
---- ---- ----
Risk-weighted assets ratio:
Tier I 18.89% 18.76% 18.46%
Total 20.05% 19.93% 19.56%
Total assets leverage ratio:
Tier I 11.93% 12.04% 11.98%
SECURITIES PORTFOLIO
The following table sets forth the carrying amount of securities at the
dates indicated:
December 31,
------------
2003 2002 2001
---- ---- ----
(In Thousands)
Available for sale securities (at fair value):
U.S. Treasury and other U.S. government obligations $57,715 $ 46,593 $30,960
States and political subdivisions 18,383 16,299 15,691
Other corporate -- 2,004 3,116
Mortgage-backed 6,260 4,628 3,951
Equity 1,226 971 945
------- ------- -------
83,584 70,495 54,663
------- ------- -------
Held to maturity securities (at amortized cost):
U.S. Treasury and other U.S. government obligations 4,476 3,467 3,461
States and political subdivisions 10,541 20,626 26,742
Other corporate -- 5,814 8,409
------- ------- -------
15,017 29,907 38,612
------- ------- -------
Total securities $98,601 $100,402 $93,275
======= ======== =======
-9-
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, 2003
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, 2003, 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 $ 3,332 4.33% $54,375 3.28% $ -- --% $ 8 2.77%
State and political
subdivisions 262 6.66 16,671 3.53 1,450 2.97 -- --
Other corporate -- -- -- -- -- -- -- --
Mortgage-backed -- -- 1,593 3.60 1,032 4.60 3,635 4.49
------- ------- ------ ------
3,594 72,639 2,482 3,643
------- ------- ------ ------
Held to maturity:
U.S. Treasury and other U.S.
government agencies -- -- 4,476 2.99 -- -- -- --
State and political
subdivisions 10,541 3.87 -- -- -- -- -- --
Other corporate -- -- -- -- -- -- -- --
------- ------- ------ ------
10,541 4,476 -- --
------- ------- ------ ------
Total $14,135 $77,115 $2,482 $3,643
======= ======= ====== ======
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.
- -10-
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 three
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-four 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,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In Thousands)
Commercial, financial and agricultural $ 25,885 $ 26,815 $ 24,548 $ 23,327 $ 18,784
Real estate mortgage 162,164 157,609 151,369 142,897 139,163
Consumer (less unearned discount) 60,154 51,352 51,733 52,991 46,419
All other 4,577 2,452 2,874 3,101 2,456
-------- -------- -------- -------- --------
Total loans $252,780 $238,228 $230,524 $222,316 $206,822
======== ======== ======== ======== ========
This table shows the maturity of loans (excluding residential mortgages of 1-4
family residences and consumer loans) outstanding as of December 31, 2003.
Maturing Maturing Maturing
During From 2005 After
2004 Thru 2008 2008 Total
---- --------- ---- -----
(In Thousands)
Commercial, agricultural and financial $ 25,885 $ -- $ -- $ 25,885
Commercial real estate 34,938 -- -- 34,938
All other 4,577 -- -- 4,577
-------- -------- -------- --------
Total loans $ 65,400 $ -- $ -- $ 65,400
======== ======== ======== ========
-11-
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,
------------
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In Thousands)
Average loans outstanding $238,794 $233,262 $223,487 $212,270 $193,305
======== ======== ======== ======== ========
Nonaccrual loans $ -- $ 219 $ 934 $ 364 $ 164
Accruing loans past due
90 days or more 584 544 811 440 262
Restructured loans -- -- -- -- --
-------- -------- -------- -------- --------
Total $ 584 $ 763 $ 1,745 $ 804 $ 426
======== ======== ======== ======== ========
Ratio of non-performing loans
to average loans outstanding .24% .33% .78% .39% .22%
Information with respect to nonaccrual and restructured loans at December 31,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In Thousands)
Nonaccrual loans $ -- $ 219 $ 934 $ 364 $ 164
Restructured loans -- -- -- -- --
Interest income that would have been
recorded under original terms -- 20 84 38 16
Interest income recorded
during the period -- -- -- -- --
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.
- -12-
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,
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In Thousands)
Average loans outstanding $238,794 $233,262 $223,487 $212,270 $193,305
======== ======== ======== ======== ========
Allowance for loan loss at January 1 $ 2,731 $ 2,526 $ 2,497 $ 2,486 $ 2,477
Losses charged to allowance
Commercial 78 54 58 155 2
Real estate 50 44 51 -- 27
Consumer 107 109 128 89 100
-------- ------- -------- -------- --------
235 207 237 244 129
-------- ------- -------- -------- --------
Recoveries credited to allowance
Commercial 1 5 2 13 --
Real estate 2 103 19 -- --
Consumer 17 4 5 12 18
-------- ------- -------- -------- --------
20 112 26 25 18
-------- ------- -------- -------- --------
Net charge-offs 215 95 211 219 111
Provision for loan losses 304 300 240 230 120
-------- ------- -------- -------- --------
Allowance for loan losses at December 31 $ 2,820 $ 2,731 $ 2,526 $ 2,497 $ 2,486
======== ======= ======== ======== ========
Ratio of net charge-offs to
average loans outstanding
.09% .04% .09% .10% .06%
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.
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
(In Thousands)
% OF % of % of % of % of
AMOUNT LOAN Amount Loan Amount Loan Amount Loan Amount Loan
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Commercial $1,055 12.0% $1,057 12.3% $ 970 11.9% $ 670 12.4% $ 577 10.3%
Real estate 548 64.2 561 66.2 747 65.7 472 64.3 468 67.3
Consumer 963 23.8 853 21.5 656 22.4 770 23.3 750 22.4
Unallocated 254 -- 260 -- 153 -- 585 -- 691 --
------ ---- ------ ---- ----- ---- ----- ---- ----- ----
Total $2,820 100% $2,731 100% $2,526 100% $2,497 100% $2,486 100%
====== === ====== === ====== === ====== === ====== ===
-13-
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 64% 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, 2003, that qualified as HLTS.
- -14-
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:
2003 2002 2001
---- ---- ----
AMOUNT RATE Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(In Thousands)
Non-interest bearing demand $ 42,010 $ 38,870 $ 36,623
Interest bearing demand 62,381 1.16% 53,896 1.59% 50,056 2.36%
Savings deposits 40,043 1.23 35,382 1.82 31,204 2.44
Time deposits 186,843 3.34 186,425 4.18 181,085 5.51
-------- -------- --------
Total $331,277 $314,573 $298,968
======== ======== ========
As of December 31, 2003, certificates of deposit outstanding in an individual
amount of $100,000 or more totalled $34,323,000.
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)
$7,463 $3,377 $6,054 $17,429
====== ====== ====== =======
-15-
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 2003
Interest income $5,673 $5,798 $5,611 $5,418
Interest expense (2,016) (1,914) (1,832) (1,710)
------ ------ ------ ------
Net interest income 3,657 3,884 3,779 3,708
Provision for loan losses (75) (75) (75) (79)
Other income 507 609 593 1,051
Other expenses (2,392) (2,451) (2,479) (2,695)
------ ------ ------ ------
Income before income taxes 1,697 1,967 1,818 1,985
Income taxes (359) (441) (502) (518)
------ ------ ------ ------
Net income $1,338 $1,526 $1,316 $1,467
====== ====== ====== ======
Per-share data:
Basic earnings $ .58 $ .67 $ .58 $ .64
Diluted earnings .58 .67 .58 .63
Cash dividends -- .47 -- .53
Three Months Ended
------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In Thousands, except per share data)
FOR THE YEAR 2002
Interest income $5,850 $5,899 $5,897 $5,824
Interest expense (2,424) (2,305) (2,321) (2,249)
------ ------ ------ ------
Net interest income 3,426 3,594 3,576 3,575
Provision for loan losses (75) (75) (75) (75)
Other income 505 517 475 517
Other expenses (2,189) (2,285) (2,269) (2,381)
------ ------ ------ ------
Income before income taxes 1,667 1,751 1,707 1,636
Income taxes (332) (421) (509) (484)
------ ------ ------ ------
Net income $1,335 $1,330 $1,198 $1,152
====== ====== ====== ======
Per-share data:
Basic and diluted earnings $ .57 $ .57 $ .51 $ .50
Cash dividends -- .43 -- .45
- -16-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY
THE JUNIATA VALLEY BANK
FIVE YEAR FINANCIAL HIGHLIGHTS o SELECTED FINANCIAL DATA
2003 2002 2001 2000 1999
---- ---- ---- ---- ----
BALANCE SHEET DATA (In Thousands)
Assets $387,780 $375,735 $356,757 $334,914 $336,119
Deposits 332,984 322,619 305,468 287,221 283,350
Loans receivable, net 249,960 235,497 227,998 219,819 204,336
Securities 103,798 106,431 98,073 85,571 104,650
Stockholders' equity 50,483 48,327 45,326 43,082 43,255
Average equity 47,629 46,210 44,348 42,106 44,526
Average assets 386,574 366,853 348,331 334,685 339,364
EARNINGS DATA (In Thousands)
Interest income $ 22,500 $ 23,470 $ 24,641 $ 24,679 $ 23,858
Interest expense 7,472 9,299 11,929 11,880 11,354
-------- -------- -------- -------- --------
Net interest income 15,028 14,171 12,712 12,799 12,504
Provision for loan losses 304 300 240 230 120
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 14,724 13,871 12,472 12,569 12,384
Other income 2,760 2,014 2,194 1,377 1,286
Other expenses 10,017 9,124 8,596 8,184 8,032
-------- -------- -------- -------- --------
Income before income taxes 7,467 6,761 6,070 5,762 5,638
Federal income taxes 1,820 1,746 1,428 1,375 1,360
-------- -------- -------- -------- --------
Net income $ 5,647 $ 5,015 $ 4,642 $ 4,387 $ 4,278
======== ======== ======== ======== ========
RATIOS
Return on average assets 1.46% 1.37% 1.33% 1.31% 1.26%
Return on average equity 11.86 10.85 10.47 10.42 9.61
Equity to assets (year end) 13.02 12.86 12.71 12.86 12.87
Loans to deposits (year end) 75.07 73.00 74.64 76.53 72.11
Dividend payout (percentage
of income) 40.43 40.72 40.78 66.90 68.61
Efficiency ratio 56.31 56.37 57.67 57.73 58.25
PER SHARE DATA
Basic earnings 2.47 2.15 1.96 1.81 1.70
Diluted earnings 2.45 2.15 1.96 1.81 1.70
Cash dividends 1.00 .88 .80 1.21 1.16
Book value 22.10 20.89 19.28 18.09 17.59
Average shares outstanding 2,290,961 2,330,390 2,368,923 2,420,966 2,519,801
Approximate number
of stockholders 1,761 1,751 1,719 1,725 1,696
-17-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
TABLE 1 - SOURCES AND USES OF FUNDS TRENDS
2003 Increase (Decrease) 2002 Increase (Decrease) 2001
AVERAGE ------------------- Average ------------------- Average
BALANCE Amount % Balance Amount % Balance
------- ------ - ------- ------ - -------
(Thousands of Dollars)
Funding uses:
Interest earning assets:
Loans:
Commercial $ 75,543 $ 4,637 6.54% $ 70,906 $ 4,319 6.49% $ 66,587
Mortgage 113,380 231 .20 113,149 6,538 6.13 106,611
Consumer 54,065 4,858 9.87 49,207 (1,082) (2.15) 50,289
-------- ------- -------- ------- --------
242,988 9,726 4.17 233,262 9,775 4.37 223,487
Less: Allowance for loan losses (2,780) (180) (6.92) (2,600) (82) (3.26) (2,518)
-------- ------- -------- ------- --------
240,208 9,546 4.14 230,662 9,693 4.39 220,969
Interest bearing deposits with banks 5,342 1,103 26.02 4,239 3,125 280.52 1,114
Securities 100,538 4,553 4.74 95,985 9,465 10.94 86,520
Funds sold 6,565 457 7.48 6,108 (4,132) (40.35) 10,240
-------- ------- -------- ------- --------
112,445 6,113 5.75 106,332 8,458 8.64 97,874
-------- ------- -------- ------- --------
Total interest earning assets 352,653 15,659 4.65 336,994 18,151 5.69 318,843
Other assets 33,921 4,062 13.60 29,859 371 1.26 29,488
-------- ------- -------- ------- --------
Total uses $386,574 $19,721 5.38 $366,853 $18,522 5.32 348,331
======== ======= ======== ======= ========
Funding sources:
Deposits:
Demand $ 42,010 $ 3,140 8.08 $ 38,870 $ 2,247 6.14 $ 36,623
Interest bearing demand 62,381 8,485 15.74 53,896 3,840 7.67 50,056
Savings 40,043 4,661 13.17 35,382 4,178 13.39 31,204
Time under $100,000 152,947 (555) (.36) 153,502 3,688 2.46 149,814
-------- ------- -------- ------- --------
Total core deposits 297,381 15,731 5.59 281,650 13,953 5.21 267,697
Time over $100,000 33,896 973 2.96 32,923 1,652 5.28 31,271
-------- ------- -------- ------- ------
Total deposits 331,277 16,704 5.31 314,573 15,605 5.22 298,968
Other liabilities 7,173 1,240 20.90 5,933 939 18.80 4,994
Short-term borrowings 495 358 261.31 137 116 552.38 21
Stockholders' equity 47,629 1,419 3.07 46,210 1,862 4.20 44,348
-------- ------- -------- ------- --------
Total sources $386,574 $19,721 5.38 $366,853 $18,522 5.32 $348,331
======== ======= ======== ======= ========
- -18-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
COMPANY OVERVIEW
This discussion concerns Juniata Valley Financial Corp. (Corporation) and its
wholly owned subsidiary The Juniata Valley Bank (Bank). The purpose of this
discussion is to focus on information concerning the Corporation's financial
condition and results of operations that is not readily apparent from the
consolidated financial statements, the notes thereto, and other financial
information presented in this Annual Report.
FORWARD-LOOKING STATEMENTS
The information contained in this Annual Report contains forward-looking
statements (as defined in the Securities Exchange Act of 1934 and the regulation
thereunder), 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, 2003, a copy of which may be
obtained from the Corporation upon request without charge.
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
Disclosure of the Corporation's significant accounting policies is included in
footnotes to the consolidated financial statements under the heading "Summary of
Significant Accounting Policies". Certain of these policies are particularly
sensitive requiring significant judgements, estimates and assumptions to be made
by management. Additional information is contained in Management's Discussion
and Analysis for the most sensitive issues, including the provision and
allowance for loan losses and accounting for stock options.
Management, in determining the allowance for loan losses, makes significant
estimates. Consideration is given to a variety of factors including current
economic conditions, diversification of the loan portfolio, delinquency
statistics, results of internal loan reviews, borrowers' perceived financial and
managerial strengths, the adequacy of the underlying collateral, if collateral
dependent, or present value of future cash flows and other relevant factors.
As permitted by SFAS No. 123, the Corporation accounts for stock-based
compensation in accordance with Accounting Principles Board Opinion (APB) No.
25. Under APB No. 25, no compensation expense is recognized in the income
statement related to any options granted under the Corporation stock option
plans. The pro forma impact to net income and earnings that would occur if
compensation expense was recognized, based on the estimated fair value of the
options on the date of the grant, is disclosed in the notes to the consolidated
financial statements. The Corporation intends to continue to account for
stock-based compensation in this manner unless there is more specific guidance
issued by the Financial Accounting Standards Board or unless a clear consensus
develops in the financial services industry on the application of accounting
methods.
BALANCE SHEET SUMMARY
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 and is most meaningful when analyzed in terms of changes in daily average
balances. 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 2003, reaching
the level of $386,574,000, an increase of $19,721,000 or 5.38% compared to 2002.
From 2001 to 2002 the Corporation experienced an increase in assets of
$18,522,000. The Corporation experienced an increase in average balances of
loans of $9,726,000 or 4.17% from 2002 to 2003. This increase was comparable to
the increase in 2002 over 2001 of $9,775,000 or 4.37%. If there are not enough
borrowers available to lend money to, then a bank needs to use the funds to
invest in interest bearing deposits with other banks, securities, or federal
funds sold. Interest bearing deposits with banks increased $1,103,000 or 26.02%
comparing 2002 to 2003. The increase in 2002 over 2001 was $3,125,000 or
280.52%. This was an effort by management to keep money invested at a better
rate than federal funds, shorter maturities and better rates than securities.
However, to be insured the dollar amounts must be kept at no more than $100,000.
Securities increased $4,553,000 or 4.74% from 2002 to 2003. Securities increased
also in 2002 over 2001 by $9,465,000 or 10.94%. Funds sold increased slightly by
$457,000 in 2003 over 2002. From 2001 to 2002 Funds sold declined $4,132,000 or
40.35%. Overall earning assets increased by $15,659,000 or 4.65% from 2002 to
2003. The increase was smaller than the increase in 2002 over 2001 of
$18,151,000 or 5.69%. Other assets includes life insurance purchased by the
bank. The average balance of the life insurance purchased is approximately
$8,500,000 in 2003, $8,000,000 in 2002, and $7,750,000 in 2001. The cash
surrender value of this instrument is included in nonearning assets and revenues
generated are included in non-interest income.
The Corporation's funding sources increase was due in part to customers exiting
the capital markets and being unsure of where to place their money. This
uncertainty caused core deposits to increase $15,731,000 or 5.59% in 2003 over
2002. The increase in core deposits from 2001 to 2002 was $13,953,000 or 5.21%.
The increase in 2003 occurred in the first half of the year. By the end of 2003,
deposits were declining. Maintaining and gathering deposits will be a challenge
in 2004. Customers appear to feel safe again in the equity market and are
returning. The largest increase was in interest bearing demand deposits in 2003.
This increase was $8,485,000 or 15.74%. Interest bearing demand deposits
increased by $3,840,000 from 2001 to 2002. Savings deposits increased by
$4,661,000 or 13.17% in 2003 over 2002. Savings deposits increased by $4,178,000
from 2001 to 2002. Certificates of deposit under $100,000 decreased $555,000
from 2003 over 2002. Certificates of deposit increased $3,688,000 or 2.46% from
2001 to 2002.
- -20-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
[ASSETS GRAPHIC OMITTED]
ASSETS
The Corporation had an increase in total assets of $12,045,000 or 3.21% from
December 31, 2002 to December 31, 2003. The increase from December 31, 2001 to
December 31, 2002 was $18,978,000 or 5.32%. Assets for the years ended December
31, 2003 and 2002 were $387,780,000 and $375,735,000, respectively. The
following discussion will highlight the changes that occurred.
[LOANS GRAPHIC OMITTED]
LOANS
At December 31, 2003, net loans increased $14,463,000 or 6.14% over 2002. This
follows an increase in 2002 over 2001 in net loans of $7,499,000 or 3.29%. The
loan to deposit ratio fluctuated throughout 2003; monthly averages were at a low
in May of 70.36% and a high in December of 74.86%. In the spring of 2003,
management had to become very aggressive with pricing to restore the level of
loans to December 31, 2002. By June the Corporation had attained that goal and
continued to grow. Residential mortgages increased by $2,319,000 or 1.86% from
2002 to 2003. Residential mortgages increased by $5,431,000 from 2001 to 2002.
Real estate loans still remain a very attractive option due to the tax
deductibility of mortgage interest. Commercial real estate loans grew by
$2,236,000 or 6.84% in 2003 over 2002. Commercial real estate loans increased by
$809,000 from 2001 to 2002. Consumer loans increased $3,417,000 or 5.59% in 2003
over 2002. This follows a year with a decrease of $304,000 in 2002 over 2001.
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 2003. For the year, the net charge-offs were $215,000 or .09%
of average loans outstanding. This compares with $95,000 or .04% in 2002 and
$211,000 or .09% in 2001. The low net charge-offs in 2002 was due to a recovery
of over $100,000 on a loan previously charged-off. The increase in 2003 and 2001
was due to a growing loan portfolio and not as a result of relaxation of
underwriting standards.
ALLOWANCE FOR LOAN LOSSES
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 amount deemed adequate by management
at that time. The 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 2003 of $2,820,000 or
-21-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES (CONTINUED)
1.13% of outstanding loans is adequate to meet any foreseeable loan loss
contingency. This is lower than the 1.15% for 2002 and higher than the 1.11% for
2001.
At December 31, 2003 and 2002, total non-performing loans were $584,000 and
$763,000, respectively; non-performing loans as a percentage of the allowance
for loan losses were 20.71% and 27.94%, respectively.
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 delinquent 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 2003 was $174,000 and in 2002 was
$189,000.
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 $584,000 at December 31, 2003, up from the $544,000 at
December 31, 2002. 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.
- -22-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
INVESTMENTS
Total investments defined to include all interest earning assets except loans
(i.e. investment securities available for sale (at market value), investment
securities held to maturity, federal funds sold, interest bearing deposits with
banks, and federal home loan bank stock) totaled $103,923,000 on December 31,
2003, representing a decrease of $6,298,000 from year end 2002. The following
table summarizes how the ending balances (in thousands) changed annually in the
last three years.
December 31,
------------
2003 2002 2001
---- ---- ----
(In Thousands)
Purchase of available
for sale securities $ 49,443 $ 41,554 $ 40,783
Sales and maturities of
available for sale
securities (35,141) (27,887) (19,629)
Adjustment in
market value (489) 1,696 728
Purchase of held to
maturity securities 3,002 498 469
Maturities of held to
maturity securities (17,833) (9,141) (13,494)
(Amortization)/Accretion (280) (170) (177)
Federal funds sold,
net change (3,700) 3,700 (4,400)
Interest bearing deposits
with banks (1,300) 1,800 3,590
-------- -------- -------
$ (6,298) $ 12,050 $ 7,870
======== ======== =======
The investment area is managed according to internally established guidelines
and quality standards. The Corporation segregates its investment portfolio into
two classifications: those held to maturity and those available for sale. At
December 31, 2003, the market value on available for sale securities was greater
than amortized cost by $2,230,000 as compared to December 31, 2002 when the
market value was greater than amortized cost by $2,719,000. The weighted average
maturity of the investment portfolio was 3 years and 2 months as of December 31,
2003 as compared to 3 years and 0 months at the end of 2002. Managements'
investment philosophy has always been to not extend maturities to receive
additional yield. Management will be able to react quickly when rates finally
start to rise.
Investment yields are declining and there will be less income added to future
earnings as a result. The securities available for sale are available for
liquidity purposes if needed. There have been no securities gains or losses
realized in 2003 or 2001. The gain from 2002 was from a security called at a
premium. Unrealized gains and losses occur from the interest rate movements from
the time a security is purchased with a stated coupon rate and current offerings
of that same security. The Corporation had no securities with unrealized losses
greater than 12 months. For additional information and details please see the
"Notes to the Consolidated Financial Statements - Securities".
BANK PREMISE AND EQUIPMENT
Net purchases of bank premises and equipment were $1,445,000, $141,000, and
$473,000 in 2003, 2002, and 2001, respectively. The purchase of computer
equipment, software, printers, and other peripherals amounted to $670,000 in
2003. The installation was started in late spring of 2003 and completed in
December. This included a wide-area network, teller automation system, and an
upgrade to the relationship management system. A significant amount of time and
effort was devoted to the development, training, and implementation of these
systems. The personnel will be better able to service customers in the future
with these systems in place.
In September, an open house was held at the Water Street location in Lewistown
to celebrate the completion of the renovations there. The cost of the
renovations were $570,000. The Water Street community office is now a very
attractive, efficient, and customer friendly community office that will serve
the Corporation well for years.
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
PENSION PLANS
The Corporation provides pension benefits to substantially all of its employees
through its noncontributory defined benefit pension plan. An employee must reach
the age of 21 and work 1,000 hours. Employees are provided benefits that are
based upon the employees' years of service and compensation. SFAS 87 dictates
the allowable pension expense that can be recognized in any given year. This
calculation is provided by the bank's actuaries. Management must make subjective
assumptions relating to amounts which are inherently uncertain. These
assumptions are agreed to by the actuaries as being reasonable. Management also
looks to industry standards for assumptions being used. Please refer to the
"Notes to the Consolidated Financial Statements - Employee benefits".
DEPOSITS
From year-end 2002 to year-end 2003, total deposits increased by $10,364,000.
The following table summarizes how the ending balances (in thousands) changed
annually in each of the last three years.
December 31,
------------
2003 2002 2001
---- ---- ----
(In Thousands)
Demand deposits $ 42,200 $ 38,892 $ 38,089
Interest bearing
demand deposits
64,838 58,160 51,769
Savings deposits 42,317 36,194 32,281
Time deposits $100,000
and greater 34,323 35,167 31,271
Time deposits, other 149,306 154,206 152,058
-------- -------- --------
$332,984 $322,619 $305,468
======== ======== ========
In the past several years the banking industry in general has experienced
limited deposit growth because of fierce competition in the market-place
provided by brokerage firms, credit unions, and other investment options that
compete directly with traditional banking products. In 2001, however, the public
perception changed somewhat and the comfort of insured deposits and local
familiarity the bank continues to offer to depositors once again became a
primary consideration for investors. Throughout the summer of 2003 the
Corporation had an inflow of deposits. The Corporation than began to experience
deposits leaving the bank and going back into the equity markets as investors
began to feel confidence. Maintaining and gathering deposits will be a challenge
in 2004.
DEFERRED 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.
The Corporation determined that it is not necessary to establish a valuation
allowance for deferred tax assets because it is management's assertion that the
deferred tax assets are likely to be realized through future reversals of
existing taxable temporary differences. 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. Please refer to the "Notes to
Consolidated Financial Statements - Income taxes" for more details.
- -24-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
[SHAREHOLDERS' EQUITY GRAPHIC OMITTED]
SHAREHOLDERS' EQUITY
On January 20, 2004 the Board of Directors of the Corporation declared a one
time special dividend of $1.00 a share payable to Shareholders' of record as of
February 1, 2004 and payable on February 27, 2004. This cash dividend was not
available for dividend reinvestment. This special dividend was to help increase
the Corporation's return on equity by returning cash value to shareholders. On
March 20, 2001, the Board of Directors of the Corporation 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 June 27, 2003, this repurchase
plan was fulfilled. On April 15, 2003, the Board of Directors authorized
repurchase of 100,000 shares outstanding of common stock. At December 31, 2003,
12,504 shares were repurchased with 87,496 shares remaining. Shares are reissued
out of treasury stock for the dividend reinvestment plan as well as the employee
stock purchase plan. At December 31, 2003 and 2002, treasury stock was 88,219
and 59,445 shares, respectively at a cost of $2,609,000 and $1,705,000.
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
18.89% and Tier II risk-based capital ratio was 20.05% at December 31, 2003. 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,
2003, the leverage ratio was 11.93%.
CAPITAL ANALYSIS
December 31,
------------
2003 2002 2001
(Thousands of Dollars)
Tier I
Common stockholders'
equity (excluding
unrealized
gains/losses
on securities) $ 45,782 $ 43,899 $ 42,515
Tier II
Allowable portion of
allowance for
loan losses 2,820 2,731 2,526
-------- -------- --------
Risk-based capital $ 48,602 $ 46,630 $ 45,041
======== ======== ========
Risk adjusted assets
(including
off-balance-sheet
exposures) $242,408 $234,004 $230,325
======== ======== ========
Tier I risk-based
capital ratio 18.89% 18.76% 18.46%
Total risk-based
capital ratio 20.05% 19.93% 19.56%
Leverage ratio 11.93% 12.04% 11.98%
-25-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
LIQUIDITY AND INTEREST RATE RISK
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 2003
the Corporation funded approximately 77% of its assets with core deposits
acquired in local communities. This core deposit base, combined with
stockholders' equity, funded over 90% of average assets in 2003 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, interest bearing
time deposits with banks maturing within one year and other short term
investments such as federal funds sold and cash and due from banks.
At December 31, 2003, these liquid assets amounted to $111,342,000 compared to
liquid assets at December 31, 2002, of $104,338,000. 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 $0 at December 31,
2003 and December 31, 2002. The Bank has a maximum borrowing capacity of
$133,456,000 with the FHLB which is collateralized by qualifying assets of the
Bank. No amounts were outstanding at December 31, 2003 and 2002.
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
effort, 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 2003 loan demand increased by $14,767,000. This was funded by
the deposit growth of $10,364,000 and maturities of securities that exceeded
purchases by $1,863,000.
The Corporation has various financial obligations that require future cash
payments. Table 2 summarizes significant obligations to third parties, by type,
that are fixed and determined at December 31, 2003.
- --------------------------------------------------------------------------------
TABLE 2 - CONTRACTUAL OBLIGATIONS
- --------------------------------------------------------------------------------
December 31, 2003
-----------------
Less than Over
1 Year 1 - 3 Years 4 - 5 Years 5 Years Total
------ ----------- ----------- ------- -----
(In Thousands)
Time deposits $89,245 $63,984 $30,400 $ -- $183,629
Long term debt -- -- -- -- --
Operating leases 276 546 33 -- 855
------- ------- ------- ----- --------
Total $89,521 $64,530 $30,433 $ -- $184,484
======= ======= ======= ===== ========
- -26-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
OFF-BALANCE SHEET ARRANGEMENTS
The Corporation's financial statements do not reflect various off-balance sheet
arrangements that are made in the normal course of business, which may involve
some liquidity risk, credit risk and interest rate risk. These commitments
consist mainly of loans approved but not yet funded, unused lines of credit and
letters of credit made under the same standards as on-balance sheet instruments.
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Standby
letters of credit are conditional commitments issued to guarantee the financial
or performance obligation of a customer to a third party. Unused commitments at
December 31, 2003, were $34,757,000. Because these instruments have fixed
maturity dates, and because many of them will expire without being drawn upon,
they do not generally present any significant liquidity risk to the Corporation.
Management believes that any amounts actually drawn upon can be funded in the
normal course of operations.
The Corporation has no investment in or financial relationship with any
unconsolidated entities that are reasonably likely to have a material effect on
liquidity or the availability of capital resources.
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 Bank'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 equity. 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 the lower rates 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-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
TABLE 3 - INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY/AVERAGE INTEREST RATE
- --------------------------------------------------------------------------------
2004 2005 2006
---- ---- ----
DECEMBER 31, 2003 (Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
ASSETS
Interest bearing and time deposits $ 3,715 2.63% $ 500 2.30% -- --
Federal funds sold -- -- -- -- -- --
Available for sale securities 3,594 4.50 20,018 4.62 $21,346 4.38%
Held to maturity securities 10,541 3.87 999 1.63 976 3.50
Loans
Commercial 25,885 7.04 -- -- -- --
Consumer 22,735 8.47 9,316 7.98 7,056 7.81
Real estate mortgage 137,551 6.33 2,186 6.03 2,285 6.31
LIABILITIES
Interest bearing demand deposits 64,838 1.16 -- -- -- --
Savings deposits 42,317 1.23 -- -- -- --
Certificates of deposit 89,245 2.51 50,847 3.07 13,137 4.37
- -----------------------------------------------------------------------------------------------------------------
2003 2004 2005
---- ---- ----
DECEMBER 31, 2002 (Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
ASSETS
Interest bearing and time deposits $ 3,565 3.25% $ 1,915 2.95% -- --
Federal funds sold 3,700 1.56 -- -- -- --
Available for sale securities 6,081 5.84 6,991 6.01 $23,512 4.12%
Held to maturity securities 15,466 4.75 12,474 4.28 -- --
Loans
Commercial 26,815 7.63 -- -- -- --
Consumer 11,752 8.66 9,178 9.14 6,772 8.92
Real estate mortgage 140,987 7.62 1,786 7.53 1,894 7.53
LIABILITIES
Interest bearing demand deposits 58,160 1.59 -- -- -- --
Savings deposits 36,194 1.82 -- -- -- --
Certificates of deposit 110,307 3.48 36,039 3.91 22,469 4.15
- -28-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
TABLE 3 (CONTINUED)
- --------------------------------------------------------------------------------
Fair Value
2007 2008 Thereafter Total December 31, 2003
---- ---- ---------- ----- -----------------
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
-- -- -- -- -- -- $ 4,215 $ 4,215
-- -- -- -- -- -- -- --
$21,861 3.88% $11,334 3.72% $ 4,308 4.15% 82,461 84,691
2,501 2.98 -- -- -- -- 15,017 15,218
-- -- -- -- -- -- 25,885 25,885
5,437 7.54 3,187 7.48 17,000 7.50 64,731 64,892
2,346 6.27 2,333 6.15 15,463 5.80 162,164 161,512
-- -- -- -- -- -- 64,838 64,838
-- -- -- -- -- -- 42,317 42,317
11,720 4.42 18,680 3.81 -- -- 183,629 186,325
- ----------------------------------------------------------------------------------------------------------------
Fair Value
2006 2007 Thereafter Total December 31, 2002
---- ---- ---------- ----- -----------------
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
-- -- -- -- -- -- $ 5,480 $ 5,480
-- -- -- -- -- -- 3,700 3,700
$ 8,100 5.37% $16,393 5.77% $ 6,700 5.26% 67,777 70,495
969 3.50 498 4.38 500 5.84 29,907 30,698
-- -- -- -- -- -- 26,815 26,815
4,441 8.64 3,202 8.61 18,459 8.57 53,804 51,571
1,982 7.53 2,006 7.50 8,954 7.46 157,609 157,825
-- -- -- -- -- -- 58,160 58,160
-- -- -- -- -- -- 36,194 36,194
10,506 4.88 10,052 4.58 189,373 186,366
-29-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
TABLE 4 - SENSITIVITY TO CHANGE IN MARKET INTEREST RATES
- --------------------------------------------------------------------------------
Interest Rate Scenarios
-----------------------
-100 bps -50 bps +100 bps +200 bps
-------- ------- -------- --------
DECEMBER 31, 2003 (In Thousands)
Prospective one-year net interest income:
Projected $14,833 $14,930 $15,036 $15,044
Percent change (1.30)% (.65)% .05% .11%
Economic value of portfolio equity:
Projected $52,051 $50,875 $49,954 $49,425
Percent change 1.55% .78% (1.05)% (2.10)%
Interest Rate Scenarios
-----------------------
-100 bps -50 bps +100 bps +200 bps
-------- ------- -------- --------
DECEMBER 31, 2002 (In Thousands)
Prospective one-year net interest income:
Projected $14,137 $14,154 $14,271 $14,371
Percent change (.24)% (.12)% .71% 1.41%
Economic value of portfolio equity:
Projected $49,393 $48,860 $47,499 $46,671
Percent change 2.21% 1.10% (1.71)% (3.42)%
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.
REGULATORY MATTERS
The Juniata Valley Bank is subject to periodic examinations by one or more of
the various regulatory agencies. During 2003 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.
- -30-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (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 2004 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 2004. 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 2004 through effective asset/liability management. Juniata Valley Financial
Corp. is committed to providing stockholders with an attractive return on their
investment.
[NET INCOME GRAPHIC OMITTED]
2003 FINANCIAL PERFORMANCE OVERVIEW
Juniata Valley Financial Corp. reported net income for 2003 of $5,647,000. This
is an increase of $632,000 or 12.60% over net income of $5,015,000 at December
31, 2002. Basic earnings per share were $2.47 in 2003 compared to $2.15 in 2002.
This represents a 14.88% increase from 2002 to 2003.
[RETURN ON AVERAGE EQUITY GRAPHIC OMITTED]
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 presents the net income to average equity maintained
throughout the year. The return on average equity for 2003 was 11.86% compared
to the 10.85% for 2002. This represents an increase of 9.31%. This is a ratio
that is used by analysts to judge how well the Corporation is deploying the
capital of the Corporation. The Corporation maintains a stock repurchase program
to help to increase this ratio.
[CASH DIVIDENDS PER SHARE GRAPHIC OMITTED]
The Board of Directors continued to increase the cash dividends paid to
shareholders. On a per share basis $1.00 was paid in 2003 compared to $.88 paid
in 2002. This represents an increase of 13.64%. The Directors declared at the
January 18, 2004 Board meeting to pay a one-time cash dividend of $1.00 per
share to shareholders' of record at February 1, 2004 payable on February 27,
2004. This will help to increase the return on equity ratio by returning cash
value to shareholders.
[RETURN ON AVERAGE ASSETS GRAPHIC OMITTED]
The return on average assets ratio presents the income for the year compared to
the average assets maintained throughout the year. The return on average assets
increased to 1.46% in 2003 from 1.37% in 2002. This represents an increase of
6.57%.
-31-
- --------------------------------------------------------------------------------
TABLE 5 - ANALYSIS OF NET INTEREST INCOME
- --------------------------------------------------------------------------------
Table 5 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".
2003
INTEREST
AVERAGE INCOME AVERAGE
BALANCES (EXPENSE) YIELD/RATE
-------- --------- ----------
(IN THOUSANDS)
INTEREST EARNING ASSETS
Interest bearing deposits in other banks $ 5,342 $ 154 2.88%
Securities (taxable) 69,111 2,642 3.82
Securities (tax exempt) 31,427 1,191 3.79
Federal funds sold 6,565 72 1.10
Loans 242,988 18,441 7.59
-------- -------
Total interest earning assets 355,433 22,500 6.33
----
NON-INTEREST EARNING ASSETS
Cash and due from banks 10,415
Other assets 23,506
Less: allowance for loan losses (2,780)
--------
Total assets $386,574
========
INTEREST BEARING LIABILITIES
Demand deposits bearing interest $ 62,381 (723) 1.16%
Savings deposits 40,043 (494) 1.23
Time deposits 186,843 (6,249) 3.34
Short-term borrowings 495 (6) 1.21
-------- -------
Total interest bearing liabilities 289,762 (7,472) 2.58
------- ----
NON-INTEREST BEARING LIABILITIES
Demand deposits 42,010
Other liabilities 7,173
STOCKHOLDERS' EQUITY 47,629
--------
Total liabilities and stockholders' equity $386,574
========
NET INTEREST INCOME/SPREAD
$15,028 3.75%
======= ====
MARGIN ANALYSIS
Interest income/earning assets 6.33%
Interest expense/earning assets 2.10
----
Net interest margin 4.23%
====
- -32-
- --------------------------------------------------------------------------------
TABLE 5 (CONTINUED)
- --------------------------------------------------------------------------------
2002 2001
Interest Interest
Average Income Average Average Income Average
Balances (Expense) Yield/Rate Balances (Expense) Yield/Rate
-------- --------- ---------- -------- --------- ----------
(In Thousands) (In Thousands)
$ 4,239 $ 145 3.42% $ 1,114 $ 53 4.76%
57,762 2,851 4.94 44,691 2,692 6.02
38,223 1,469 3.84 41,829 1,555 3.72
6,108 95 1.56 10,240 412 4.02
233,262 18,910 8.11 223,487 19,929 8.92
-------- ------- -------- -------
339,594 23,470 6.91 321,361 24,641 7.67
---- ----
9,791 9,596
20,068 19,892
(2,600) (2,518)
-------- --------
$366,853 $348,331
======== ========
$ 53,896 (855) 1.59% $ 50,056 (1,183) 2.36%
35,382 (642) 1.81 31,204 (760) 2.44
186,425 (7,799) 4.18 181,085 (9,985) 5.51
137 (3) 2.19 21 (1) 4.76
-------- ------- -------- -------
275,840 (9,299) 3.37 262,366 (11,929) 4.55
------- ---- ------- ----
38,870 36,623
5,933 4,994
46,210 44,348
-------- --------
$366,853 $348,331
======== ========
$14,171 3.54% $12,712 3.12%
======= ==== ======= ====
6.91% 7.67%
2.74 3.71
---- ----
4.17% 3.96%
==== ====
-33-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
NET INTEREST INCOME
Net interest income is the amount by which interest income on earning assets
exceeds interest expense on interest bearing liabilities. Net interest income is
the most significant component of revenue. 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.
Both net interest income and net interest margin are impacted by interest rates
and changes, changes in the relationships between rates and changes in the
composition of the average balance sheet. Additionally, product pricing, product
mix, and customer preferences dictate the composition of the balance sheet and
the resulting net interest income. Table 5 shows average asset and liability
balances, average interest rates, and net interest income and expense for the
period 2001 to 2003. Additionally, table 6 shows the changes attributable to the
volume and rate components of net interest income.
Total average loans were $242,988,000 in 2003 at a weighted average yield of
7.59% that produced $18,441,000 in interest income. This represented a
$9,726,000, or 4.17% increase in loan volume from 2002. As mentioned previously,
in 2003, the bank had to become very aggressive with loan pricing and
consequently yield declined on loans by .52% from 8.11% to 7.59%. This resulted
in a decrease in interest income of $469,000. From the rate volume analysis on
table 6, of this $469,000 decline, the volume increased the interest income from
loans whereas the rate declines caused the decrease in interest income from
loans.
Securities averaged $100,538,000, an increase of $4,553,000 or 4.74% from the
average securities in 2002. The weighted average yield decreased to 3.81% from
4.50% in 2002. This resulted in a decrease in interest income of $487,000. From
table 6 the volume contributed an increase, however the rate is the cause of the
decline. Interest bearing deposits and federal funds sold, as a group on
average, increased $1,560,000 from 2002 to 2003. Rates also declined on this
group .50% from 2.49% to 1.99% which caused a decline in the contribution to net
interest income of $14,000.
Total interest earning assets averaged $355,433,000 at a yield of 6.33% and
produced total interest income of $22,500,000 for 2003. The increase in average
earning assets of $15,839,000 in 2003 over 2002 was funded by demand deposit
growth, cash on hand, and earnings. The yield on these earning assets declined
by .58% to 6.33% in 2003 from 6.91%. Interest income declined $970,000 from 2002
to 2003. From the rate volume analysis on table 6 volume contributed $1,052,000
increase to interest income, however, the decline in rates caused a $2,022,000
decline in interest income.
Interest bearing liabilities averaged $289,762,000 at a cost of $7,472,000
carrying a composite rate of 2.58%. This represented an increase in interest
bearing liabilities of 5.05% or $13,922,000 from 2002. The composite rate
declined .79% in 2003 from 3.37% to 2.58%. Interest expense increased $220,000
due to volume and declined $2,047,000 due to rate. Combined, the reduction in
interest expense was $1,827,000. The most significant change in liabilities was
in time deposits. Volume was fairly steady but the rate contributed $1,567,000
to the decline in interest expense of $1,550,000.
Net interest income was increased $857,000 for 2003 to $15,028,000 from
$14,171,000 in 2002. The increase was a result of $832,000 from volume and mix
changes and $25,000 from interest rates. Net interest margin for 2003 was 4.23%
an increase of .06% from the 4.17% yield for 2002.
PROVISION FOR LOAN LOSSES
The provision for loan losses shows a slight increase due to the analysis to
determine the allowance and corresponding provision. The provision was increased
also because of increased loan volume, uncertain economic conditions locally,
and the diversification of the loan portfolio. In 2003 the provision was
$304,000 an increase of $4,000 over 2002.
- -34-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
TABLE 6 - RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
- --------------------------------------------------------------------------------
Table 6 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 amount of change that is not
due solely to volume or rate is allocated proportionally to both.
2003/2002 Increase (Decrease) 2002/2001 Increase (Decrease)
----------------------------- -----------------------------
Due to Change in Due to Change in
---------------- ----------------
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest bearing deposits
in other banks $ 34 $ (25) $ 9 $ 111 $ (19) $ 92
Securities (taxable) 501 (710) (209) 699 (540) 159
Securities (tax free) (258) (20) (278) (138) 52 (86)
Federal funds sold 7 (30) (23) (126) (191) (317)
Loans 768 (1,237) (469) 846 (1,865) (1,019)
------ ------- ------- ------ ------- -------
Interest income 1,052 (2,022) (970) 1,392 (2,563) (1,171)
------ ------- ------- ------ ------- -------
Demand deposits
bearing interest 122 (254) (132) 85 (413) (328)
Savings deposits 77 (225) (148) 93 (211) (118)
Time deposits 17 (1,567) (1,550) 286 (2,472) (2,186)
Short-term borrowings 4 (1) 3 3 (1) 2
------ ------- ------- ------ ------- -------
Interest expense 220 (2,047) (1,827) 467 (3,097) (2,630)
------ ------- ------- ------ ------- -------
Increase (decrease)
in net interest income $ 832 $ 25 $ 857 $ 925 $ 534 $ 1,459
====== ======= ======= ====== ======= =======
-35-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
OTHER INCOME
The Corporation remains committed to constantly increasing customer satisfaction
by delivering consumer-preferred services through convenient methods. Success in
this endeavor is evidenced by the continued increase in income from bank
services. Management believes that our advanced front line delivery systems, the
interactive web site with on-line banking, telephone banking, and debit card
have all contributed to the satisfaction of our customer base. Technology
advances that allow us to be better and more quickly informed about our clients
continue to help us be more responsive to their financial needs through
personalized service and product design.
Other income increased $746,000 or 37.04% from 2002 to 2003. Trust department
fees increased $72,000 from 2002 to 2003. This was due in part to a focus on
pension funds and investment management. Customer service fees increased
$100,000 in 2003 over 2002. This was due to increased use of the bank's
services, not increased fees. Earnings from life insurance owned by the bank
increased $70,000 from 2002 to 2003. The other category increased $512,000 in
2003 over 2002. The primary changes were an increase of $238,000 from proceeds
from life insurance and an increase in alternative investment commissions of
$134,000.
OTHER EXPENSES
In order to optimize earnings, management strives to minimize operating expenses
and where feasible to produce the highest levels of income possible. This is
evidenced by the efficiency ratio that declines slightly every year. Other
expenses were $10,017,000 for 2003 as compared to $9,124,000 for 2002,
representing as increase of $893,000 or 9.79%.
Salaries and wages increased by 8.50% or $319,000 in 2003 over 2002. This is a
result of an increase of five full time equivalent employees and annual merit
increases. Employee benefits increased 10.76% or $134,000 from 2002 to 2003.
This is a result of higher benefit costs as opposed to additional benefits being
offered. Occupancy increased $91,000 in 2003 due to $30,000 for snow removal and
$14,000 increase in both insurance and real estate taxes. Equipment costs
continue to rise with increased equipment and maintenance on that equipment. In
2003 this increase amounted $231,000. Directors' compensation increased
$54,000 from 2002 to 2003 due to a deferred compensation arrangement. Other
expenses increased $52,000 in 2003 over 2002. This can be attributed to
increased credit report charges for increased loans volume in 2003 which
amounted to $22,000. Postage increased $25,000 in 2003 over 2002.
INCOME TAXES
The provision for income taxes for 2003 was $1,820,000 compared to $1,746,000 in
2002. The effective tax rate, which is the ratio of income tax expense to income
before income taxes, was 24.37% in 2003 a decrease from the 25.82% in 2002. The
tax rate for all periods was less than the statutory rate of 34% due to tax
exempt securities and loan income, tax free earnings on life insurance owned by
the bank and life insurance proceeds. Please refer to the Notes to the
Consolidated Financial Statements "Income Taxes" for further analysis of federal
income tax expense.
- -36-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
2002 FINANCIAL PERFORMANCE OVERVIEW
Juniata Valley Financial Corp. reported net income for 2002 of $5,015,000. This
is an increase of $373,000 or 8.04% over net income of $4,642,000 at December
31, 2001. Basic earnings per share were $2.15 in 2002 compared to $1.96 in 2001.
This represents a 9.69% increase from 2001 to 2002.
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 presents the net income to average equity maintained
throughout the year. The return on average equity for 2002 was 10.85% compared
to the 10.47% for 2001. This represents an increase of 3.63%.
The Board of Directors continued to increase the cash dividends paid to
shareholders. On a per share basis $.88 was paid in 2002 compared to $.80 paid
in 2001. This represents an increase of 10.00%.
The return on average assets ratio presents the income for the year compared to
the average assets maintained throughout the year. The return on average assets
increased to 1.37% in 2002 from 1.33% in 2001. This represents and increase of
3.01%.
NET INTEREST INCOME
Total average loans were $233,262,000 in 2002 at a weighted average yield of
8.11% that produced $18,910,000 in interest income. This represented a
$9,775,000, or 4.37% increase in loan volume from 2001. Yield declined on loans
by .81% from 8.92% to 8.11%. This resulted in a decrease in interest income of
$1,019,000. From the rate volume analysis on table 6, of this $1,019,000
decline, the volume increased the interest income from loans by $846 whereas the
rate declines caused the decrease in interest income from loans of $1,865,000.
Securities averaged $95,985,000, an increase of $9,465,000 or 10.94% from the
average securities in 2001. The weighted average yield decreased to 4.50% from
4.91% in 2001. This, however, did not result in a decrease to interest income
from securities. Interest income from securities increased by $73,000 in 2002
over 2001. From table 6 the volume contributed to an increase in interest income
which was offset by the rate decline. Interest bearing deposits and federal
funds sold, as a group on average, decreased $1,007,000 from 2001 to 2002. Rates
also declined on this group 1.78% from 4.10% to 2.32% which caused a decline in
there contribution to net interest income of $225,000. Total interest earning
assets averaged $339,594,000 at a yield of 6.91% and produced total interest
income of $23,470,000 for 2002. The increase in average earning assets of
$18,233,000 in 2002 over 2001 was funded by demand deposit growth, cash on hand,
and earnings. The yield on these earning assets declined by .76% to 6.91% in
2002 from 7.67%. Interest income declined $1,171,000 from 2001 to 2002. From the
rate volume analysis on table 6 volume contributed $1,392,000 increase to
interest income, however, the decline in rates caused a $2,563,000 decline in
interest income.
Interest bearing liabilities averaged $275,840,000 at a cost of $9,299,000
carrying a composite rate of 3.37%. This represented an increase in interest
bearing liabilities of 5.14% or $13,474,000 from 2001. The composite rate
declined 1.18% in 2002 from 4.55% to 3.37%. Interest expense increased $467,000
due to volume and declined $3,097,000 due to rate. Combined, the reduction in
interest expense was $2,630,000. The most significant change in liabilities was
in time deposits. Volume increased interest expense by $286,000 and rate
decreased interest expense by $2,472,000. These factors combined made interest
expense decline by $2,186,000.
Net interest income was increased $1,459,000 for 2002 to $14,171,000 from
$12,712,000 in 2001. The increase was a result of $925,000 from volume and mix
changes and $534,000 from interest rates. Net interest margin for 2002 was 4.17%
an increase of .21% from the 3.96% yield for 2001.
PROVISION FOR LOAN LOSSES
The provision for loan losses shows an increase due to the analysis to determine
the allowance and corresponding provision. The provision was increased also
because of increase in loan volume, uncertain economic conditions locally, and
the diversification of the loan portfolio. In 2002, the provision was $300,000
an increase of $60,000 over 2001.
-37-
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
OTHER INCOME
Other income decreased $180,000 or 8.20% from 2001 to 2002. Trust department
fees decreased $96,000 from 2001 to 2002. This was a result of a decline in
estate settlements. Customer service fees increased $61,000 for 2002 compared to
2001. The increases in customer service fees can be attributed to an increase in
volume and not as a result of increased fees. The net realized gains on sales of
securities was a result of a security called at a premium. This resulted in an
$8,000 increase in 2002 over 2001. There were no realized gains on the sale of
securities in 2001. Income on life insurance owned by the bank increased by
$20,000 from 2002 over 2001. The other income decreased in 2002 over 2001 by
$173,000. In 2001, a settlement of a long-standing litigation process in which
the bank was a plaintiff was reached. This settlement was for $236,000. If it
were not for this settlement, the increase in 2002 over 2001 would have been
$63,000. The bank experienced an increase in credit card interchange fees of
$26,000 and increased commissions on alternative investment sales of $17,000.
OTHER EXPENSES
In 2002, other expenses increased $528,000 or 6.14% over 2001. Salaries and
wages increased $255,000 from 2001 to 2002. The increase can be attributed to
regular salary merit increases as oppose to additional employees. Employee
benefits increased $136,000 from 2001 to 2002. This was due to price changes of
benefits provided as opposed to changed benefits. Occupancy increased $87,000 in
2002 over 2001. These increases are because of the Bank's new operations center.
Equipment expense decreased $24,000 in 2002. This decline is due to negotiations
with the third-party bank service provider of computer processing. Directors'
compensation remained virtually unchanged between 2001 to 2002. Taxes, other
than income is due to an increase in the Pennsylvania Shares Tax of $19,000 in
2002 over 2001. Other expenses increased $58,000 in 2002 over 2001. This can be
attributed to an increase in outside professional fees.
INCOME TAXES
The provision for income taxes for 2002 was $1,746,000 compared to $1,428,000 in
2001. The effective tax rate, which is the ratio of income tax expense to income
before income taxes, was 25.82% in 2002 an increase from the 23.53% in 2001. 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 life insurance owned
by the bank. Please refer to the Notes to the Consolidated Financial Statements
"Income Taxes" for further analysis of federal income tax expense.
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.
- -38-
[BEARD MILLER LOGO 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, 2003 and 2002, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2003. These consolidated financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with 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, 2003 and 2002, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 2003 in
conformity with accounting principles generally accepted in the United States of
America.
[BEARD MILLER GRAPHIC OMITTED]
Harrisburg, Pennsylvania
January 23, 2004
-39-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED BALANCE SHEETS
ASSETS
------
December 31,
------------
2003 2002
---- ----
(In Thousands, Except Share Data)
Assets:
Cash and due from banks $ 13,502 $ 11,111
Interest bearing deposits with banks 125 90
Federal funds sold -- 3,700
-------- --------
Cash and cash equivalents 13,627 14,901
Interest bearing time deposits with banks 4,090 5,390
Securities available for sale 83,584 70,495
Securities held to maturity, fair value 2003 $15,218; 2002 $30,698 15,017 29,907
Restricted investment in bank stock 1,107 639
Loans receivable, net of allowance for loan losses 2003 $2,820; 2002 $2,731 249,960 235,497
Bank premises and equipment, net 6,755 5,767
Accrued interest receivable and other assets 13,640 13,139
-------- --------
Total assets $387,780 $375,735
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 42,200 $ 38,892
Interest bearing 290,784 283,727
-------- --------
Total deposits 332,984 322,619
Accrued interest payable and other liabilities 4,313 4,789
-------- --------
Total liabilities 337,297 327,408
-------- --------
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 2003 2,372,922 shares; 2002 2,372,930 shares 2,373 2,373
Surplus 20,231 20,212
Retained earnings 29,016 25,652
Accumulated other comprehensive income 1,472 1,795
Treasury stock, at cost 2003 88,219 shares; 2002 59,445 shares (2,609) (1,705)
-------- --------
Total stockholders' equity 50,483 48,327
-------- --------
Total liabilities and stockholders' equity $387,780 $375,735
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- -40-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(In Thousands, Except Per Share Data)
Interest income:
Loans receivable, including fees $18,441 $18,910 $19,929
Taxable securities 2,642 2,851 2,692
Tax-exempt securities 1,191 1,469 1,555
Other 226 240 465
------- ------- -------
Total interest income 22,500 23,470 24,641
------- ------- -------
Interest expense:
Deposits 7,466 9,299 11,928
Short-term borrowings 6 -- 1
------- ------- -------
Total interest expense 7,472 9,299 11,929
------- ------- -------
Net interest income 15,028 14,171 12,712
Provision for loan losses 304 300 240
------- ------- -------
Net interest income after provision for loan losses 14,724 13,871 12,472
------- ------- -------
Other income:
Trust department 411 339 435
Customer service fees 788 688 627
Net realized gains on sales of securities -- 8 --
Earnings on investment in life insurance 452 382 362
Other 1,109 597 770
------- ------- -------
Total other income 2,760 2,014 2,194
------- ------- -------
Other expenses:
Salaries and wages 4,070 3,751 3,496
Employee benefits 1,379 1,245 1,109
Occupancy 753 662 575
Equipment 1,411 1,180 1,204
Director compensation 412 358 361
Taxes, other than income 516 504 485
Other 1,476 1,424 1,366
------- ------- -------
Total other expenses 10,017 9,124 8,596
------- ------- -------
Income before income taxes 7,467 6,761 6,070
Federal income taxes 1,820 1,746 1,428
------- ------- -------
Net income $ 5,647 $ 5,015 $ 4,642
======= ======= =======
Per share data:
Basic $ 2.47 $ 2.15 $ 1.96
======= ======= =======
Diluted $ 2.46 $ 2.15 $ 1.96
======= ======= =======
Cash dividends $ 1.00 $ 0.88 $ 0.80
======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-41-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2003, 2002 and 2001
--------------------------------------------
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
----- ------- -------- ------ ----- -----
(In Thousands)
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
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
-------
Comprehensive income:
Net income -- -- 5,015 -- -- 5,015
Change in unrealized gains
on securities available for sale,
net of reclassification adjustment
and tax effects -- -- -- 1,119 -- 1,119
-------
Total comprehensive income 6,134
-------
Cash dividends declared -- -- (2,042) -- -- (2,042)
Treasury stock issued under dividend
reinvestment plan -- 1 -- -- 413 414
Treasury stock issued under employee
stock purchase plan -- (10) -- -- 65 55
Treasury stock acquired -- -- -- -- (1,560) (1,560)
------ ------- ------- ------ ------- -------
Balance, December 31, 2002 2,373 20,212 25,652 1,795 (1,705) 48,327
-------
Comprehensive income:
Net income -- -- 5,647 -- -- 5,647
Change in unrealized gains
on securities available for sale,
net of reclassification adjustment
and tax effects -- -- -- (323) -- (323)
-------
Total comprehensive income 5,324
-------
Cash dividends declared -- -- (2,283) -- -- (2,283)
Treasury stock issued under dividend
reinvestment plan -- 24 -- -- 458 482
Treasury stock issued under employee
stock purchase plan -- (5) -- -- 63 58
Treasury stock acquired -- -- -- -- (1,425) (1,425)
------ ------- ------- ------ ------- -------
BALANCE, DECEMBER 31, 2003 $2,373 $20,231 $29,016 $1,472 $(2,609) $50,483
====== ======= ======= ====== ======= =======
See Notes to Consolidated Financial Statements
- -42-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,647 $ 5,015 $ 4,642
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 304 300 240
Provision for depreciation 457 442 396
Net amortization of security premiums 280 170 177
Net realized gains on sales of securities -- (8) --
Deferred compensation expense 515 545 528
Payment of deferred compensation (258) (267) (252)
Deferred income taxes 95 (146) (103)
(Increase) decrease in accrued interest receivable and other assets 94 (228) 181
Increase (decrease) in accrued interest payable and other liabilities (733) (177) (199)
Earnings on investment in life insurance (452) (382) (362)
------- ------- -------
Net cash provided by operating activities 5,949 5,264 5,248
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing time deposits 1,300 (1,800) (3,590)
Purchases of available for sale securities (48,626) (41,526) (40,760)
Proceeds from sales of available for sale securities -- 258 --
Purchase of restricted bank stock (817) (28) (23)
Proceeds from sale of restricted bank stock 349 597 --
Proceeds from maturities of and principal repayments
on available for sale securities 34,827 27,032 19,629
Purchases of held to maturity securities (3,002) (498) (961)
Proceeds from maturities of and principal repayments
on held to maturity securities 17,833 9,141 13,494
Net increase in loans receivable (14,767) (7,799) (8,419)
Purchase of investment in life insurance (310) -- (5,000)
Net purchases of bank premises and equipment (1,445) (141) (473)
Proceeds from life insurance 238 -- --
------- ------- -------
Net cash provided by (used in) investing activities (14,420) (14,764) (26,103)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 10,365 17,151 18,248
Net increase (decrease) in short-term borrowings -- (1,275) 1,275
Cash dividends and cash paid for fractional shares (2,283) (2,042) (1,904)
Purchase of treasury stock (1,425) (1,560) (1,189)
Treasury stock issued 540 469 181
Stock issued for dividend reinvestment
and employee stock purchase plan -- -- 205
------- ------- -------
Net cash provided by (used in) financing activities 7,197 12,743 16,816
------- ------- -------
Increase (decrease) in cash and cash equivalents (1,274) 3,243 (4,039)
Cash and cash equivalents:
Beginning 14,901 11,658 15,697
------- ------- -------
Ending $13,627 $14,901 $11,658
======= ======= =======
Supplementary cash flows information:
Interest paid $ 7,635 $ 8,935 $11,967
======= ======= =======
Income taxes paid $ 1,858 $ 1,925 $ 1,470
======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
-43-
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.
Use of 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.
Significant group concentrations of credit risk:
Most of the Corporation's activities are with customers located within the
Juniata Valley region. The securities footnote discusses the types of
securities the Corporation invests in. The loans receivable footnote
discusses the types of lending the Corporation engages in. The Corporation
does not have any significant concentrations to any one industry or
customer. Although the Corporation has a diversified loan portfolio, its
debtors ability to honor their contracts is influenced by the regions
economy.
Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents include
cash on hand, amounts due from banks, interest bearing demand deposits with
banks and federal funds sold.
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 terms of the securities.
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 their contractual lives.
Management determines the appropriate classification of debt securities at
the time of purchase and reevaluates such designation as of each balance
sheet date.
Restricted investment in bank stocks:
The bank owns restricted stock investment in the Federal Home Loan Bank.
Federal law requires a member institution of the Federal Home Loan Bank to
hold stock according to a predetermined formula. The stock is carried at
cost.
Loans 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.
- -44-
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.
Trust assets:
Assets held in a fiduciary capacity are not assets of the Bank or Trust and
are, therefore, not included in the financial statements.
Foreclosed real estate:
Foreclosed real estate is comprised of property acquired through a
foreclosure proceeding or acceptance of a deed in lieu of foreclosure and
loans classified as in-substance foreclosure. Such properties are included
in other assets. A loan is classified as in-substance foreclosure when the
Bank has taken possession of the collateral regardless of whether formal
foreclosure proceedings take place. Foreclosed assets initially are recorded
at fair value, net of estimated selling costs, at the date of foreclosure
establishing a new cost basis. After foreclosure, valuations are
periodically performed by management and the assets are carried at the lower
of the carrying amount or fair value minus estimated costs to sell. Revenues
and expenses from operations and changes in the valuation allowance are
included in other expenses.
-45-
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:
The Corporation follows the policy of charging the costs of advertising to
expense 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.
Stock-based compensation:
The Corporation has adopted the disclosure only provisions of SFAS 123
"Accounting for Stock-Based Compensation". Accordingly, no stock-based
employee compensation cost is reflected in net income, as all options
granted under the Corporation's stock option plan had an exercise price
equal to the market value of the underlying common stock on the date of
grant. The following table illustrates the effect on net income and earnings
per share if the Corporation had applied the fair value recognition
provisions of FASB Statement No. 123, "Accounting for Stock-Based
Compensation," to stock-based compensation for the years ended December 31:
2003 2002 2001
---- ---- ----
(In Thousands, except per share data)
Net income, as reported $5,647 $5,015 $4,642
Total stock-based employee compensation expense
determined under fair value based method for all awards (24) (12) (1)
------ ------ ------
Pro forma net income $5,623 $5,003 $4,641
====== ====== ======
Basic earnings per share:
As reported $ 2.47 $ 2.15 $ 1.96
Pro forma $ 2.45 $ 2.15 $ 1.96
Diluted earnings per share:
As reported $ 2.46 $ 2.15 $ 1.96
Pro forma $ 2.45 $ 2.15 $ 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 2003,
2002 and 2001, respectively: risk-free interest rate of 3.65%, 3.80% and 4.70%,
volatility of 0.17, 0.18 and 0.22, dividend yield of 2.90%, 3.00% and 4.00% and
an expected life of seven years. The fair value of options granted in 2003, 2002
and 2001 was $6.25, $4.81 and $5.16, respectively.
- -46-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Earnings per share:
Basic earnings per share (EPS) is computed by dividing net income by the
weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common
stock or resulted in the issuance of common stock that then shared in the
earnings of the Corporation. Potential common shares that may be issued by
the Corporation relate solely to outstanding stock options and are
determined using the treasury stock method. The following table sets forth
the computation of basic and diluted earnings per share:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(In Thousands, except per share data)
Basic earnings per share:
Net income $ 5,647 $ 5,015 $ 4,642
Weighted average shares outstanding 2,290,959 2,330,390 2,368,923
Earnings per share $ 2.47 $ 2.15 $ 1.96
Diluted earnings per share:
Net income $ 5,647 $ 5,015 $ 4,643
Weighted average shares outstanding 2,290,959 2,330,390 2,368,923
Dilutive effect of employee stock options 1,125 117 --
Total diluted weighted averge shares outstanding 2,292,084 2,330,507 2,368,923
Earnings per share $ 2.46 $ 2.15 $ 1.96
Comprehensive income:
Accounting principles generally require that recognized revenue, expenses,
and 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 and related tax effects are as
follows:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(In Thousands)
Unrealized holding (losses) gains on available for sale securities $(489) $1,704 $470
Reclassification adjustment for gains realized in income -- (8) --
----- ------ ----
(489) 1,696 470
Tax benefit (expense) 166 (577) (161)
----- ------ ----
Net of tax amount $(323) $1,119 $309
===== ====== ====
-47-
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 2002 and 2001 financial statements have been
reclassified to conform with the 2003 presentation format. Such
reclassifications had no impact on the Corporation's 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 November 2002, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 45 (FIN 45), "Guarantor's Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of Indebtedness
of Others." This Interpretation expands the disclosures to be made by a
guarantor in its financial statements about its obligations under certain
guarantees and requires the guarantor to recognize a liability for the fair
value of an obligation assumed under certain specified guarantees. Under FIN
45, the Corporation does not issue any guarantees that would require
liability recognition or disclosure, other than its standby letters of
credit, as discussed in Note 13. The adoption of FIN 45 did not have a
significant impact on the Corporation's financial condition or results of
operations.
In January 2003, the Financial Accounting Standards Board issued FASB
Interpretation No. 46, "Consolidation of Variable Interest Entities, an
Interpretation of ARB No. 51." FIN 46 was revised in December 2003. This
Interpretation provides new guidance for the consolidation of variable
interest entities (VIEs) and requires such entities to be consolidated by
their primary beneficiaries if the entities do not effectively disperse
risk among parties involved. The Interpretation also adds disclosure
requirements for investors that are involved with unconsolidated VIEs. The
disclosure requirements apply to all financial statements issued after
December 31, 2003. The consolidation requirements apply to companies that
have interests in special purpose entities for periods ending after
December 15, 2003. Consolidation of other types of VIEs is required in
financial statements for periods ending after March 15, 2004. The adoption
of this Interpretation did not have and is not expected to have an impact
on the Corporation's financial condition or results of operations.
In April 2003, the Financial Accounting Standards Board issued Statement
No. 149, "Amendment of Statement No. 133, Accounting for Derivative
Instruments and Hedging Activities." This Statement clarifies the
definition of a derivative and incorporates certain decisions made by the
Board as part of the Derivatives Implementation Group process. This
Statement is effective for contracts entered into or modified and for
hedging relationships designated after June 30, 2003 and should be applied
prospectively. The provisions of the Statement that relate to
implementation issues addressed by the Derivatives Implementation Group
that have been effective should continue to be applied in accordance with
their respective dates. Adoption of this standard did not have an impact on
the Corporation's financial condition or results of operations.
In May 2003, the Financial Accounting Standards Board issued Statement No.
150, "Accounting for Certain Financial Instruments with Characteristics of
both Liabilities and Equity." This Statement requires that an issuer
classify a financial instrument that is within its scope as a liability.
Many of these instruments were previously classified as equity. This
Statement was effective for financial instruments entered into or modified
after May 31, 2003 and otherwise was effective beginning July 1, 2003. The
adoption of this standard did not have an 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 in vault cash and with the
Federal Reserve Bank. The average reserve balances for 2003 and 2002
approximated $4,581,000 and $4,091,000, respectively.
- -48-
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, 2003:
U.S. Government agency obligations $56,825 $ 965 $ (75) $57,715
Obligations of states and political subdivisions 17,696 687 -- 18,383
Mortgage-backed securities 6,253 40 (33) 6,260
Equity securities 580 647 (1) 1,226
------- ----- ----- -------
$81,354 $2,339 $(109) $83,584
======= ====== ===== =======
DECEMBER 31, 2002:
U.S. Treasury securities $ 1,001 $ 3 $ -- $ 1,004
U.S. Government agency obligations 44,082 1,507 -- 45,589
Obligations of states and political subdivisions 15,627 675 (3) 16,299
Corporate and other debt securities 1,960 44 -- 2,004
Mortgage-backed securities 4,526 102 -- 4,628
Equity securities 578 427 (34) 971
------- ----- ----- -------
$67,774 $2,758 $ (37) $70,495
======= ====== ===== =======
HELD TO MATURITY SECURITIES:
DECEMBER 31, 2003:
U.S. Treasury securities $ 2,474 $ 92 $ -- $ 2,566
U.S. Government agency obligations 2,003 -- (23) 1,980
Obligations of states and political subdivisions 10,540 132 -- 10,672
------- ----- ----- -------
$15,017 $ 224 $ (23) $15,218
======= ====== ===== =======
DECEMBER 31, 2002:
U.S. Treasury securities $ 1,467 $ 110 $ -- $ 1,577
U.S. Government agency obligations 2,000 62 -- 2,062
Obligations of states and political subdivisions 20,626 535 -- 21,161
Corporate and other debt securities 5,814 84 -- 5,898
------- ----- ----- -------
$29,907 $ 791 $ -- $30,698
======= ====== ===== =======
-49-
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, 2003, by
contractual maturity, are shown below. Expected maturities may differ from
contractual maturities because the securities may be called or prepaid with or
without prepayment penalties.
AVAILABLE FOR SALE HELD TO MATURITY
------------------ ----------------
AMORTIZED FAIR AMORTIZED FAIR
COST VALUE COST VALUE
---- ----- ---- -----
(IN THOUSANDS)
Due in one year or less $ 3,513 $ 3,594 $10,541 $10,672
Due after one year through five years 69,574 71,046 4,476 4,546
Due after five years through ten years 1,427 1,450
Due after ten years 7 8 -- --
Mortgage-backed securities 6,253 6,260 -- --
Equity securities 580 1,226 -- --
------- ------- ------- -------
$81,354 $83,584 $15,017 $15,218
======= ======= ======= =======
Gross gains of $-0-, $8,000 and $-0- were realized on sales of securities
available for sale in 2003, 2002 and 2001, respectively.
Securities with a fair value of $24,749,000 and $18,349,000 at December 31, 2003
and 2002, respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law.
- -50-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECURITIES (CONTINUED)
The following table shows the Corporation's investments' gross unrealized losses
and fair value aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position, at
December 31, 2003:
Less than 12 Months 12 Months or More Total
------------------- ----------------- -----
Fair Unrealized Fair Unrealized Fair Unrealized
Value Losses Value Losses Value Losses
----- ------ ----- ------ ----- ------
(In Thousands)
Securities available for sale:
U.S. Government agency obligations $11,299 $ (75) $ -- $ -- $11,299 $ (75)
Obligations of states
and political subdivisions -- -- -- -- -- --
Mortgage-backed securities 3,688 (33) -- -- 3,688 (33)
Equity securities 83 (1) -- -- 83 (1)
------- ----- ---- ---- ------- -----
15,070 (109) -- -- 15,070 (109)
------- ----- ---- ---- ------- -----
Securities held to maturity:
U.S. Treasury securities -- -- -- -- -- --
U.S. Government agency obligations 1,980 (23) -- -- 1,980 (23)
Obligations of states
and political subdivisions -- -- -- -- -- --
------- ----- ---- ---- ------- -----
1,980 (23) -- -- 1,980 (23)
------- ----- ---- ---- ------- -----
Total temporarily impaired securities $17,050 $(132) $ -- $ -- $17,050 $(132)
======= ===== ==== ==== ======= =====
Management evaluates securities for other-than-temporary impairment at least on
a quarterly basis, and more frequently when economic or market concerns warrant
such evaluation. Consideration is given to the length of time and the extent to
which fair value has been less than cost, the financial condition and near-term
prospects of the issuer and the intent and ability of the Corporation to retain
its investment in the issuer for a period of time sufficient to allow for any
anticipated recovery in fair value. The decline in fair value at December 31,
2003, is due primarily to interest rate fluctuations. At December 31, 2003,
there were 16 securities in a unrealized loss position.
At December 31, 2003, the Corporation had no unrealized losses in the investment
portfolio with a duration greater than twelve months.
-51-
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 receivable are comprised of the following:
December 31,
------------
2003 2002
---- ----
(In Thousands)
Commercial, agricultural and financial $ 25,885 $ 26,815
Real estate mortgages:
Residential 127,226 124,907
Commercial 34,938 32,702
Consumer 64,593 61,176
Other 4,577 2,452
-------- --------
257,219 248,052
Unearned discount on loans (4,439) (9,824)
Allowance for loan losses (2,820) (2,731)
-------- --------
$249,960 $235,497
======== ========
The following table presents changes in the allowance for loan losses:
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(In Thousands)
Balance, beginning $ 2,731 $ 2,526 $2,497
Provision for loan losses 304 300 240
Recoveries 20 112 26
Loans charged off (235) (207) (237)
------- ------- ------
Balance, ending $ 2,820 $ 2,731 $2,526
======= ======= ======
The recorded investment in impaired loans not requiring an allowance for loan
losses was $802,000 and $-0- at December 31, 2003 and 2002, respectively. The
recorded investment in impaired loans requiring an allowance for loan losses at
December 31, 2003 and 2002 was $2,173,000 and $2,080,000, respectively. The
related allowance for loan losses associated with these loans was $125,000 and
$175,000, respectively. For the years ended December 31, 2003, 2002 and 2001,
the average recorded investment in these impaired loans was $3,306,000,
$2,433,000 and $582,000, respectively. Interest income recognized on these
impaired loans was $174,000, $189,000 and $-0-, respectively.
The recorded investment in nonaccrual loans at December 31, 2003 and 2002
totaled $-0- and $219,000, respectively. The recorded investment in loans
greater than 90 days past due and still accruing at December 31, 2003 and 2002
totaled $584,000 and $544,000, respectively.
- -52-
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,
------------
2003 2002
---- ----
(In Thousands)
Land and improvements $ 686 $ 686
Buildings and improvements 7,091 6,405
Furniture and equipment 3,486 3,065
-------- --------
11,263 10,156
Accumulated depreciation (4,508) (4,389)
-------- --------
$ 6,755 $ 5,767
======== ========
DEPOSITS
The composition of deposits is as follows:
December 31,
------------
2003 2002
---- ----
(In Thousands)
Demand, non-interest bearing $ 42,200 $ 38,892
NOW and Money Market 64,838 58,160
Savings 42,317 36,194
Time, $100,000 or more 34,323 35,167
Other time 149,306 154,206
-------- --------
$332,984 $322,619
======== ========
At December 31, 2003, the scheduled maturities of time deposits are as
follows (in thousands):
2004 $ 89,245
2005 50,847
2006 13,137
2007 11,720
2008 18,680
---- --------
$183,629
========
BORROWING CAPACITY
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 $-0- as of December 31, 2003 and 2002. The
agreement expires in March 2004 and the interest rate was 0.73% and 0.96%
at December 31, 2003 and 2002, respectively.
The Bank has a maximum borrowing capacity of $133,456,000 with the FHLB
which is collateralized by qualifying assets of the Bank. No amounts were
outstanding at December 31, 2003.
-53-
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 I capital (as defined in the regulations) to risk-weighted assets and
of Tier I capital to average assets. Management believes, as of December 31,
2003, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 2003, the most recent notification from the Federal Deposit
Insurance Corporation 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, 2003:
Total capital (to risk-weighted assets) $48,602 20.05% =>$19,393 =>8.00% =>$24,241 =>10.00%
Tier I capital (to risk-weighted assets) 45,782 18.89 => 9,696 =>4.00 => 14,544 => 6.00
Tier I capital (to average assets) 45,782 11.93 => 15,348 =>4.00 => 19,185 => 5.00
AS OF DECEMBER 31, 2002:
Total capital (to risk-weighted assets) $46,630 19.93% =>$18,720 =>8.00% =>$23,401 =>10.00%
Tier I capital (to risk-weighted assets) 43,899 18.76 => 9,360 =>4.00 => 14,040 => 6.00
Tier I capital (to average assets) 43,899 12.04 =>1 4,580 =>4.00 => 18,226 => 5.00
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, 2003, $33,863,000 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, subject to
regulatory capital requirements noted above.
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 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, 2003, 88,846 shares were available for issuance under the
Dividend Reinvestment Plan.
- -54-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE BENEFITS
Stock option plan:
Under the 2000 Incentive Stock Option Plan, 220,000 shares of common stock
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 one year after the grant and expire ten years after the date of
the grant.
Stock option transactions under the Plan were as follows:
Weighted
Average
Options Exercise Price
------- --------------
Outstanding at December 31, 2000 -- --
Granted 7,982 $28.20
------
Outstanding at December 31, 2001 7,982 28.20
Granted 8,582 28.50
------
Outstanding at December 31, 2002 16,564 28.36
Granted 7,841 30.25
Forfeited (605) 28.35
------
Outstanding at December 31, 2003 23,800 28.98
====== =====
Exercisable at December 31, 2003 6,408 28.32
===== =====
Options outstanding at December 31, 2003 are exercisable at prices of $28.20
to $30.25. The weighted-average remaining contractual life of these options
is approximately nine years.
-55-
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,
------------------------
2003 2002
---- ----
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $4,203 $3,657
Service cost 221 174
Interest cost 304 274
Actuarial loss 127 247
Benefits paid (158) (149)
------ ------
Benefit obligation at end of year 4,697 4,203
------ ------
Change in plan assets:
Fair value of plan assets at beginning of year 3,623 3,437
Actual return on plan assets (134) 72
Employer contribution 650 263
Benefits paid (158) (149)
------ ------
Fair value of plan assets at end of year 3,981 3,623
------ ------
Funded status (716) (580)
Unrecognized net actuarial gain 864 368
Unrecognized net transition asset (17) (19)
------ ------
Prepaid (accrued) benefit cost $ 131 $ (231)
====== ======
Pension expense included the following components for the years ended
December 31:
2003 2002 2001
---- ---- ----
(In Thousands)
Service cost, benefits earned during the year $ 222 $ 174 $ 167
Interest cost on projected benefit obligation 298 268 248
Expected return on plan assets (255) (237) (239)
Net amortization (2) (2) (2)
------ ------ -----
$ 263 $ 203 $ 174
====== ====== =====
Assumptions used in the accounting were:
2003 2002 2001
---- ---- ----
Discount rates 7.0% 7.0% 7.5%
Rates of increase in compensation levels 4.0 4.0 4.0
Expected long-term rate of return on assets 7.0 7.0 7.5
The investment strategy and investment policy for the retirement plan is 40%
equity and 60% fixed income. The asset allocation as of December 31, 2003 is
approximately 34.50% equities and 65.50% fixed income investments.
- -56-
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, 2003
and 2002, the present value of the future liability was $1,226,000 and
$1,173,000, respectively. The Corporation has funded these plans through the
purchase of annuities and life insurance policies, which have an aggregate
cash surrender value of $2,645,000 and $2,681,000 at December 31, 2003 and
2002, respectively. For the years ended December 31, 2003, 2002 and 2001,
$248,000, $192,000 and $188,000, respectively, was charged to expense in
connection with this plan.
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, 2003 and 2002, the present value of the future
liability was $1,939,000 and $1,846,000, 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 $1,594,000 and $1,481,000 at December 31,
2003 and 2002, respectively. For the years ended December 31, 2003, 2002 and
2001, $204,000, $205,000 and $213,000, 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 2003, 2002 and 2001, 2,227, 2,296, and 1,500
shares, respectively, were issued under the Plan. At December 31, 2003,
94,900 shares were reserved for issuance under the Plan.
Salary continuation plan:
The Corporation has non-qualified Salary Continuation Plans for key
employees. At December 31, 2003 and 2002, the present value of the future
liability was $601,000 and $490,000, respectively. The Corporation has
funded the Plan through the purchase of life insurance policies which have
an aggregate cash surrender value of $5,361,000 and $5,151,000 at December
31, 2003 and 2002, respectively. For the years ended December 31, 2003, 2002
and 2001, $117,000, $152,000 and $127,000, respectively, was charged to
expense in connection with the Plan.
-67-
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,
------------------------
2003 2002 2001
---- ---- ----
(In Thousands)
Current $1,725 $1,892 $1,531
Deferred 95 (146) (103)
------ ------ ------
$1,820 $1,746 $1,428
====== ====== ======
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,
------------------------
2003 2002 2001
---- ---- ----
(In Thousands)
Federal income tax at statutory rate $2,539 $2,299 $2,064
Tax-exempt interest (448) (544) (583)
Disallowance of interest expense 47 69 96
Income on life insurance (144) (148) (128)
Life insurance proceeds (117) -- --
Other (57) 70 (21)
------ ------ ------
$1,820 $1,746 $1,428
====== ====== ======
The income tax provision includes $-0-, $3,000 and $-0- in 2003, 2002 and 2001,
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,
------------
2003 2002
---- ----
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 832 $ 802
Deferred directors' fees 659 628
Pension liabilities 562 636
------ ------
Total deferred tax assets 2,053 2,066
------ ------
Deferred tax liabilities:
Bank premises and equipment (203) (111)
Securities accretion -- (9)
Unrealized gains on securities available for sale (758) (925)
------ ------
Total deferred tax liabilities (961) (1,045)
------ ------
Net deferred tax asset $1,092 $1,021
====== ======
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, 2003
and 2002, these persons were indebted to the Bank for loans totaling
$1,614,000 and $2,289,000, respectively. During 2003, loans totaling
$1,374,000 were disbursed and loan repayments totaled $2,049,000.
- -58-
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 $771,000, $582,000 and $654,000
for the years ended December 31, 2003, 2002 and 2001, respectively. Rent
expense, including the license fee for the branch offices, was $71,000, $67,000
and $55,000 in 2003, 2002 and 2001, respectively.
Minimum future payments under all noncancellable lease and service agreements as
of December 31, 2003 are as follows (in thousands):
2004 $276
2005 276
2006 270
2007 33
-----
$855
====
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 standby 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 standby
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,
------------
2003 2002
---- ----
(In Thousands)
Commitments to grant loans $ 2,727 $ 2,897
Unfunded commitments under lines of credit 31,266 30,822
Standby letters of credit 764 735
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.
Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. The majority of
these standby letters of credit expire within the next twelve months. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending other loan commitments. The Bank requires collateral
supporting these standby letters of credit as deemed necessary. Management
believes that the proceeds obtained through a liquidation of such collateral
would be sufficient to cover the maximum potential amount of future payments
required under the corresponding guarantees. The current amount of the liability
as of December 31, 2003 for guarantees under standby letters of credit issued is
not material.
-59-
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 and liabilities. 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 Corporation's financial instruments at
December 31, 2003 and 2002:
o For cash and due from banks, 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 fair 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 restricted investment in 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 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.
- -60-
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,
------------
2003 2002
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
Financial assets:
Cash and due from banks $ 13,502 $ 13,502 $ 11,111 $ 11,111
Interest bearing deposits with banks 125 125 90 90
Interest bearing time deposits with banks 4,090 4,090 5,390 5,390
Federal funds sold -- -- 3,700 3,700
Securities 98,601 98,802 100,402 101,193
Restricted investment in bank stock 1,107 1,107 639 639
Loans receivable, net of allowance 249,960 249,609 235,497 236,211
Accrued interest receivable 1,810 1,810 2,011 2,011
Financial liabilities:
Deposits 332,984 335,680 322,619 325,626
Accrued interest payable 756 756 1,314 1,314
Off-balance sheet financial instruments:
Commitments to extend credit -- -- -- --
Standby letters of credit -- -- -- --
-61-
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,
------------
ASSETS 2003 2002
---- ----
(In Thousands)
Cash $ 3 $ 4
Interest bearing deposits with banks 490 490
------- -------
Cash and cash equivalents 493 494
Investment in Bank subsidiary 47,175 45,615
Securities available for sale 2,803 2,233
Other 53 26
------- -------
$50,524 $48,368
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities, other $ 41 $ 41
Stockholders' equity 50,483 48,327
------- -------
$50,524 $48,368
======= =======
STATEMENTS OF INCOME
Years Ended December 31,
------------------------
2003 2002 2001
---- ---- ----
(In Thousands)
Dividends from Bank subsidiary $ 3,708 $ 3,603 $ 3,090
Interest income 146 109 102
Other expenses (90) (77) (66)
------- ------- -------
Income before equity in undistributed net income of subsidiary 3,764 3,635 3,126
Equity in undistributed net income of Bank subsidiary 1,883 1,380 1,516
------- ------- -------
Net income $ 5,647 $ 5,015 $ 4,642
======= ======= =======
- -62-
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,
------------------------
2003 2002 2001
---- ---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,647 $ 5,015 $ 4,642
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income
of Bank subsidiary (1,883) (1,380) (1,516)
Increase in other assets (27) -- (10)
Increase in other liabilities -- 14 18
------- ------- -------
Net cash provided by operating activities 3,737 3,649 3,134
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available for sale securities (2,330) (1,159) (622)
Proceeds from maturities of available for sale securities 1,760 640 200
------- ------- -------
Net cash used in investing activities (570) (519) (422)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid and cash paid in lieu of fractional shares (2,283) (2,042) (1,904)
Purchase of treasury stock (1,425) (1,560) (1,189)
Treasury stock issued 540 469 181
Stock issued under dividend reinvestment plan
and employee stock purchase plan -- -- 205
------- ------- -------
Net cash used in financing activities (3,168) (3,133) (2,707)
------- ------- -------
Increase (decrease) in cash and cash equivalents (1) (3) 5
Cash and cash equivalents:
Beginning 494 497 492
------- ------- -------
Ending $ 493 $ 494 $ 497
======= ======= =======
-63-
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
- -64-