JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
DECEMBER 31, 1998
CONTENTS
Page
Stock, Dividend and Broker Information .................................................. 2
Letter to Shareholders .................................................................. 3
Corporation Officers and Directors ...................................................... 4
Advisory Board Members .................................................................. 5
Bank Officers ........................................................................... 6
Business ................................................................................ 7 - 15
Financial Highlights .................................................................... 16
Management's Discussion and Analysis of Financial Condition and Results of Operations ...17 - 31
Report of Independent Auditors .......................................................... 32
Financial Statements:
Consolidated Balance Sheets ........................................................ 33
Consolidated Statements of Income .................................................. 34
Consolidated Statements of Stockholders' Equity .................................... 35
Consolidated Statements of Cash Flows .............................................. 36
Notes to Consolidated Financial Statements .........................................37 - 52
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 1998 and 1997 are provided in the
table below.
1998 1997
---- ----
Dividends Dividends
Quarter High Low per share High Low per share
------- ---- --- --------- ---- --- ---------
First $38.00 $36.50 $32.80 $32.00
Second 39.50 38.00 .36 34.00 32.80 .32
Third 39.75 39.50 35.00 34.00
Fourth 39.50 37.50 .38 36.50 35.00 .34
For further information, we refer you to:
Hopper Soliday & Co., Inc.
1703 Oregon Pike
Lancaster, PA 17601
(800) 456-9234
Janney, Montgomery, Scott, Inc.
48 E. Market St., P.O. Box 2246
York, PA 17405-2246
(717) 845-5611
F.J. Morrissey & Co., Inc.
1700 Market St., Suite 1420
Philadelphia, PA 19103-3913
(800) 842-8928
Sandler O'Neil & Partners, L.P.
Two World Trade Center 104th Floor
New York, NY 10048
(800) 635-6851
Ryan, Beck & Co.
150 Monument Road, Suite 106
Bala Cynwyd, PA 19004
(800) 223-8969
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-
[LOGO OF JUNIATA VALLEY FINANCIAL CORP APPEARS HERE]
POST OFFICE BOX 66
TELEPHONE (717) 436-8211
Dear Shareholder,
It is hard to imagine it is over a year since the merger with the Lewistown
Trust Company was announced. As was anticipated, consolidating the operations
area of the two banks was indeed a difficult task. However, with that aspect of
the merger behind us, we can now devote more time and attention to offering more
products and services to our shareholders and customers. As a result of the
merger we now have twelve offices located conveniently throughout the Juniata
Valley to serve our customers.
Excluding the expense incurred related to the merger, this is the fifteenth
consecutive year of increased earnings.
We would like to take this opportunity to thank Harry B. Fairman, Jr. for
his years of dedication, loyalty and support. Mr. Fairman has been a director
since 1983 and will retire in May, 1999. He is the past Chairman of the Board
and led the bank during its most profitable years in its 131 year history.
As always, we would like to thank you for your continued loyalty and
support. Further, we want to assure you that the Officers, Directors and
employees will continue to work diligently to ensure that the Juniata Valley
Financial Corp. continues to be a quality financial institution.
Sincerely,
/s/ A. Jerome Cook
Chairman and CEO
/s/ Francis J. Evanitsky
President and COO
AJC:FJE:rhn
-3-
Juniata Valley Financial Corp. Officers
A. Jerome Cook
Chairman
Francis J. Evanitsky
President
Ronald H. Witherite
Vice Chairman, Secretary
Linda L. Engle
Treasurer
Directors
Joe E. Benner
Owner, Benner Automotive
A. Jerome Cook
Chairman & CEO, The Juniata Valley Bank
Martin L. Dreibelbis
Self-Employed, Petroleum Consultant
Francis J. Evanitsky
President & COO, The Juniata Valley Bank
Harry B. Fairman, Jr.
President, Hilltop Oil, Inc.
Philip E. Gingerich, Jr.
President, Central Insurers Group, Inc.
Karl E. Guss
Funeral Director, Guss Funeral Home
Marshall L. Hartman
Retired President, Lewistown Trust Co.
Don E. Haubert
President, Haubert Homes
Timothy I. Havice
Restaurant Operator
Charles L. Hershberger
President, Hoenstine Funeral Homes, Inc.
Robert K. Metz, Jr.
President, Metz Poultry Farms, Inc.
Dale G. Nace
Owner, Glenn Nace Plumbing & Heating;
GlenDale Storage
John A. Renninger
President, A. D. Renninger
Lumber Company
Edward R. Rhodes
Retired Partner, E. R. Rhodes & Son
Richard M. Scanlon, DMD
Self-Employed Dentist
Harold B. Shearer
Self-employed Farmer
Jan G. Snedeker
President, Snedeker Oil Co., Inc.
John M. Wilson
Retired President, Wilson Oil, Co.
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-
ADVISORY BOARD MEMBERS
MILLERSTOWN OFFICE MONUMENT SQUARE /WAL-MART OFFICES
R. Franklin Campbell William H. Bradford
Lowell R. Frantz, C.L.U. William R. Carter
Gregory J. Gordon Sharon Havice
Gerald M. Lyter Harry F. Stimely
James A. Witmer Frank A. Zampelli
Gary G. Wright
PORT ROYAL OFFICE GARDENVIEW OFFICE
Clinton F. Bashore David B. Esh
Richard J. Junk M. Randall French
Dennis A. Long H. Ross Harshbarger
Freeburn Love Donald R. Hartzler
Betty D. Ryan Jerry L. Wagner
Earl J. Wagner
McALISTERVILLE OFFICE MARKET STREET/WATER STREET OFFICES
Clair Ehrenzeller George W. Anderson
Clair S. Graybill Susan M. McCartney
Samuel E. Knouse R. Jack Morgan
Ralph E. Rickenbaugh Steve R. Watson
Joseph D. Ritzman
Richard J. Sankey
BLAIRS MILLS OFFICE BURNHAM OFFICE
Wayde H. Cisney Mark S. Elsesser
William R. Goshorn Daniel B. Firth
George Love David E. Walker
C. Roger Searer
-5-
THE JUNIATA VALLEY BANK OFFICERS
A Wholly-Owned Subsidiary of Juniata Valley Financial Corp.
MIFFLINTOWN OFFICE
A. Jerome Cook ......................................... Chairman & C.E.O.
Francis J. Evanitsky .................................. President & C.O.O.
Helen L. Sieber ................ Vice President & Community Office Manager
Jeffrey A. Pottorff .............................................. Auditor
Lou Ann Wilson ........................................ Compliance Officer
Paul M. Lipka .......................................... Marketing Officer
Ruth H. Nace ......................................... Executive Secretary
ADMINISTRATION
Donald L. Musser ............... Sr. Vice President, Branch Administration
Pamela S. Eberman ................................. Human Resource Manager
CONTROLLER
Linda L. Engle .......................... Executive Vice President, C.F.O.
Susan B. Cherry ............................................... Controller
Anna Mae Peoples .................... Vice President, Assistant Controller
LOANS
Edward L. Kauffman ............... Sr. Vice President, Loan Administration
Robert G. Dillon ............................ Vice President, Loan Officer
Scott E. Nace ................................Vice President, Loan Officer
David A. Pecht ......................... Vice President, Mortgage Division
Kurt L. McKinney, Jr .................................... Sr. Loan Officer
Loretta A. Saylor ........................................... Loan Officer
John B. Zavacky .............................. Loan Administration Officer
OPERATIONS
Judy R. Aumiller .......................... Sr. Vice President, Operations
Kathy D. Hutchinson ........................... Vice President, Operations
Sherise Pelizzari ..................................... Operations Manager
Deborah A. Sheaffer ................................... Operations Officer
TRUST
Terry S. Love .......................... Sr. Vice President, Trust Officer
James C. Dillman ........................... Vice President, Trust Officer
Cynthia L. Williams ........................ Vice President, Trust Officer
BLAIRS MILLS OFFICE
C. Roger Searer ................. Vice President, Community Office Manager
Wanda K. Rowles ................................. Customer Service Officer
BURNHAM OFFICE
Leann M. Fisher ................................. Community Office Manager
GARDENVIEW OFFICE
M. Randall French ............... Vice President, Community Office Manager
MARKET STREET OFFICE
R. Jack Morgan .................. Vice President, Community Office Manager
McALISTERVILLE OFFICE
Joseph D. Ritzman ............... Vice President, Community Office Manager
Leslie A. Miller ................................ Customer Service Officer
MILLERSTOWN OFFICE
James A. Witmer ................. Vice President, Community Office Manager
Barbara I. Seaman ............................... Customer Service Officer
MONUMENT SQUARE OFFICE
Lee Ellen Foose ................................. Community Office Manager
Suzanne Booher .................................. 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
WAL-MART SUPERCENTER OFFICE
J. Neal Shawver ................................. Community Office Manager
WATER STREET OFFICE
Catherine J. Laub ............................... Community Office Manager
- -6-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
DESCRIPTION OF BUSINESS
On April 19, 1983, the shareholders of The Juniata Valley Bank (The Bank)
approved a plan of merger and reorganization. The plan was approved by the
various regulatory agencies on June 7, 1983 and the Juniata Valley Financial
Corp., a one bank holding company, registered under the Bank Holding Company Act
of 1956, as amended, was organized. The Bank is the oldest independent
commercial bank in Juniata and Mifflin County having originated under a state
bank charter in 1867.
The Juniata Valley Bank operates twelve branch banking offices and two trust
service offices. At December 31, 1998, the Bank had 140 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,
1998, the Bank had four offices in Juniata County, one office in Perry County,
six offices in Mifflin County and one office in Huntingdon County.
On July 1, 1998, the Corporation completed the merger of Lewistown Trust Company
(Lewistown), a commercial bank located in Lewistown, Pennsylvania, by issuing
931,700 shares of common stock for all of the outstanding common stock of
Lewistown, except for the 5,324 shares of Lewistown held by the Corporation
which were cancelled. The merger was accounted for under the
pooling-of-interests method of accounting and, as such, all prior period
information has been restated.
COMPETITION
The Bank's principal market area includes all of Mifflin and Juniata Counties,
and portions of Perry, Huntingdon, Centre, Franklin and Snyder Counties. There
are 15 commercial banks which are headquartered or have branch offices located
within the Bank's market area which the Bank considers its primary competitors.
Of the 15 commercial banks with operations in the Bank's market area, the Bank
ranked second in assets as of December 31, 1998.
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, 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.
-7-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
SUPERVISION AND REGULATION (CONTINUED)
The deposits of The Juniata Valley Bank are insured by the Bank Insurance Fund
of the Federal Deposit Insurance Corporation (FDIC). Consequently, the Bank is
subject to regulations and reviews under the provisions of the Federal Deposit
Insurance Act, but the primary regulatory body is the Pennsylvania Department of
Banking. The Pennsylvania Department of Banking conducts regular reviews which
have resulted in satisfactory evaluations to date.
In 1991, the Federal Deposit Insurance Corporation Act (FDICIA) was signed into
law. FDICIA established five different levels of capitalization of financial
institutions, with prompt corrective actions and significant operational
restrictions imposed on institutions that are capital deficient. The five
categories are: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
To be considered well capitalized, an institution must have a total risk-based
capital ratio of at least 10%, a Tier I risk based capital ratio of at least 6%,
a leverage capital ratio of 5% and must not be subject to any order or directive
requiring the institution to improve its capital level. An institution falls
within the adequately capitalized category if it has a total risk-based capital
ratio of at least 8%, a Tier I risk-based capital ratio of at least 4%, and a
leverage capital ratio of at least 4%. Institutions with lower capital levels
are deemed to be undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on their actual capital levels.
The following table sets forth the computation of the Bank's regulatory capital
ratios. The Bank exceeded the minimum capital levels of the well capitalized
category. The Corporation's ratios were not materially different from those of
the Bank.
December 31,
------------
1998 1997 1996
---- ---- ----
Risk-weighted assets ratio:
Tier I 21.16% 20.33% 20.28%
Total 22.36% 21.50% 21.45%
Total assets leverage ratio:
Tier I 13.12% 12.50% 12.04%
SECURITIES PORTFOLIO
The following table sets forth the carrying amount of securities at the dates
indicated:
December 31,
------------
1998 1997 1996
---- ---- ----
(In Thousands)
Available for sale securities (at fair value):
U.S. Treasury and other U.S. government obligations $ 8,873 $ 23,216 $ 22,787
States and political subdivisions 28,123 26,960 28,368
Other corporate 4,872 5,082 6,953
Mortgage-backed 11,046 16,501 17,124
Equity 1,806 1,705 1,440
-------- -------- --------
54,720 73,464 76,672
-------- -------- --------
Held to maturity securities (at amortized cost):
U.S. Treasury and other U.S. government obligations 16,042 7,160 5,217
States and political subdivisions 30,297 15,726 19,729
Other corporate 22,446 17,407 15,338
-------- -------- --------
68,785 40,293 40,284
-------- -------- --------
Total securities $123,505 $113,757 $116,956
======== ======== ========
- -8-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
SECURITIES PORTFOLIO (CONTINUED)
The following table sets forth the maturities of securities at December 31, 1998
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, 1998, 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 $ 6,120 6.32% $ 2,602 6.01% $ - - $ 151 4.96%
State and political
subdivisions 9,339 5.36 17,946 5.10 565 6.05% 273 6.50
Other corporate 1,134 5.81 3,682 6.02 56 6.65 - -
Mortgage-backed 685 6.37 73 6.29 409 7.63 9,879 6.81
------- ------- ------ -------
17,278 24,303 1,030 10,303
------- ------- ------ -------
Held to maturity:
U.S. Treasury and other U.S.
government agencies 5,999 6.41 10,043 5.97 - - - -
State and political
subdivisions 6,366 4.53 16,956 4.24 6,975 3.95 - -
Other corporate 2,707 6.72 19,739 6.19 - - - -
------- ------- ------ -------
15,072 46,738 6,975 - -
------- ------- ------ -------
Total $32,350 $71,041 $8,005 $10,303
======= ======= ====== =======
Securities classified as available for sale are those debt securities that the
Bank intends to hold for an indefinite period of time, but not necessarily to
maturity. Securities available for sale are carried at fair value. Unrealized
gains or losses are reported in other comprehensive income, net of the related
deferred tax effect. Securities classified as held to maturity are those debt
securities the Bank has both the intent and ability to hold to maturity. These
securities are carried at cost adjusted for amortization of premium and
accretion of discount.
-9-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
LOAN PORTFOLIO
The highest loan concentration by activity type continues to be the trucking
industry. The percentage of these loans to total loans was approximately three
percent at the latest review. This industry services many other industries and
no potential significant risk is evident.
As with any lending activity, potential risk exists. Loans in the commercial,
financial and industrial category have 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 twenty-one percent of
total loans, average a three to four year repayment period and are fixed at such
a rate that rate sensitivity is considered to be limited.
The following table shows the Bank's loan distribution at the end of each of the
last five years:
December 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Commercial, financial and agricultural $ 15,047 $ 16,110 $ 15,531 $ 15,132 $ 16,433
Real estate mortgage 133,047 142,216 130,865 125,987 122,591
Consumer (less unearned discount) 41,049 32,428 30,822 30,116 31,231
All other 2,819 2,945 3,674 4,184 4,392
-------- -------- -------- -------- --------
Total loans $191,962 $193,699 $180,892 $175,419 $174,647
======== ======== ======== ======== ========
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 2000 After
1999 Thru 2003 2004 Total
---- --------- ---- -----
(In Thousands)
Commercial, agricultural and financial $15,047 $ - $ - $15,047
All other 2,819 - - 2,819
------- ---------- --------- -------
Total loans $17,866 $ - $ - $17,866
======= ========== ========= =======
- -10-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
NONACCRUAL, PAST DUE AND RESTRUCTURED LOANS
The following table summarizes the Bank's nonaccrual, past due and restructured
loans:
December 31,
------------
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Average loans outstanding $189,778 $186,510 $174,575 $171,388 $168,041
======== ======== ======== ======== ========
Nonaccrual loans $ - $ 239 $ 482 $ 512 $ 433
Accruing loans past due
90 days or more 386 395 408 511 520
Restructured loans - 173 - - -
-------- -------- -------- -------- --------
Total $ 386 $ 807 $ 890 $ 1,023 $ 953
======== ======== ======== ======== ========
Ratio of non-performing loans
to average loans outstanding .20% .43% .51% .60% .57%
Information with respect to nonaccrual and restructured loans at December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Nonaccrual loans $ - $ 239 $ 482 $ 512 $ 433
Restructured loans - 173 - - -
Interest income that would have been
recorded under original terms - 20 56 48 28
Interest income recorded
during the period - 24 4 5 9
Commitments to lend additional funds - - - - -
A loan is generally considered impaired when it is probable the Bank will be
unable to collect all contractual principal and interest payments due in
accordance with the terms of the loan agreement. The accrual of interest is
discontinued when the contractual payment of principal and interest has become
90 days past due or management has serious doubts about further collectibility
of principal or interest, even though the loan is currently performing. A loan
may remain on accrual status if it is in process of collection and is either
guaranteed or well secured. When a loan is placed on nonaccrual status, unpaid
interest credited to income in the current year is reversed and unpaid interest
accrued in prior years is charged against the allowance for loan losses.
Interest received on nonaccrual loans generally is either applied against
principal or reported as interest income, according to management's judgement as
to the collectibility of principal. Generally, loans are restored to accrual
status when the obligation is brought current, has performed in accordance with
the contractual terms for a reasonable period of time and the ultimate
collectibility of the total contractual principal and interest is no longer in
doubt.
-11-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
SUMMARY OF LOAN LOSS EXPERIENCE
The following table summarizes the Bank's loan loss experience for each of the
five years ended December 31,
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
Average loans outstanding $189,778 $186,510 $174,575 $171,388 $168,041
======== ======== ======== ======== ========
Allowance for loan loss January 1 $ 2,390 $ 2,350 $ 2,228 $ 2,115 $ 2,034
Losses charged to allowance
Commercial 37 60 58 12 -
Real estate 13 12 - 28 92
Consumer 93 161 98 97 103
-------- -------- -------- --------- ---------
143 233 156 137 195
-------- -------- -------- --------- ---------
Recoveries credited to allowance
Commercial 1 17 2 3 -
Real estate - - - 42 2
Consumer 19 36 46 15 29
-------- ------- -------- --------- ---------
20 53 48 60 31
Net charge-offs 123 180 108 77 164
Provision for possible loan losses 210 220 230 190 245
-------- -------- -------- --------- ---------
Allowance for loan losses December 31 $ 2,477 $ 2,390 $ 2,350 $ 2,228 $ 2,115
======== ======== ======== ========= =========
Ratio of net charge-offs to
average loans outstanding .06% .10% .06% .04% .10%
The amount charged to operations and the related balance in the allowance for
loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience and management's estimate of future potential losses.
This table shows an allocation of the allowance for loan losses as of the end of
each of the last five years.
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
(In Thousands)
% of % of % of % of % of
Amount Loan Amount Loan Amount Loan Amount Loan Amount Loan
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Commercial $ 537 9.3% $ 482 9.9% $ 569 10.6% $ 510 11.0% $ 471 11.9%
Real estate 483 69.3 483 73.4 436 72.3 432 71.8 416 70.2
Consumer 741 21.4 694 16.7 617 17.1 597 17.2 651 17.9
Unallocated 716 - 731 - 728 - 689 - 577 -
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $2,477 100% $2,390 100% $2,350 100% $2,228 100% $2,115 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
- -12-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
SUMMARY OF LOAN LOSS EXPERIENCE (CONTINUED)
While loans secured by real estate mortgages comprise greater than 69% 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, 1998, that qualified as HLTS.
-13-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
DEPOSITS
The average daily amount of deposits and rates paid on such deposits is
summarized for December 31, in the following table:
1998 1997 1996
---- ---- ----
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(In Thousands)
Non-interest bearing demand $ 30,719 $ 29,844 $ 28,129
Interest bearing demand 49,199 2.87% 46,688 2.85% 46,270 2.91%
Savings deposits 32,796 2.92 25,860 2.78 27,114 2.81
Time deposits 176,905 5.52 178,835 5.49 173,661 5.52
--------- -------- -----------
Total $289,619 $281,227 $ 275,174
========= ======== ===========
As of December 31, 1998, certificates of deposit outstanding in an individual
amount of $100,000 or more totalled $24,350,000.
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)
$8,328 $2,618 $4,161 $9,243
====== ====== ====== ======
- -14-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
QUARTERLY RESULTS OF OPERATIONS
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In Thousands, except per share data)
FOR THE YEAR 1998
Interest income $ 6,164 $ 6,304 $ 6,263 $ 6,133
Interest expense (2,977) (3,042) (3,082) (3,035)
------- ------- ------- -------
Net interest income 3,187 3,262 3,181 3,098
Provision for loan losses (45) (45) (55) (65)
Other income 228 262 430 262
Other expenses (1,862) (1,843) (2,284) (1,997)
------- ------- ------- -------
Income before income taxes 1,508 1,636 1,272 1,298
Income taxes (377) (428) (297) (211)
------- ------- ------- -------
Net income $ 1,131 $ 1,208 $ 975 $ 1,087
======= ======= ======= =======
Per-share data:
Basic earnings $ .49 $ .52 $ .42 $ .47
Cash dividends - .36 - .38
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In Thousands, except per share data)
FOR THE YEAR 1997
Interest income $ 5,875 $ 6,050 $ 6,195 $ 6,197
Interest expense (2,883) (2,936) (3,015) (3,028)
------- ------- ------- -------
Net interest income 2,992 3,114 3,180 3,169
Provision for loan losses (50) (80) (45) (45)
Other income 290 385 214 384
Other expenses (1,828) (1,847) (1,801) (2,055)
------- ------- ------- -------
Income before income taxes 1,404 1,572 1,548 1,453
Income taxes (335) (406) (376) (288)
------- ------- ------- -------
Net income $ 1,069 $ 1,166 $ 1,172 $ 1,165
======= ======= ======= =======
Per-share data:
Basic earnings $ .46 $ .50 $ .50 $ .50
Cash dividends - .32 - .34
-15-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY
THE JUNIATA VALLEY BANK
FIVE YEAR FINANCIAL HIGHLIGHTS . SELECTED FINANCIAL DATA
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
BALANCE SHEET DATA (In Thousands)
Assets $ 343,857 $ 332,440 $ 318,708 $ 310,580 $ 287,490
Deposits 293,890 285,138 274,670 269,499 250,895
Loans receivable, net 189,485 191,309 178,542 173,191 172,532
Securities 123,505 113,757 116,956 112,297 162,469
Stockholders' equity 45,980 42,695 39,862 36,920 33,150
Average equity 44,448 41,449 38,072 34,671 31,690
Average assets 338,295 327,068 317,384 300,185 289,660
EARNINGS DATA (In Thousands)
Interest income $ 24,864 $ 24,317 $ 23,613 $ 22,688 $ 20,554
Interest expense 12,136 11,862 11,697 10,952 9,063
---------- ---------- ---------- ---------- ----------
Net interest income 12,728 12,455 11,916 11,736 11,491
Provision for loan losses 210 220 230 190 245
---------- ---------- ---------- ----------- ----------
Net interest income after
provision for loan losses 12,518 12,235 11,686 11,546 11,246
Other income 1,182 1,273 1,025 869 856
Other expenses 7,986 7,531 7,026 6,907 6,905
---------- ---------- ---------- ----------- ----------
Income before income taxes 5,714 5,977 5,685 5,508 5,197
Federal income taxes 1,313 1,405 1,356 1,350 1,276
---------- ---------- ---------- ----------- ----------
Net income $ 4,401 $ 4,572 $ 4,329 $ 4,158 $ 3,921
RATIOS
Return on average assets 1.30% 1.40% 1.36% 1.39% 1.35%
Return on average equity 9.90 11.03 11.37 11.99 12.37
Equity to assets (year end) 13.37 12.84 12.51 11.89 11.53
Loans to deposits (year end) 64.47 67.09 65.00 64.26 68.77
Dividend payout (percentage
of income) 37.99 32.68 31.21 30.86 30.40
PER SHARE DATA
Basic earnings 1.90 1.96 1.86 1.79 1.69
Cash dividends .74 .66 .60 .55 .51
Book value 19.73 18.43 17.09 15.83 14.21
Average shares outstanding 2,321,739 2,328,101 2,324,964 2,322,951 2,322,951
Approximate number
of stockholders 1,607 1,603 1,417 1,381 1,428
- -16-
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
1998 1997 1996
Average Increase (Decrease) Average Increase (Decrease) Average
Balance Amount % Balance Amount % Balance
------- ------ - ------- ------ - -------
(Thousands of Dollars)
Funding uses:
Interest earning assets:
Loans:
Commercial $ 59,804 $ (4,263) (6.65)% $ 64,067 $ 1,658 2.66% $ 62,409
Mortgage 91,533 4,918 5.68 86,615 6,542 8.17 80,073
Consumer 38,441 2,613 7.29 35,828 3,735 11.64 32,093
--------- --------- --------- --------- ---------
189,778 3,268 1.75 186,510 11,935 6.84 174,575
Less: Allowance for loan losses (2,446) (67) (2.82) (2,379) (66) (2.85) (2,313)
--------- --------- --------- --------- ---------
187,332 3,201 1.74 184,131 11,869 6.89 172,262
Interest bearing deposits
with banks 514 369 254.48 145 10 7.41 135
Securities 121,725 3,314 2.80 118,411 (1,608) (1.34) 120,019
Funds sold 10,719 3,526 49.02 7,193 (1,647) (18.63) 8,840
--------- --------- --------- --------- ---------
132,958 7,209 5.73 125,749 (3,245) (2.52) 128,994
Total interest earning
assets 320,290 10,410 3.36 309,880 8,624 2.86 301,256
Other assets 18,005 817 4.75 17,188 1,060 6.57 16,128
--------- --------- --------- --------- ---------
Total uses $ 338,295 $ 11,227 3.43 $ 327,068 $ 9,684 3.05 $ 317,384
========= ========= ========= ========= =========
Funding sources:
Deposits:
Demand $ 30,719 $ 875 2.93 $ 29,844 $ 1,715 6.10 $ 28,129
Interest bearing demand 49,199 2,511 5.38 46,688 418 .90 46,270
Savings 32,796 6,936 26.82 25,860 (1,254) (4.62) 27,114
Time under $100,000 153,928 (4,935) (3.11) 158,863 4,332 2.80 154,531
--------- --------- --------- --------- ---------
Total core deposits 266,642 5,387 2.06 261,255 5,211 2.04 256,044
Time over $100,000 22,977 3,005 15.05 19,972 842 4.40 19,130
--------- --------- --------- --------- ---------
Total deposits 289,619 8,392 2.98 281,227 6,053 2.20 275,174
Other liabilities 4,228 (164) (3.73) 4,392 254 6.14 4,138
Stockholders' equity 44,448 2,999 7.24 41,449 3,377 8.87 38,072
--------- --------- --------- --------- ---------
Total sources $ 338,295 $ 11,227 3.43 $ 327,068 $ 9,684 3.05 $ 317,384
========= ========= ========= ========= =========
-17-
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 1998, reaching the level of
$338,295,000 an increase of $11,227,000 or 3.43% compared to 1997. The funding
source was an increase in deposits. The funding use was an increase in
securities, loans and federal funds sold.
Securities increased $3,314,000 or 2.80% in 1998 over 1997. This followed a
decrease of $1,608,000 from 1996 to 1997. Securities maturing and being called
and finding securities to meet the Corporation's asset/liability objectives,
lead to an increase of funds sold in 1998 over 1997 of $3,526,000 or 49.02%.
This followed a decline of $1,647,000 in 1997 over 1996.
Loans experienced a modest increase of $3,201,000 or 1.74% from 1997 to 1998
which was less than the $11,869,000 increase in 1997 over 1996. Mortgage loans
increased $4,918,000 from 1997 to 1998 which was less than the $6,542,000
increase from 1996 to 1997. 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. Consumer loans increased $2,613,000 or 7.29%
in 1998 over 1997 which was less than the $3,735,000 increase in 1997 over 1996.
While commercial loans grew $1,658,000 in 1997 over 1996 they experienced a
decline of $4,263,000 during 1998. This overall loan growth is reflective of the
strength in the economy.
The asset growth was funded by an increase in deposits of $8,392,000 or 2.98%
from 1997 to 1998. This was more than the deposit growth experienced in 1997
over 1996 of $6,053,000. The primary source of funds is core deposits. The
largest category of core deposits is time deposits under $100,000; however this
category suffered a decline of $4,935,000 or 3.11% from 1997 to 1998. Time
deposits 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. Savings accounts had the largest increase of $6,936,000
from 1997 to 1998. This category decreased $1,254,000 from 1996 to 1997.
Interest bearing demand increased $2,511,000 in 1998 over 1997 which was more
than the $418,000 increase in 1997 over 1996. On average during 1998, core
deposits experienced an increase of $5,387,000. 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
- --------------------------------------------------------------------------------
Juniata Valley Financial Corp. reported net income
for 1998 of $4,401,000 which was $171,000 or 3.74%
less than the $4,572,000 reported in 1997 and an
increase of 1.66% over the 1996 earnings of
$4,329,000. However, if it had not been for the one
time merger expense, net of related tax effect, net
income for 1998 would have been $4,661,000. Basic
earnings per share was $1.90 in 1998. This was a
decrease of $.06 from 1997 and an increase of $.04
over 1996.
- -18-
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 9.90% in 1998,compared to
11.03% in 1997 and 11.37% in 1996.
Return on average assets presents the income for
the year compared to the average assets maintained
throughout the year. The return on average assets
was 1.30% in 1998, compared to 1.40% in 1997 and
1.36% in 1996.
The Board of Directors continued to increase the
cash dividends paid to shareholders. On a per share
basis $.74 was paid in 1998, up 12.12% from the
$.66 paid in 1997 and up 23.33% from the $.60 paid
in 1996. On February 16, 1999, The Board of
Directors declared an extra $.50 dividend payable
on April 9, 1999.
While increasing dividends, the Corporation was
able to increase stockholders' equity to total
assets (the capital ratio) to 13.37% at December
31, 1998, up from 12.84% in 1997 and 12.51% in
1996.
The Corporation has realized steady growth over the
past two years. Assets for the year ended December
31, 1998, were $343,857,000 an increase of
$11,417,000 or 3.43% compared to assets of $332,440,000
at December 31, 1997.
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (Continued)
- --------------------------------------------------------------------------------
The Juniata Valley Bank's allowance for loan losses was $2,477,000 in 1998,
$2,390,000 in 1997 and $2,350,000 in 1996. The provision provided in each of
those years was $210,000 in 1998, $220,000 in 1997 and $230,000 in 1996. The
provision for loan losses exceeded net charge-offs by 70.73%, 22.22%, and
112.96% in 1998, 1997 and 1996, respectively. In 1998 net charge-offs were .06%
of average loans outstanding. In 1997 and 1996 net charge-offs were .10% and
.06% of average loans outstanding, respectively.
Other income decreased $91,000 or 7.14% over 1997. From 1996 to 1997 the
increase was $248,000 or 24.20%. The trust department income decreased $48,000
from 1997 to 1998 due to the settling of estates in 1997 that did not occur in
1998 or 1996. Customer service fees increased $9,000 for 1998 compared to 1997
and $50,000 in 1997 compared to 1996. The increases in customer service fees can
be attributed to an increase in volume and not as a result of increased fees.
There was an increase of $68,000 in net realized gains on sales of securities in
1998 over 1997. The increase from 1996 to 1997 in net realized gains on sales of
securities was $49,000. The other income decreased in 1998 compared to 1997 by
$120,000. This decrease can be attributed to $51,000 of life insurance proceeds
and $41,000 commissions on the sale of life and disability insurance in 1997
which did not ocur in 1998 or 1996. The management of the Juniata Valley Bank
seeks products 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 alternative investment. Fee income derived from
the sale of this product in 1998 was $33,000.
Other expenses increased $455,000 or 6.04% over 1997, compared to an increase of
$505,000 or 7.19% from 1996 to 1997. If it had not been for the merger expense,
the increase would have been $61,000 in 1998 over 1997. Salaries and wages
increased $43,000 from 1997 to 1998. This compares to an increase of $153,000
from 1996 to 1997. The increases in salaries and wages can be attributed to
annual merit increases, promotions of employees and the addition of a new
branch. Employee benefits increased $182,000 from 1997 to 1998. From 1996 to
1997 this increase was $31,000. This was due primarily to a keyman pension plan
in place for 10 years that required additional funding as employees age.
Occupancy expense declined $46,000 in 1998 compared to 1997 due mainly to a
reassessment in real estate taxes. The increase in 1997 over 1996 of $37,000 is
due to a new branch opening in the fall of 1996. The expense recorded in 1997
reflected one full year of branch operations. Equipment expense increased
$101,000 from 1997 to 1998 due to the purchase of equipment for software
compatibility of the four former Lewistown Trust branches. The increase in
equipment expense of $31,000 from 1996 to 1997 was due to the new branch which
opened in the fourth quarter of 1996. Director's compensation remained
relatively stable during the years presented. The increase in taxes, other than
income is the result of an increase in the Pennsylvania shares tax of $29,000
from 1997 to 1998 and $28,000 from 1996 to 1997. The $254,000 decrease in other
expenses from 1997 to 1998 is due to $98,000 of expense recognized in 1997
assoicated with preparing two foreclosed properties for sale. Professional fees
increased $68,000 in 1997 due to the audit and consulting fees of Lewistown
Trust Company. Other expenses also declined in 1998 compared to 1997 as a result
of additional expenses associated with the opening of the new branch which were
incurred in 1997. For these same reasons, other expenses increased $243,000 from
1996 to 1997.
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 1999 to help improve the bottom line.
Management is not aware of any known trends or uncertainties that will have or
that are reasonably likely to have material adverse effects on liquidity,
capital resources or operations of the Corporation.
- -20-
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
YEAR 2000 ISSUES
- --------------------------------------------------------------------------------
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 commenced in the fall of 1998 and will be completed by March
31, 1999. The vendors are still on target with these dates. The Federal
Financial Institutions Examination Council has conducted special examinations to
make sure that the software vendors are doing everything necessary to be in
compliance with the year 2000 guidelines. The results of these examinations have
been released to the Corporation for review.
Because of the data processing being outsourced to two data processing vendors,
the cost of year 2000 compliance will be shared with other subscribers. With the
merger in July, it is very difficult to separate equipment costs for the merger
and the cost of what was necessary for the year 2000 project. To date
approximately $30,000 has been expended that can be attributed to the year 2000
project. This does not include personnel cost for the ongoing testing.
Approximately $70,000 may be needed for future remediation costs. Management
does not feel this cost will materially impact the results of operations of the
Corporation in 1999.
Another important area is the Corporation's PC network. Testing has been
performed on all PC's and the software to ensure that they are year 2000
compliant. The PC and software was tested by a third party to make
recommendations for upgrading or replacing. This process was completed in June
of 1998 and all additional purchases of equipment and software are validated for
year 2000.
The Corporation has many customers and through the use of questionnaires the
larger loan customers are being assessed for their potential year 2000 risk. No
individual customer could materially impact the financial position of the
Corporation, however, the credit risk could be increased if these customers are
not addressing their year 2000 problems. As a result, problem loans and losses
could increase in the following year of operation for the Corporation. Due to
uncertainties involved, it is not possible to quantify potential losses due to
year 2000 at this time.
A contingency plan to provide financial services to customers will be provided
to the Corporation through the software vendors currently used. A switch to
other systems could be accomplished with little to no impact to customers.
Management believes they would continue to operate in the year 2000 manually if
necessary for a short period of time until the new systems would be in place.
The manual operation would be accomplished through hiring of temporary staff
until normal operations could resume. The hiring of additional staff would
impact the financial results but cannot be quantified at this time. The cost of
switching to the new system also cannot be quantified at this time.
Management believes that adequate resources are available to fund and address
the year 2000 issue. Management also believes that the costs associated with
bringing the Corporation into compliance will not have a material impact on the
Corporation's financial results. However, with all remediation, testing and
contingency plans there is no guarantee that these steps will fully expose all
failures and problems. In addition, the Corporation relies on various third
party providers, such as telecommunication and utility companies, where
alternative sources or arrangements are limited or unavailable. While the
Corporation continues to address year 2000 issues, potential uncertainties
remain.
-21-
- --------------------------------------------------------------------------------
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".
1998
Interest
Average Income %
Balances (Expense) Rate
-------- --------- ----
(In Thousands)
INTEREST EARNING ASSETS
Interest bearing deposits in other banks $ 514 $ 28 5.45%
Securities (taxable) 85,572 5,159 6.03
Securities (tax exempt) 36,153 1,603 4.43
Federal funds sold 10,719 664 6.19
Loans 189,778 17,410 9.17
--------- ---------
Total interest earning assets 322,736 24,864 7.70
----
NON-INTEREST EARNING ASSETS
Cash and due from banks 8,663
Other assets 9,342
Less: allowance for loan losses (2,446)
---------
Total assets $ 338,295
=========
INTEREST BEARING LIABILITIES
Demand deposits bearing interest $ 49,199 (1,411) 2.87
Savings deposits 32,796 (958) 2.92
Time deposits 176,905 (9,767) 5.52
--------- ---------
Total interest bearing liabilities 258,900 (12,136) 4.69
--------- ----
NON-INTEREST BEARING LIABILITIES
Demand deposits 30,719
Other liabilities 4,228
STOCKHOLDERS' EQUITY 44,448
---------
Total liabilities and stockholders' equity $ 338,295
=========
NET INTEREST INCOME/SPREAD $ 12,728 3.01%
========= ====
MARGIN ANALYSIS
Interest income/ earning assets 7.70%
Interest expense/earning assets 3.76
----
Net interest margin 3.94%
====
- -22-
- --------------------------------------------------------------------------------
TABLE 1 (Continued)
- --------------------------------------------------------------------------------
1997 1996
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 $ 145 $ 8 5.52% $ 135 $ 7 5.19%
Securities (taxable) 78,531 5,163 6.57 80,630 5,221 6.48
Securities (tax exempt) 39,880 1,625 4.07 39,389 1,683 4.27
Federal funds sold 7,193 406 5.64 8,840 484 5.48
Loans 186,510 17,115 9.18 174,575 16,218 9.29
--------- -------- -------- --------
Total interest earning assets 312,259 24,317 7.79 303,569 23,613 7.78
---- ----
NON-INTEREST EARNING ASSETS
Cash and due from banks 8,599 7,893
Other assets 8,589 8,235
Less: allowance for loan losses (2,379) (2,313)
--------- --------
Total assets $ 327,068 $317,384
========= ========
INTEREST BEARING LIABILITIES
Demand deposits bearing interest $ 46,688 (1,331) 2.85 $ 46,270 (1,345) 2.91
Savings deposits 25,860 (718) 2.78 27,114 (767) 2.83
Time deposits 178,835 (9,813) 5.49 173,661 (9,585) 5.52
--------- -------- -------- --------
Total interest bearing liabilities 251,383 (11,862) 4.72 247,045 (11,697) 4.73
-------- ---- -------- ----
NON-INTEREST BEARING LIABILITIES
Demand deposits 29,844 28,129
Other liabilities 4,392 4,138
STOCKHOLDERS' EQUITY 41,449 38,072
--------- --------
Total liabilities and stockholders' equity $ 327,068 $317,384
========= ========
NET INTEREST INCOME/SPREAD $ 12,455 3.07% $ 11,916 3.05%
======== ==== ======== ====
MARGIN ANALYSIS
Interest income/ earning assets 7.79% 7.78%
Interest expense/earning assets 3.80 3.85
---- ----
Net interest margin 3.99% 3.93%
==== ====
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- --------------------------------------------------------------------------------
NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income is the most significant contributor to the Corporation's net
income. During 1998, net interest income increased 2.19% to $12,728,000 compared
to an increase of 4.52% during 1997. Table 1 shows the interest income, interest
expense and net interest income with the percentage change between the years.
Table 2 presents average balances, interest income and expense and yields earned
or paid. This table summarized the components of the net interest income growth.
Interest earning assets increased $10,477,000 or 3.36% in 1998 which was more
than the $8,690,000 increase in 1997. The largest contributor to interest income
is loans. The yield on loans remained fairly stable among the years presented.
The yield on taxable securities decreased 54 basis points in 1998, while the
yield on tax exempt securities increased 36 basis points. In 1997 the opposite
effect is presented with taxable securities increasing 9 basis points and tax
exempt securities declining 20 basis points. The overall yield on interest
earning assets for 1998 was a decline of 9 basis points. For the preceding two
years the overall yield held steady.
Interest bearing liabilities increased $7,517,000 or 2.99% for 1998 which was
less then the $4,338,000 increase in 1997. From 1997 to 1998 savings deposits
increased by $6,936,000 and demand deposits bearing interest increased
$2,511,000; time deposits decreased by $1,930,000. Rates paid declined slightly
by 3 basis points in 1998 which followed two stable years.
The Corporation's net spread was 3.01% in 1998 down slightly from the 3.07% in
1997 and 3.05% in 1996. 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 asset versus interest expense to
earning assets. The Corporation's net interest margin was 3.94% for 1998
compared to 3.99% in 1997 and 3.93% in 1996.
From Table 3 it can be seen that the increase in net interest income during 1998
was influenced by increases in volume. The increase in interest income in 1998
and 1997 was due to an overall increase in volume, offset by lower rates offered
on interest earning assets which reduced interest income. Increases in volume
and rates offered on interest bearing liabilities caused the change in interest
expense during 1998. In 1997, the increase in interest expense was due to an
increase in volume which was offset by the reduction in rates offered on
interest-bearing liabilities. In 1998 interest income increased $547,000;
$463,000 of the increase attributed to the volume of taxable securities and
$300,000 of the increase in volume of loans. In 1997 loan volume was the primary
reason for the increase in interest income. Interest expense had relatively
little change. Volume of time deposits declined in 1998 by $106,000 and
increased in 1997 by $286,000. Rates on interest earning assets displayed more
volatility in 1998 and 1997 than interest bearing liabilities, though both
fluctuated less than 10 basis points over the three year period.
- --------------------------------------------------------------------------------
TABLE 2--NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income, defined as interest income less interest expense, is shown
in the following table:
1998 % Change 1997 % Change 1996
---- -------- ---- -------- ----
(In Thousands)
Interest income $24,864 2.25% $24,317 2.98% $23,613
Interest expense 12,136 2.31 11,862 1.41 11,697
------- ------- -------
Net interest income $12,728 2.19 $12,455 4.52 $11,916
======= ======= =======
- -24-
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.
1998/1997 Increase (Decrease) 1997/1996 Increase (Decrease)
Due to Change in Due to Change in
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest bearing deposits
in other banks $ 20 $ 0 $ 20 $ 1 $ 0 $ 1
Securities (taxable) 463 (467) (4) (136) 78 (58)
Securities (tax exempt) (152) 130 (22) 21 (79) (58)
Federal funds sold 199 59 258 (90) 12 (78)
Loans 300 (5) 295 1,109 (212) 897
------- ------- ------- ------- ------- -------
Interest income 830 (283) 547 905 (201) 704
------- ------- ------- ------- ------- -------
Demand deposits
bearing interest 72 8 80 12 (26) (14)
Savings deposits 193 47 240 (35) (14) (49)
Time deposits (106) 60 (46) 286 (58) 228
------- ------- ------- ------- ------- -------
Interest expense 159 115 274 263 (98) 165
------- ------- ------- ------- ------- -------
Increase (decrease)
in net interest income $ 671 $ (398) $ 273 $ 642 $ (103) $ 539
======= ======= ======= ======= ======= =======
- --------------------------------------------------------------------------------
LOAN PORTFOLIO
- --------------------------------------------------------------------------------
At December 31, 1998, net loans decreased $1,824,000 or .95% over 1997. This
follows an increase in1997 over 1996 in net loans of $12,767,000 or 7.15%. The
loan to deposit ratio fluctuated slightly throughout 1998; monthly averages were
at a high in January of 66.5% and a low in August of 64.3%. Residential
mortgages decreased by $10,118,000 or 8.60% from 1997 to 1998. Real estate loans
still remain a very attractive option due to the tax deductibility of mortgage
interest by the borrower. Consumer loans increased $8,621,000 or 26.59% in 1998
over 1997. This follows a year with an increase of $1,606,000 from 1996 to 1997.
In spite of the slow economy and increasing credit problems nationwide, the
Corporation continued its excellent charge-off record (charge-offs, net of
recoveries) during 1998. For the year, the net charge-offs were $123,000 or .06%
of average loans outstanding. This compares with $180,000 or .10% for 1997 and
$108,000 or .06% for 1996.
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 judgment that the allowance for 1998 of $2,477,000 or 1.31% of net
outstanding loans is adequate to meet any foreseeable loan loss contingency.
This is higher than the 1.25% for 1997 and lower than the 1.32% for 1996. At
December 31, 1998 and 1997, total non-performing loans were $386,000 and
$807,000, respectively; non-performing loans as a percentage of the allowance
for loan losses were 15.58% and 33.77%, respectively. Increased collection
efforts continue to be made so that the level of non-performing loans remains at
historical levels in the future.
-25-
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- --------------------------------------------------------------------------------
LIQUIDITY AND INTEREST RATE RISK MANAGEMENT
- --------------------------------------------------------------------------------
The goals of the Corporation's asset/liability management function are to ensure
adequate liquidity and to maintain an appropriate balance between the relative
rate sensitivity of interest earning assets and interest bearing liabilities.
Liquidity management encompasses the ability to meet ongoing cash flow
requirements of customers, who, as depositors, may want to withdraw funds or
who, as borrowers, need credit availability. Interest rate sensitivity
management attempts to prove stable net interest margins through changing
interest rate environments and thereby achieve consistent growth in net interest
income.
Liquidity management is influenced by several key elements, including asset
quality and the maturity structure of assets and liabilities. The single most
important source of liquidity for the Corporation is a strong, stable core
deposit base. This funding source has exhibited steady growth over the years and
consists of deposits from customers with long-standing relationships. In 1998
the Corporation funded approximately 80% of its assets with core deposits
acquired in local communities. This core deposit base, combined with
stockholders' equity, funded 93% of average assets in 1998 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, 1998, these liquid assets amounted to $90,520,000 compared to
liquid assets at December 31, 1997, of $102,390,000. 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
$7,163,000 at December 31, 1998, 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
efforts, competitive interest rates, and other conditions which help maintain
consumer confidence in the stability of the financial institution. This
confidence is evaluated by such factors as profitability, capitalization and
overall financial condition.
The Corporation's primary funding requirement is loan demand; however, from the
statement of cash flows it is demonstrated that in 1998 loan demand declined by
$1,595,000. Deposit growth of $8,752,000 was used to purchase securities.
Securities purchased exceeded maturities and repayments by $9,544,000.
- -26-
MANAGEMENT'S DISCUSSION AND ANALYSIS (Continued)
- --------------------------------------------------------------------------------
REGULATORY MATTERS
- --------------------------------------------------------------------------------
The Juniata Valley Bank is subject to periodic examinations by one or more of
the various regulatory agencies. During 1998 an examination was conducted by the
Federal Deposit Insurance Corporation. This examination included but was not
limited to, procedures designed to review lending practices, credit quality,
liquidity, operations and capital adequacy. No comments were received from this
regulatory body which would have a material effect on the Corporation's
liquidity, capital resources or operations.
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as of
January 1, 1998. Accounting principles generally require that revenue, expenses,
gains and losses be included in net income. Although certain changes in assets
and liabilities, such as unrealized gains and losses on available for sale
securities, are reported as a separate component of the equity section of the
balance sheet, such items, along with net income, are components of
comprehensive income. The adoption of SFAS No. 130 had no effect on the
Corporation's net income or stockholders' equity.
The Financial Accounting Standards Board issued Statement No. 131, "Disclosures
about Segments of an Enterprise and Related Information". Adoption of this
Statement was to take place on January 1, 1998. The Bank acts as an independent
community financial service provider and offers traditional banking related
financial services to individual, business and government customers. Through its
branch and automated teller machine network, the Bank offers a full array of
commercial and retail financial services, including the taking of time, savings
and demand deposits; the making of commercial, consumer and mortgage loans;
trust services and the providing of other financial services.
Management does not separately allocate expenses, including the cost of funding
loan demand, between the commercial and retail trust operations of the Bank. As
such, discrete financial information is not available and segment reporting
would not be meaningful.
The Financial Accounting Standards Board issued Statement No. 133, "Accounting
for Derivative Instruments and Hedging Activities", in June 1998. The
Corporation is required to adopt the Statement on January 1, 2000. The adoption
of the Statement is not expected to have a significant impact on the financial
condition or results of operations of the Corporation.
- --------------------------------------------------------------------------------
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.
-27-
- --------------------------------------------------------------------------------
TABLE 4 - INTEREST RATE SENSITIVITY
PRINCIPAL AMOUNT BY EXPECTED MATURITY
AVERAGE INTEREST RATE
- --------------------------------------------------------------------------------
1999 2000 2001
---- ---- ----
(Dollars in Thousands)
ASSETS
Interest bearing deposits $ 619 - -
Average interest rate 5.45%
Federal funds sold 7,825 - -
Average interest rate 6.19
Available for sale securities 17,054 $ 11,992 $ 7,252
Average interest rate 5.54 5.27% 5.10%
Held to maturity securities 15,072 14,047 6,972
Average interest rate 5.75 5.77 5.97
Loans
Commercial 15,047 - -
Average interest rate 9.26
Consumer 6,021 4,871 3,897
Average interest rate 9.81 10.38 9.88
Real estate mortgage 121,304 1,443 1,514
Average interest rate 8.27 8.17 8.14
LIABILITIES
Interest bearing demand deposits 47,506 - -
Average interest rate 2.87
Savings deposit 34,111 - -
Average interest rate 2.92
Certificates of deposit 105,225 36,205 13,017
Average interest rate 5.20 5.71 5.69
- -28-
- --------------------------------------------------------------------------------
TABLE 4 (Continued)
- --------------------------------------------------------------------------------
Fair Value
2002 2003 Thereafter Total December 31, 1998
---- ---- ---------- ----- -----------------
(Dollars in Thousands)
- - - $ 619 $ 619
- - - 7,825 7,825
$ 3,882 $ 2,084 $11,219 53,483 54,720
5.04% 5.36% 6.77%
10,159 15,560 6,975 68,785 69,444
4.93 4.74 3.95
- - - 15,047 15,047
2,801 2,036 24,242 43,868 44,259
9.46 9.57 10.00
1,570 1,570 5,646 133,047 133,089
8.14 8.14 8.14
- - - 47,506 47,506
- - - 34,111 34,111
8,153 13,514 45 176,159 177,885
6.01 5.82 6.79
-29-
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 credit risk.
The FDIC classified capital into two tiers, referred to as Tier I and Tier II.
Tier I capital consists of common stockholders' equity (excluding the net
unrealized appreciation on securities available for sale), noncumulative and
cumulative (bank holding companies only) perpetual stock, and minority interests
less goodwill. Tier II capital consists of allowance for loan and lease losses,
perpetual preferred stock (not included in Tier I), hybrid capital instruments,
term subordinated debt, and intermediate-term preferred stock. Since December
31, 1992, all banks have been required to meet a minimum ratio of 8% and
qualifying total capital to risk adjusted total assets with at least 4% Tier I
capital and 8% of risk-adjusted assets in total capital. As indicated on the
schedule following this discussion, the Tier I risk-based capital ratio was
21.16% and Tier II risk-based capital ratio was 22.36% at December 31, 1998.
The Bank's capital ratios are well above the current minimum ratio requirement
set forth by federal banking regulators.
In addition to risk-based requirements, the Federal Reserve Board has
established minimum leverage guidelines for bank holding companies. For most
banks, the minimum leverage rate is 3% plus an additional cushion of 100 to 200
basis points depending on risk profiles and other factors. As of December 31,
1998, the leverage ratio was 13.12%.
CAPITAL ANALYSIS
December 31,
------------
1998 1997 1996
---- ---- ----
(Thousands of Dollars)
Tier I
Common stockholders' equity (excluding unrealized
appreciation/depreciation on securities) $ 44,337 $ 41,614 $ 39,104
Tier II
Allowable portion of allowance for loan losses 2,477 2,390 2,350
-------- -------- --------
Risk-based capital $ 46,814 $ 44,004 $ 41,454
======== ======== ========
Risk adjusted assets (including off-balance-sheet exposures) $209,346 $204,700 $193,007
======== ======== ========
Tier I risk-based capital ratio 21.16% 20.33% 20.28%
Total risk-based capital ratio 22.36% 21.50% 21.45%
Leverage ratio 13.12% 12.50% 12.04%
- -30-
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 1999 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 1999. 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 1999 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 1998 was $1,313,000 compared to $1,405,000 in
1997 and $1,356,000 in 1996. The effective tax rate, which is the ratio of
income tax expense to income-before-income-taxes, was 22.98% in 1998, a decrease
from the 23.51% in 1997 and 23.85% in 1996. The tax rate for all periods was
less than the statutory rate of 34% due to tax exempt securities and loan
income. Please refer to the Note to the Consolidated Financial Statements
"Income Taxes" for further analysis of federal income tax expense.
- --------------------------------------------------------------------------------
MERGER
- --------------------------------------------------------------------------------
On July 1, 1998, the Corporation completed the merger of Lewistown Trust Company
(Lewistown), a commercial bank located in Lewistown, Pennsylvania, by issuing
931,700 shares of its common stock for all of the outstanding common stock of
Lewistown, except for the 5,324 shares of Lewistown held by the Corporation
which were cancelled. The merger was accounted for under the pooling-of-interest
method of accounting and, as such, all prior period information has been
restated. Please refer to the Note to the Consolidated Financial Statements
"Merger" for further analysis of the merger.
- --------------------------------------------------------------------------------
SIGNIFICANT FINANCIAL EVENTS
- --------------------------------------------------------------------------------
On February 16,1999, the Board of Directors of the Juniata Valley Financial
Corp. declared an extra fifty cent ($.50) per share dividend which cannot be
used in the dividend reinvestment program. This dividend is above the normal
dividends declared by Juniata Valley Financial Corp. Shareholders of record on
March 15, 1999, will receive the extra dividend, payable on April 9, 1999.
The Board of Directors of the Juniata Valley Financial Corp. authorized the
repurchase of up to 5% of its shares outstanding of common stock (116,500
shares). Pursuant to the authorization, appropriate senior officers of the
Corporation may direct the repurchase at times and in amounts determined by them
to be prudent.
The Corporation expects to use available cash to fund the repurchases and does
not anticipate borrowing for this purpose. Repurchases will be made from time to
time on the open market or in privately negotiated transactions. The shares
purchased are to be held as treasury stock for various corporate programs,
including the funding of existing employee benefit plans and such other benefit
plans as may hereinafter be adopted by the Corporation.
-31-
[LETTERHEAD OF BEARD & COMPANY INC. 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, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity and cash flows for each of the three years in the
period ended December 31, 1998. 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 amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Juniata
Valley Financial Corp. and its wholly-owned subsidiary, The Juniata Valley Bank,
as of December 31, 1998 and 1997, and the results of their operations and their
cash flows for each of the three years in the period ended December 31, 1998 in
conformity with generally accepted accounting principles.
Reading, Pennsylvania
January 22, 1999
- -32-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED BALANCE SHEETS
ASSETS
------
December 31,
------------
1998 1997
---- ----
(In Thousands)
Cash and due from banks $ 12,284 $ 11,469
Interest-bearing deposits with banks 619 117
Federal funds sold 7,825 6,080
--------- ---------
Total cash and cash equivalents 20,728 17,666
Securities available for sale 54,720 73,464
Securities held to maturity, fair value 1998 $69,444; 1997 $40,535 68,785 40,293
Loans receivable, net of allowance for loan losses 1998 $2,477; 1997 $2,390 189,485 191,309
Bank premises and equipment, net 2,876 2,602
Accrued interest receivable and other assets 7,263 7,106
--------- ---------
Total assets $ 343,857 $ 332,440
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities:
Deposits:
Non-interest bearing $ 36,114 $ 29,795
Interest bearing 257,776 255,343
--------- ---------
Total deposits 293,890 285,138
Accrued interest payable and other liabilities 3,987 4,607
--------- ---------
Total liabilities 297,877 289,745
--------- ---------
Stockholders' equity:
Preferred stock, no par value; 500,000 shares authorized; no shares
issued or outstanding - -
Common stock, par value $1.00 per share; authorized 20,000,000 shares;
issued 2,332,086 shares in 1998 and 1997 2,332 2,332
Surplus 20,580 20,569
Retained earnings 22,322 19,593
Accumulated other comprehensive income 816 744
Treasury stock, at cost 1998 1,938 shares; 1997 14,898 shares (70) (543)
--------- ---------
Total stockholders' equity 45,980 42,695
--------- ---------
Total liabilities and stockholders' equity $ 343,857 $ 332,440
========= =========
See Notes to Consolidated Financial Statements.
33
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF INCOME
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In Thousands, Except Per Share Amounts)
Interest income:
Loans receivable, including fees $17,410 $17,115 $16,218
Taxable securities 5,159 5,163 5,221
Tax-exempt securities 1,603 1,625 1,683
Other 692 414 491
------- ------- -------
Total interest income 24,864 24,317 23,613
Interest expense on deposits 12,136 11,862 11,697
------- ------- -------
Net interest income 12,728 12,455 11,916
Provision for loan losses 210 220 230
------- ------- -------
Net interest income after provision for loan losses 12,518 12,235 11,686
------- ------- -------
Other income:
Trust department 299 347 295
Customer service fees 414 405 355
Net realized gains on sales of securities 212 144 95
Other 257 377 280
------- ------- -------
Total other income 1,182 1,273 1,025
------- ------- -------
Other expenses:
Salaries and wages 3,370 3,327 3,174
Employee benefits 995 813 782
Occupancy 499 545 508
Equipment 922 821 790
Director compensation 302 296 314
Taxes, other than income 399 370 342
Merger 394 - -
Other 1,105 1,359 1,116
------- ------- -------
Total other expenses 7,986 7,531 7,026
------- ------- -------
Income before income taxes 5,714 5,977 5,685
Federal income taxes 1,313 1,405 1,356
------- ------- -------
Net income $ 4,401 $ 4,572 $ 4,329
======= ======= =======
Per share data:
Basic earnings $ 1.90 $ 1.96 $ 1.86
======= ======= =======
Cash dividends $ 0.74 $ 0.66 $ 0.60
======= ======= =======
See Notes to Consolidated Financial Statements.
34
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years Ended December 31, 1998, 1997 and 1996
--------------------------------------------
Accumulated
Other
Common Retained Comprehensive Treasury
Stock Surplus Earnings Income Stock Total
----- ------- -------- ------ ----- -----
(In Thousands)
Balance, December 31, 1995 $ 1,858 $ 20,781 $ 13,557 $ 725 - $ 36,921
--------
Comprehensive income:
Net income - - 4,329 - - 4,329
Change in unrealized gains (losses)
on securities available for sale,
net of reclassification adjustment
and tax effects - - - (186) - (186)
--------
Total comprehensive income 4,143
--------
Cash dividends - - (1,351) - - (1,351)
Stock issued under dividend reinvestment
plan 4 145 - - - 149
-------- -------- -------- -------- -------- --------
Balance, December 31, 1996 1,862 20,926 16,535 539 - 39,862
--------
Comprehensive income:
Net income - - 4,572 - - 4,572
Change in unrealized gains (losses)
on securities available for sale,
net of reclassification adjustment
and tax effects - - - 205 - 205
--------
Total comprehensive income 4,777
--------
Cash dividends - - (1,494) - - (1,494)
Stock issued under employee stock
purchase plan 3 110 - - - 113
5-for-4 stock split in the form of a 25%
stock dividend 467 (467) (20) - - (20)
Treasury stock acquired - - - - (543) (543)
-------- -------- -------- -------- -------- --------
Balance, December 31, 1997 2,332 20,569 19,593 744 (543) 42,695
--------
Comprehensive income:
Net income - - 4,401 - - 4,401
Change in unrealized gains (losses)
on securities available for sale,
net of reclassification adjustment
and tax effects - - - 72 - 72
--------
Total comprehensive income 4,473
--------
Cash dividends - - (1,672) - - (1,672)
Treasury stock issued under dividend
reinvestment plan - 25 - - 381 406
Treasury stock issued under employee
stock purchase plan` - (14) - - 92 78
-------- -------- -------- -------- -------- --------
Balance, December 31, 1998 $ 2,332 $ 20,580 $ 22,322 $ 816 $ (70) $ 45,980
======== ======== ======== ======== ======== ========
See Notes to Consolidated Financial Statements.
-35-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,401 $ 4,572 $ 4,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Provision for loan losses 210 220 230
Provision for depreciation 273 278 266
Net amortization on securities' premium 118 141 181
Net realized gains on sales of securities (212) (144) (95)
Deferred directors' fees and supplemental retirement plan expense 395 170 242
Payment of deferred compensation (158) (145) (150)
Deferred income taxes (172) (51) (50)
Increase in accrued interest receivable and other assets (3) (328) (591)
Increase (decrease) in accrued interest payable and other liabilities (568) 294 (114)
-------- -------- --------
Net cash provided by operating activities 4,284 5,007 4,248
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of available for sale securities (12,303) (23,268) (31,162)
Proceeds from sales of available for sale securities 252 192 1,690
Proceeds from maturities of and principal repayments
on available for sale securities 31,133 26,721 22,190
Purchases of held to maturity securities (42,077) (13,356) (8,531)
Proceeds from maturities of and principal repayments
on held to maturity securities 13,451 13,223 10,788
Net (increase) decrease in loans receivable 1,595 (12,987) (5,503)
Net purchases of bank premises and equipment (547) (289) (532)
Purchase of life insurance - (1,250) -
-------- -------- --------
Net cash used in investing activities (8,496) (11,014) (11,060)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in deposits 8,752 10,467 5,170
Cash dividends and cash paid for fractional shares (1,962) (1,506) (1,303)
Stock issued under dividend reinvestment plan - - 149
Stock issued under employee stock purchase plan - 113 -
Purchase of treasury stock - (543) -
Treasury stock issued 484 - -
-------- -------- --------
Net cash provided by financing activities 7,274 8,531 4,016
-------- -------- --------
Increase (decrease) in cash and cash equivalents 3,062 2,524 (2,796)
Cash and cash equivalents:
Beginning 17,666 15,142 17,938
-------- -------- --------
Ending $ 20,728 $ 17,666 $ 15,142
======== ======== ========
Cash payments for:
Interest $ 12,147 $ 11,871 $ 11,701
======== ======== ========
Income taxes $ 1,459 $ 1,497 $ 1,443
======== ======== ========
See Notes to Consolidated Financial Statements.
- -36-
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 Corporation intends to hold for an indefinite period of time, but not
necessarily to maturity. Any decision to sell a security classified as
available for sale would be based on various factors, including significant
movements in interest rates, changes in the maturity mix of the Bank's
assets and liabilities, liquidity needs, regulatory capital considerations,
and other similar factors. Securities available for sale are carried at fair
value. Unrealized gains and losses are reported in other comprehensive
income, net of the related deferred tax effect. Realized gains or losses,
determined on the basis of the cost of specific securities sold, are
included in earnings. Premiums and discounts are recognized in interest
income using the interest method over the period to maturity.
Securities classified as held to maturity are those debt securities the
Corporation has both the intent and ability to hold to maturity regardless
of changes in market conditions, liquidity needs or changes in general
economic conditions. These securities are carried at cost adjusted for
amortization of premium and accretion of discount, computed by the interest
method over 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.
-37-
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 recognized for taxable temporary differences. Temporary
differences are the differences between the reported amounts of assets and
liabilities in the financial statements and their tax basis. Deferred tax
assets are reduced by a valuation allowance when, in the opinion of
management, it is more likely than not that some portion or all of the
deferred tax assets will not be realized. Deferred tax assets and
liabilities are adjusted through the provision for income taxes for the
effects of changes in tax laws and rates on the date of enactment.
The Corporation and its subsidiary file a consolidated federal income tax
return.
Advertising:
Advertising costs are expensed as incurred.
Off-balance sheet financial instruments:
In the ordinary course of business, the Bank has entered into off-balance
sheet financial instruments consisting of commitments to extend credit and
letters of credit. Such financial instruments are recorded in the balance
sheet when they are funded.
Earnings and dividends per share:
Basic earnings per share represents income available to common stockholders
divided by the weighted average number of common shares outstanding during
the period, adjusted for stock dividends for all periods presented. The
weighted average number of common shares outstanding was 2,321,739,
2,328,101 and 2,324,964 in 1998, 1997 and 1996 respectively. Dividends per
share represent the historical dividends of the Corporation which excludes
the dividends of Lewistown Trust Company. Total dividends paid by Lewistown
in 1998, 1997 and 1996 were $290,000, $572,000 and $515,000 respectively.
38
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive income:
The Corporation adopted SFAS No. 130, "Reporting Comprehensive Income," as
of January 1, 1998. Accounting principles generally require that recognized
revenue, expenses, gains and losses be included in net income. Although
certain changes in assets and liabilities, such as unrealized gains and
losses on available for sale securities, are reported as a separate
component of the equity section of the balance sheet, such items, along with
net income, are components of comprehensive income. The adoption of SFAS No.
130 had no effect on the Corporation's net income or stockholders' equity.
The components of other comprehensive income and related tax effects are a
follows:
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Unrealized holding gains (losses) on available for sale securities $ 322 $ 455 $(187)
Less reclassification adjustment for gains realized in income (212) (144) (95)
----- ----- -----
Net unrealized gains (losses) 110 311 (282)
Tax effect 38 106 (96)
----- ----- -----
Net of tax amount $ 72 $ 205 $(186)
===== ===== =====
Segment reporting:
The Bank acts as an independent community financial services provider, and
offers traditional banking and related financial services to individual,
business and government customers. Through its branch and automated teller
machine network, the Bank offers a full array of commercial and retail
financial services, including the taking of time, savings and demand
deposits; the making of commercial, consumer and mortgage loans; trust
services and the providing of other financial services.
Management does not separately allocate expenses, including the cost of
funding loan demand, between the commercial and retail trust operations of
the bank. As such, discrete financial information is not available and
segment reporting would not be meaningful.
New accounting standard:
The Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities", in June
1998. The Corporation is required to adopt the Statement on January 1, 2000.
The adoption of the Statement is not expected to have a significant impact
on the financial condition or results of operations of the Corporation.
-39-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
MERGER
On July 1, 1998, the Corporation completed the merger of Lewistown Trust Company
(Lewistown), a commercial bank located in Lewistown, Pennsylvania, by issuing
931,700 shares of its common stock for all of the outstanding common stock of
Lewistown, except for the 5,324 shares of Lewistown held by the Corporation
which were canceled. The merger was accounted for under the pooling-of-interests
method of accounting and, as such, all prior period information has been
restated.
The results of operations for periods prior to the merger are summarized as
follows:
Net Interest Net
Income Income
------ ------
(In Thousands)
Six months ended June 30, 1998:
Corporation $ 4,525 $ 1,519
Lewistown 1,925 820
------- -------
$ 6,450 $ 2,339
======= =======
Year ended December 31, 1997:
Corporation $ 8,682 $ 3,045
Lewistown 3,773 1,527
------- -------
$12,455 $ 4,572
======= =======
Year ended December 31, 1996:
Corporation $ 8,163 $ 2,764
Lewistown 3,753 1,565
------- -------
$11,916 $ 4,329
======= =======
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 1998 and 1997 approximated $2,101,000 and
$2,157,000 respectively.
- -40-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SECURITIES
The amortized cost and fair value of securities at December 31 were as follows:
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
(In Thousands)
Available for sale securities:
December 31, 1998:
U.S. Treasury securities $ 3,044 $ 46 $ - $ 3,090
U.S. Government and agency obligations 5,755 28 - 5,783
Obligations of states and political subdivisions 27,566 557 - 28,123
Corporate and other debt securities 4,807 68 (3) 4,872
Mortgage-backed securities 10,995 80 (29) 11,046
Equity securities 1,316 510 (20) 1,806
-------- -------- --------- --------
$ 53,483 $ 1,289 $ (52) $ 54,720
======== ======== ========= ========
December 31, 1997:
U.S. Treasury securities $ 6,690 $ 37 $ - $ 6,727
U.S. Government and agency obligations 16,483 24 (18) 16,489
Obligations of states and political subdivisions 26,608 383 (31) 26,960
Corporate and other debt securities 5,086 14 (18) 5,082
Mortgage-backed securities 16,422 98 (19) 16,501
Equity securities 1,048 657 - 1,705
-------- -------- --------- --------
$ 72,337 $ 1,213 $ (86) $ 73,464
======== ======== ========= ========
Held to maturity securities:
December 31, 1998:
U.S. Treasury securities $ 1,750 $ 16 $ - $ 1,766
U.S. Government and agency obligations 14,292 91 (3) 14,380
Obligations of states and political subdivisions 30,297 329 (30) 30,596
Corporate and other debt securities 22,446 275 (19) 22,702
-------- -------- --------- --------
$ 68,785 $ 711 $ (52) $ 69,444
======== ======== ========= ========
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
======== ======== ========= ========
-41-
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, 1998, 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 $16,473 $16,593 $15,072 $15,153
Due after one year through five years 23,721 24,230 46,738 47,279
Due after five years through ten years 577 621 6,975 7,012
Due after ten years 401 424 - -
Mortgage-backed securities 10,995 11,046 - -
Equity securities 1,316 1,806 - -
------- ------- ------- -------
$53,483 $54,720 $68,785 $69,444
======= ======= ======= =======
Equity securities include Federal Home Loan Bank stock with an aggregate cost
and fair value of $760,000 and $704,000 at December 31, 1998 and 1997
respectively.
Gross gains of $212,000, $144,000 and $142,000 were realized on sales of
securities available for sale in 1998, 1997 and 1996 respectively. Gross losses
of $47,000 were realized on sales of securities available for sale in 1996.
Securities with a fair value of $21,774,000 and $16,526,000 at December 31, 1998
and 1997 respectively, were pledged to secure public deposits and for other
purposes as required or permitted by law.
- -42-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LOANS RECEIVABLE AND ALLOWANCE FOR LOAN LOSSES
Loans are comprised of the following:
December 31,
------------
1998 1997
---- ----
(In Thousands)
Commercial, agricultural and financial $ 15,047 $ 16,110
Real estate mortgages:
Residential 107,596 117,714
Commercial 25,451 24,502
Consumer 46,643 37,207
Other 2,819 2,945
-------- --------
197,556 198,478
Unearned discount on loans 5,594 4,779
Allowance for loan losses 2,477 2,390
-------- --------
$189,485 $191,309
======== ========
The following table presents changes in the allowance for loan losses:
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Balance, beginning $ 2,390 $ 2,350 $ 2,228
Provision for loan losses 210 220 230
Recoveries 20 53 48
Loans charged off (143) (233) (156)
------- ------- -------
Balance, ending $ 2,477 $ 2,390 $ 2,350
======= ======= =======
The recorded investment in impaired loans not requiring an allowance for loan
losses was $-0- and $286,000 at December 31, 1998 and 1997 respectively. At
December 31, 1998 and 1997, the recorded investment in impaired loans requiring
an allowance for loan losses was $-0-. For the years ended December 31, 1998,
1997 and 1996, the average recorded investment in these impaired loans was
$143,000, $351,000 and $517,000 respectively, and no interest income was
recognized on impaired loans in 1998 while $16,000 and $2,000 was recognized on
impaired loans in 1997 and 1996 respectively.
-43-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
BANK PREMISES AND EQUIPMENT
The major components of bank premises and equipment were as follows:
December 31,
------------
1998 1997
---- ----
(In Thousands)
Land and land improvements $ 541 $ 536
Buildings and improvements 3,168 2,946
Furniture and equipment 2,651 2,710
-------- --------
6,360 6,192
Less accumulated depreciation 3,484 3,590
-------- --------
$ 2,876 $ 2,602
======== ========
DEPOSITS
The composition of deposits is as follows:
December 31,
------------
1998 1997
---- ----
(In Thousands)
Demand, non-interest bearing $ 36,114 $ 29,795
Now and Money Market 47,506 48,460
Savings 34,111 25,458
Time, $100,000 or more 24,350 20,794
Other Time 151,809 160,631
-------- --------
$293,890 $285,138
======== ========
At December 31, 1998, the scheduled maturities of time deposits are as follows
(in thousands):
1999 $105,225
2000 36,205
2001 13,017
2002 8,153
2003 13,514
Thereafter 45
--------
$176,159
========
- -44-
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
$7,163,000 from the Federal Home Loan Bank. There were no outstanding balances
under this agreement as of December 31, 1998 and 1997.
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 l capital (as defined in the regulations) to risk-weighted
assets, and of Tier l capital to average assets. Management believes, as of
December 31, 1998, that the Bank meets all capital adequacy requirements to
which it is subject.
As of December 31, 1998, 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, 1998 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, 1998:
Total capital (to risk-weighted assets) $46,814 22.36% $Greater than or equal to 16,748 Greater than or equal to 8.00%
Tier l capital (to risk-weighted assets) 44,337 21.16 Greater than or equal to 8,374 Greater than or equal to 4.00
Tier l capital (to average assets) 44,337 13.12 Greater than or equal to 13,522 Greater than or equal to 4.00
As of December 31, 1997:
Total capital (to risk-weighted assets) $44,004 21.50% $Greater than or equal to 16,376 Greater than or equal to 8.00%
Tier I capital (to risk-weighted assets) 41,614 20.33 Greater than or equal to 8,188 Greater than or equal to 4.00
Tier I capital (to average assets) 41,614 12.50 Greater than or equal to 13,319 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, 1998:
Total capital (to risk-weighted assets) $Greater than or equal to 20,935 Greater than or equal to 10.00%
Tier l capital (to risk-weighted assets) Greater than or equal to 12,561 Greater than or equal to 6.00
Tier l capital (to average assets) Greater than or equal to 16,903 Greater than or equal to 5.00
As of December 31, 1997:
Total capital (to risk-weighted assets) $Greater than or equal to 20,470 Greater than or equal to 10.00%
Tier I capital (to risk-weighted assets) Greater than or equal to 12,282 Greater than or equal to 6.00
Tier I capital (to average assets) Greater than or equal to 16,649 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, 1998, $32,418,000 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.
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 plan. At December 31, 1998, 95,913 shares
were available under the Dividend Reinvestment Plan.
-45-
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.
Information pertaining to the activity in the Plan is as follows:
1998 1997
---- ----
(In Thousands)
Change in benefit obligation:
Benefit obligation at beginning of year $ 2,583 $ 2,336
Service cost 145 98
Interest cost 194 166
Actuarial loss 4 61
Benefits paid (68) (78)
------- -------
Benefit obligation at end of year 2,858 2,583
------- -------
Change in plan assets:
Fair value of plan assets at beginning of year 2,401 2,187
Actual return on plan assets 167 197
Employer contribution 154 95
Benefits paid (68) (78)
------- -------
Fair value of plan assets at end of year 2,654 2,401
------- -------
Funded status (204) (182)
Unrecognized net actuarial loss (102) (130)
Unrecognized net transition asset (26) (28)
------- -------
Accrued benefit cost $ (332) $ (340)
======= =======
Pension expense included the following components for the years ended
December 31:
1998 1997 1996
---- ---- ----
(In Thousands)
Service cost, benefits earned during the year $ 145 $ 98 $ 110
Interest cost on projected benefit obligation 194 166 157
Actual return on plan assets (167) (197) (160)
Net amortization (20) 36 11
------- ------- -------
$ 152 $ 103 $ 118
======= ======= =======
Assumptions used in the accounting were:
1998 1997 1996
---- ---- ----
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
- -46-
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, 1998 and 1997, the present
value of the future liability was $876,000 and $815,000 respectively. The
Corporation has funded these plans through the purchase of annuities and
life insurance policies, which have an aggregate cash surrender value of
$907,000 and $899,000 at December 31, 1998 and 1997 respectively. For the
years ended December 31, 1998, 1997 and 1996, $154,000, $76,000 and $58,000
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, 1998 and 1997, the present value of the future
liability was $1,450,000 and $1,337,000 respectively. To fund the benefits
under these agreements, the Corporation is the owner and beneficiary of life
insurance policies on the lives of certain directors. The policies had an
aggregate cash surrender value of $1,080,000 and $909,000 at December 31,
1998 and 1997, respectively. For the years ended December 31, 1998, 1997 and
1996, $283,000, $264,000 and $244,000 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, beginning July 1, 1997. 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 1998 and
1997, 2,497 and 3,600 shares were issued under the Plan.
Salary continuation plan:
In 1997, the Corporation established a non-qualified Salary Continuation
Plan for key employees. At December 31, 1998 and 1997, the present value of
the future liability was $73,000 and $10,000 respectively. The Corporation
has funded the Plan through the purchase of life insurance policies which
have an aggregate cash surrender value of $1,328,000 and $1,261,000 at
December 31, 1998 and 1997 respectively. For the year ended December 31,
1998 and 1997, $63,000 and $10,000 respectively was charged to expense in
connection with the Plan.
Profit sharing plan;
The profit sharing plan of Lewistown was terminated in 1998. The
participants' balances were transferred into the Corporation's 401(k) plan,
in which the employer does not contribute. The annual discretionary
contributions for 1998, 1997 and 1996 were $-0-, $143,000 and $151,000
respectively.
-47-
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,
------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Current $ 1,485 $ 1,456 $ 1,406
Deferred (172) (51) (50)
------- ------- -------
$ 1,313 $ 1,405 $ 1,356
======= ======= =======
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,
------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Federal income tax at statutory rate $ 1,943 $ 2,032 $ 1,933
Tax-exempt interest (689) (622) (631)
Disallowance of interest expense 84 100 100
Other (25) (105) (46)
------- ------- -------
$ 1,313 $ 1,405 $ 1,356
======= ======= =======
The income tax provision includes $72,000, $49,000 and $32,000 in 1998, 1997 and
1996 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,
------------
1998 1997
---- ----
(In Thousands)
Deferred tax assets:
Allowance for loan losses $ 715 $ 743
Deferred directors' fees 493 451
Pension liabilities 385 300
Other 66 -
------- -------
Total deferred tax assets 1,659 1,494
------- -------
Deferred tax liabilities:
Bank premises and equipment (78) (54)
Securities accretion (51) (75)
Unrealized gains on securities available for sale (390) (352)
Other - (7)
------- -------
Total deferred tax liabilities (519) (488)
------- -------
Net deferred tax asset $ 1,140 $ 1,006
======= =======
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, 1998 and 1997, these
persons were indebted to the Bank for loans totaling $1,698,000 and $2,615,000
respectively. During 1998, loans totaling $1,262,000 were disbursed and loan
repayments totaled $1,232,000. Other changes caused the December 31, 1998
balance of the loans outstanding to decrease by $947,000.
- -48-
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 2003.
Equipment and servicing fees were $469,000, $385,000 and $378,000 for the years
ended December 31, 1998, 1997 and 1996 respectively. Additionally, the Bank
leases branch offices for which rent expense, including the license fee, was
$52,000 $61,000 and $47,000 in 1998, 1997 and 1996 respectively.
Minimum future payments under all noncancellable lease agreements as of December
31, 1998 are as follows (in thousands):
1999 $277
2000 278
2001 262
2002 166
2003 31
------
$1,014
======
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,
1998 1997
---- ----
(In Thousands)
Commitments to grant loans $ 2,675 $ 2,649
Unfunded commitments under lines of credit 19,461 18,475
Outstanding letters of credit 415 403
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.
-49-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
Management uses its best judgment in estimating the fair value of the
Corporation's financial instruments; however, there are inherent weaknesses in
any estimation technique. Therefore, the fair value estimates herein are not
necessarily indicative of the amounts the Corporation could have realized in a
sales transaction on the dates indicated. The estimated fair value amounts have
been measured as of their respective year ends and have not been re-evaluated or
updated for purposes of these consolidated financial statements subsequent to
those respective dates. As such, the estimated fair values of these financial
instruments subsequent to the respective reporting dates may be different than
the amounts reported at each year end.
The following information should not be interpreted as an estimate of the fair
value of the entire Corporation since a fair value calculation is only provided
for a limited portion of the Corporation's assets. Due to a wide range of
valuation techniques and the degree of subjectivity used in making the
estimates, comparisons between the Corporation's disclosures and those of other
companies may not be meaningful. The following methods and assumptions were used
to estimate the fair values of the Bank's financial instruments at December 31,
1998 and 1997:
. 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,
1998 1997
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
------ ----- ------ -----
(In Thousands)
Financial assets:
Cash and due from banks $ 12,284 $ 12,284 $ 11,469 $ 11,469
Interest-bearing deposits in other banks 619 619 117 117
Federal funds sold 7,825 7,825 6,080 6,080
Securities 123,505 124,164 113,757 113,999
Loans receivable, net of allowance 189,485 189,918 191,309 190,949
Accrued interest receivable 2,443 2,443 2,565 2,565
Financial liabilities:
Deposits 293,890 295,616 285,138 286,008
Accrued interest payable 994 994 1,005 1,005
Off-balance sheet financial instruments:
Commitments to extend credit - - - -
Standby letters of credit - - - -
- -50-
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,
------------
1998 1997
---- ----
ASSETS (In Thousands)
Cash $ 6 $ 12
Interest-bearing deposits with banks 490 -
------- -------
Total cash and cash equivalents 496 12
Investment in Bank subsidiary 45,094 42,308
Securities available for sale 388 374
Other 34 26
------- -------
$46,012 $42,720
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES, other $ 32 $ 25
STOCKHOLDERS' EQUITY 45,980 42,695
------- -------
$46,012 $42,720
======= =======
STATEMENTS OF INCOME
Years Ended December 31,
------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
Dividends from Bank subsidiary $ 1,972 $ 2,067 $ 1,324
Other dividend income 29 16 5
Other expenses (23) (28) (42)
------- ------- -------
Income before equity in undistributed net income of subsidiary 1,978 2,055 1,287
Equity in undistributed net income of Bank subsidiary 2,423 2,517 3,042
------- ------- -------
Net income $ 4,401 $ 4,572 $ 4,329
======= ======= =======
-51-
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,
------------------------
1998 1997 1996
---- ---- ----
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 4,401 $ 4,572 $ 4,329
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed net income of Bank subsidiary (2,423) (2,517) (3,042)
(Increase) decrease in other assets (8) (11) 17
Decrease in other liabilities (8) - -
------- ------- -------
Net cash provided by operating activities 1,962 2,044 1,304
------- ------- -------
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 (1,962) (1,506) (1,303)
Stock issued under dividend reinvestment plan - - 149
Stock issued under employee stock purchase plan - 113 -
Purchase of treasury stock - (543) -
Treasury stock issued 484 - -
------- ------- -------
Net cash used in financing activities (1,478) (1,936) (1,154)
------- ------- -------
Increase (decrease) in cash and cash equivalents 484 (91) 103
Cash and cash equivalents:
Beginning 12 103 -
------- ------- -------
Ending $ 496 $ 12 $ 103
======= ======= =======
- -52-
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
-53-