JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
DECEMBER 31, 1997
CONTENTS
Page
Stock, Dividend and Broker Information ................................................. 2
Letter to Shareholders ................................................................. 3
Corporation Officers and Directors ..................................................... 4
Bank Officers & Advisory Board Members ................................................. 5
Business ............................................................................... 6 - 14
Financial Highlights ................................................................... 15
Management's Discussion and Analysis of Financial Condition and Results of Operations .. 16 - 29
Report of Independent Auditors ......................................................... 30
Financial Statements:
Consolidated Balance Sheets ....................................................... 31
Consolidated Statements of Income ................................................. 32
Consolidated Statements of Stockholders' Equity ................................... 33
Consolidated Statements of Cash Flows ............................................. 34
Notes to Consolidated Financial Statements ........................................ 35 - 47
STOCK, DIVIDEND AND BROKER INFORMATION
Common stock issued by Juniata Valley Financial Corp. is quoted under the symbol
"JUVF" on the over-the-counter ("OTC") Electronic Bulletin Board, an automated
quotation service, made available through, and governed by, the NASDAQ system.
Prices presented in the table below are bid prices between broker-dealers which
do not include retail mark-ups or mark-downs or any commission to the
broker-dealer. The published bid prices do not necessarily reflect prices in
actual transactions. Cash dividends paid for 1997 and 1996 are provided in the
table below. Both the market values and cash dividends have been adjusted for a
5-for-4 stock split issued September 5, 1997.
1997 1996
---- ----
Dividends Dividends
Quarter High Low per share High Low per share
------- ---- --- --------- ---- --- ---------
First $32.80 $32.00 $27.00 $25.60
Second 34.00 32.80 .32 29.40 27.00 .30
Third 35.00 34.00 30.20 29.20
Fourth 36.50 35.00 .34 32.00 30.20 .30
For further information, we refer you to:
Hopper Soliday & Co., Inc. F.J. Morrissey & Co., Inc. Ryan, Beck & Co.
1703 Oregon Pike 1700 Market St., Suite 1420 150 Monument Road, Suite 106
Lancaster, PA 17601 Philadelphia, PA 19103-3913 Bala Cynwyd, PA 19004
(800) 456-9234 (800) 842-8928 (800) 223-8969
Janney, Montgomery, Scott, Inc. Sandler O'Neil & Partners, L.P. SNL Securities, L.P.
48 E. Market St., P.O. Box 2246 Two World Trade Center 104th Floor 410 E. Main St., P.O. Box 2124
York, PA 17405-2246 New York, NY 10048 Charlottesville, VA 22902
(717) 845-5611 (800) 635-6851 (804) 977-1600
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
- - 2 -
[LETTERHEAD OF JUNIATA VALLEY FINANCIAL CORP. APPEARS HERE]
February 23, 1998
Dear Shareholders,
On December 30, 1997, The Juniata Valley Bank signed a merger agreement with
Lewistown Trust Company. As previously announced, the offices of Lewistown Trust
Company will become offices of The Juniata Valley Bank. We are pleased with this
merger because it adds four more offices for the convenience of our customers,
and gives employees more chances for advancement. We feel that the bank will
continue to be a very strong community oriented bank.
John E. Groninger will retire in March, 1998. He was a Director of the Port
Royal National Bank and also Director of The Juniata Valley Bank since 1971. We
will miss his knowledge and experience.
Please review the Annual Report. This is the fourteenth consecutive year of
record profits.
I want to thank you for your loyalty and recommending your bank, and thank
the officers and employees for their excellent efforts in making this a quality
financial service company.
Sincerely,
/s/ A. Jerome Cook
A. Jerome Cook
President
AJC:rhn
- 3 -
Juniata Valley Financial Corp. Officers
Harry B. Fairman, Jr. Ronald H. Witherite
Chairman Vice Chairman, Secretary
A. Jerome Cook Linda L. Engle
President Treasurer
Directors
Joe E. Benner Don E. Haubert
Owner, Benner Automotive President, Haubert Homes
Mifflintown, PA
A. Jerome Cook
President, The Juniata Valley Bank Dale G. Nace
Owner, Glenn Nace Plumbing & Heating;
Harry B. Fairman, Jr. GlenDale Storage
President, Hilltop Oil, Inc.
John A. Renninger
John E. Groninger President, A. D. Renninger
President, John E. Groninger, Inc. Lumber Company
Contractor, Director of
Consumers Financial Corp. Edward R. Rhodes
Retired Partner, E. R. Rhodes & Son
Karl E. Guss
Funeral Director Harold B. Shearer
Guss Funeral Home Self-employed Farmer
Ronald H. Witherite
Owner, Ron's IGA Fruit Market, Inc.
NOTE: Above Directors also comprise the Board of Directors for
The Juniata Valley Bank
- - 4 -
THE JUNIATA VALLEY BANK OFFICERS
A Wholly-Owned Subsidiary of Juniata Valley Financial Corp.
MIFFLINTOWN OFFICE
A. Jerome Cook................................................... President
Helen L. Sieber.................. Vice President & Community Office Manager
Jeffrey A. Pottorff............................Auditor & Compliance Officer
Paul M. Lipka.............................................Marketing Officer
Ruth H. Nace............................................Executive Secretary
ADMINISTRATION
Donald L. Musser......................... Sr Vice President, Administration
CONTROLLER
Linda L. Engle.................. Sr Vice President, Chief Financial Officer
Anna Mae Peoples...................... Vice President, Assistant Controller
LOANS
Edward L. Kauffman.................. Sr Vice President, Loan Administration
Scott E. Nace..................................Vice President, Loan Officer
David A. Pecht......................................... Senior Loan Officer
Loretta A. Saylor..............................................Loan Officer
OPERATIONS
Judy R. Aumiller............................ Sr. Vice President, Operations
Kathy D. Hutchinson....................Assistant Vice President, Operations
Deborah A. Sheaffer......................................Operations Officer
TRUST
Terry S. Love............................ Sr. Vice President, Trust Officer
Cynthia L. Williams............... Assistant Vice President & Trust Officer
BLAIRS MILLS OFFICE
C. Roger Searer.................. Vice President & Community Office Manager
Wanda K. Rowles................................... Customer Service Officer
GARDENVIEW OFFICE
M. Randall French................ Vice President & Community Office Manager
LEWISTOWN OFFICE
R. Jack Morgan....................Vice President & Community Office Manager
Lee Ellen Foose................................... Customer Service Officer
McALISTERVILLE OFFICE
Joseph D. Ritzman.................Vice President & Community Office Manager
Leslie A. Miller.................................. Customer Service Officer
MILLERSTOWN OFFICE
James A. Witmer.................. Vice President & Community Office Manager
Barbara I. Seaman..................................Customer Service Officer
MOUNTAIN VIEW OFFICE
Connie C. Benner................. Vice President & Community Office Manager
PORT ROYAL OFFICE
Betty D. Ryan.................... Vice President & Community Office Manager
Larry B. Cottrill, Jr............................. Customer Service Officer
ADVISORY BOARD MEMBERS
BLAIRS MILLS OFFICE PORT ROYAL OFFICE McALISTERVILLE OFFICE
Wayde H. Cisney Clinton F. Bashore Clair Ehrenzeller
William R. Goshorn Martin L. Dreibelbis Clair S. Graybill
Hays I. Lauthers Richard J. Junk Samuel E. Knouse
George Love Dennis A. Long Ralph E. Rickenbaugh
C. Roger Searer Freeburn Love Joseph D. Ritzman
Betty D. Ryan Richard J. Sankey
Earl J. Wagner
LEWISTOWN OFFICE MILLERSTOWN OFFICE GARDENVIEW OFFICE
William H. Bradford R. Franklin Campbell David B. Esh
William R. Carter Lowell R. Frantz, C.L.U. M. Randall French
Sharon D. Havice Gregory J. Gordon H. Ross Harshbarger
R. Jack Morgan Gerald M. Lyter Donald R. Hartzler
Harry F. Stimely James A. Witmer Jerry L. Wagner
Frank A. Zampelli Gary G. Wright
-5-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
DESCRIPTION OF BUSINESS
On April 19, 1983, the shareholders of The Juniata Valley Bank (The Bank)
approved a plan of merger and reorganization. The plan was approved by the
various regulatory agencies on June 7, 1983 and the Juniata Valley Financial
Corp., a one bank holding company, registered under the Bank Holding Company Act
of 1956, as amended, was organized. The Bank is the oldest independent
commercial bank in Juniata and Mifflin County having originated under a state
bank charter in 1867.
The Juniata Valley Bank operates eight branch banking offices and one trust
service office. At December 31, 1997, the Bank had 100 full-time equivalent
employees. The Bank is engaged in commercial banking and trust business as
authorized by the Pennsylvania Banking Code of 1965. This includes accepting
time and demand deposits, making secured and unsecured commercial and consumer
loans, financing commercial transactions, making construction and mortgage
loans, and administering corporate, pension and personal trust services. The
Bank provides its services to individuals, corporations, partnerships,
associations, municipalities and other governmental bodies. As of December 31,
1997, the Bank had four offices in Juniata County, one office in Perry County,
two offices in Mifflin County and one office in Huntingdon County.
In December 1997, The Corporation announced the signing of a definitive
agreement with Lewistown Trust Company, a commercial bank with total assets of
$112 million, headquartered in Lewistown, Pennsylvania. Under terms of the
agreement, each Lewistown Trust shareholder will receive one share of the
Corporation's common stock for each Lewistown Trust share and Lewistown Trust
will be merged into the Bank. The transaction will be accounted for under the
pooling-of-interests method of accounting and is subject to regulatory and
shareholder approvals. The merger is expected to be consummated in the second or
third quarter of 1998.
COMPETITION
The Bank's principal market area includes all of Mifflin and Juniata Counties,
and portions of Perry, Huntingdon, Franklin and Snyder Counties. There are 16
commercial banks which are headquartered or have branch offices located within
the Bank's market area which the Bank considers its primary competitors. Of the
16 commercial banks with operations in the Bank's market area, the Bank ranked
fifth in assets as of December 31, 1997.
Additionally, the Bank has been subjected to competition from non-bank firms,
such as savings and loans, credit unions, brokerage firms, insurance companies,
mutual fund companies, consumer finance and credit card firms, retail and
manufacturing conglomerates, and other firms providing financial services and
credit to customers. Although many non-bank industries now offer services
traditionally provided only by banks, banks are constrained by costly
regulations and time-worn laws to compete effectively against non-bank providers
of financial services. However, the Bank strives to remain competitive with
respect to interest rates, service fees and service quality in order to achieve
continued growth and success in its market. The Bank also continues to develop
and strengthen its strong ties to the communities it serves, relying on the
unique and strong relationship that a community bank has with its customers and
community by providing excellent, personal customer service.
The deposit base of The Juniata Valley Bank is such that the loss of one
depositor or a related group of depositors would not have a dramatically adverse
effect on the Bank's business. In addition, the loan portfolio is very well
diversified, so that one industry or group or related industries does not
comprise a material portion of total loans outstanding. The Bank's business is
not seasonal, nor does it have any risks attendant to foreign sources.
SUPERVISION AND REGULATION
Juniata Valley Financial Corp. operates in a highly regulated industry, and thus
may be affected by changes in state and federal regulations and legislation. As
a registered bank holding company under the Bank Holding Company Act of 1956, as
amended (the Act), the Corporation is subject to supervision and examination by
the Board of Governors of the Federal Reserve System and is required to file
with the Federal Reserve Board quarterly reports and information regarding its
business operations and those of its subsidiary.
The Act requires the Corporation to obtain Federal Reserve approval before:
acquiring more than five percent ownership interest in any class of the voting
securities of any bank; acquiring all or substantially all of the assets of a
bank; or, merging or consolidating with another bank holding company. In
addition, the Act prohibits a bank holding company from acquiring the assets, or
more than five percent of the voting securities, of a bank located in another
state, unless such acquisition is specifically authorized by the statutes of the
state in which the bank is located.
A bank holding company is normally not permitted to acquire direct or indirect
ownership of more than five percent of any class of voting securities of any
company that is not a bank or not engaged in activities determined by the
Federal Reserve Board regulations, activities deemed to be closely related to
banking including such ventures as consumer finance, equipment leasing, certain
data processing services, mortgage banking and investment advisory services. The
Act does not place geographic restrictions on the activities of non-bank
subsidiaries of bank holding companies.
- -6-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
SUPERVISION AND REGULATION (CONTINUED)
The deposits of The Juniata Valley Bank are insured by the Bank Insurance Fund
of the Federal Deposit Insurance Corporation (FDIC). Consequently, the Bank is
subject to regulations and reviews under the provisions of the Federal Deposit
Insurance Act, but the primary regulatory body is the Pennsylvania Department of
Banking. The Pennsylvania Department of Banking conducts regular reviews which
have resulted in satisfactory evaluations to date.
In 1991, the Federal Deposit Insurance Corporation Act (FDICIA) was signed into
law. FDICIA established five different levels of capitalization of financial
institutions, with prompt corrective actions and significant operational
restrictions imposed on institutions that are capital deficient. The five
categories are: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
To be considered well capitalized, an institution must have a total risk-based
capital ratio of at least 10%, a Tier I risk based capital ratio of at least 6%,
a leverage capital ratio of 5% and must not be subject to any order or directive
requiring the institution to improve its capital level. An institution falls
within the adequately capitalized category if it has a total risk-based capital
ratio of at least 8%, a Tier I risk-based capital ratio of at least 4%, and a
leverage capital ratio of at least 4%. Institutions with lower capital levels
are deemed to be undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on their actual capital levels.
The following table sets forth the computation of the Bank's regulatory capital
ratios. The Bank exceeded the minimum capital levels of the well capitalized
category.
December 31,
------------
1997 1996 1995
---- ---- ----
Risk-weighted assets ratio:
Tier I 18.61% 18.56% 18.04%
Total 19.82% 19.77% 19.24%
Total assets leverage ratio:
Tier I 12.82% 12.36% 12.25%
SECURITIES PORTFOLIO
The following table sets forth the carrying amount of securities at the dates
indicated:
December 31,
------------
1997 1996 1995
---- ---- ----
(In Thousands)
Available for sale securities (at fair value):
U.S. Treasury and other U.S. government obligations $ 6,469 $ 8,141 $ 9,585
States and political subdivisions 9,942 10,420 3,683
Other corporate 4,665 5,118 3,168
Mortgage-backed 3,860 5,273 6,971
Equity 1,551 1,263 1,098
------- ------- -------
26,487 30,215 24,505
------- ------- -------
Held to maturity securities (at amortized cost):
U.S. Treasury and other U.S. government obligations 7,160 5,217 5,751
States and political subdivisions 15,726 19,729 20,448
Other corporate 17,407 15,338 16,472
------- ------- -------
40,293 40,284 42,671
------- ------- -------
Total securities $66,780 $70,499 $67,176
======= ======= =======
- 7 -
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, 1997
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, 1997, 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 $ 2,747 5.72% $ 3,722 6.33% $ - - $ - -
State and political
subdivisions 690 5.20 8,734 4.66 - - 518 4.45%
Other corporate - - 4,665 5.96 - - - -
Mortgage-backed - - 1,526 6.30 23 5.63 2,311 6.65
------- ------- ------ ------
3,437 18,647 23 2,829
------- ------- ------ ------
Held to maturity:
U.S. Treasury and other U.S.
government agencies 1,498 6.93 5,662 6.37 - - - -
State and political
subdivisions 5,900 4.18 9,541 4.75 285 5.63 - -
Other corporate 3,862 6.41 12,471 6.50 1,074 6.50 - -
------- ------- ------ ------
11,260 27,674 1,359 -
------- ------- ------ ------
Total $14,697 $46,321 $1,382 $2,829
======= ======= ====== ======
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 as increases or decreases in stockholders' equity,
net of 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.
- - 8 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
LOAN PORTFOLIO
The highest loan concentration by activity type continues to be the trucking
industry. The percentage of these loans to total loans was approximately four
percent at the latest review. This industry services many other industries and
no potential significant risk is evident.
As with any lending activity, potential risk exists. Loans in the commercial,
financial and industrial category have declined as a percentage of total loans
over the past three years. 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 eighteen percent of
total loans, average a three 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,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Commercial, financial and agricultural $ 12,520 $ 11,808 $ 11,843 $ 14,472 $ 19,361
Real estate mortgage 98,383 91,865 88,593 86,316 75,613
Consumer (less unearned discount) 25,288 23,061 21,019 20,917 18,792
All other 1,321 1,412 1,483 1,486 1,968
-------- -------- -------- -------- --------
Total loans $137,512 $128,146 $122,938 $123,191 $115,734
======== ======== ======== ======== ========
This table shows the maturity of loans (excluding residential mortgages of 1-4
family residences and consumer loans) outstanding as of December 31, 1997.
Maturing Maturing Maturing
During From 1999 After
1998 Thru 2000 2000 Total
---- --------- ---- -----
(In Thousands)
Commercial, agricultural and financial $ 12,520 $ - $ - $ 12,520
All other 1,321 - - 1,321
-------- ------- ------- ---------
Total loans $ 13,841 $ - $ - $ 13,841
======== ======= ======= =========
- 9 -
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,
------------
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Average loans outstanding $131,523 $123,104 $121,193 $116,805 $114,896
======== ======== ======== ======== ========
Nonaccrual loans $ 113 $ 296 $ 390 $ 433 $ 105
Accruing loans past due
90 days or more 259 396 462 166 177
Restructured loans - - - - -
-------- -------- -------- -------- --------
Total $ 372 $ 692 $ 852 $ 599 $ 282
======== ======== ======== ======== ========
Ratio of non-performing loans
to average loans outstanding .28% .56% .70% .51% .25%
Information with respect to nonaccrual and restructured loans at December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Nonaccrual loans $ 113 $ 296 $ 390 $ 433 $ 105
Restructured loans - - - - -
Interest income that would have been
recorded under original terms 18 41 37 28 12
Interest income recorded
during the period - - 5 9 -
Commitments to lend additional funds - - - - -
All of the nonaccrual loans at December 31, 1997, are secured by real estate or
otherwise guaranteed as to repayment. The majority of the nonaccrual balance
relates to one borrower.
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.
- - 10 -
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,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
Average loans outstanding $131,523 $123,104 $121,193 $116,805 $114,896
======== ======== ======== ======== ========
Allowance for loan loss January 1 $ 1,707 $ 1,616 $ 1,523 $ 1,458 $ 1,363
Losses charged to allowance
Commercial 1 58 12 - 19
Real estate 12 0 28 92 66
Consumer 110 45 55 86 79
-------- -------- -------- -------- --------
123 103 95 178 164
-------- -------- -------- -------- --------
Recoveries credited to allowance
Commercial 17 2 3 - 2
Real estate 0 0 42 2 10
Consumer 22 12 8 21 27
-------- -------- -------- -------- --------
39 14 53 23 39
-------- -------- -------- -------- --------
Net charge-offs 84 89 42 155 125
Provision for possible loan losses 180 180 135 220 220
-------- -------- -------- -------- --------
Allowance for loan losses December 31 $ 1,803 $ 1,707 $ 1,616 $ 1,523 $ 1,458
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding .06% .07% .03% .13% .11%
Management feels the increase in losses charged to allowance from consumer loans
is not indicative of a decline in the local economy or of future results in
consumer loans.
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.
This table shows an allocation of the allowance for loan losses as of the end of
each of the last five years.
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(In Thousands)
% of % of % of % of % of
Amount Loan Amount Loan Amount Loan Amount Loan Amount Loan
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Commercial $ 336 10.1% $ 330 9.2% $ 321 9.6% $ 303 11.7% $ 385 4.3%
Real estate 342 71.5 326 71.7 322 72.1 298 70.1 243 77.1
Consumer 489 18.4 458 19.1 443 18.3 468 18.2 410 18.6
Unallocated 636 - 593 - 530 - 454 - 420 -
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $1,803 100% $1,707 100% $1,616 100% $1,523 100% $1,458 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
- 11 -
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 70% 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 and the Bank's
independent accountants 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, 1997, that qualified as HLTS.
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, indicated in the following table:
1997 1996 1995
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(In Thousands)
Non-interest bearing demand $ 21,727 $ 20,328 $ 19,182
Interest bearing demand 26,118 2.42% 25,930 2.45% 25,505 2.45%
Savings deposits 21,055 2.84 22,124 2.84 22,183 2.86
Time deposits 117,212 5.59 112,377 5.63 103,793 5.50
-------- -------- --------
Total $186,112 $180,759 $170,663
======== ======== ========
As of December 31, 1997, certificates of deposit outstanding in an individual
amount of $100,000 or more totalled $15,445,000.
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)
$3,684 $2,604 $2,661 $6,496
====== ====== ====== ======
- 13 -
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 1997
Interest income $ 3,989 $ 4,089 $ 4,189 $ 4,200
Interest expense (1,900) (1,931) (1,968) (1,986)
------- ------- ------- -------
Net interest income 2,089 2,158 2,221 2,214
Provision for loan losses (45) (45) (45) (45)
Other income 170 268 165 188
Other expenses (1,314) (1,380) (1,361) (1,343)
------- ------- ------- -------
Income before income taxes 900 1,001 980 1,014
Income taxes (203) (231) (242) (174)
------- ------- ------- -------
Net income $ 697 $ 770 $ 738 $ 840
======= ======= ======= =======
Per-share data:
Basic earnings .50 .55 .53 .60
Cash dividends - .32 - .34
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In Thousands, except per share data)
FOR THE YEAR 1996
Interest income $ 3,916 $ 3,901 $ 3,963 $ 3,975
Interest expense (1,871) (1,869) (1,922) (1,930)
------- ------- ------- -------
Net interest income 2,045 2,032 2,041 2,045
Provision for loan losses (45) (45) (45) (45)
Other income 133 144 157 199
Other expenses (1,283) (1,285) (1,292) (1,211)
------- ------- ------- -------
Income before income taxes 850 846 861 988
Income taxes (189) (221) (201) (170)
------- ------- ------- -------
Net income $ 661 $ 625 $ 660 $ 818
======= ======= ======= =======
Per-share data:
Basic earnings .47 .45 .47 .59
Cash dividends - .30 - .30
- - 14 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY
THE JUNIATA VALLEY BANK
FIVE YEAR FINANCIAL HIGHLIGHTS . SELECTED FINANCIAL DATA
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
BALANCE SHEET DATA (In Thousands)
Assets $ 220,910 $ 212,264 $ 205,878 $ 190,176 $ 189,776
Deposits 189,007 182,455 178,153 165,151 166,542
Loans receivable 135,709 126,439 121,322 121,668 114,276
Securities 66,780 70,499 67,176 57,214 59,932
Stockholders' equity 28,712 26,763 24,723 22,434 20,803
Average equity 27,815 25,443 23,316 21,363 19,497
Average assets 217,531 209,613 197,168 192,759 187,603
EARNINGS DATA (In Thousands)
Interest income $ 16,467 $ 15,755 $ 15,070 $ 13,972 $ 14,090
Interest expense 7,785 7,592 6,970 5,813 6,073
---------- ---------- ---------- ---------- ----------
Net interest income 8,682 8,163 8,100 8,159 8,017
Provision for loan losses 180 180 135 220 220
---------- ---------- ---------- ---------- ----------
Net interest income after
provision for loan losses 8,502 7,983 7,965 7,939 7,797
Other income 791 633 581 551 518
Other expenses 5,398 5,071 5,106 5,146 5,237
---------- ---------- ---------- ---------- ----------
Income before income taxes 3,895 3,545 3,440 3,344 3,078
Federal income taxes 850 781 780 791 697
---------- ---------- ---------- ---------- ----------
Income before cumulative effect
of change in accounting
principle 3,045 2,764 2,660 2,553 2,381
Net income $ 3,045 $ 2,764 $ 2,660 $ 2,553 $ 2,934
RATIOS
Return on average assets 1.40% 1.32% 1.35% 1.32% 1.27%
Return on average equity 10.95 10.86 11.41 11.94 12.21 (1)
Equity to assets (year end) 13.00 12.61 12.01 11.80 10.27 (1)
Loans to deposits (year end) 71.80 69.30 68.10 73.67 68.62
Dividend payout (percentage
of income) 30.31 30.25 29.14 29.18 28.60
*PER SHARE DATA
Income before cumulative
effect of change in accounting
principle $ 2.18 $ 1.98 $ 1.91 $ 1.84 $ 1.71
Basic earnings 2.18 1.98 1.91 1.84 2.11
Cash dividends .66 .60 .56 .54 .50
Book value 20.72 19.21 17.77 16.13 14.95
Average shares outstanding 1,396,401 1,393,264 1,391,251 1,391,251 1,391,251
Approximate number
of stockholders 1,195 1,098 1,066 1,089 1,021
* Outstanding and per-share information for all years presented has been
restated to give effect to the 5-for-4 stock splits in the form of 25% stock
dividends issued September 5, 1997, January 9, 1996, and on October 26, 1994,
and the 10% stock dividend issued on September 30, 1993.
(1) Excluding the cumulative effect of change in accounting principle of
$553,000 or $.50 per share.
- 15 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
The purpose of this discussion is to focus on information about the
Corporation's financial condition and results of operations which is not
otherwise apparent from the consolidated financial statements included in this
annual report. Reference should be made to those statements and the selected
financial data presented elsewhere in this report for an understanding of the
following discussion and analysis.
- --------------------------------------------------------------------------------
FINANCIAL CONDITION
- --------------------------------------------------------------------------------
SOURCES AND USES OF FUNDS TRENDS
1997 Increase (Decrease) 1996 Increase (Decrease) 1995
Average -------- ---------- Average -------- ---------- Average
Balance Amount % Balance Amount % Balance
------- ------ - ------- ------ - -------
(Thousands of Dollars)
Funding uses:
Interest earning assets:
Loans:
Commercial $ 43,844 $ 2,077 4.97% $ 41,767 $ 524 1.27% $ 41,243
Mortgage 64,104 5,192 8.81 58,912 1,658 2.90 57,254
Consumer 23,575 1,150 5.13 22,425 (271) (1.19) 22,696
--------- --------- --------- --------- ---------
131,523 8,419 6.84 123,104 1,911 1.58 121,193
Less: Allowance for loan losses (1774) (97) 5.78 (1,677) (101) 6.41 (1,576)
--------- --------- --------- --------- ---------
129,749 8,322 6.85 121,427 1,810 1.51 119,617
Securities 71,952 (713) (.98) 72,665 9,805 15.60 62,860
Funds sold 3,098 (1,009) (24.57) 4,107 114 2.85 3,993
--------- --------- --------- --------- ---------
75,050 (1,722) (2.24) 76,772 9,919 14.84 66,853
Total interest earning
assets 204,799 6,600 3.33 198,199 11,729 6.29 186,470
Other assets 12,732 1,318 11.55 11,414 716 6.69 10,698
--------- --------- --------- --------- ---------
Total uses $ 217,531 $ 7,918 3.78 $ 209,613 $ 12,445 6.31 $ 197,168
========= ========= ========= ========= =========
Funding sources:
Deposits:
Demand $ 21,727 $ 1,399 6.88 $ 20,328 $ 1,146 5.97 $ 19,182
Interest bearing demand 26,118 188 .73 25,930 425 1.67 25,505
Savings 21,055 (1,069) (4.83) 22,124 (59) (.27) 22,183
Time under $100,000 101,767 3,773 3.85 97,994 6,547 7.16 91,447
--------- --------- --------- --------- ---------
Total core deposits 170,667 4,291 2.58 166,376 8,059 5.09 158,317
Time over $100,000 15,445 1,062 7.38 14,383 2,037 16.50 12,346
--------- --------- --------- --------- ---------
Total deposits 186,112 5,353 2.96 180,759 10,096 5.92 170,663
Other liabilities 3,604 193 5.66 3,411 222 6.96 3,189
Stockholders' equity 27,815 2,372 9.32 25,443 2,127 9.12 23,316
--------- --------- --------- --------- ---------
Total sources $ 217,531 $ 7,918 3.78 $ 209,613 $ 12,445 6.31 $ 197,168
========= ========= ========= ========= =========
- - 16 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
FINANCIAL CONDITION (Continued)
- --------------------------------------------------------------------------------
The Corporation functions as a financial intermediary and therefore its
financial condition is analyzed in terms of its sources and uses of funds. The
following comparison of daily average balances indicates how the Corporation has
managed its sources and uses of funds.
The Corporation's assets continued to grow during 1997, reaching the level of
$217,531,000 an increase of $7,918,000 or 3.78% compared to 1996. The rate of
growth for 1997 can be attributed to loan demand. This loan growth was funded
primarily through an increase in deposits.
Loans experienced growth of $8,322,000 or 6.85% from 1996 to 1997 which was more
than the $1,810,000 increase in 1996 over 1995. Mortgage loans had the greatest
increase of $5,192,000 or 8.81%. The increase in mortgage loans is due to the
refinancing of existing mortgages as well as first time home buyers. Other
consumers took this opportunity to renovate their existing homes and consolidate
other debt into existing mortgages. This compares to an increase of $1,658,000
from 1995 to 1996. Commercial loans grew $2,077,000 or 4.97% in 1997 over 1996.
The growth in commercial loans in 1996 over 1995 was $524,000. While consumer
loans experienced a decline from 1995 to 1996 of $271,000, an increase in demand
occurred of $1,150,000 or 5.13% in 1997 over 1996. This growth in loans is
reflective of the strength in the economy.
Investment securities decreased $713,000 or .98% in 1997 over 1996. This
followed an increase of $9,805,000 from 1995 to 1996. A portion of the proceeds
from maturities and sales was used to fund loan growth rather than reinvestment
in securities. Treasury securities increased $926,000 to $4,095,000, tax-free
municipals increased $440,000 to $30,554,000 and corporate securities increased
$236,000 to $22,972,000. The decrease occurred in federal agency securities
which declined $2,701,000 to $14,331,000.
The asset growth was funded by an increase in deposits of $5,353,000 from 1996
to 1997 or 2.96%. This was less than the deposit growth experienced in 1996 over
1995 of $10,096,000. The primary source of funds is core deposits. The largest
category of core deposits continues to be time deposits under $100,000. Time
deposits under $100,000 increased $3,773,000 or 3.85% in 1997 over 1996 which
was less than the $6,547,000 increase from 1995 to 1996. This category includes
certificates of deposit, which allow customers to invest their funds at selected
maturities ranging from 6 months to 5 years and individual retirement accounts.
Demand deposits increased 6.88% or $1,399,000 from 1996 to 1997 which was
similar to the growth of $1,146,000 from 1995 to 1996. A slight increase was
experienced in interest bearing demand of .73% or $188,000 in 1997 over 1996.
The increase of interest bearing demand in 1996 over 1995 was $425,000. Savings
decreased $1,069,000 or 4.83% from 1996 to 1997. The decrease from 1995 to 1996
was $59,000. On average during 1997, core deposits experienced an increase of
$4,291,000. The Corporation's ability to maintain its core deposit base despite
the intense competition and nonbank influences in the market area, reflects the
Corporation's strong customer base.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
Juniata Valley Financial Corp. reported net income for 1997 of $3,045,000, an
increase of 10.17% from the $2,764,000 net income reported in 1996 and an
increase of 14.47% over 1995 earnings of $2,660,000. Basic earnings per share
was $2.18 in 1997 an increase of $.20 from 1996 and an increase of $.27 from
1995.
- 17 -
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
- --------------------------------------------------------------------------------
The two most widely recognized performance ratios within the financial services
industry are the return on average equity and return on average assets. The
return on average equity ratio presents the net income to average equity
maintained throughout the year. The return on average equity was 10.95% in 1997,
compared to 10.86% in 1996 and 11.41% in 1995.
RETURN ON AVERAGE EQUITY
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
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 was
1.40% in 1997, compared to 1.32% in 1996 and 1.35% in 1995.
RETURN ON AVERAGE ASSETS
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
The Board of Directors continued to increase the cash dividends paid to
shareholders. On a per share basis $.66 was paid in 1997, up 10.00% from the
$.60 paid in 1996 and up 17.86% over the $.56 paid in 1995. Along with the
increase in cash dividends, a 5-for-4 stock split in the form of a 25% stock
dividend was issued on September 5, 1997, and January 9, 1996. After giving
effect to these stock splits the market price per share increased from $25.60 at
January 1, 1996, to $36.50 at December 31, 1997.
CASH DIVIDENDS PER SHARE
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
While increasing dividends, the Corporation was able to increase stockholders'
equity to total assets (the capital ratio) to 13.00% at December 31, 1997, up
from 12.61% in 1996 and 12.01% in 1995.
EQUITY TO ASSETS
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
The Corporation has realized steady growth over the past two years. Assets for
the year ended December 31, 1997, were $220,910,000 an increase of $8,646,000 or
4.07% compared to 1996 assets of $212,264,000. Assets for 1996 grew $6,386,000
or 3.10% compared to 1995 assets of $205,878,000.
ASSETS
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
- --------------------------------------------------------------------------------
The Juniata Valley Bank's allowance for loan losses was $1,803,000 in 1997,
$1,707,000 in 1996 and $1,616,000 in 1995. The provision provided in each of
those years was $180,000 in 1997, $180,000 in 1996 and $135,000 in 1995. The
provision for loan losses exceeded net charge-offs by 114.29%, 102.25%, and
221.43% in 1997, 1996 and 1995, respectively. In 1997 net charge-offs were .06%
of average loans outstanding. In 1996 and 1995 net charge-offs were .07% and
.03% of average loans outstanding, respectively.
Other income increased $158,000 or 24.96% over 1996. From 1995 to 1996 the
increase was $52,000 or 8.95%. The increase in trust department income was
$10,000 in 1997 over 1996. The increase in 1996 of trust department income was
$25,000 due to the settlement of three estates. Customer service fees increased
$22,000 for 1997 compared to 1996. The increase was $14,000 from 1995 to 1996
for customer service fees. The increases in 1997 and 1996 for customer service
fees can be attributed to an increase in volume and not as a result of increased
fees. There was a $65,000 gain on sales of securities during 1997, which the
Corporation did not have in 1996 or 1995. The other income category increased
$61,000 for 1997 due principally to $51,000 of life insurance proceeds. The
increase in other income for 1996 over 1995 was $13,000.
Other expenses increased $327,000 or 6.45% from 1996 to 1997. This compares to a
decrease of $35,000 from 1995 to 1996. The $72,000 increase in salaries and
wages in 1997 can be attributed to annual merit increases and promotions of
employees. This compares to an increase of $83,000 in salaries and wages for
1996 over 1995. In 1997 employee benefits increased $5,000 which followed an
increase of $25,000 in 1996 over 1995. This was due to price changes of the
benefits provided as opposed to increased benefits. Occupancy and equipment
expenses were relatively stable over the three year period. There was a $21,000
increase in federal deposit insurance premiums in 1997 due to legislation
approved in 1996 for all banks to help finance the FICO debt service assessment.
There was a decrease of $190,000 in 1996 compared to 1995 in FDIC premiums. The
$23,000 decrease in director compensation in 1997 followed a decrease of $20,000
in 1996. The decrease is due to fully funded retirement plans. The $165,000
increase in repossession and foreclosed real estate is due to costs associated
with preparing two properties for sale and legal fees. The $68,000 increase in
the other category can be attributed to increased professional fees, a $20,000
increase in stationery and supplies and $9,000 increase in advertising. The
$27,000 increase in 1996 over 1995 was due to holding company expenses related
to stockholder matters including the introduction of a dividend reinvestment
plan incurred in 1996 and not incurred in 1995.
The management of the Juniata Valley Bank seeks product and service improvements
that both strengthen existing customer relationships and help attract new ones.
During 1997, sales of mutual funds were introduced through a third party
arrangement with T.H.E. Financial. For those customers desiring this type of
investment vehicle Juniata Valley Bank can offer them. Fee income derived from
the sale of this product in 1997 was not significant.
The United States Supreme Court issued its decision in the case of Barnett Bank
versus Nelson that national banks may sell insurance to anyone in a community
with a population under 5,000. Both the Pennsylvania insurance and banking
departments have issued policy statements recognizing that state chartered banks
may become licensed insurance agents, either directly or through an operating
subsidiary. The Juniata Valley Bank will evaluate the merits of insurance sales
during 1998 to help improve the bottom line.
The Corporation has conducted a comprehensive review of its computer systems to
identify the systems that could be affected by the Year 2000 issue and is
developing an implementation plan to resolve any issues. The Year 2000 problem
is the result of computer programs being written using two digits rather than
four to define the applicable year. Any of the Corporation's programs that have
time-sensitive software could recognize a date using "00" as the year 1900
rather than the year 2000. This could result in a major system failure.
Financial institutions are in a unique situation in that time-deposits and
loans, for a number of years have had maturity dates into the future well beyond
the year 2000.
The Corporation uses two major software vendors for data processing. Letters of
certification have been obtained assuring that they will be year 2000 compliant
in 1998 and testing can be performed by the fall of 1998 and into 1999. Because
of the data processing being out sourced, the cost of the year 2000 compliance
will be shared with the two data processing vendors. Management does not feel
this cost will materially impact the results of operations of the Corporation in
1998 or 1999.
Management is not aware of any known trends, events or uncertainties that will
have or that are reasonably likely to have material adverse effects on
liquidity, capital resources or operations of the Corporation.
- 19 -
- --------------------------------------------------------------------------------
TABLE 1 - ANALYSIS OF NET INTEREST INCOME
- --------------------------------------------------------------------------------
Table 1 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".
1997
Interest
Average Income %
Balances (Expense) Rate
-------- --------- ----
(In Thousands)
INTEREST EARNING ASSETS
Interest bearing deposits in other banks $ 45 $ 2 4.44%
Securities (taxable) 41,353 2,749 6.65
Securities (tax free) 30,554 1,204 3.94
Federal funds sold 3,098 182 5.87
Loans 131,523 12,330 9.3
--------- ---------
Total interest earning assets 206,573 16,467 7.97
----
NON-INTEREST EARNING ASSETS
Cash and due from banks 5,190
Other assets 7,542
Less: allowance for loan losses (1,774)
---------
Total assets $ 217,531
=========
INTEREST BEARING LIABILITIES
Demand deposits bearing interest $ 26,118 (633) 2.42
Savings deposits 21,055 (597) 2.84
Time deposits 117,212 (6,555) 5.59
--------- ---------
Total interest bearing liabilities 164,385 (7,785) 4.74
--------- ----
NON-INTEREST BEARING LIABILITIES
Demand deposits 21,727
Other liabilities 3,604
STOCKHOLDERS' EQUITY 27,815
---------
Total liabilities and stockholders' equity $ 217,531
=========
NET INTEREST INCOME/SPREAD $ 8,682 3.23%
========= ====
MARGIN ANALYSIS
Interest income/ earning assets 7.97%
Interest expense/earning assets 3.77
----
Net interest margin 4.20%
====
- - 20 -
- --------------------------------------------------------------------------------
TABLE 1 (Continued)
- --------------------------------------------------------------------------------
1996 1995
Interest Interest
Average Income % Average Income %
Balances (Expense) Rate Balances (Expense) Rate
-------- --------- ---- -------- --------- ----
(In Thousands) (In Thousands)
INTEREST EARNING ASSETS
Interest bearing deposits in other banks $ 35 $ 2 5.71% $ 153 $ 10 6.54%
Securities (taxable) 42,836 2,758 6.44 36,011 2,212 6.14
Securities (tax free) 29,794 1,230 4.13 26,696 1,195 4.48
Federal funds sold 4,107 218 5.31 3,993 236 5.91
Loans 123,104 11,547 9.38 121,193 11,417 9.42
-------- -------- -------- -------
Total interest earning assets 199,876 15,755 7.88 188,046 15,070 8.01
---- ----
NON-INTEREST EARNING ASSETS
Cash and due from banks 5,156 5,127
Other assets 6,258 5,571
Less: allowance for loan losses (1,677) (1,576)
-------- --------
Total assets $209,613 $197,168
======== ========
INTEREST BEARING LIABILITIES
Demand deposits bearing interest $ 25,930 (634) 2.45 $ 25,505 (624) 2.45
Savings deposits 22,124 (629) 2.84 22,183 (635) 2.86
Time deposits 112,377 (6,329) 5.63 103,793 (5,711) 5.50
-------- -------- -------- -------
Total interest bearing liabilities 160,431 (7,592) 4.73 151,481 (6,970) 4.60
-------- ---- ------- ----
NON-INTEREST BEARING LIABILITIES
Demand deposits 20,328 19,182
Other liabilities 3,411 3,189
STOCKHOLDERS' EQUITY 25,443 23,316
-------- --------
Total liabilities and stockholders' equity $209,613 $197,168
======== ========
NET INTEREST INCOME/SPREAD $ 8,163 3.15% $ 8,100 3.41%
======== ==== ======= ====
MARGIN ANALYSIS
Interest income/ earning assets 7.88% 8.01%
Interest expense/earning assets 3.80 3.71
---- ----
Net interest margin 4.08% 4.31%
==== ====
- 21 -
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- --------------------------------------------------------------------------------
NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income is the most significant contributor to the Corporation's net
income. During 1997, net interest income increased 6.36% to $8,682,000 compared
to an increase of .78% during 1996. Table 2 shows the interest income, interest
expense and net interest income with the percentage change between the years.
Table 1 presents average balances, interest income and expense and yields earned
or paid. This table summarized the components of the net interest income growth.
Interest earning assets increased $6,697,000 or 3.35% in 1997 which was less
than the $11,830,000 in 1996. The largest contributor to interest income is
loans. The yield on loans remains fairly stable among the years presented. The
yield on taxable securities increased by 21 basis points in 1997, while the
yield on tax free securities declined 19 basis points. This same trend was
experienced in 1996 with taxable securities having an increased yield of 30
basis points and the tax free securities having a decline in the yield of 35
basis points. The overall yield on these interest earning assets for 1997 was an
increase of 9 basis points. For 1996 there was a decline of 13 basis points.
Interest bearing liabilities increased $3,954,000 for 1997 which was less then
the increase of $8,950,000 in 1996. The yield on interest bearing demand and
savings deposits remained relatively unchanged for 1997 and 1996. Time deposits
is the fastest growing component of interest bearing liabilities. Rates paid on
time deposits declined slightly by 4 basis points in 1997 which followed a 13
basis point increase in 1996. Higher paying time deposits matured throughout
1997 and were renewed at the current competitive rates.
The Corporation's net spread was 3.23% in 1997 up from 3.15% in 1996 and down
from 3.41% in 1995. Interest spread measures the absolute difference between
average rates earned and average rates paid while net interest margin reflects
the relationship of interest income to earning assets versus interest expense to
earning assets. The Corporation's net interest margin was 4.20% for 1997
compared to 4.08% in 1996 and 4.31% in 1995.
From Table 3 it can be seen that the increases in interest income and interest
expense during 1997 were due mainly to growth in interest-earning assets and
interest-bearing liabilities while average rates over the period remained fairly
stable. As previously discussed, of the $712,000 increase in interest income
$783,000 was attributed to loans, while interest income on securities and
federal funds sold declined $71,000. In 1996, of the $685,000 change in interest
income, $546,000 could be attributed to taxable investment securities
principally as a result of higher volumes of securities. Rates on interest
earning assets in 1996 displayed more volatility than in 1997.
Interest expense shows that for 1997 time deposits accounted for $226,000 of the
$193,000 change due to the growth in this portfolio mentioned above; however
there was a slight decline in rates paid. In 1996, of the $622,000 change, time
deposits accounted for $618,000 of the change. Volume of time deposits
attributed $472,000 while an increase in rates accounted for $146,000 of the
change.
- --------------------------------------------------------------------------------
TABLE 2 --- NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income, defined as interest income less interest expense, is shown
in the following table:
1997 % Change 1996 % Change 1995
---- -------- ---- -------- ----
(In Thousands)
Interest income $16,467 4.52% $ 15,755 4.55% $ 15,070
Interest expense 7,785 2.54 7,592 8.92 6,970
------- -------- --------
Net interest income $ 8,682 6.36 $ 8,163 .78 $ 8,100
======= ======== ========
- - 22 -
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- --------------------------------------------------------------------------------
TABLE 3 - RATE-VOLUME ANALYSIS OF NET INTEREST INCOME
- --------------------------------------------------------------------------------
Table 3 attributes increases and decreases in components of net interest income
to changes in average volume and to changes in average rates for interest
earning assets and interest bearing liabilities.
1997/1996 Increase (Decrease) 1996/1995 Increase (Decrease)
Due to Change in Due to Change in
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest bearing deposits
in other banks $ 1 $ (1) $ 0 $ (8) $ 0 $ (8)
Securities (taxable) (95) 86 (9) 419 127 546
Securities (tax free) 31 (57) (26) 139 (104) 35
Federal funds sold (54) 18 (36) 7 (25) (18)
Loans 790 (7) 783 180 (50) 130
----- ----- ----- ----- ----- -----
Interest income 673 39 712 737 (52) 685
----- ----- ----- ----- ----- -----
Demand deposits
bearing interest 5 (6) (1) 10 0 10
Savings deposits (30) (2) (32) (2) (4) (6)
Time deposits 272 (46) 226 472 146 618
----- ----- ----- ----- ----- -----
Interest expense 247 (54) 193 480 142 622
----- ----- ----- ----- ----- -----
Increase (decrease)
in net interest income $ 426 $ 93 $ 519 $ 257 $(194) $ 63
===== ===== ===== ===== ===== =====
- --------------------------------------------------------------------------------
LOAN PORTFOLIO
- --------------------------------------------------------------------------------
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
At December 31, 1997 the net loan increase was $9,270,000 or 7.33% over 1996.
This follows a year with an increase in net loans of $5,117,000 or 4.22% over
1995. The loan to deposit ratio fluctuated slightly throughout 1997; monthly
averages were at a high in December of 71.91% and a low in March of 69.24%.
Mortgage loans increased $6,518,000 or 7.10% over 1996. The growth for 1995 over
1994 was $3,272,000. Real estate loans still remain a very attractive option due
to the tax deductibility of mortgage interest. Consumer loans increased
$2,227,000 or 9.66% in 1996 to 1997. The increase for 1996 over 1995 was
$2,042,000. Commercial loans increased $712,000 in 1997 while the same type of
loan decreased $35,000 from 1995 to 1996.
In spite of the slow economy and increasing credit problems nationwide, the
Corporation continued its excellent net charge-off record (charge-offs, net of
recoveries) during 1997. For the year, the net charge-offs were $84,000 or .06%
of average loans outstanding. This compares with $89,000 or .07% for 1996 and
$42,000 or .03% for 1995. Management feels the increase in losses charged to
allowance from consumer loans is not indicative of a decline in the local
economy or of future results in consumer loans.
The allowance for loan losses is based upon quarterly loan portfolio reviews by
management. The purpose of the review is to assess loan quality, analyze
delinquencies, ascertain loan growth, evaluate potential charge-offs and
recoveries and assess general economic conditions in the market served. It is
Management's judgement that the allowance for 1997 of $1,803,000 or 1.33% of
outstanding loans is adequate to meet any foreseeable loan loss contingency.
This is lower than the 1.35% for 1996 and the same 1.33% for 1995. At December
31, 1997 and l996, total non-performing loans were $372,000 and $692,000,
respectively; non-performing loans as a percentage of the allowance for loan
losses were 20.63% and 40.54%, respectively. Increased collection efforts
continue to be made so that the level of nonperforming loans remains at
historical levels in the future.
- 23 -
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- --------------------------------------------------------------------------------
LIQUIDITY AND INTEREST RATE SENSITIVITY MANAGEMENT
- --------------------------------------------------------------------------------
The goals of the Corporation's asset/liability management function are to ensure
adequate liquidity and to maintain an appropriate balance between the relative
rate sensitivity of interest earning assets and interest bearing liabilities.
Liquidity management encompasses the ability to meet ongoing cash flow
requirements of customers, who, as depositors, may want to withdraw funds or
who, as borrowers, need credit availability. Interest rate sensitivity
management attempts to prove stable net interest margins through changing
interest rate environments and thereby achieve consistent growth in net interest
income.
Liquidity management is influenced by several key elements, including asset
quality and the maturity structure of assets and liabilities. The single most
important source of liquidity for the Corporation is a string, stable core
deposit base. This funding source has exhibited steady growth over the years and
consists of deposits from customers with long-standing relationships. In 1997
the Corporation funded approximately 80% of its assets with core deposits
acquired in local communities. This core deposit base, combined with
stockholders' equity, funded 90% of average assets in 1997 and provides a
substantial and highly stable source of liquidity.
Principal sources of asset liquidity are provided by held to maturity securities
maturing in one year or less, available for sale securities, and other
short-term investments such as federal funds sold and cash and due from banks.
At December 31, 1997, these liquid assets amounted to $48,460,000 compared to
liquid assets at December 31, 1996, of $51,764,000. Liquidity is also provided
by scheduled and unscheduled principal repayments of loans.
The Corporation joined the Federal Home Loan Bank of Pittsburgh in August of
1993 for the purpose of providing short term liquidity when other sources are
unable to fill these needs. The Corporation has an unused line of credit of
$6,470,000 at December 31, 1997, from the Federal Home Loan Bank which it can
draw upon for additional liquidity.
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 it is demonstrated that loan demand is primarily funded through
deposit growth. Loan growth of $9,450,000 was more than deposit growth of
$6,552,000. Security proceeds of $18,661,000 were used to purchase securities of
$14,614,000. The funding short fall in loans from deposits of $2,898,000 was
offset by the net proceeds from security transactions of $4,047,000. The
additional proceeds from securities not used for loans were used toward the
increase of cash and cash equivalents of $1,691,000.
- --------------------------------------------------------------------------------
REGULATORY MATTERS
- --------------------------------------------------------------------------------
The Juniata Valley Bank is subject to periodic examinations by one or more of
the various regulatory agencies. During 1997 no examinations were conducted.
On January 1, 1997 the Financial Accounting Standards Board (FASB) issued
Statement No. 128, "Earnings Per Share". Since the Corporation has a simple
capital structure, previously reported earnings per share for 1996 and 1995
equals basic earnings per share for those periods as reflected in the statement
of income. The weighted average number of common shares outstanding was adjusted
for stock dividends for all periods presented.
- - 24 -
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- --------------------------------------------------------------------------------
MARKET RATE RISK
- --------------------------------------------------------------------------------
The operations of the Bank are subject to risk resulting from interest rate
fluctuations to the extent that there is a difference between the amount of the
Bank's interest earning assets and the amount of interest bearing liabilities
that are prepaid/ withdrawn, mature or reprice 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 Bank. The Bank 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 Bank do not subject it to foreign currency exchange or
commodity price risk. Also the Bank and Corporation do not utilize interest rate
swaps, caps or other hedging transactions.
Table 4 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.
- 25 -
- --------------------------------------------------------------------------------
TABLE 4 - INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
- --------------------------------------------------------------------------------
1998 1999 2000
---- ---- ----
(Dollars in Thousands)
ASSETS
Interest bearing deposits $ 17 $ -- $ --
Average interest rate 4.44%
Federal funds sold 4,180 -- --
Average interest rate 5.87%
Available for sale securities 3,439 5,336 7,935
Average interest rate 5.62% 5.97% 5.68%
Held to maturity securities 11,260 13,294 6,468
Average interest rate 5.31% 5.70% 6.08%
Loans
Commercial 12,520 -- --
Average interest rate 9.58%
Consumer 6,248 4,993 3,392
Average interest rate 10.84% 10.52% 10.18%
Real estate mortgage 95,051 283 307
Average interest rate 8.34% 8.82% 8.84%
LIABILITIES
Interest bearing demand deposits 26,120 -- --
Average interest rate 2.48%
Savings deposit 20,833 -- --
Average interest rate 2.80%
Certificates of deposit 70,960 26,345 12,493
Average interest rate 5.37% 5.74% 6.17%
- - 26 -
- --------------------------------------------------------------------------------
TABLE 4 (Continued)
- --------------------------------------------------------------------------------
Fair Value
2001 2002 Thereafter Total December 31, 1997
---- ---- ---------- ----- -----------------
(Dollars in Thousands)
ASSETS
Interest bearing deposits $ -- $ -- $ -- $ 17 $ 17
Average interest rate
Federal funds sold -- -- -- 4,180 4,180
Average interest rate
Available for sale securities 3,212 1,925 3,891 25,738 26,487
Average interest rate 5.06% 4.62% 4.76%
Held to maturity securities 5,105 2,807 1,359 40,293 40,535
Average interest rate 5.73% 6.46% 6.31%
Loans
Commercial -- -- -- 12,520 12,520
Average interest rate
Consumer 2,029 1,221 8,726 26,609 26,670
Average interest rate 9.94% 9.98%
Real estate mortgage 311 326 2,105 98,383 98,204
Average interest rate 8.78% 8.78% 8.77%
LIABILITIES
Interest bearing demand deposits -- -- -- 26,120 26,120
Average interest rate
Savings deposit -- -- -- 20,833 20,833
Average interest rate
Certificates of deposit 6,445 3,287 62 119,592 120,236
Average interest rate 5.92% 5.96% 5.80%
- 27 -
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- --------------------------------------------------------------------------------
CAPITAL
- --------------------------------------------------------------------------------
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 a 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 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 preferred 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% of qualifying total capital to risk adjusted total assets with at least 4%
Tier I capital and 8% of risk-adjusted assets in total capital. As indicated on
the schedule following this discussion, the Tier I risk-based capital ratio was
18.61% and Tier II risk-based capital ratio was 19.82% at December 31, 1997. The
Bank's capital ratios are well above the current minimum ratio requirements set
forth by federal banking regulators.
STOCKHOLDERS' EQUITY
[BAR GRAPH APPEARS HERE]
[PLOT POINTS TO COME]
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,
1997, the Bank's leverage ratio was 12.82%.
CAPITAL ANALYSIS
December 31,
------------
1997 1996 1995
---- ---- ----
(Thousands of Dollars)
Tier I
Common stockholders' equity (excluding unrealized
appreciation/depreciation on securities) $ 27,836 $ 26,281 $ 24,161
Tier II
Allowable portion of allowance for loan losses 1,803 1,707 1,616
-------- -------- --------
Risk-based capital $ 29,639 $ 27,988 $ 25,777
======== ======== ========
Risk adjusted assets (including off-balance-sheet exposures) $149,543 $141,592 $133,897
======== ======== ========
Tier I risk-based capital ratio 18.61% 18.56% 18.04%
Total risk-based capital ratio 19.82% 19.77% 19.24%
Leverage ratio 12.82% 12.36% 12.25%
- - 28 -
MANAGEMENT'S DISCUSSION AND ANALYSIS (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 1998 because of the 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 1998. 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 1998 through effective asset/liability management. Juniata Valley
Financial Corp. is committed to providing stockholders with an attractive return
on their investment.
- --------------------------------------------------------------------------------
FEDERAL INCOME TAX
- --------------------------------------------------------------------------------
The provision for income taxes for 1997 was $850,000 compared to $781,000 in
1996 and $780,000 in 1995. The effective tax rate, which is the ratio of income
tax expense to income-before-income-taxes, was 21.82% in 1997, a decrease from
the 22.03% in 1996 and 22.67% in 1995. The tax rate for all periods was less
than the statutory rate of 34% due to tax exempt securities and loan income.
Please refer to the Notes to the Consolidated Financial Statements "Income
Taxes" for further analysis of federal income tax expense.
- --------------------------------------------------------------------------------
MERGER
- --------------------------------------------------------------------------------
On December 30, 1997, Juniata Valley Financial Corp. and Lewistown Trust Company
entered into a definitive agreement and plan of merger providing for the merger
of Lewistown Trust Company with and into the Juniata Valley Bank, a wholly owned
subsidiary of Juniata Valley Financial Corp. (Juniata).
Under the terms of the definitive merger agreement, Lewistown Trust Company will
be merged into the Juniata Valley Bank and Juniata will exchange one share of
Juniata common stock for each share of Lewistown Trust Company common stock
outstanding in a tax-free exchange. Based upon Juniata's closing price on
December 31, 1997, the shares of Juniata to be received by Lewistown Trust
Company shareholders would have a value of $34.2 million or $36.50 per share.
The transaction consideration is approximately 2.42 times Lewistown Trust
Company's book value. The transaction will be accounted for as a pooling of
interests and, pending regulatory and shareholder approvals, is expected to be
completed in the second or third quarter of 1998.
Based on December 31, 1997 financial data, the combined organization will have
approximately $333 million in total assets, $191 million in loans, $285 million
in deposits and $43 million in total equity. At consummation, it is expected
that the combined banking subsidiary will have 12 full service banking offices.
- 29 -
[LOGO OF BEARD & COMPANY APPEARS HERE]
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders
Juniata Valley Financial Corp.
Mifflintown, Pennsylvania
We have audited the accompanying consolidated balance sheets of Juniata
Valley Financial Corp. and its wholly-owned subsidiary, The Juniata Valley Bank,
as of December 31, 1997 and 1996, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1997. These financial statements are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 amount and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Juniata
Valley Financial Corp. and subsidiary as of December 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1997 in conformity with generally accepted
accounting principles.
/s/ Beard & Company, Inc.
Reading, Pennsylvania
January 16, 1998
- - 30 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED BALANCE SHEETS
ASSETS
------
December 31,
------------
1997 1996
---- ----
(In Thousands)
Cash and due from banks $ 6,516 $ 5,857
Interest-bearing deposits with banks 17 65
Federal funds sold 4,180 3,100
--------- ---------
Total cash and cash equivalents 10,713 9,022
Securities available for sale 26,487 30,215
Securities held to maturity, fair value 1997 $40,535; 1996 $40,309 40,293 40,284
Loans receivable, net of allowance for loan losses 1997 $1,803; 1996 $1,707 135,709 126,439
Bank premises and equipment, net 1,733 1,766
Accrued interest receivable and other assets 5,975 4,538
--------- ---------
Total assets $ 220,910 $ 212,264
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 22,462 $ 21,873
Interest bearing 166,545 160,582
--------- ---------
Total deposits 189,007 182,455
Accrued interest payable and other liabilities 3,191 3,046
--------- ---------
Total liabilities 192,198 185,501
--------- ---------
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 5,000,000 shares;
issued 1997 1,400,389 shares; 1996 1,117,088 shares 1,400 1,117
Surplus 14,709 14,879
Retained earnings 12,651 10,549
Treasury stock, at cost 1997 14,898 shares (543) -
Net unrealized appreciation on securities available for sale, net of taxes 495 218
--------- ---------
Total stockholders' equity 28,712 26,763
--------- ---------
Total liabilities and stockholders' equity $ 220,910 $ 212,264
========= =========
See Notes to Consolidated Financial Statements.
- 31 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In Thousands, Except Per Share Amounts)
Interest income:
Loans receivable, including fees $ 12,330 $ 11,547 $ 11,417
Taxable securities 2,749 2,758 2,212
Tax-exempt securities 1,204 1,230 1,195
Other 184 220 246
---------- ---------- ----------
Total interest income 16,467 15,755 15,070
Interest expense on deposits 7,785 7,592 6,970
---------- ---------- ----------
Net interest income 8,682 8,163 8,100
Provision for loan losses 180 180 135
---------- ---------- ----------
Net interest income after provision for loan losses 8,502 7,983 7,965
---------- ---------- ----------
Other income:
Trust department 208 198 173
Customer service fees 259 237 223
Net realized gains on sales of securities 65 - -
Other 259 198 185
---------- ---------- ----------
Total other income 791 633 581
---------- ---------- ----------
Other expenses:
Salaries and wages 2,268 2,196 2,113
Employee benefits 597 592 567
Occupancy 315 310 309
Equipment 325 330 302
Federal deposit insurance premiums 23 2 192
Director compensation 246 269 289
Taxes, other than income 254 235 215
Repossession and foreclosed real estate 207 42 51
Other 1,163 1,095 1,068
---------- ---------- ----------
Total other expenses 5,398 5,071 5,106
---------- ---------- ----------
Income before income taxes 3,895 3,545 3,440
Federal income taxes 850 781 780
---------- ---------- ----------
Net income $ 3,045 $ 2,764 $ 2,660
========== ========== ==========
Basic earnings per share $ 2.18 $ 1.98 $ 1.91
========== ========== ==========
Weighted average number of shares outstanding 1,396,401 1,393,264 1,391,251
========== ========== ==========
See Notes to Consolidated Financial Statements.
- - 32 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1997, 1996 and 1995
--------------------------------------------
Net Unrealized
Appreciation
(Depreciation)
On Securities
Common Retained Treasury Available
Stock Surplus Earnings Stock For Sale Total
----- ------- -------- ----- -------- -----
(In Thousands)
Balance, December 31, 1994 $ 891 $ 14,956 $ 6,749 $ - $ (162) $ 22,434
Net income - - 2,660 - - 2,660
Cash dividend, $.56 per share - - (775) - - (775)
5-for-4 stock split in the form of a
25% stock dividend 222 (222) (13) - - (13)
Net change in unrealized appreciation
(depreciation) on securities available
for sale, net of taxes - - - - 417 417
-------- -------- -------- -------- -------- --------
Balance, December 31, 1995 1,113 14,734 8,621 - 255 24,723
Net income - - 2,764 - - 2,764
Cash dividend, $.60 per share - - (836) - - (836)
Stock issued under dividend
reinvestment plan 4 145 - - - 149
Net change in unrealized appreciation
(depreciation) on securities available
for sale, net of taxes - - - - (37) (37)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 1,117 14,879 10,549 - 218 26,763
Net income - - 3,045 - - 3,045
Cash dividend, $.66 per share - - (923) - - (923)
Stock issued under employee stock
purchase plan 3 110 - - - 113
5-for-4 stock split in the form of a
25% stock dividend 280 (280) (20) - - (20)
Treasury stock acquired - - - (543) - (543)
Net change in unrealized appreciation
(depreciation) on securities available
for sale, net of taxes - - - - 277 277
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 $ 1,400 $ 14,709 $ 12,651 $ (543) $ 495 $ 28,712
======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements.
- 33 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,045 $ 2,764 $ 2,660
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 180 180 135
Provision for depreciation 191 192 174
Net amortization on securities premium 155 195 192
Net realized gains on sales of securities (65) - -
Deferred directors' fees and supplemental retirement plan expense 170 242 303
Payment of deferred compensation (145) (150) (135)
Deferred income taxes (53) (56) (74)
Increase in accrued interest receivable and other assets (155) (488) (356)
Increase (decrease) in accrued interest payable and other liabilities - (123) 108
-------- -------- --------
Net cash provided by operating activities 3,323 2,756 3,007
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available for sale securities (1,258) (12,105) (13,935)
Proceeds from sales of available for sale securities 93 - -
Proceeds from maturities of and principal repayments
on available for sale securities 5,345 6,275 6,118
Purchases of held to maturity securities (13,356) (8,531) (8,753)
Proceeds from maturities of and principal repayments
on held to maturity securities 13,223 10,788 7,048
Net (increase) decrease in loans receivable (9,450) (5,219) 211
Net purchases of bank premises and equipment (158) (230) (222)
Purchase of life insurance (1,250) - -
-------- -------- --------
Net cash used in investing activities (6,811) (9,022) (9,533)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 6,552 4,302 13,002
Cash dividends and cash paid for fractional shares (943) (836) (788)
Stock issued under dividend reinvestment plan - 149 -
Stock issued under employee stock purchase plan 113 - -
Purchase of treasury stock (543) - -
-------- -------- --------
Net cash provided by financing activities 5,179 3,615 12,214
-------- -------- --------
Increase (decrease) in cash and cash equivalents 1,691 (2,651) 5,688
Cash and cash equivalents:
Beginning 9,022 11,673 5,985
-------- -------- --------
Ending $ 10,713 $ 9,022 $ 11,673
======== ======== ========
Cash payments for:
Interest $ 7,787 $ 7,566 $ 6,798
======== ======== ========
Income taxes $ 933 $ 879 $ 833
======== ======== ========
See Notes to Consolidated Financial Statements.
- - 34 -
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, Franklin
and Snyder, Pennsylvania.
Estimates:
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Presentation of cash flows:
For purposes of reporting cash flows, cash and cash equivalents include cash
on hand, amounts due from banks, interest-bearing demand deposits with banks
and federal funds sold.
Securities:
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. 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 appreciation and depreciation is reported as increases or
decreases in stockholders' equity, 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.
Securities classified as held to maturity are those debt securities the Bank
has both the intent and ability to hold to maturity regardless of changes in
market conditions, liquidity needs or changes in general economic
conditions. These securities are carried at cost adjusted for amortization
of premium and accretion of discount, computed by the interest method over
their contractual lives.
Management determines the appropriate classification of debt securities at
the time of purchase and re-evaluates such designation as of each balance
sheet date.
Loans receivable:
Loans 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.
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 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.
- 35 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 related to impaired loans that are identified
for evaluation is based on discounted cash flows using the loan's initial
effective interest rate or the fair value, less selling costs, of the
collateral for certain collateral dependent loans. By the time a loan
becomes probable of foreclosure it has been charged down to fair value, less
estimated costs to sell.
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.
Bank premises and equipment:
Bank premises and equipment are stated at cost less accumulated
depreciation. Depreciation is computed principally on the straight-line
method over the estimated useful lives of the related assets.
Foreclosed real estate:
Foreclosed assets, which are recorded in other assets, include properties
acquired through foreclosure or in full or partial satisfaction of the
related loan.
Foreclosed assets are initially recorded at fair value, net of estimated
selling costs, at the date of foreclosure. After foreclosure, valuations are
periodically performed by management and the real estate is carried at the
lower of carrying amount or fair value, less estimated costs to sell.
Revenue and expenses from operations and changes in the valuation allowance
are included in foreclosed real estate 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.
Off-balance sheet financial instruments:
In the ordinary course of business, the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
letters of credit. Such financial instruments are recorded in the balance
sheet when they are funded.
Earnings per share:
The Corporation adopted FASB Statement No. 128, "Earnings Per Share" in
1997. Since the Corporation has a simple capital structure, previously
reported earnings per share for 1996 and 1995 equals basic earnings per
share for those periods as reflected in the statements of income. The
weighted average number of common shares outstanding was adjusted for stock
dividends for all periods presented.
Reclassifications:
Certain items in the 1996 and 1995 consolidated financial statements have
been reclassified to conform with the 1997 consolidated financial statement
presentation format. Such reclassifications had no impact on net income.
- - 36 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 1997 and 1996 approximated $1,377,000 and
$1,311,000 respectively.
SECURITIES
The amortized cost and fair value of securities at December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Appreciation Depreciation Value
---- ------------ ------------ -----
(In Thousands)
Available for sale securities:
December 31, 1997:
U.S. Treasury securities $ 2,093 $ 11 $ - $ 2,104
U.S. Government and agency obligations 4,360 9 (4) 4,365
Obligations of states and political subdivisions 9,794 148 - 9,942
Corporate and other debt securities 4,670 13 (18) 4,665
Mortgage-backed securities 3,830 43 (13) 3,860
Equity securities 991 560 - 1,551
------- ---- ----- -------
$ 25,738 $784 $ (35) $ 26,487
======= ==== ===== =======
December 31, 1996:
U.S. Treasury securities $ 994 $ - $ (3) $ 991
U.S. Government and agency obligations 7,155 12 (17) 7,150
Obligations of states and political subdivisions 10,331 95 (6) 10,420
Corporate and other debt securities 5,187 5 (74) 5,118
Mortgage-backed securities 5,265 43 (35) 5,273
Equity securities 953 312 (2) 1,263
------- ---- ----- -------
$ 29,885 $467 $(137) $ 30,215
======= ==== ===== =======
Held to maturity securities:
December 31, 1997:
U.S. Treasury securities $ 1,748 $ 9 $ - $ 1,757
U.S. Government and agency obligations 5,412 32 (4) 5,440
Obligations of states and political subdivisions 15,726 100 (5) 15,821
Corporate and other debt securities 17,407 121 (11) 17,517
------- ---- ----- -------
$ 40,293 $262 $ (20) $ 40,535
======= ==== ===== =======
December 31, 1996:
U.S. Treasury securities $ 2,250 $ 1 $ (3) $ 2,248
U.S. Government and agency obligations 2,967 1 (12) 2,956
Obligations of states and political subdivisions 19,729 90 (38) 19,781
Corporate and other debt securities 15,338 55 (69) 15,324
------- ---- ----- -------
$ 40,284 $147 $(122) $ 40,309
======= ==== ===== =======
- 37 -
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, 1997, by
contractual maturity or call date, are shown below. Expected maturities may
differ from contractual maturities or call dates because the securities may be
called or prepaid with or without call or prepayment penalties.
Available For Sale Held To Maturity
------------------ ----------------
Amortized Fair Amortized Fair
Cost Value Cost Value
---- ----- ---- -----
(In Thousands)
Due in one year or less $ 3,439 $ 3,437 $11,260 $11,290
Due after one year through five years 16,983 17,121 27,674 27,872
Due after five years through ten years - - 1,359 1,373
Due after ten years 495 518 - -
Mortgage-backed securities 3,830 3,860 - -
Equity securities 991 1,551 - -
------- ------- ------- -------
$25,738 $26,487 $40,293 $40,535
======= ======= ======= =======
Equity securities include Federal Home Loan Bank stock with an aggregate cost
and fair value of $704,000 at December 31, 1997 and $702,000 at December 31,
1996.
Gross gains of $65,000 were realized on sales of securities available for sale
in 1997. There were no sales of securities in 1996 and 1995.
Securities with an amortized cost of $5,139,000 and $6,403,000 at December 31,
1976 and 1996 respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law.
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans are comprised of the following:
December 31,
-----------
1997 1996
---- ----
(In Thousands)
Commercial, agricultural and financial $ 12,520 $ 11,808
Real estate mortgages 98,383 91,865
Consumer 29,805 27,340
Other 1,321 1,412
-------- --------
142,029 132,425
Unearned discount on loans 4,517 4,279
Allowance for loan losses 1,803 1,707
-------- --------
$135,709 $126,439
======== ========
- - 38 -
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 (CONTINUED)
The following table presents changes in the allowance for loan losses:
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Balance, beginning $ 1,707 $ 1,616 $ 1,523
Provision for loan losses 180 180 135
Recoveries 39 14 53
Loans charged off (123) (103) (95)
--------- --------- ---------
Balance, ending $ 1,803 $ 1,707 $ 1,616
========= ========= =========
The recorded investment in impaired loans not requiring an allowance for loan
losses was $113,000 and $-0- at December 31, 1997 and 1996 respectively. At
December 31, 1997 and 1996, the recorded investment in impaired loans requiring
an allowance for loan losses was $-0- and $229,000 respectively. The related
allowance for loan losses associated with these loans was $25,000 at December
31, 1996. For the years ended December 31, 1997, 1996 and 1995, the average
recorded investment in these impaired loans was $177,000, $350,000 and $406,000
respectively, and no interest income was recognized on impaired loans in 1997
and 1996 while $5,000 was recognized on impaired loans in 1995.
BANK PREMISES AND EQUIPMENT
The major components of bank premises and equipment were as follows:
December 31,
------------
1997 1996
---- ----
(In Thousands)
Land and land improvements $ 438 $ 438
Buildings and improvements 1,894 1,863
Furniture and equipment 1,672 1,583
-------- --------
4,004 3,884
Less accumulated depreciation 2,271 2,118
-------- --------
$ 1,733 $ 1,766
======== ========
DEPOSITS
The composition of deposits is as follows:
December 31,
------------
1997 1996
---- ----
(In Thousands)
Demand, non-interest bearing $ 22,462 $ 21,873
Now and Money Market 26,120 26,053
Savings 20,833 20,665
Time Certificates $100,000 or more 15,445 13,530
Other Time Certificates 104,147 100,334
-------- --------
$189,007 $182,455
======== ========
At December 31, 1997, the scheduled maturities of time deposits are as follows
(in thousands):
1998 $ 70,960
1999 26,345
2000 12,493
2001 6,445
2002 3,287
Thereafter 62
--------
$119,592
========
- 39 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BORROWINGS
The Bank has entered into an agreement whereby it can borrow up to approximately
$6,470,000 from the Federal Home Loan Bank. There were no outstanding balances
under this agreement as of December 31, 1997 and 1996.
REGULATORY MATTERS AND STOCKHOLDERS' EQUITY
The Bank is 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
Bank's financial statements. Under capital adequacy guidelines and the
regulatory framework for prompt corrective action, the Bank must meet specific
capital guidelines that involve quantitative measures of the Bank's assets,
liabilities and certain off-balance sheet items as calculated under regulatory
accounting practices. The Bank's 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 Bank to maintain minimum amounts and ratios (set forth below) of
total and Tier 1 capital (as defined in the regulations) to risk-weighted
assets, and of Tier 1 capital to average assets. Management believes, as of
December 31, 1997, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1997, 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 at December 31, 1997 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.
For Capital
Adequacy
Actual Purposes
------ --------
Amount Ratio Amount Ratio
------ ----- ------ -----
(Dollar Amounts In Thousands)
As of December 31, 1997:
Total capital (to risk weighted assets) $29,639 19.82% $greater than or equal to 11,963 greater than or equal to 8.00%
Tier 1 capital (to risk weighted assets) 27,836 18.61 greater than or equal to 5,982 greater than or equal to 4.00
Tier 1 capital (to average assets) 27,836 12.82 greater than or equal to 8,684 greater than or equal to 4.00
As of December 31, 1996:
Total capital (to risk weighted assets) $27,988 19.77% $greater than or equal to 11,327 greater than or equal to 8.00%
Tier I capital (to risk weighted assets) 26,281 18.56 greater than or equal to 5,664 greater than or equal to 4.00
Tier I capital (to average assets) 26,281 12.36 greater than or equal to 8,503 greater than or equal to 4.00
To Be Well
Capitalized Under
Prompt Corrective
Action Provisions
-----------------
Amount Ratio
------ -----
(Dollar Amounts In Thousands)
As of December 31, 1997:
Total capital (to risk weighted assets) $14,954 greater than or equal to 10.00%
Tier 1 capital (to risk weighted assets) 8,973 greater than or equal to 6.00
Tier 1 capital (to average assets) 10,855 greater than or equal to 5.00
As of December 31, 1996:
Total capital (to risk weighted assets) $14,159 greater than or equal to 10.00%
Tier I capital (to risk weighted assets) 8,496 greater than or equal to 6.00
Tier I capital (to average assets) 10,629 greater than or equal to 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, 1997, $22,754,000 of undistributed earnings of the Bank, included in the
consolidated stockholders' equity, was available for distribution to the
Corporation as dividends without prior regulatory approval.
In August 1990, 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 $12.24 for each share issued and outstanding, upon
the occurrence of certain events, as defined in the Plan. These rights are fully
transferrable and expire on August 31, 2000. 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.
In 1995, the Corporation established a dividend reinvestment and stock purchase
plan, effective January 1, 1996. 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 Dividend Reinvestment Plan. During the year
ended December 31, 1997, shares were purchased on the open market to satisfy the
Dividend Reinvestment Plan, while 4,087 shares were issued under the Plan in
1996. The Corporation reserved 100,000 shares of common stock for the employee
stock purchase plan. In 1997, 3,600 shares were issued under the Plan (see
"Employee Benefits").
In 1997, the Board of Directors approved a plan to repurchase up to
approximately 10% of the Corporation's common stock. As of December 31, 1997,
14,898 shares were purchased under the plan.
- - 40 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE BENEFITS
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 but also for those expected to be earned in the
future.
The following table sets forth the Plan's funded status and amounts
recognized in the balance sheets at December 31:
1997 1996
---- ----
(In Thousands)
Actuarial present value of:
Accumulated benefit obligation, including vested benefits
of $1,694,000 and $1,714,000 $(1,702) $(1,726)
======= =======
Projected benefit obligation for service rendered to date $(2,583) $(2,336)
Plan assets at fair value 2,401 2,187
------- -------
Plan assets less than projected benefit obligation (182) (149)
Unrecognized net gain from experience different from that assumed (130) (145)
Unrecognized net transition asset (28) (29)
------- -------
Accrued pension cost $ (340) $ (323)
======= =======
Pension expense included the following components for the years ended
December 31:
1997 1996 1995
---- ---- ----
(In Thousands)
Service cost, benefits earned during the year $ 98 $ 110 $ 101
Interest cost on projected benefit obligation 166 157 143
Actual return on plan assets (212) (164) (204)
Net amortization 51 15 73
----- ----- -----
$ 103 $ 118 $ 113
===== ===== =====
Assumptions used in the accounting were:
1997 1996 1995
---- ---- ----
Discount rates 7.5% 7.5% 7.5%
Rates of increase in compensation levels 4.0 4.0 4.0
Expected long-term rate of return on assets 7.5 7.5 7.5
Assets in the Plan consist primarily of U.S. Government securities, U.S.
Government security mutual funds and certificates of deposit.
- 41 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EMPLOYEE BENEFITS (CONTINUED)
Supplemental retirement plan:
The Corporation has a non-qualified supplemental retirement plan for
directors and key employees. At December 31, 1997 and 1996, the present
value of the future liability was $815,000 and $751,000 respectively. The
Corporation has funded these plans through the purchase of annuities and
life insurance policies, which have an aggregate cash surrender value of
$899,000 and $803,000 at December 31, 1997 and 1996 respectively. For the
years ended December 31, 1997, 1996 and 1995, $76,000, $58,000 and $47,000
was charged to expense in connection with this plan.
Deferred compensation:
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, 1997 and 1996, the present value of the future
liability was $1,162,000 and $1,092,000 respectively. To fund the benefits
under these agreements, the Corporation is the owner and beneficiary of life
insurance policies on the lives of the directors. The policies had an
aggregate cash surrender value of $909,000 and $797,000 at December 31, 1997
and 1996, respectively. For the years ended December 31, 1997, 1996 and
1995, $178,000, $183,000 and $223,000 respectively, was charged to expense
in connection with this plan.
Employee Stock Purchase Plan:
In 1996, the Corporation established an Employee Stock Purchase Plan. Under
the Plan, 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 1997, 3,600 shares were issued under the
Plan and $-0- was charged to expense in connection with this Plan.
Salary continuation plan:
In 1997, the Corporation established a non-qualified Salary Continuation
Plan for key employees. At December 31, 1997, the present value of the
future liability was $10,000. The Corporation has funded the Plan through
the purchase of life insurance policies which have an aggregate cash
surrender value of $1,261,000 at December 31, 1997. For the year ended
December 31, 1997, $10,000 was charged to expenses in connection with the
Plan.
- - 42 -
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 consisted of the following:
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Current $ 903 $ 837 $ 854
Deferred (53) (56) (74)
------- ------- -------
$ 850 $ 781 $ 780
======= ======= =======
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,
------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Federal income tax at statutory rate $ 1,324 $ 1,205 $ 1,170
Tax-exempt interest (436) (446) (434)
Disallowance of interest expense 69 70 62
Other (107) (48) (18)
------- ------- -------
$ 850 $ 781 $ 780
======= ======= =======
The income tax provision includes $22,000 in 1997, $-0- in 1996 and 1995
respectively, of income tax related to investment security gains.
The net deferred tax asset in the accompanying balance sheets includes the
following amounts of deferred tax assets and liabilities:
December 31,
1997 1996
---- ----
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 619 $ 586
Deferred directors' fees 391 367
Pension liabilities 306 306
------- -------
Total deferred tax assets 1,316 1,259
------- -------
Deferred tax liabilities:
Bank premises and equipment (54) (54)
Unrealized appreciation on securities
available for sale (255) (112)
Other (4) -
------- -------
Total deferred tax liabilities (313) (166)
------- -------
Net deferred tax asset $ 1,003 $ 1,093
======= =======
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, 1997 and 1996, these
persons were indebted to the Bank for loans totaling $1,744,000 and $1,996,000
respectively. During 1997, loans totaling $4,488,000 were disbursed and loan
repayments totaled $4,740,000.
- 43 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
COMMITMENTS
The Bank rents equipment under operating leases that expire through 2002.
Equipment and servicing fees were $385,000, $378,000 and $368,000 for the years
ended December 31, 1997, 1996 and 1995 respectively. Additionally the Bank
leases a branch office building for which rent expense was $27,000 in 1997 and
1996 respectively and $26,000 in 1995.
Minimum future payments under all noncancellable lease agreements as of December
31, 1997 are (in thousands):
1998 $269
1999 232
2000 244
2001 234
2002 166
------
$1,145
======
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,
1997 1996
---- ----
(In Thousands)
Commitments to extend credit $17,206 $14,715
Outstanding letters of credit 250 293
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Since many
of the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements.
Commitments generally have fixed expiration dates or other termination clauses
and may require payment of a fee. The Bank evaluates each customer's credit
worthiness on a case-by-case basis. The amount of collateral obtained, if deemed
necessary by the Bank upon extension of credit, is based on management's credit
evaluation. Collateral held varies but may include personal or commercial real
estate, accounts receivable, inventory and equipment.
Outstanding letters of credit written are conditional commitments issued by the
Bank to guarantee the performance of a customer to a third party. The credit
risk involved in issuing letters of credit is essentially the same as that
involved in extending loan facilities to customers.
CONCENTRATION OF CREDIT RISK
The Bank grants commercial, residential and consumer loans to customers
primarily located in the counties of Juniata, Mifflin, Perry, Huntingdon,
Franklin and Snyder, Pennsylvania. The concentrations of credit by type of loan
are set forth in the note "Loans Receivable and Allowance for Loan Losses".
Although the Bank has a diversified loan portfolio, its debtors' ability to
honor their contracts is influenced by the region's economy.
- - 44 -
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgement in estimating the fair value of the
Corporation's financial instruments; however, there are inherent weaknesses in
any estimation technique. Therefore, the fair value estimates herein are not
necessarily indicative of the amounts the Corporation could have realized in a
sales transaction on the dates indicated. The estimated fair value amounts have
been measured as of their respective year ends and have not been re-evaluated or
updated for purposes of these consolidated financial statements subsequent to
those respective dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire corporation since a fair value calculation is only provided
for a limited portion of the Corporation's assets. Due to a wide range of
valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Corporation's disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate the fair values of the Bank's financial instruments at December 31,
1997 and 1996:
. For cash, cash equivalents, interest-bearing demand deposits in other banks
and federal funds sold, the carrying amount is a reasonable estimate of fair
value.
. 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.
. 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.
. 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.
. For accrued interest receivable and accrued interest payable, the carrying
amount is a reasonable estimate of fair value.
. 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.
The estimated fair values of the Corporation's financial instruments were as
follows:
December 31,
1997 1996
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
Financial assets:
Cash and due from banks $ 6,516 $ 6,516 $ 5,857 $ 5,857
Interest-bearing deposits in other banks 17 17 65 65
Federal funds sold 4,180 4,180 3,100 3,100
Securities 66,780 67,022 70,499 70,524
Loans receivable, net of allowance 135,709 135,591 126,439 126,197
Accrued interest receivable 1,573 1,573 1,525 1,525
Financial liabilities:
Deposits 189,007 189,651 182,455 183,199
Accrued interest payable 694 694 696 696
Off-balance sheet financial instruments:
Commitments to extend credit - - - -
Standby letters of credit - - - -
- 45 -
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,
------------
1997 1996
---- ----
(In Thousands)
ASSETS
Cash $ 12 $ 103
Investment in Bank subsidiary 28,189 26,441
Securities available for sale 558 235
Due from Bank subsidiary 22 15
Other 4 -
------- -------
$28,785 $26,794
======= =======
LIABILITY AND STOCKHOLDERS' EQUITY
LIABILITY, other $ 73 $ 31
STOCKHOLDERS' EQUITY 28,712 26,763
------- -------
$28,785 $26,794
======= =======
STATEMENTS OF INCOME
Years Ended December 31,
------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
Dividends from Bank subsidiary $ 1,504 $ 856 $ 807
Other dividend income 16 5 4
Other expenses (28) (42) (15)
------- ------- -------
Income before equity in undistributed net income of subsidiary 1,492 819 796
Equity in undistributed net income of Bank subsidiary 1,553 1,945 1,864
------- ------- -------
Net income $ 3,045 $ 2,764 $ 2,660
======= ======= =======
- - 46 -
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,
------------------------
1997 1996 1995
---- ---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 3,045 $ 2,764 $ 2,660
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of Bank subsidiary (1,553) (1,945) (1,864)
Increase in other assets (4) - -
(Increase) decrease in due from subsidiary (7) 18 (8)
------- ------- -------
Net cash provided by operating activities 1,481 837 788
------- ------- -------
CASH FLOWS USED IN INVESTING ACTIVITIES
Purchases of available for sale securities (199) (47) -
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Dividends paid and cash paid in lieu of fractional shares (943) (836) (788)
Stock issued under dividend reinvestment plan - 149 -
Stock issued under employee stock purchase plan 113 - -
Purchase of treasury stock (543) - -
------- ------- -------
Net cash used in financing activities (1,373) (687) (788)
------- ------- -------
Increase (decrease) in cash (91) 103 -
Cash:
Beginning 103 - -
------- ------- -------
Ending $ 12 $ 103 $ -
======= ======= =======
MERGER
In December 1997, the Corporation announced the signing of a definitive
agreement to merge with Lewistown Trust Company, a commercial bank with total
assets of $112 million, headquartered in Lewistown, Pennsylvania. Under terms of
the agreement, each Lewistown Trust shareholder will receive one share of the
Corporation's common stock for each Lewistown Trust share and Lewistown trust
will be merged into the bank. The transaction will be accounted for under the
pooling-of-interests method of accounting and is subject to regulatory and
shareholder approvals. The merger is expected to be consummated in the second or
third quarter of 1998.
The following table provides a summary of the consolidated operating results and
financial condition on a pro forma basis as of and for the year ended December
31, 1997:
Corporation Lewistown Corporation
(As Reported) Trust Pro forma
(In Thousands)
Net interest income $ 8,682 $ 3,773 $ 12,455
Net income 3,045 1,527 4,572
Total assets 220,910 111,667 332,577
Total stockholders' equity 28,712 14,119 42,831
- 47 -
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. Ruth Nace
The Juniata Valley Bank
P.O. Box 66
Mifflintown, PA 17059
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