JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
DECEMBER 31, 2004
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 - 39
Report of Independent Auditors --------------------------------------------- 40
Financial Statements:
Consolidated Balance Sheets ---------------------------------------- 41
Consolidated Statements of Income ---------------------------------- 42
Consolidated Statements of Stockholders' Equity -------------------- 43
Consolidated Statements of Cash Flows ------------------------------ 44
Notes to Consolidated Financial Statements -------------------- 45 - 66
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 markdowns or any commission to the
broker-dealer. The published bid prices do not necessarily reflect prices in
actual transactions. Cash dividends paid for 2004 and 2003 are provided in the
table below.
2004 2003
---- ----
Dividends Dividends
Quarter High Low per share Quarter High Low per share
- ------- ---- --- --------- ------- ---- --- ---------
First $38.00 $34.50 $1.00 First $30.75 $29.00
Second 41.00 36.00 .56 Second 30.75 29.65 $.47
Third 42.00 39.25 Third 30.60 30.00
Fourth 42.00 40.00 .58 Fourth 34.50 30.25 .53
As noted in "Regulatory Matters and Stockholders' Equity" on page 57, the
Corporation is subject to various regulatory capital requirements that limit the
amount of capital available for dividends. The Corporation expects that it will
continue to pay comparable dividends in the future, subject to regulatory
requirements, the Corporation's financial condition and requirements, future
prospects, business conditions and other factors deemed relevant by the Board of
Directors.
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 LOGO OMITTED]
POST OFFICE BOX 66
TELEPHONE (717) 436-8211
Dear Shareholder:
On behalf of our entire team, we proudly present for your review, the 2004
Annual Report of the Juniata Valley Financial Corp.
Despite a continuous low interest rate environment and a very sluggish
economy in our market area, the team at The Juniata Valley Bank was able to
continue to improve the financial performance of your bank.
In addition to reporting the financial results for 2004, a meaningful
measure of your Bank's success, this letter will also address other key aspects
of our performance that are worthy of mention.
In 2003, and continuing into 2004, we developed a strategy to expand our
focus in our Trust and Investment Management Division. This strategy was
designed to place more emphasis on Investment Management as an enhancement to
our Trust and Investment Management Division's goals and objectives. As a result
of our expanded focus, Trust assets under management, on an investment cost
basis, have reached $66,843,000 as of December 31, 2004, compared to $61,736,000
as of December 31, 2003, this represents an increase of 8.27%.
Early in 2004 we relocated our Trust and Investment Management Division to
the first floor of our Operations Center to provide easier access and
convenience to our customers. At the same time, we relocated our management team
to the location which previously housed our Trust and Investment Management
Division. This relocation will provide for more effective communication among
management team members, and afford us the opportunity to enhance our
effectiveness as a management team.
In late spring of 2004, we began our focus on continuing to seek
alternatives to improve our performance. After considerable thought and
discussion, we initiated the implementation of our Profit Enhancement Program.
This process caused us and will continue to encourage us to review every facet
of the way we do business. We would anticipate the implementation of this
initiative will prove to be beneficial to our company.
In our ongoing desire to create efficiencies, during late summer of 2004,
after considerable discussion and review, we decided to consolidate our Market
Street Office into our Monument Square and Water Street offices. This decision
was not easy. However, customer traffic had decreased significantly as a result
of limited parking and a single lane drive up that would have been extremely
costly to expand and upgrade. Additionally, we determined there was no need for
us to have three branch offices within a three block area. The Market Street
Office ceased operations on October 29, 2004.
In conjunction with the consolidation of our Market Street facility, we
relocated our Alternative Investment Division and several members of our loan
origination staff to a smaller more efficient and convenient location in the
strip mall on South Main Street in Lewistown.
- 3 -
Finally, in October of 2004, we installed a "state of the art" check
imaging system. This system allows us the opportunity to provide our customers
clear detailed images of their checks while yet creating savings and
efficiencies to the Bank. This system also enables us to be compliant when other
features of the Federal Reserve Board's "Check 21" program are fully
implemented. When combining this check imaging system with our "state of the
art" internet banking product, we will be in a position to continue to provide
enhanced technology banking opportunities to our customers.
In addition to the aforementioned activities, 2004 was a very successful
year from a financial standpoint for your Bank. Net income of the Corporation
grew to $5,829,000 from $5,647,000 in 2003, an increase of 3.22%. Earnings per
share increased from $2.47 in 2003 to $2.56 in 2004, an increase of 3.64%. Net
income benefited from our ongoing attempt to improve non interest income. While
net interest income grew 1.74%, non interest income increased by 25.40%. In
2004, non interest income represented 18.46% of total operating revenue compared
to 15.52% in 2003. Excluding gains from the sale of securities, non interest
income increased 12.41% over 2003.
Despite the sluggish economy, mentioned earlier, the assets of your Bank
reached $396,758,000 at 2004 year end versus $387,780,000 at year end 2003. Net
loans outstanding reached record levels as we ended 2004 at $276,759,000
compared to $249,960,000 at year end 2003. This represents an increase of
$26,799,000 or 10.72%.
The two most commonly used financial measurements in the banking industry
again reflected a nice improvement in 2004 compared to 2003. Return on average
assets (ROAA) increased from 1.46% in 2003 to 1.48% in 2004. Return on average
equity (ROAE) improved from 11.86% in 2003 to 11.95% in 2004.
Finally, as a result of the financial performance mentioned above, the
market value of our stock again increased significantly, closing 2004 at $42.00
per share from the 2003 closing price of $34.50. When considering the
appreciation in stock value, our $1.00 special cash dividend and $1.14 in
regular dividends, the total return on the stock of JUVF for 2004 was 27.94%
compared to 21.36% in 2003.
For over 137 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 OMITTED]
Francis J. Evanitsky
President & CEO
- - 4 -
JUNIATA VALLEY FINANCIAL CORP. OFFICERS
TIMOTHY I. HAVICE 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
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.
Chairman, 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 D. Havice
Gerald M. Lyter Nancy S. Reinke
James A. Witmer Christine L. Weyer
Gary G. Wright Frank A. Zampelli
PORT ROYAL OFFICE GARDENVIEW OFFICE
Kim E. Bomberger Larry B. Cottrill, Jr.
Robert D. Hower David B. Esh
Richard J. Junk H. Ross Harshbarger
N. Jeffrey Leonard Donald R. Hartzler
Dennis A. Long Jerry L. Wagner
McALISTERVILLE OFFICE WATER STREET OFFICE
Mark D. Apple George W. Anderson
M. Richard Dimm Catherine J. Searer
Steve D. Ehrenzeller Susan M. McCartney
Samuel E. Knouse 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
Pamela S. Eberman ------------------------------- Sr. Vice President, Human Resource Manager
Thomas L. Parrish --------------------------- Sr. Vice President, Community Banking Division
Lou Ann Wilson ------------------------------------------ Vice President, Compliance Officer
Suzanne Booher-------------------------------------------------- Facilities/Security Officer
ACCOUNTING
Kristi J. Burdge ---------------------------------------------------------- Staff Accountant
Anna Mae Peoples-------------------------------------- Vice President, Accounting Specialist
LOANS
Edward L. Kauffman --------------------------------------- Sr. Vice President, Loan Division
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
M. Randall French ----------------------------------------- Vice President, Sr. Loan Officer
Kurt L. McKinney, Jr. ------------------------------------- Vice President, Sr. Loan Officer
J. Neal Shawver ----------------------------------------------- Vice President, Loan Officer
R. Jack Morgan ---------------------------------------------------------------- Loan Officer
Penny L. Adams ---------------------------------------------------------------- Loan Officer
OPERATIONS
Judy R. Aumiller ------------------------ Sr. Vice President, Operations Technology Division
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 Management Division
James C. Dillman --------------------------------------------- Vice President, Trust Officer
Cynthia L. Williams ------------------------------------------ Vice President, Trust Officer
BLAIRS MILLS OFFICE
Wayne S. McCoy ------------------------------------ Vice President, Community Office Manager
BURNHAM OFFICE
Leann M. Fisher ----------------------------------- Vice President, Community Office Manager
GARDENVIEW OFFICE
Larry B. Cottrill, Jr. ---------------------------- Vice President, Community Office Manager
Christine L. Searer ----------------------------------------------- Customer Service Officer
McALISTERVILLE OFFICE
Leslie A. Miller -------------------------------------------------- Community Office Manager
Kelly M. Neimond -------------------------------------------------- Customer Service Officer
MIFFLINTOWN OFFICE
Betty D. Ryan ------------------------------------- Vice President, Community Office Manager
MILLERSTOWN OFFICE
James A. Witmer ----------------------------------- Vice President, Community Office Manager
Lisa M. Freet ----------------------------------------------------- Customer Service Officer
MONUMENT SQUARE OFFICE
Lee Ellen Foose ----------------------------------- Vice President, Community Office Manager
Stacey K. McMurtrie ----------------------------------------------- Customer Service Officer
MOUNTAIN VIEW OFFICE
Brenda A. Brubaker -------------------------------- Vice President, Community Office Manager
PORT ROYAL OFFICE
Barbara I. Seaman --------------------------------- Vice President, Community Office Manager
Lona Rae Hawthorne------------------------------------------------- Customer Service Officer
WAL-MART OFFICE
Christine L. Weyer -------------------------------- Vice President, Community Office Manager
Denise M. Rothrock ------------------------------------------------ Customer Service Officer
WATER STREET OFFICE
Catherine J. Searer ------------------------------- Vice President, Community Office Manager
FINANCIAL SERVICES
Winston L. Libby ------------------------------------------------ Financial Services Officer
Malcolm R. Parks ------------------------------------------------ Financial Services Officer
- 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
11 offices in the following locations: Juniata County is home to four community
offices; Mifflin County is home to five community offices along with a new
financial services office; Perry and Huntingdon counties each have one community
office; Centre County houses a loan production office. A full range of consumer
and commercial banking services are offered through the Corporation. Consumer
banking services include: Internet banking; telephone banking; eight automated
teller machines; personal checking accounts; club accounts; checking overdraft
privileges; money market deposit accounts; savings accounts; debit cards;
certificates of deposit; individual retirement accounts; secured and unsecured
installment loans; secured and unsecured lines of credit; construction and
mortgage loans; safe deposit boxes. Commercial banking services include: small
and highvolume business checking accounts; internet account management services;
ACH origination; payroll direct deposit; commercial lines of credit; commercial
letters of credit; commercial term and demand loans. Comprehensive trust, asset
management and estate services are provided; and the Corporation has staff
contracted with a brokerdealer to allow them to offer a full range of financial
services: 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.
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, well-managed 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.
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
wellcapitalized, 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.
- - 8 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
SUPERVISION AND REGULATION (CONTINUED)
The Sarbanes-Oxley Act of 2002 implemented a broad range of corporate
governance, accounting and reporting measures for companies that have securities
registered under the Securities Exchange Act of 1934, such as the Corporation.
Specifically, the Sarbanes-Oxley Act and the various regulations promulgated
thereunder, established, among other things: (i) new requirements for audit
committees, including independence, expertise, and responsibilities; (ii)
additional responsibilities regarding financial statements for the Chief
Executive Officer and Chief Financial Officer of the reporting company; (iii)
new standards for auditors and regulation of audits, including independence
provisions that restrict non-audit services that accountants may provide to
their audit clients; (iv) increased disclosure and reporting obligations for the
reporting company and their directors and executive officers, including
accelerated reporting of stock transactions and a prohibition on trading during
pension blackout periods; (v) a prohibition on personal loans to directors and
officers, except certain loans made by insured financial institutions on
non-preferential terms and in compliance with other bank regulatory
requirements; and (vi) a range of new and increased civil and criminal penalties
for fraud and other violations of the securities laws.
Section 404 of the Sarbanes-Oxley Act requires the Corporation to include in its
Annual Report on Form 10-K for fiscal years ending after November 15, 2004, a
report by its management and an attestation report by its independent registered
public accounting firm on the adequacy of the Corporation's internal control
over financial reporting. Management's internal control report must, among other
things, set forth management's assessment of the effectiveness of the
Corporation's internal control over financial reporting as of the end of the
Corporation's most recent fiscal year, including a statement as to whether or
not internal control over financial reporting is effective. On November 30,
2004, the Securities and Exchange Commission issued an exemptive order
permitting companies of our size to include such reports in an amended Annual
Report on Form 10-K filed on or before May 2, 2005. In reliance on this
exemptive order, our Annual Report on Form 10-K does not include reports of
management and the Corporation's independent registered public accounting firm
on internal control over the Corporation's financial reporting. We will include
these reports in an amended Form 10-K that we will file by May 2, 2005.
- 9 -
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,
------------
2004 2003 2002
---- ---- ----
Risk-weighted assets ratio:
Tier I 17.54% 18.89% 18.76%
Total 18.69% 20.05% 19.93%
Total assets leverage ratio:
Tier I 11.58% 11.93% 12.04%
- - 10 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
SECURITIES PORTFOLIO
The following table sets forth the carrying amount of securities at the dates
indicated:
December 31,
------------
2004 2003 2002
---- ---- ----
(In Thousands)
Available for sale securities (at fair value):
U.S. Treasury and other U.S. government obligations $48,247 $57,715 $ 46,593
States and political subdivisions 17,234 18,383 16,299
Other corporate -- -- 2,004
Mortgage-backed 4,947 6,260 4,628
Equity 1,155 1,226 971
------- ------- --------
71,583 83,584 70,495
------- ------- --------
Held to maturity securities (at amortized cost):
U.S. Treasury and other U.S. government obligations 4,485 4,476 3,467
States and political subdivisions -- 10,541 20,626
Other corporate -- -- 5,814
------- ------- --------
4,485 15,017 29,907
------- ------- --------
Total securities $76,068 $98,601 $100,402
======= ======= ========
- 11 -
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, 2004
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, 2004, 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 $11,565 3.17% $36,682 3.22% $ -- --% $ -- --%
State and political
subdivisions 1,895 3.82 15,339 3.44 -- -- -- --
Mortgage-backed -- -- 1,743 3.93 -- -- 3,204 4.20
------- ------- ------- ------
13,460 53,764 -- 3,204
------- ------- ------- ------
Held to maturity:
U.S. Treasury and other U.S.
government agencies 1,000 1.71 3,485 3.36 -- -- -- --
------- ------- ------- ------
1,000 3,485 -- --
------- ------- ------- ------
Total $14,460 $57,249 $ -- $3,204
======= ======= ======= ======
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.
- - 12 -
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 two
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-two 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,
------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In Thousands)
Commercial, financial and agricultural $ 23,301 $ 25,885 $ 26,815 $ 24,548 $ 23,327
Real estate mortgage 191,045 162,164 157,609 151,369 142,897
Consumer (less unearned discount) 61,108 60,154 51,352 51,733 52,991
All other 4,294 4,577 2,452 2,874 3,101
-------- -------- -------- -------- --------
Total loans $279,748 $252,780 $238,228 $230,524 $222,316
======== ======== ======== ======== ========
This table shows the maturity of loans (excluding residential mortgages of 1-4
family residences and consumer loans) outstanding as of December 31, 2004.
Maturing Maturing Maturing
During From 2006 After
2005 Thru 2009 2009 Total
---- --------- ---- -----
(In Thousands)
Commercial, agricultural and financial $ 23,301 $ -- $ -- $ 23,301
Commercial real estate 50,036 -- -- 50,036
All other 4,294 -- -- 4,294
-------- -------- -------- --------
Total loans $ 77,631 $ -- $ -- $ 77,631
======== ======== ======== ========
- 13 -
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,
------------
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In Thousands)
Average loans outstanding $263,773 $238,794 $233,262 $223,487 $212,270
======== ======== ======== ======== ========
Nonaccrual loans $ -- $ -- $ 219 $ 934 $ 364
Accruing loans past due
90 days or more 365 584 544 811 440
Restructured loans -- -- -- -- --
-------- -------- -------- -------- --------
Total $ 365 $ 584 $ 763 $ 1,745 $ 804
======== ======== ======== ======== ========
Ratio of non-performing loans
to average loans outstanding .14% .24% .33% .78% .39%
Information with respect to nonaccrual and restructured loans at December 31,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In Thousands)
Nonaccrual loans $ -- $ -- $ 219 $ 934 $ 364
Restructured loans -- -- -- -- --
Interest income that would have been
recorded under original terms -- -- 20 84 38
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.
- - 14 -
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,
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In Thousands)
Average loans outstanding $263,773 $238,794 $233,262 $223,487 $212,270
======== ======== ======== ======== ========
Allowance for loan loss at January 1 $ 2,820 $ 2,731 $ 2,526 $ 2,497 $ 2,486
Losses charged to allowance
Commercial 43 78 54 58 155
Real estate 10 50 44 51 --
Consumer 122 107 109 128 89
-------- -------- -------- -------- --------
175 235 207 237 244
-------- -------- -------- -------- --------
Recoveries credited to allowance
Commercial 1 1 5 2 13
Real estate 2 2 103 19 --
Consumer 15 17 4 5 12
-------- -------- -------- -------- --------
18 20 112 26 25
-------- -------- -------- -------- --------
Net charge-offs 157 215 95 211 219
Provision for loan losses 326 304 300 240 230
-------- -------- -------- -------- --------
Allowance for loan losses at December 31 $ 2,989 $ 2,820 $ 2,731 $ 2,526 $ 2,497
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding .06% .09% .04% .09% .10%
The amount charged to operations and the related balance in the allowance for
loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience and management's estimate of future potential losses.
Management maintains an allowance for loan losses that it considers adequate
based on the evaluation process that it performs on a quarterly basis. As part
of this process, management considers it appropriate to maintain a portion of
the allowance that is based on credit quality trends, loan volume, current
economic trends and other uncertainties. This portion of the allowance for loan
losses is reflected as the unallocated portion in the table below that indicates
the distribution of the allowance as of the end of each of the last five years.
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
(In Thousands)
% OF % of % of % of % of
AMOUNT LOAN Amount Loan Amount Loan Amount Loan Amount Loan
Commercial $1,087 9.9% $1,055 12.0% $1,057 12.3% $ 970 11.9% $ 670 12.4%
Real estate 602 68.3 548 64.2 561 66.2 747 65.7 472 64.3
Consumer 1,002 21.8 963 23.8 853 21.5 656 22.4 770 23.3
Unallocated 298 -- 254 -- 260 -- 153 -- 585 --
------ --- ------ --- ------ --- ------ --- ------ ---
Total $2,989 100% $2,820 100% $2,731 100% $2,526 100% $2,497 100%
====== === ====== === ====== === ====== === ====== ===
- 15 -
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 68% 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, 2004, that qualified as HLTS.
- - 16 -
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:
2004 2003 2002
---- ---- ----
AMOUNT RATE Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(In Thousands)
Non-interest bearing demand $ 45,402 $ 42,010 $ 38,870
Interest bearing demand 62,494 .84% 62,381 1.16% 53,896 1.59%
Savings deposits 44,988 .96 40,043 1.23 35,382 1.82
Time deposits 182,384 2.96 186,843 3.34 186,425 4.18
-------- -------- --------
Total $335,268 $331,277 $314,573
======== ======== ========
As of December 31, 2004, certificates of deposit outstanding in an individual
amount of $100,000 or more totalled $38,247,000.
The maturity of these certificates of deposits is as follows:
Over 3 Over 6
3 months through 6 through 12 Over 12
or less months months months
------- ------ ------ ------
(In Thousands)
$10,850 $6,352 $6,001 $15,044
======= ====== ====== =======
- 17 -
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 2004
Interest income $ 5,317 $ 5,445 $ 5,476 $ 5,489
Interest expense (1,641) (1,550) (1,593) (1,654)
------- ------- ------- -------
Net interest income 3,676 3,895 3,883 3,835
Provision for loan losses (80) (77) (82) (87)
Other income 827 925 754 955
Other expenses (2,618) (2,649) (2,667) (2,692)
------- ------- ------- -------
Income before income taxes 1,805 2,094 1,888 2,011
Income taxes (450) (519) (572) (428)
------- ------- ------- -------
Net income $ 1,355 $ 1,575 $ 1,316 $ 1,583
======= ======= ======= =======
Per-share data:
Basic earnings $ .59 $ .69 $ .58 $ .70
Diluted earnings .59 .69 .57 .69
Cash dividends 1.00 .56 -- .58
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 507 609 930 714
Other expenses (2,392) (2,451) (2,577) (2,597)
------- ------- ------- -------
Income before income taxes 1,697 1,967 2,057 1,746
Income taxes (359) (441) (502) (518)
------- ------- ------- -------
Net income $ 1,338 $ 1,526 $ 1,555 $ 1,228
======= ======= ======= =======
Per-share data:
Basic and diluted earnings $ .58 $ .67 $ .68 $ .54
Diluted earnings .58 .67 .68 .53
Cash dividends -- .47 -- .53
- - 18 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY
THE JUNIATA VALLEY BANK
FIVE YEAR FINANCIAL HIGHLIGHTS o SELECTED FINANCIAL DATA
2004 2003 2002 2001 2000
---- ---- ---- ---- ----
BALANCE SHEET DATA (In Thousands)
Assets $ 396,758 $ 387,780 $ 375,735 $ 356,757 $ 334,914
Deposits 332,642 332,984 322,619 305,468 287,221
Loans receivable, net 276,759 249,960 235,497 227,998 219,819
Securities 84,157 103,798 106,431 98,073 85,571
Stockholders' equity 50,153 50,483 48,327 45,326 43,082
Average equity 48,776 47,629 46,210 44,348 42,106
Average assets 393,554 386,574 366,853 348,331 334,685
EARNINGS DATA (In Thousands)
Interest income $ 21,727 $ 22,500 $ 23,470 $ 24,641 $ 24,679
Interest expense 6,438 7,472 9,299 11,929 11,880
---------- ---------- ---------- ---------- ----------
Net interest income 15,289 15,028 14,171 12,712 12,799
Provision for loan losses 326 304 300 240 230
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 14,963 14,724 13,871 12,472 12,569
Other income 3,461 2,760 2,014 2,194 1,377
Other expenses 10,626 10,017 9,124 8,596 8,184
---------- ---------- ---------- ---------- ----------
Income before income taxes 7,798 7,467 6,761 6,070 5,762
Federal income taxes 1,969 1,820 1,746 1,428 1,375
---------- ---------- ---------- ---------- ----------
Net income $ 5,829 $ 5,647 $ 5,015 $ 4,642 $ 4,387
========== ========== ========== ========== ==========
RATIOS
Return on average assets 1.48% 1.46% 1.37% 1.33% 1.31%
Return on average equity 11.95 11.86 10.85 10.47 10.42
Equity to assets (year end) 12.64 13.02 12.86 12.71 12.86
Loans to deposits (year end) 83.20 75.07 73.00 74.64 76.53
Dividend payout (percentage
of income) 83.70 40.43 40.72 40.78 66.90
Efficiency ratio 56.67 56.31 56.37 57.67 57.73
PER SHARE DATA
Basic earnings 2.56 2.47 2.15 1.96 1.81
Diluted earnings 2.54 2.45 2.15 1.96 1.81
Cash dividends 2.14 1.00 .88 .80 1.21
Book value 21.99 22.10 20.89 19.28 18.09
Average shares outstanding 2,279,584 2,290,961 2,330,390 2,368,923 2,420,966
Approximate number
of stockholders 1,751 1,761 1,751 1,719 1,725
- 19 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
TABLE 1 - SOURCES AND USES OF FUNDS TRENDS
2004 Increase (Decrease) 2003 Increase (Decrease) 2002
AVERAGE ------------------- Average ------------------ Average
BALANCE Amount % Balance Amount % Balance
------- ------ - ------- ------ - -------
(Thousands of Dollars)
Funding uses:
Interest earning assets:
Loans:
Commercial $ 84,819 $ 9,276 12.28% $ 75,543 $ 4,637 6.54% $ 70,906
Mortgage 123,614 10,234 9.03 113,380 231 .20 113,149
Consumer 59,486 5,421 10.03 54,065 4,858 9.87 49,207
--------- --------- --------- --------- ---------
267,919 24,931 10.26 242,988 9,726 4.17 233,262
Less: Allowance for loan losses (2,916) (136) (4.89) (2,780) (180) (6.92) (2,600)
--------- --------- --------- --------- ---------
265,003 24,795 10.32 240,208 9,546 4.14 230,662
Interest bearing deposits
with banks 5,569 227 4.25 5,342 1,103 26.02 4,239
Securities 85,754 (14,784) (14.70) 100,538 4,553 4.74 95,985
Funds sold 3,933 (2,632) (40.09) 6,565 457 7.48 6,108
--------- --------- --------- --------- ---------
95,256 (17,189) (15.29) 112,445 6,113 5.75 106,332
--------- --------- --------- --------- ---------
Total interest earning
assets 360,259 7,606 2.16 352,653 15,659 4.65 336,994
Other assets 33,295 (626) (1.85) 33,921 4,062 13.60 29,859
--------- --------- --------- --------- ---------
Total uses $ 393,554 $ 6,980 1.81 $ 386,574 $ 19,721 5.38 $ 366,853
========= ========= ========= ========= =========
Funding sources:
Deposits:
Demand $ 45,402 $ 3,392 8.07 $ 42,010 $ 3,140 8.08 $ 38,870
Interest bearing demand 62,494 113 .18 62,381 8,485 15.74 53,896
Savings 44,988 4,945 12.35 40,043 4,661 13.17 35,382
Time under $ 100,000 145,953 (6,994) (4.57) 152,947 (555) (.36) 153,502
--------- --------- --------- --------- ---------
Total core deposits 298,837 1,456 .49 297,381 15,731 5.59 281,650
Time over $100,000 36,431 2,535 7.48 33,896 973 2.96 32,923
--------- --------- --------- --------- ---------
Total deposits 335,268 3,991 1.20 331,277 16,704 5.31 314,573
Other liabilities 5,984 (1,189) (16.58) 7,173 1,240 20.90 5,933
Borrowings 3,526 3,031 612.32 495 358 261.31 137
Stockholders' equity 48,776 1,147 2.41 47,629 1,419 3.07 46,210
--------- --------- --------- --------- ---------
Total sources $ 393,554 $ 6,980 1.81 $ 386,574 $ 19,721 5.38 $ 366,853
========= ========= ========= ========= =========
- - 20 -
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
hereunder), 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, 2004, a copy of which may be
obtained from the Corporation upon request without charge.
- 21 -
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.
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 2004, reaching
the level of $393,554,000, an increase of $6,980,000 or 1.81%, compared to 2003.
From 2002 to 2003 the Corporation experienced an increase in assets of
$19,721,000. The Corporation experienced an increase in average balances of
loans of $24,931,000 or 10.26% from 2003 to 2004. This increase in 2003 over
2002 was $9,726,000 or 4.17%. Because the increase in loans was so significant
in 2004, as securities matured or were called the money could be utilized for
funding loan growth. Average securities declined to $85,754,000 in 2004 from
$100,538,000 in 2003, a difference of $14,784,000 or 14.70%. Average securities
increased from $95,985,000 in 2002 to $100,538,000 in 2003. This represents an
increase of $4,553,000 or 4.74%. Interest bearing deposits with banks increased
slightly to $5,569,000 in 2004 from $5,342,000 in 2003. The increase in 2004
over 2003 was $227,000 or 4.25%. The average balance in interest bearing
deposits for 2002 was $4,239,000 compared to $5,342,000 in 2003. The 2003
balance represents a $1,103,000 increase over 2002 or 26.02%. Federal funds sold
average balance decreased $2,632,000 or 40.09% in 2004 over 2003. This was
preceded by a small increase in 2003 over 2002 of $457,000 or 7.48%. Average
balances for federal funds sold for 2004, 2003, and 2002 were $3,933,000,
$6,565,000 and $6,108,000, respectively. This reflects an effort by management
to keep money invested at a better rate than federal funds, therefore interest
bearing deposits with banks have been maintained in certificates of deposit with
no more than $100,000 at an FDIC insured institution. Overall, average earning
assets increased in 2004 to $360,259,000 from $352,653,000 in 2003. This was an
increase of $7,606,000 or 2.16%. Average earning assets increased in 2003 to
$352,653,000 from $336,994,000 in 2002. This was an increase of $15,659,000 or
4.65%. Other assets include life insurance purchased by the bank. The average
balance of the life insurance purchased is approximately $10,200,000 in 2004,
$8,500,000 in 2003, and $8,000,000 in 2002. The cash surrender value of this
instrument is included in non-earning assets and revenues generated are included
in non-interest income.
The Corporation's funding sources increased only slightly in 2004. Customers are
feeling greater comfort with the capital markets than in the past two years.
Core deposits increased to $298,837,000 from $297,381,000 in 2003. This increase
of $1,456,000 or .49% when compared to the increase in 2003 over 2002 of
$15,731,000 or 5.59%, demonstrates the sentiment of our customers. The average
balance of core deposits for 2003 was $297,381,000 compared to $281,650,000 in
2002. The increase in 2003 occurred in the first half of the year. By the end of
2003, deposits were declining. Maintaining and gathering deposits has been a
challenge in 2004. Customers appear to feel safe again in the equity market and
are returning. The largest increases were in demand and savings deposits. The
average balance in demand accounts in 2004
- - 22 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
BALANCE SHEET SUMMARY (CONTINUED)
was $45,402,000 an increase of $3,392,000 over the $42,010,000 balance in 2003
which was an increase of $3,140,000 over the $38,870,000 balance in 2002. The
average balance in savings deposits increased to $44,988,000 in 2004 versus
$40,043,000 in 2003. This was in increase of $4,945,000 or 12.35%. The increase
in 2003 over 2002 was $4,661,000. The balance in 2003 was $40,043,000 compared
to the average balance in 2002 of $35,382,000. Certificates of deposit under
$100,000 declined to $145,953,000 in 2004 from $152,947,000 in 2003. This
represents a decline of $6,994,000 or 4.57%. The decline in 2002 to 2003 was
$555,000. The balance was $153,502,000 in 2002 and $152,947,000 in 2003. The
certificates of deposit over $100,000 increased to $36,431,000 in 2004 from
$33,896,000 in 2003 or an increase of $2,535,000 and 7.48%. The average balance
in 2003 over 2002 was $33,896,000 and 32,923,000, respectively. This was an
increase of $973,000 or 2.96%. Because deposits could not keep up with loan
growth an increase of borrowings was experienced. The average balances were
$3,526,000, $495,000 and $137,000 in 2004, 2003, and 2002 respectively. This
represents increases of $3,031,000 or 612.32% and $358,000 or 261.31%.
ASSETS
[ASSETS GRAPHIC OMITTED]
The Corporation had an increase in total assets of $8,978,000 or 2.32% from
December 31, 2003 to December 31, 2004. The increase from December 31, 2002 to
December 31, 2003 was $12,045,000 or 3.21%. Assets for the years ended December
31, 2004 and 2003 were $396,758,000 and $387,780,000, respectively. The
following discussion will highlight the changes that occurred.
LOANS
[NET LOANS GRAPHIC OMITTED]
At December 31, 2004, net loans increased $26,799,000 or 10.72% over 2003. This
follows an increase in 2003 over 2002 in net loans of $14,463,000 or 6.14%. The
loan to deposit ratio fluctuated throughout 2004; monthly averages were at a low
in January of 75.18% and a high in November of 82.40%. Residential mortgages
increased by $13,783,000 or 10.83% from 2003 to 2004. Residential mortgages
increased by $2,319,000 from 2002 to 2003. Real estate loans still remain a very
attractive option due to the tax deductibility of mortgage interest. Commercial
real estate loans grew by $15,098,000 or 43.21% in 2004 over 2003. Commercial
real estate loans grew by $2,236,000 from 2002 to 2003. Consumer loans decreased
$1,375,000 or 2.13% in 2004 over 2003. This follows a year with an increase of
$3,417,000 in 2003 over 2002.
In spite of the slow economy and increasing credit problems nationwide, the
Corporation continued its excellent chargeoff record (charge-offs, net of
recoveries) during 2004. For the year, the net charge-offs were $157,000 or .06%
of average loans outstanding. This compares with $215,000 or .09% in 2003 and
$95,000 or .04% in 2002. The low net charge-offs in 2002 were due to a recovery
of over $100,000 from a loan previously charged-off. The increase in 2003 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.
- 23 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
ALLOWANCE FOR LOAN LOSSES
(CONTINUED)
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 2004 of $2,989,000 or 1.08% of outstanding loans is adequate to
meet any foreseeable loan loss contingency. This is lower than the 1.13% and
1.15% for 2003 and 2002.
At December 31, 2004 and 2003, total non-performing loans were $365,000 and
$584,000, respectively; non-performing loans as a percentage of the allowance
for loan losses were 12.21% and 20.71%, 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 2004 was $121,000 and in 2003 was
$174,000.
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 $365,000 at December 31, 2004 down from the $584,000 at
December 31, 2003. 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.
- - 24 -
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 $88,224,000 on December 31,
2004, representing a decrease of $15,699,000 from year end 2003. The following
table summarizes how the ending balances (in thousands) changed annually in the
last three years.
December 31,
------------
2004 2003 2002
---- ---- ----
(In Thousands)
Purchase of available
for sale securities $ 16,314 $ 49,443 $ 41,554
Sales and maturities of
available for sale
securities (26,229) (35,141) (27,887)
Adjustment in
market value (1,602) (489) 1,696
Purchase of held
to maturity securities 1,295 3,002 498
Maturities of held to
maturity securities (11,819) (17,833) (9,141)
(Amortization)/Accretion (228) (280) (170)
Federal funds sold,
net change 3,900 (3,700) 3,700
Interest bearing deposits
with banks 2,670 (1,300) 1,800
-------- -------- --------
$(15,699) $ (6,298) $ 12,050
======== ======== ========
The investment area is managed according to internally established guidelines
and quality standards. The Corporation segregates its investment portfolio into
two classifications: held to maturity and available for sale. At December 31,
2004, the market value on available for sale securities was greater than
amortized cost by $628,000 as compared to December 31, 2003 when the market
value was greater than amortized cost by $2,230,000. The weighted average
maturity of the investment portfolio was 2 years and 11 months as of December
31, 2004 as compared to 3 years and 2 months at the end of 2003. Management's
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.
The securities available for sale are available for liquidity purposes if
needed. There were security gains taken in 2004 because of the lack of deposit
growth and the growth in the loan portfolio. There were no gains taken in 2003
and the gain recognized in 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 3 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 $607,000, $1,445,000, and
$141,000 in 2004, 2003 and 2002, respectively. The purchase of an image enabled
reader/sorter, upgrade to the ATMs' and new telephone banking system were added
in 2004. In 2003, computer equipment, software, printers and other peripherals
amounted to $670,000. 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 went into 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 2003, 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 was $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.
- 25 -
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 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 2003 to year-end 2004, total deposits decreased by $342,000. The
following table summarizes how the ending balances (in thousands) changed
annually in each of the last three years.
December 31,
------------
2004 2003 2002
---- ---- ----
(In Thousands)
Demand deposits $ 47,458 $ 42,200 $ 38,892
Interest bearing
demand deposits 58,043 64,838 58,160
Savings deposits 43,640 42,317 36,194
Time deposits $100,000
and greater 38,124 34,323 35,167
Time deposits, other 145,376 149,306 154,206
-------- -------- --------
$332,641 $332,984 $322,619
======== ======== ========
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 which became a
primary consideration for investors. Throughout the summer of 2003 the
Corporation had an inflow of deposits. The Corporation then began to experience
deposits leaving the bank and going back into the equity markets as investors
began to feel confidence. Maintaining and gathering deposits has been a
challenge in 2004 and will continue to be a challenge in 2005.
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.
- - 26 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (CONTINUED)
- --------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
[SHAREHOLDERS' EQUITY GRAPHIC OMITTED]
On February 15, 2005 the Board of Directors of the Corporation declared a
special dividend of $1.00 a share payable to shareholders of record as of March
1, 2005 and payable on April 1, 2005. On January 20, 2004, the Board of
Directors of the Corporation declared a special cash dividend of $1.00 a share
payable to shareholders of record as of February 1, 2004 and payable on February
27, 2004. These special cash dividends were not available for dividend
reinvestment. The special dividends were to help increase the Corporation's
return on equity by returning cash value to shareholders. On April 15, 2003, the
Board of Directors authorized repurchase of 100,000 shares outstanding of common
stock. At December 31, 2004, 34,800 shares were repurchased with 65,200 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,
2004 and 2003, treasury stock was 92,284 and 88,219 shares, respectively at a
cost of $2,986,000 and $2,609,000.
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
17.54% and Tier II risk-based capital ratio was 18.69% at December 31, 2004. 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,
2004, the leverage ratio was 11.74%.
CAPITAL ANALYSIS
December 31,
------------
2004 2003 2002
---- ---- ----
(Thousands of Dollars)
Tier I
Common stockholders'
equity (excluding
unrealized
gains/losses
on securities) $ 45,739 $ 45,782 $ 43,899
Tier II
Allowable portion of
allowance for
loan losses 2,989 2,820 2,731
-------- -------- --------
Risk-based capital $ 48,728 $ 48,602 $ 46,630
======== ======== ========
Risk adjusted assets
(including
off-balance-sheet
exposures) $260,777 $242,408 $234,004
======== ======== ========
Tier I risk-based
capital ratio 17.54% 18.89% 18.76%
Total risk-based
capital ratio 18.69% 20.05% 19.93%
Leverage ratio 11.58% 11.93% 12.04%
- 27 -
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 longstanding relationships. In 2004,
the Corporation funded approximately 75% of its assets with core deposits
acquired in local communities. This core deposit base, combined with
stockholders' equity, funded over 88% of average assets in 2004 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, 2004, these liquid assets amounted to $88,973,000 compared to liquid assets
at December 31, 2003, of $111,342,000. 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,
2004 and December 31, 2003. The Corporation has a maximum borrowing capacity of
$170,745,000 with the FHLB which is collateralized by qualifying assets of the
Corporation. The Corporation borrowed $5,000,000 on August 9, 2004, with a fixed
rate of interest of 2.86% due August 9, 2006. This $5,000,000 was used to buy
certificate of deposits in federally insured banks with no more than $100,000 at
any one bank. There were no outstanding borrowing amounts at December 31, 2003.
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 2004, loan demand increased by $27,125,000. This was funded by
the sales, calls, and maturities of securities that exceeded purchases by
$18,169,000. Also on September 28, 2004, the Corporation offered an attractive
sweep account arrangement for our commercial customers. This brought
approximately $5,000,000 on the Corporation books in the form of securities sold
under agreements to repurchase.
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, 2004.
- --------------------------------------------------------------------------------
TABLE 2 - CONTRACTUAL OBLIGATIONS
- --------------------------------------------------------------------------------
December 31, 2004
-----------------
Less than Over
1 Year 1 - 3 Years 4 - 5 Years 5 Years Total
------ ----------- ----------- ------- -----
(In Thousands)
Time deposits $102,367 $ 49,448 $ 31,685 $ -- $183,500
Long term debt -- 5,000 -- -- 5,000
Operating leases 294 339 19 -- 652
-------- -------- -------- -------- --------
Total $102,661 $ 54,787 $ 31,704 -- $189,152
======== ======== ======== ======== ========
- - 28 -
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.
Letters of credit are conditional commitments to guarantee the financial or
performance obligation of a customer to a third party. Unused commitments at
December 31, 2004, were $38,596,000. 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 3 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 oneyear time frame. As indicated in Table 4, 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.
- 29 -
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
- --------------------------------------------------------------------------------
DECEMBER 31, 2004 2005 2006 2007
- ----------------- ---- ---- ----
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
ASSETS
Interest bearing and time deposits $ 1,100 2.31% $ -- --% $ 135 2.96%
Federal funds sold 3,900 1.23 -- -- -- --
Available for sale securities 12,918 3.17 17,976 4.51 23,858 4.27
Held to maturity securities 1,000 1.71 984 3.50 2,501 2.97
Loans
Commercial 23,301 6.74 -- -- -- --
Consumer 19,759 8.34 7,937 8.41 6,723 8.11
Real estate mortgage 165,806 6.21 2,183 6.11 2,276 6.10
LIABILITIES
Interest bearing demand deposits 58,043 .84 -- -- -- --
Savings deposits 43,640 .96 -- -- -- --
Certificates of deposit 102,367 2.39 26,135 3.24 23,313 3.80
Borrowings 4,716 1.17 5,000 2.86 -- --
- -----------------------------------------------------------------------------------------------------
DECEMBER 31, 2003 2004 2005 2006
- ----------------- ---- ---- ----
(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
- - 30 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
TABLE 3(CONTINUED)
- --------------------------------------------------------------------------------
Fair Value
2008 2009 Thereafter Total December 31, 2004
---- ---- ---------- ----- -----------------
(Dollars in Thousands)
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
$ 200 3.54% $ 5,325 4.31% $ -- --% $ 6,760 $ 6,760
-- -- -- -- -- -- 3,900 3,900
7,690 3.49% 6,075 3.56% 3,066 4.01 71,583 71,583
-- -- -- -- -- -- 4,485 4,489
-- -- -- -- -- -- 23,301 23,301
5,096 7.60 3,629 8.32 22,258 7.36 65,402 65,594
2,271 6.03 2,252 5.99 16,257 5.57 191,045 190,159
-- -- -- -- -- -- 58,043 58,043
-- -- -- -- -- -- 43,640 43,640
18,978 3.82 12,707 4.00 -- -- 183,500 184,847
- ---------------------------------------------------------------------------------------------------
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 13,564 3.72 4,308 4.15 84,691 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
- 31 -
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
-----------------------
-200 bps -100 bps +100 bps +200 bps
-------- -------- -------- --------
DECEMBER 31, 2004 (In Thousands)
Prospective one-year net interest income:
Projected $15,169 $15,229 $15,290 $15,291
Percent change (.78)% (.40)% 0.00% 0.01%
Economic value of portfolio equity:
Projected $51,434 $50,793 $49,830 $49,507
Percent change 2.25% 1.28% (.64)% (1.29)%
Interest Rate Scenarios
-----------------------
-200 bps -100 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)%
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 2004, an examination was conducted by
the Federal Deposit Insurance Corporation. 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.
- - 32 -
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 2005 because of many
uncertainties surrounding the economy. However, The Juniata Valley Bank's
management and Board of Directors are looking forward to meeting the challenges
a changing economy can present. The Juniata Valley Bank's commitment to
providing quality banking services for the communities it serves will continue
through 2005. 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 Bank'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 2005 through effective asset/liability management. Juniata Valley
Financial Corp. is committed to providing stockholders with an attractive return
on their investment.
- 33 -
- --------------------------------------------------------------------------------
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".
2004
INTEREST
AVERAGE INCOME AVERAGE
BALANCES (EXPENSE) YIELD/RATE
-------- ---------- ----------
(IN THOUSANDS)
INTEREST EARNING ASSETS
Interest bearing deposits in other banks $ 5,569 $ 167 3.00%
Securities (taxable) 62,012 2,052 3.31
Securities (tax exempt) 23,742 807 3.40
Federal funds sold 3,933 48 1.22
Loans 267,919 18,653 6.96
--------- ---------
Total interest earning assets 363,175 21,727 5.98
----
NON-INTEREST EARNING ASSETS
Cash and due from banks 10,201
Other assets 23,094
Less: allowance for loan losses (2,916)
---------
Total assets $ 393,554
INTEREST BEARING LIABILITIES
Demand deposits bearing interest $ 62,494 (524) 0.84%
Savings deposits 44,988 (431) 0.96
Time deposits 182,384 (5,402) 2.96
Borrowings 3,526 (81) 2.30
--------- ---------
Total interest bearing liabilities 293,392 (6,438) 2.19
--------- ----
NON-INTEREST BEARING LIABILITIES
Demand deposits 45,402
Other liabilities 5,984
STOCKHOLDERS' EQUITY 48,776
---------
Total liabilities and stockholders' equity $ 393,554
=========
NET INTEREST INCOME/SPREAD $ 15,289 3.79%
========= ====
MARGIN ANALYSIS
Interest income/earning assets 5.98%
Interest expense/earning assets 1.77
----
Net interest margin 4.21%
====
- - 34 -
- --------------------------------------------------------------------------------
TABLE 5 (CONTINUED)
- --------------------------------------------------------------------------------
2003 2002
Interest Interest
Average Income Average Average Income Average
Balances (Expense) Yield/Rate Balances (Expense) Yield/Rate
-------- --------- ---------- -------- --------- ----------
(In Thousands) (In Thousands)
$ 5,342 $ 154 2.88% $ 4,239 $ 145 3.42%
69,111 2,642 3.82 57,762 2,851 4.94
31,427 1,191 3.79 38,223 1,469 3.84
6,565 72 1.10 6,108 95 1.56
242,988 18,441 7.59 233,262 18,910 8.11
-------- -------- -------- -------
355,433 22,500 6.33 339,594 23,470 6.91
---- ----
10,415 9,791
23,506 20,068
(2,780) (2,600)
-------- --------
$386,574 $366,853
======== ========
$ 62,381 (723) 1.16% $ 53,896 (855) 1.59%
40,043 (494) 1.23 35,382 (642) 1.81
186,843 (6,249) 3.34 186,425 (7,799) 4.18
495 (6) 1.21 137 (3) 2.19
-------- -------- -------- -------
289,762 (7,472) 2.58 275,840 (9,299) 3.37
-------- ---- ------- ----
42,010 38,870
7,173 5,933
47,629 46,210
-------- --------
$386,574 $366,853
======== ========
$ 15,028 3.75% $ 14,171 3.54%
======== ==== ========= ====
6.33% 6.91%
2.10 2.74
---- ----
4.23% 4.17%
==== ====
- 35 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
2004 FINANCIAL PERFORMANCE OVERVIEW
[NET INCOME GRAPHIC OMITTED]
Juniata Valley Financial Corp. reported net income for 2004 of $5,829,000. This
is an increase of $182,000 or 3.22% over net income of $5,647,000 at December
31, 2003. Basic earnings per share were $2.56 in 2004 compared to $2.47 in 2003.
This represents a 3.64% increase from 2003 to 2004.
[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 2004 was 11.95% compared
to 11.86% for 2003. This represents an increase of .76%. 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. A special $1.00 a share dividend was paid on February 27, 2004. On
a per share basis $2.14 was paid in 2004 compared to $1.00 paid in 2003. This
represents an increase of 114.00%. The Directors declared at the February 15,
2005 Board meeting to pay a cash dividend of $1.00 a share to shareholders of
record at March 1, 2005 payable on April 1, 2005. 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 1.48% in 2004 from 1.46% in 2003. This represents an increase of
1.37%.
- - 36 -
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 2002 to 2004. Additionally, table 6 shows the changes attributable to the
volume and rate components of net interest income.
Total average loans were $267,919,000 in 2004 at a weighted average yield of
6.96% that produced $18,653,000 in interest income. This represented a
$24,931,000, or 10.26% increase in loan volume from 2003. In order to continue
to grow the loan portfolio, the Corporation had to become very competitive with
loan pricing. The yield earned in 2003 was 7.59% which declined to 6.69% in
2004. However, because of the increase in loan volume, interest income on loans
increased by $212,000. From the rate volume analysis on table 6, of this
$212,000 increase, the volume increased the interest income from loans whereas
the rate declines caused a decrease in interest income from loans.
Securities averaged $85,754,000, a decrease of $14,784,000 or 14.70% from the
average securities in 2003. The weighted average yield decreased to 3.33% from
3.81% in 2003. This resulted in a decrease in interest income of $974,000. From
table 6 both the volume and the rate contributed to the decline. Interest
bearing deposits and federal funds sold, as a group on average, decreased
$2,405,000 from 2003 to 2004. Rates increased on this group .36% from 1.90% in
2003 to 2.26% in 2004. From table 6 only the volume in federal funds caused the
collective decline in interest income of $11,000. Management strives to keep
federal funds at the lowest possible amount because of low interest rate being
paid for the first six months of 2004.
Total interest earning assets averaged $363,175,000 at a yield of 5.98% and
produced total interest income of $21,727,000 for 2004. The increase in average
earning assets of $7,742,000 in 2004 over 2003 was funded by borrowings and
earnings. The yield on these earning assets declined by .35% to 5.98% in 2004
from 6.33% in 2003. Interest income declined $773,000 from 2003 to 2004. From
the rate volume analysis on table 6, volume contributed $1,257,000 increase to
interest income, however, the decline in rates caused a $2,031,000 decline in
interest income.
Interest bearing liabilities averaged $293,392,000 at a cost of $6,438,000
carrying a composite rate of 2.19%. This represented an increase in interest
bearing liabilities of 1.25% or $3,630,000 from 2003. The composite rate
declined .39% in 2004 from 2.58% in 2003 to 2.19%. Interest expense decreased
$23,000 due to volume and declined $1,011,000 due to rate. Combined, the
reduction in interest expense was $1,034,000. In almost all categories of
interest bearing liabilities, rate contributed to the decline in interest
expense. Only the certificates of deposits had a decline in volume.
Net interest income was increased $261,000 for 2004 to $15,289,000 from
$15,028,000 in 2003. The increase was a result of $1,280,000 from volume and mix
changes and a decline of $1,019,000 from interest rates changes. Net interest
margin for 2004 was 4.21% a decrease of .02% from the 4.23% yield for 2003.
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 2004, the provision
was $326,000, an increase of $22,000 over 2003.
- 37 -
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.
2004/2003 Increase (Decrease) 2003/2002 Increase (Decrease)
----------------------------- -----------------------------
Due to Change in Due to Change in
---------------- ----------------
(In Thousands)
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest bearing deposits
in other banks $ 7 $ 6 $ 13 $ 34 $ (25) $ 9
Securities (taxable) (255) (335) (590) 501 (710) (209)
Securities (tax free) (270) (114) (384) (258) (20) (278)
Federal funds sold (31) 7 (24) 7 (30) (23)
Loans 1,806 (1,594) 212 768 (1,237) (469)
------- ------- ------- ------- ------- -------
Interest income 1,257 (2,030) (773) 1,052 (2,022) (970)
------- ------- ------- ------- ------- -------
Demand deposits
bearing interest 1 (200) (199) 122 (254) (132)
Savings deposits 56 (119) (63) 77 (225) (148)
Time deposits (146) (701) (847) 17 (1,567) (1,550)
Borrowings 66 9 75 4 (1) 3
------- ------- ------- ------- ------- -------
Interest expense (23) (1,011) (1,034) 220 (2,047) (1,827)
------- ------- ------- ------- ------- -------
Increase (decrease)
in net interest income $ 1,280 $(1,019) $ 261 $ 832 $ 25 $ 857
======= ======= ======= ======= ======= =======
- - 38 -
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. In 2004, we were
finally able to justify image technology to better able us to move forward with
Check 21. 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 $701,000 or 25.40% from 2003 to 2004. Trust department
fees increased $41,000 from 2003 to 2004. This was due in part to a focus on
pension funds and investment management. Customer service fees increased
$523,000 in 2004 over 2003. The increase in customer service fees is a result of
higher transaction volume as opposed to an increase in fees. The increased
volume is due to the introduction of an overdraft privilege program introduced
in November 2003. Gains on sales of securities increased by $358,000 in 2004.
There were no gains realized in 2003. The sales of securities in 2004 were taken
to help fund the increased loan demand. Earnings from life insurance owned by
the bank increased $43,000 from 2003 to 2004. The other category decreased
$264,000. This decrease was due to life insurance proceeds received in 2003.
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 low efficiency ratio that the Corporation is able to maintain
every year. Other expenses were $10,626,000 for 2004 as compared to $10,017,000
for 2003, representing as increase of $609,000 or 6.08%.
Salaries and wages increased by 2.53% or $103,000 in 2004 over 2003. This
increase can be attributed to annual merit increases. Employee benefits
increased 5.44% or $75,000 from 2003 to 2004. This is a result of higher benefit
costs specifically for health insurance as opposed to additional benefits being
offered. Occupancy increased $52,000 in 2004 due in part to $25,000 for snow
removal and $16,000 increase in depreciation for the Water Street office
remodeling. Equipment costs continue to rise with increased equipment and
depreciation and maintenance on that equipment. In 2004, this increase amounted
to $309,000. Directors' compensation decreased $17,000 from 2003 to 2004 due to
a currently funded retirement plan. Taxes other than income had no significant
change. Other expenses increased $89,000 in 2004 over 2003. This can be
attributed to increased audit fees and consulting services.
INCOME TAXES
The provision for income taxes for 2004 was $1,969,000 compared to $1,820,000 in
2003. The effective tax rate, which is the ratio of income tax expense to income
before income taxes, was 25.25% in 2004, an increase from the 24.37% in 2003.
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.
- 39 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
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.
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 bank is deploying the capital of
the bank. The bank maintains a stock repurchase program to help to increase this
ratio.
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 helped to increase the return on equity ratio by returning cash value
to shareholders.
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%.
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
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 2002 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 to 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 .42% from 2.32% to 1.90% 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.
- - 40 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
NET INTEREST INCOME (CONTINUED)
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.
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;
$340,000 was from proceeds from life insurance and an increase in alternative
investment commissions of $134,000 in 2003 over 2002.
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 an 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 to $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.
- 41 -
[BEARD MILLER COMPANY LOGO OMITTED]
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2004 and 2003, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 2004. 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 the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Juniata Valley Financial Corp. and its wholly-owned subsidiary, The Juniata
Valley Bank, as of December 31, 2004 and 2003, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2004 in conformity with accounting principles generally accepted in
the United States of America.
[BEARD MILLER COMPANY SIGNATURE OMITTED]
Pittsburgh, Pennsylvania
February 14, 2005
- - 42 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED BALANCE SHEETS
ASSETS
------
December 31,
------------
2004 2003
---- ----
(In Thousands, Except Share Data)
Assets:
Cash and due from banks $ 10,733 $ 13,502
Interest bearing deposits with banks 167 125
Federal funds sold 3,900 --
-------- --------
Cash and cash equivalents 14,800 13,627
Interest bearing time deposits with banks 6,760 4,090
Securities available for sale 71,583 83,584
Securities held to maturity, fair value 2004 $4,489; 2003 $15,218 4,485 15,017
Restricted investments in bank stock 1,329 1,107
Loans receivable, net of allowance for loan losses 2004 $2,989; 2003 $2,820 276,759 249,960
Bank premises and equipment, net 6,802 6,755
Accrued interest receivable and other assets 14,240 13,640
-------- --------
Total assets $396,758 $387,780
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 47,459 $ 42,200
Interest bearing 285,183 290,784
-------- --------
Total deposits 332,642 332,984
Securities sold under agreements to repurchase 4,716 --
Long term debt 5,000 --
Accrued interest payable and other liabilities 4,247 4,313
-------- --------
Total liabilities 346,605 337,297
-------- --------
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 2004 2,372,913 shares; 2003 2,372,922 shares 2,373 2,373
Surplus 20,386 20,231
Retained earnings 29,966 29,016
Accumulated other comprehensive income 414 1,472
Treasury stock, at cost 2004 92,284 shares; 2003 88,219 shares (2,986) (2,609)
-------- --------
Total stockholders' equity 50,153 50,483
-------- --------
Total liabilities and stockholders' equity $396,758 $387,780
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 43 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
(In Thousands, Except Per Share Data)
Interest income:
Loans receivable, including fees $18,653 $18,441 $18,910
Taxable securities 2,052 2,642 2,851
Tax-exempt securities 807 1,191 1,469
Other 215 226 240
------- ------- -------
Total interest income 21,727 22,500 23,470
------- ------- -------
Interest expense:
Deposits 6,357 7,466 9,299
Borrowings 81 6 --
------- ------- -------
Total interest expense 6,438 7,472 9,299
------- ------- -------
Net interest income 15,289 15,028 14,171
Provision for loan losses 326 304 300
------- ------- -------
Net interest income after provision for loan losses 14,963 14,724 13,871
------- ------- -------
Other income:
Trust department 452 411 339
Customer service fees 1,311 788 688
Realized gains on sales of securities 358 -- 8
Income on life insurance 495 452 382
Other 845 1,109 597
------- ------- -------
Total other income 3,461 2,760 2,014
------- ------- -------
Other expenses:
Salaries and wages 4,173 4,070 3,751
Employee benefits 1,454 1,379 1,245
Occupancy 805 753 662
Equipment 1,720 1,411 1,180
Director compensation 395 412 358
Taxes, other than income 514 516 504
Other 1,565 1,476 1,424
------- ------- -------
Total other expenses 10,626 10,017 9,124
------- ------- -------
Income before income taxes 7,798 7,467 6,761
Federal income taxes 1,969 1,820 1,746
------- ------- -------
Net income $ 5,829 $ 5,647 $ 5,015
======= ======= =======
Per share data:
Basic $ 2.56 $ 2.47 $ 2.15
======= ======= =======
Diluted $ 2.54 $ 2.46 $ 2.15
======= ======= =======
Cash dividends $ 2.14 $ 1.00 $ 0.88
======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- - 44 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 2004, 2003 and 2002
--------------------------------------------
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
----- ------- -------- ------ ----- -----
(In Thousands)
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 (14,576 shares) -- 1 -- -- 413 414
Treasury stock issued under employee
stock purchase plan (2,296 shares) -- (10) -- -- 65 55
Treasury stock acquired (54,383 shares) -- -- -- -- (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 (16,042 shares) -- 24 -- -- 458 482
Treasury stock issued under employee
stock purchase plan (2,227 shares) -- (5) -- -- 63 58
Treasury stock acquired (47,043 shares) -- -- -- -- (1,425) (1,425)
------ ------- ------- ------- ------- -------
Balance, December 31, 2003 2,373 20,231 29,016 1,472 (2,609) 50,483
Comprehensive income:
Net income -- -- 5,829 -- -- 5,829
Change in unrealized gains
on securities available for sale,
net of reclassification adjustment
and tax effects -- -- -- (1,058) -- (1,058)
-------
Total comprehensive income 4,771
-------
Cash dividends declared -- -- (4,879) -- -- (4,879)
Treasury stock issued under dividend
reinvestment plan (14,706 shares) -- 160 -- -- 421 581
Treasury stock issued under employee
stock purchase plan (5,574 shares) -- (5) -- -- 159 154
Treasury stock issued under
stock option plans (100 shares) -- -- -- -- 3 3
Treasury stock acquired (24,445 shares) -- -- -- -- (960) (960)
------ ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 2004 $2,373 $20,386 $29,966 $ 414 $(2,986) $50,153
====== ======= ======= ======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 45 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,829 $ 5,647 $ 5,015
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 326 304 300
Provision for depreciation 560 457 442
Net amortization of premium on securities 228 280 170
Net realized gains on sales of securities (358) -- (8)
Deferred compensation expense 515 515 545
Payment of deferred compensation (354) (258) (267)
Deferred income taxes 93 95 (146)
(Increase) decrease in accrued interest receivable and other assets 170 94 (228)
Decrease in accrued interest payable and other liabilities (227) (733) (177)
Net earnings on investment in life insurance (319) (452) (382)
------- ------- -------
Net cash provided by operating activities 6,463 5,949 5,264
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest bearing time deposits (2,670) 1,300 (1,800)
Purchases of available for sale securities (15,451) (48,626) (41,526)
Proceeds from sales of available for sale securities 3,405 -- 258
Purchase of restricted bank stock (863) (817) (28)
Proceeds from sale of restricted bank stock 641 349 597
Proceeds from maturities of and principal repayments
on available for sale securities 22,583 34,827 27,032
Purchases of held to maturity securities (1,295) (3,002) (498)
Proceeds from maturities of and principal repayments
on held to maturity securities 11,819 17,833 9,141
Net increase in loans receivable (27,125) (14,767) (7,799)
Purchase of investment in life insurance -- (310) --
Net purchases of bank premises and equipment (607) (1,445) (141)
Proceeds from life insurance -- 238 --
------- ------- -------
Net cash used in investing activities (9,563) (14,420) (14,764)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in deposits (342) 10,365 17,151
Net increase (decrease) in short-term borrowings 4,716 -- (1,275)
Long term debt advances 5,000 -- --
Cash dividends and cash paid for fractional shares (4,879) (2,283) (2,042)
Purchase of treasury stock (960) (1,425) (1,560)
Treasury stock issued 738 540 469
------- ------- -------
Net cash provided by financing activities 4,273 7,197 12,743
------- ------- -------
Net increase (decrease) in cash and cash equivalents 1,173 (1,274) 3,243
Cash and cash equivalents:
Beginning 13,627 14,901 11,658
------- ------- -------
Ending $14,800 $13,627 $14,901
======= ======= =======
Supplementary cash flows information:
Interest paid $ 6,441 $ 7,635 $ 8,935
======= ======= =======
Income taxes paid $ 1,956 $ 1,858 $ 1,925
======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- - 46 -
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. Material estimates that are
particularly susceptible to significant change in the near term relate to
the determination of the allowance for loan losses and the valuation of
deferred tax assets.
Significant group concentrations of credit risk:
Most of the Corporation's activities are with customers located within the
Juniata Valley region. The Corporation does not have any significant
concentrations to any one industry or customer.
Cash and cash equivalents:
For purposes of reporting cash flows, cash and cash equivalents includes
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 five 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.
Declines in the fair value of held-to-maturity and available-for-sale
securities below their cost that are deemed to be other than temporary are
reflected in earnings as realized losses. In estimating other-thentemporary
impairment losses, management considers (1) the length of time and the
extent to which the fair value has been less than cost, (2) the financial
condition and near-term prospects of the issuer, and (3) 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.
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 investments in the Federal Home Loan Bank.
Federal law requires a member institution of the Federal Home Loan Bank to
hold stock according to a predetermined formula. The stock is carried at
cost.
- 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)
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.
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.
The allowance consists of specific, general and unallocated components. The
specific component relates to loans that are classified as either doubtful,
substandard or special mention. For such loans that are also classified as
impaired, an allowance is established when the discounted cash flows (or
collateral value or observable market price) of the impaired loan is lower
than the carrying value of that loan. The general component covers
non-classified loans and is based on historical loss experience adjusted
for qualitative factors. An unallocated component is maintained to cover
uncertainties that could affect management's estimate of probable losses.
The unallocated component of the allowance reflects the margin of
imprecision inherent in the underlying assumptions used in the
methodologies for estimating specific and general losses in the portfolio.
A loan is considered impaired when, based on current information and
events, it is probable that the Bank will be unable to collect the
scheduled payments of principal or interest when due according to the
contractual terms of the loan agreement. Factors considered by management
in determining impairment include payment status, collateral value and the
probability of collecting scheduled principal and interest payments when
due. Loans that experience insignificant payment delays and payment
shortfalls generally are not classified as impaired. Management determines
the significance of payment delays and payment shortfalls on a case-by-case
basis, taking into consideration all of the circumstances surrounding the
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, unless such loans are the subject of a restructuring
agreement.
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.
- - 48 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Trust assets:
Assets held in a fiduciary capacity are not assets of the Bank or the
Bank's Trust Department and are, therefore, not included in the financial
statements.
Foreclosed assets:
Foreclosed assets is comprised of property acquired through a foreclosure
proceeding or acceptance of a deed in lieu of foreclosure and loans
classified as insubstance 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.
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 option plans:
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 those plans 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, 2004, 2003 and
2002:
2004 2003 2002
---- ---- ----
(In Thousands)
Net income, as reported $5,829 $5,647 $5,015
Total stock-based employee compensation expense
determined under fair value based method
for all awards (35) (24) (12)
------ ------ ------
Pro forma net income $5,794 $5,623 $5,003
====== ====== ======
Basic earnings per share:
As reported $ 2.56 $ 2.47 $ 2.15
Pro forma $ 2.54 $ 2.45 $ 2.15
Diluted earnings per share:
As reported $ 2.55 $ 2.46 $ 2.15
Pro forma $ 2.53 $ 2.45 $ 2.15
The fair value of each option granted is estimated on the date of grant using
the Black-Scholes option-pricing model, with the following assumptions for 2004,
2003 and 2002, respectively: risk-free interest rate of 4.19%, 3.65% and 3.80%,
volatility of 0.20, 0.17 and 0.18, dividend yield of 5.10%, 2.90% and 3.00% and
an expected life of seven years. The fair value of options granted in 2004, 2003
and 2002, was $5.23, $6.25 and $4.81, respectively.
- 49 -
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,
------------------------
2004 2003 2002
---- ---- ----
(Dollars in Thousands, except per share data)
Basic earnings per share:
Net income $ 5,829 $ 5,647 $ 5,015
Weighted average shares outstanding 2,279,584 2,290,959 2,330,390
Earnings per share $ 2.56 $ 2.47 $ 2.25
Diluted earnings per share:
Net income $ 5,829 $ 5,647 $ 5,015
Weighted average shares outstanding 2,279,584 2,290,959 2,330,390
Dilutive effect of employee stock options 6,171 1,125 117
---------- ---------- ----------
Total diluted weighted average shares outstanding 2,285,755 2,292,084 2,330,507
Earnings per share $ 2.55 $ 2.46 $ 2.15
Comprehensive income:
Accounting principles generally require that recognized revenue, expenses,
gains and losses be included in net income. Although certain changes in
assets and liabilities, such as unrealized gains and losses on available
for sale securities, are reported as a separate component of the equity
section of the balance sheet, such items, along with net income, are
components of comprehensive income.
The components of other comprehensive income and related tax effects are as
follows:
Years Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
(In Thousands)
Unrealized holding gains (losses) on available
for sale securities $(1,244) $(489) $1,704
Reclassification adjustment for gains realized in income (358) -- (8)
------- ----- ------
(1,602) (489) 1,696
Tax benefit (expense) 544 166 (577)
------- ----- ------
Net of tax amount $(1,058) $(323) $1,119
======= ===== ======
- - 50 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 December 2004, the Financial Accounting Standards Board (FASB) issued
Statement No. 123(R), "Share- Based Payment." Statement No. 123(R) revised
Statement No. 123, "Accounting for Stock-Based Compensation," and
supersedes APB Opinion No. 25, "Accounting for Stock Issued to Employees,"
and its related implementation guidance. Statement No. 123(R) will require
compensation costs related to share-based payment transactions to be
recognized in the financial statements (with limited exceptions). The
amount of compensation cost will be measured based on the grant-date fair
value of the equity or liability instruments issued. Compensation cost will
be recognized over the period that an employee provides service in exchange
for the award. This statement is effective as of the beginning of the first
interim or annual reporting period that begins after June 15, 2005. The
Company is currently evaluating the impact from this standard on its
results of operations and financial position.
RESTRICTIONS ON CASH AND DUE FROM BANK BALANCES
The Bank is required to maintain reserve balances with the Federal Reserve Bank.
The average reserve balances for 2004 and 2003 approximated $3,568,000 and
$4,581,000, respectively.
- 51 -
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, 2004:
U.S. Government agency obligations $48,420 $ 180 $(353) $48,247
Obligations of states and political subdivisions 16,866 368 -- 17,234
Mortgage-backed securities 4,984 21 (58) 4,947
Equity securities 685 478 (8) 1,155
------- ------ ----- -------
$70,955 $1,047 $(419) $71,583
======= ====== ===== =======
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
======= ====== ===== =======
HELD TO MATURITY SECURITIES:
DECEMBER 31, 2004:
U.S. Treasury securities $ 2,483 $ 39 $ -- $ 2,522
U.S. Government agency obligations 2,002 -- (35) 1,967
------- ------ ----- -------
$ 4,485 $ 39 $ (35) $ 4,489
======= ====== ===== =======
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
======= ====== ===== =======
- - 52 -
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, 2004, 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 $13,418 $13,460 $1,000 $1,000
Due after one year through five years 51,868 52,021 3,485 3,489
Due after five years through ten years -- -- -- --
Due after ten years -- -- -- --
Mortgage-backed securities 4,984 4,947 -- --
Equity securities 685 1,155 -- --
------- ------- ------ ------
$70,955 $71,583 $4,485 $4,489
======= ======= ====== ======
Gross gains of $358,000, $-0-, and $8,000 were realized on sales of securities
available for sale in 2004, 2003 and 2002, respectively.
Securities with a fair value of $32,458,000 and $24,749,000 at December 31, 2004
and 2003, respectively, were pledged to secure public deposits, securities sold
under agreements to repurchase and for other purposes as required or permitted
by law.
- 53 -
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 gross unrealized losses and fair value of the
Corporation's investments, aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position,
at December 31, 2004:
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 $31,770 $(329) $1,352 $(24) $33,122 $(353)
Mortgage-backed securities 1,106 (14) 2,069 (44) 3,175 (58)
Equity securities -- -- 76 (8) 76 (8)
------- ----- ------ ---- ------- -----
32,876 (343) 3,497 (76) 36,373 (419)
------- ----- ------ ---- ------- -----
Securities held to maturity:
U.S. Government agency obligations 1,967 (35) -- -- 1,967 (35)
------- ----- ------ ---- ------- -----
1,967 (35) -- -- 1,967 (35)
------- ----- ------ ---- ------- -----
Total temporarily impaired securities $34,843 $(378) $3,497 $(76) $38,340 $(454)
======= ===== ====== ==== ======= =====
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,
2004, is due primarily to interest rate fluctuations. At December 31, 2004,
there were 25 securities in an unrealized loss position. As the Corporation has
the intent and ability to hold such investments until maturity or market price
recovery, no securities are deemed to be other-than-temporarily impaired.
- - 54 -
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,
------------
2004 2003
---- ----
(In Thousands)
Commercial, agricultural and financial $ 23,301 $ 25,885
Real estate mortgages:
Residential 141,009 127,226
Commercial 50,036 34,938
Consumer 63,218 64,593
Other 4,294 4,577
-------- --------
281,858 257,219
Unearned discount on loans (2,110) (4,439)
Allowance for loan losses (2,989) (2,820)
-------- --------
$276,759 $249,960
======== ========
The following table presents changes in the allowance for loan losses:
Years Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
(In Thousands)
Balance, beginning $ 2,820 $ 2,731 $2,526
Provision for loan losses 326 304 300
Recoveries 18 20 112
Loans charged off (175) (235) (207)
-------- -------- ------
Balance, ending $ 2,989 $ 2,820 $2,731
======== ======== ======
The recorded investment in impaired loans not requiring an allowance for loan
losses was $2,205,000 and $802,000 at December 31, 2004 and 2003, respectively.
The recorded investment in impaired loans requiring an allowance for loan losses
at December 31, 2004 and 2003 was $-0- and $2,173,000, respectively. The related
allowance for loan losses associated with these loans was $-0- and $125,000,
respectively. For the years ended December 31, 2004, 2003 and 2002, the average
recorded investment in these impaired loans was $2,026,000, $3,306,000 and
$2,433,000, respectively. Interest income recognized on these impaired loans was
$121,000, $174,000 and $189,000, respectively.
There were no nonaccrual loans at December 31, 2004 and 2003. The recorded
investment in loans greater than 90 days past due and still accruing at December
31, 2004 and 2003 totaled $365,000 and $584,000, respectively.
- 55 -
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,
------------
2004 2003
---- ----
(In Thousands)
Land and improvements $ 686 $ 686
Buildings and improvements 7,157 7,091
Furniture and equipment 4,025 3,486
-------- --------
11,868 11,263
Accumulated depreciation (5,066) (4,508)
-------- --------
$ 6,802 $ 6,755
======== ========
DEPOSITS
The composition of deposits is as follows:
December 31,
------------
2004 2003
---- ----
(In Thousands)
Demand, non-interest bearing $ 47,459 $ 42,200
NOW and Money Market 58,042 64,838
Savings 43,639 42,317
Time, $100,000 or more 38,247 34,323
Other time 145,255 149,306
-------- --------
$332,642 $332,984
======== ========
At December 31, 2004, the scheduled maturities of time deposits are as follows
(in thousands):
2005 $102,367
2006 26,135
2007 23,313
2008 18,979
2009 12,708
--------
$183,502
========
- - 56 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BORROWINGS AND SECURITIES SOLD UNDER AGREEMENTS TO REPURCHASE
In September 2004 the Bank entered into sales of securities under agreements to
repurchase. Securities sold under agreements to repurchase are overnight
borrowings. Securities sold under agreements to repurchase are reflected at the
amount of cash received in connection with the borrowing. The Corporation may be
required to provide additional collateral based on the fair value of underlying
securities. These borrowings are described below:
December 31, 2004
(Dollars in Thousands)
Ending Balance $4,716
Average Balance 5,132
Maximum month-end balance 5,484
Weighted Average Rate 1.59%
Range of interest rates paid on December 31 1.81% to 1.94%
The securities that serve as collateral for securities sold under agreements to
repurchase consist of U.S. Agency securities with a fair value of $8,213,000 at
December 31, 2004.
The Bank has a maximum borrowing capacity of $170,745,000 with the FHLB which is
collateralized by qualifying assets of the Bank. A $5,000,000 term loan was
entered into on August 9, 2004. It matures on August 9, 2006, with a fixed rate
of interest of 2.86%.
The Bank has entered into an agreement whereby it can borrow up to an additional
$10,000,000 from the Federal Home Loan Bank (FHLB). Outstanding balances under
this agreement were $-0- as of December 31, 2004 and 2003. The agreement expires
in March 2005 and the interest rate was 2.25% and 0.73% at December 31, 2004 and
2003, respectively.
- 57 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REGULATORY MATTERS AND STOCKHOLDERS' EQUITY
The Corporation and the Bank are subject to various regulatory capital
requirements administered by the federal banking agencies. Failure to meet the
minimum capital requirements can initiate certain mandatory and possibly
additional discretionary actions by regulators that, if undertaken, could have a
direct material effect on the Corporation's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Corporation and the Bank must meet specific capital guidelines that involve
quantitative measures of their assets, liabilities and certain off-balance sheet
items as calculated under regulatory accounting practices. The capital amounts
and classification are also subject to qualitative judgments by the regulators
about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios (set forth below) of total
and Tier l capital (as defined in the regulations) to risk-weighted assets and
of Tier l capital to average assets. Management believes, as of December 31,
2004, that the Corporation and the Bank meet all capital adequacy requirements
to which they are subject.
As of December 31, 2004, 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, 2004:
Total capital (to risk-weighted assets) $48,728 18.69% =>$20,862 =>8.00% =>$26,077 =>10.00%
Tier I capital (to risk-weighted assets) 45,739 17.54 => 10,431 =>4.00 => 15,547 => 6.00
Tier I capital (to average assets) 45,739 11.58 => 15,795 =>4.00 => 19,743 => 5.00
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 11.86 => 15,348 =>4.00 => 19,185 => 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, 2004, $33,820,000 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 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, 2004, 88,846 shares were available for issuance under the
Dividend Reinvestment Plan.
- - 58 -
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,
as adjusted for the 2001 stock dividend, were reserved for issuance upon
the exercise of options granted or available for grant to officers and key
employees of the Corporation. The plan provides that the option price per
share shall not be less than the fair market value of the stock on the day
the option is granted, but in no event less than the par value of such
stock. Options granted are exercisable no earlier than 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, 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 --
------ ------
Outstanding at December 31, 2003 23,800 28.98
Granted 4,775 40.50
Exercised 100 30.25
------ ------
Outstanding at December 31, 2004 28,475 $30.91
====== ======
Exercisable at December 31, 2004 12,660 $28.62
====== ======
Options outstanding at December 31, 2004 are exercisable at prices of $28.20 to
$40.50. The weighted-average remaining contractual life of these options is
approximately seven years.
- 59 -
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,
------------------------
2004 2003
---- ----
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $4,697 $4,203
Service cost 253 221
Interest cost 327 304
Actuarial loss (31) 127
Benefits paid (161) (158)
------ ------
Benefit obligation at end of year 5,085 4,697
------ ------
Change in plan assets:
Fair value of plan assets at beginning of year 3,981 3,623
Actual return on plan assets 538 (134)
Employer contribution 410 650
Benefits paid (161) (158)
------ ------
Fair value of plan assets at end of year 4,768 3,981
------ ------
Funded status (317) (716)
Unrecognized net actuarial gain 393 864
Unrecognized net transition asset (15) (17)
------ ------
Prepaid (accrued) benefit cost $ 61 $ 131
====== ======
- - 60 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE BENEFITS (CONTINUED)
Pension expense included the following components for the years ended December
31:
2004 2003 2002
---- ---- ----
(In Thousands)
Service cost, benefits earned during the year $ 253 $ 222 $ 174
Interest cost on projected benefit obligation 321 298 268
Expected return on plan assets (307) (255) (237)
Net amortization (2) (2) (2)
----- ----- -----
$ 265 $ 263 $ 203
===== ===== =====
Assumptions used in the accounting were:
2004 2003 2002
---- ---- ----
Discount rates 7.0% 7.0% 7.0%
Rates of increase in compensation levels 4.0 4.0 4.0
Expected long-term rate of return on assets 7.0 7.0 7.0
The investment strategy and investment policy for the retirement plan is 50%
equity and 50% fixed income. The asset allocation as of December 31, 2004 is
approximately 49.5% equities and 50.5% fixed income investments.
2005 2006 2007 2008 2009
---- ---- ---- ---- ----
(In Thousands)
Future expected benefit payments $290 $352 $427 $519 $630
Supplemental retirement plans:
The Corporation has non-qualified supplemental retirement and split-dollar
life insurance plans for directors and key employees. At December 31, 2004
and 2003, the present value of the future liability was $1,231,000 and
$1,226,000, respectively. The Corporation has funded these plans through
the purchase of annuities and life insurance policies, which have an
aggregate cash surrender value of $3,323,000 and $2,645,000 at December 31,
2004 and 2003, respectively. For the years ended December 31, 2004, 2003
and 2002, $274,000, $248,000 and $192,000, 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, 2004 and 2003, the present value of
the future liability was $2,474,000 and $1,939,000, 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 $1,708,000 and
$1,594,000 at December 31, 2004 and 2003, respectively. For the years ended
December 31, 2004, 2003 and 2002, $130,000, $204,000 and $205,000,
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 2004, 2003 and 2002, 5,574, 2,227 and 2,296
shares, respectively, were issued under the Plan. At December 31, 2004,
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, 2004 and 2003, the present value of the future
liability was $656,000 and $601,000, respectively. The Corporation has
funded the Plan through the purchase of life insurance policies which have
an aggregate cash surrender value of $5,436,000 and $5,361,000 at December
31, 2004 and 2003, respectively. For the years ended December 31, 2004,
2003 and 2002, $120,000, $117,000 and $152,000, respectively, was charged
to expense in connection with the Plan.
- 61 -
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,
------------------------
2004 2003 2002
---- ---- ----
(In Thousands)
Current $1,876 $1,725 $1,892
Deferred 93 95 (146)
------ ------ ------
$1,969 $1,820 $1,746
====== ====== ======
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,
------------------------
2004 2003 2002
---- ---- ----
(In Thousands)
Federal income tax at statutory rate $2,651 $2,539 $2,299
Tax-exempt interest (293) (401) (475)
Income on life insurance (168) (144) (148)
Life insurance proceeds -- (117) --
Other (221) (57) 70
------ ------ ------
$1,969 $1,820 $1,746
====== ====== ======
The income tax provision includes $122,000, $-0- and $3,000 in 2004, 2003 and
2002, 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,
------------
2004 2003
---- ----
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 888 $ 832
Deferred directors' fees 693 659
Pension liabilities 536 562
------ ------
Total deferred tax assets 2,117 2,053
------ ------
Deferred tax liabilities:
Bank premises and equipment (299) (203)
Prepaid expense (61) --
Unrealized gains on securities available for sale (213) (758)
------ ------
Total deferred tax liabilities (573) (961)
------ ------
Net deferred tax asset $1,544 $1,092
====== ======
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, 2004 and 2003, these
persons were indebted to the Bank for loans totaling $1,805,000 and $1,614,000,
respectively. During 2004, loans totaling $1,342,000 were disbursed and loan
repayments totaled $1,151,000.
- - 62 -
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 $996,000, $771,000 and $582,000
for the years ended December 31, 2004, 2003 and 2002, respectively. Rent
expense, including the license fee for the branch offices, was $75,000, $71,000
and $67,000 in 2004, 2003 and 2002, respectively.
Minimum future payments under all noncancellable lease and service agreements as
of December 31, 2004 which the Corporation expects to pay from normal operating
income, are as follows (in thousands):
2005 $294
2006 288
2007 51
2008 19
----
$652
====
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK
The Bank is a party to financial instruments with off-balance sheet risk in the
normal course of business to meet the financing needs of its customers. These
financial instruments include commitments to extend credit and letters of
credit. Those instruments involve, to varying degrees, elements of credit risk
in excess of the amount recognized in the balance sheet.
The Bank's exposure to credit loss in the event of nonperformance by the other
party to the financial instrument for commitments to extend credit and letters
of credit is represented by the contractual amount of those instruments. The
Bank uses the same credit policies in making commitments and conditional
obligations as it does for on-balance sheet instruments.
A summary of the Bank's financial instrument commitments is as follows:
December 31,
------------
2004 2003
---- ----
(In Thousands)
Commitments to grant loans $ 3,424 $ 2,727
Unfunded commitments under lines of credit 33,612 31,266
Outstanding letters of credit 1,560 764
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include personal or commercial real
estate, accounts receivable, inventory and equipment.
Outstanding letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The 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 letters of credit as deemed necessary. The current amount of
the liability as of December 31, 2004 and 2003 for guarantees under letters of
credit issued is not material.
The maximum undiscounted exposure related to these commitments at December 31,
2004 was $1,560,000 and the approximate value of underlying collateral upon
liquidation that would be expected to cover this maximum potential exposure was
$1,335,000.
- 63 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONCENTRATION OF CREDIT RISK
The Bank grants commercial, residential and consumer loans to customers
primarily located in the counties of Juniata, Mifflin, Perry, Huntingdon,
Centre, Franklin and Snyder, Pennsylvania. The concentrations of credit by type
of loan are set forth in the note, "Loans Receivable and Allowance for Loan
Loses." Although the Bank has a diversified loan portfolio, its debtors' ability
to honor their contracts is influenced by the region's economy.
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, 2004 and 2003:
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 short-term borrowings, the carrying amount is a reasonable estimate of
fair value.
o For long-term borrowings, fair value is estimated by discounting future
cash flows, using rates currently available on borrowings with similar
remaining maturities.
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.
- - 64 -
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,
------------
2004 2003
---- ----
CARRYING FAIR Carrying Fair
AMOUNT VALUE Amount Value
------ ----- ------ -----
(In Thousands)
Financial assets:
Cash and due from banks $ 10,733 $ 10,733 $ 13,502 $ 13,502
Interest bearing deposits with banks 167 167 125 125
Interest bearing time deposits with banks 6,760 6,760 4,090 4,090
Federal funds sold 3,900 3,900 -- --
Securities 76,068 76,072 98,601 98,802
Restricted investments in bank stock 1,329 1,329 1,107 1,107
Loans receivable, net of allowance 276,759 276,065 249,960 249,609
Accrued interest receivable 1,682 1,682 1,810 1,810
Financial liabilities:
Deposits 332,642 333,988 332,984 335,680
Securities sold under agreements to repurchase 4,716 4,716 -- --
Long term debt 5,000 5,000 -- --
Accrued interest payable 593 593 756 756
Off-balance sheet financial instruments:
Commitments to extend credit -- -- -- --
Standby letters of credit -- -- -- --
- 65 -
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,
------------
2004 2003
---- ----
(In Thousands)
ASSETS
Cash $ 7 $ 3
Interest bearing deposits with banks 490 490
------- -------
Cash and cash equivalents 497 493
Investment in Bank subsidiary 46,085 47,175
Securities available for sale 3,531 2,803
Other 75 53
------- -------
$50,188 $50,524
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities, other $ 35 $ 41
Stockholders' equity 50,153 50,483
------- -------
$50,188 $50,524
======= =======
STATEMENTS OF INCOME
Years Ended December 31,
------------------------
2004 2003 2002
---- ---- ----
(In Thousands)
Dividends from Bank subsidiary $ 5,840 $ 3,708 $ 3,603
Interest income 124 146 109
Other expenses (96) (90) (77)
------- ------- -------
Income before equity in undistributed net income of subsidiary 5,868 3,764 3,635
Equity in undistributed net income of Bank subsidiary (39) 1,883 1,380
------- ------- -------
Net income $ 5,829 $ 5,647 $ 5,015
======= ======= =======
- - 66 -
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,
------------------------
2004 2003 2002
---- ---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 5,829 $ 5,647 $ 5,015
Adjustments to reconcile net income to net cash
provided by operating activities:
Equity in undistributed net income
of Bank subsidiary 39 (1,883) (1,380)
Increase in other assets (22) (27) --
(Decrease) increase in other liabilities (6) -- 14
------- ------- -------
Net cash provided by operating activities 5,840 3,737 3,649
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available for sale securities (1,635) (2,330) (1,159)
Proceeds from maturities of available for sale securities 900 1,760 640
------- ------- -------
Net cash used in investing activities (735) (570) (519)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Cash dividends and cash paid in lieu of fractional shares (4,879) (2,283) (2,042)
Purchase of treasury stock (960) (1,425) (1,560)
Treasury stock issued 738 540 469
------- ------- -------
Net cash used in financing activities (5,101) (3,168) (3,133)
------- ------- -------
Net increase (decrease) in cash and cash equivalents 4 (1) (3)
Cash and cash equivalents:
Beginning 493 494 497
------- ------- -------
Ending $ 497 $ 493 $ 494
======= ======= =======
- 67 -
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
- - 68 -