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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 2000 Commission File Number 0-13232
JUNIATA VALLEY FINANCIAL CORP.
------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2235254
------------ ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Bridge & Main Streets, PO Box 66, Mifflintown, PA 17059-0066
------------------------------------------------------------
(Address or principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (717) 436-8211
--------------
SECURITIES REGISTERED PURSUANT TO SECTION 12 (b) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12 (g) OF THE ACT:
Common Stock, Par Value $1.00 Per Share
---------------------------------------
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
The aggregate market value of the voting stock held by non-affiliates of the
Registrant as of January 31, 2001.
Common Stock, $1.00 Par Value - $54,475,562
-------------------------------------------
Indicate the number of shares outstanding of each issuer's classes of common
stock, as of January 31, 2001.
Common Stock, $1.00 Par Value 2,157,448
---------------------------------------
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the Annual Report to Shareholders for the year ended December 31,
2000, are incorporated by reference into Parts I, II and III.
Portions of the Proxy Statement for the Annual Meeting of Shareholders to be
held April 17, 2001, are incorporated by reference into Part III.
PART I
ITEM 1. BUSINESS
Incorporated by reference are the data appearing on Pages 7 through
14 of the 2000 Annual Report.
ITEM 2. PROPERTIES
The physical properties of the Corporation are all owned or
leased by the Bank.
The Bank owns the buildings located at: Bridge and Main Streets,
Mifflintown, Pennsylvania (its corporate headquarters); Butcher Shop
Road, Mifflintown, Pennsylvania (financial center); 301 Market
Street, Port Royal, Pennsylvania; corner of Main and School Streets,
McAlisterville, Pennsylvania; Four North Market Street, Millerstown,
Pennsylvania; Main Street, Blairs Mills, Pennsylvania; Monument
Square, Lewistown, Pennsylvania; Route 322 Reedsville, Pennsylvania;
100 East Market Street, Lewistown, Pennsylvania; 100 West Water
Street, Lewistown, Pennsylvania; 302 South Logan Boulevard, Burnham,
Pennsylvania. In addition thereto, the Bank leases two offices. One,
in the Shopping Plaza located on Legislative Route 31, Mifflintown,
Pennsylvania, which lease with extension expires in 2007. The second
one is located in the Wal-Mart Supercenter, Lewistown, Pennsylvania,
which expires in October 2001. All of the buildings used by the Bank
are freestanding and are used exclusively for banking purposes.
ITEM 3. LEGAL PROCEEDINGS
The nature of the Corporation's and Bank's business, at times,
generates litigation involving matters arising in the ordinary
course of business. However, in the opinion of management of the
Corporation, there are no proceedings pending to which the Bank is a
party or to which its property is subject, which, if determined
adversely to the Bank, would be material in relation to the Bank's
financial condition, nor are there any proceedings pending other
than ordinary routine litigation incident to the business of the
Bank. In addition, no material proceedings are pending or are known
to be threatened or contemplated against the Bank by government
authorities or others.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS
Incorporated by reference are the data appearing on page 2 of the
2000 Annual report.
ITEM 6. SELECTED FINANCIAL DATA
Incorporated by reference are the data appearing on Page 16 of the
2000 Annual Report.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Incorporated by reference are the data appearing on Pages 17 through
32 of the 2000 Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Incorporated by reference are the data under the caption "Market
Rate Risk" appearing on Pages 27 through 30 of the 2000 Annual
Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Icorporated by reference are the financial statements and notes on
Pages 33 through 53 of the 2000 Annual Report and the Quarterly
Results of Operations on Page 15 of the Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference is information appearing under the
captions "Election of Directors of JVF" and "Remuneration of
Executive Officers" in the Proxy Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference in the proxy statement under the caption
"Remuneration of Executive Officers".
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference is the following information contained in
the Proxy Statement filed under the captions "Election of Directors
of JVF" and "Management of JVF and the Bank".
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference is the information pertaining to
transactions with directors and officers of the Bank within the
footnote "Transactions with Executive Officers and Directors: on
Page 49 of the 2000 Annual Report.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The Consolidated Financial Statements of Juniata
Valley Financial Corp., as included in the 2000
Annual Report to Shareholders, are incorporated in
this report by reference.
2. All schedules are omitted because they are not
applicable, the data is not significant, or the
required information is shown in the financial
statements or the notes thereto.
(b) Reports on Form 8-K
None.
(c) Exhibits
(13) Annual Report to Shareholders
(21) Subsidiaries of the Registrant - As of the date of
this report Juniata Valley Bank is the only
subsidiary of the Registrant.
(23) Consent of Beard Miller Company L.L.P., Independent
Auditors
SIGNATURES
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
JUNIATA VALLEY FINANCIAL CORP. (REGISTRANT)
Date: March 15, 2001
By _____________________________
Francis J. Evanitsky
Director, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
------------------------- -------------------------
Ronald H. Witherite Joe E. Benner
Vice Chairman, Secretary Director
Date: March 15, 2001 Date: March 15, 2001
------------------------- -------------------------
Jan G. Snedeker A. Jerome Cook
Director Chairman
Date: March 15, 2001 Date: March 15, 2001
------------------------- -------------------------
Don E. Haubert Martin L. Dreibelbis
Director Director
Date: March 15, 2001 Date: March 15, 2001
------------------------- -------------------------
John A. Renninger Dale G. Nace
Director Director
Date: March 15, 2001 Date: March 15, 2001
------------------------- -------------------------
Francis J. Evanitsky Harold B. Shearer
President Director
Date: March 15, 2001 Date: March 15, 2001
------------------------- -------------------------
Philip E. Gingrich Jr. Charles L. Hershberger
Director Director
Date: March 15, 2001 March 15, 2001
------------------------- -------------------------
Marshall L. Hartman Robert K. Metz, Jr.
Director Director
Date: March 15, 2001 Date: March 15, 2001
------------------------- -------------------------
Timothy I. Havice Richard M. Scanlon, DMD
Director Director
Date: March 15, 2001 Date: March 15, 2001
------------------------- -------------------------
John M. Wilson Linda L. Engle
Director Chief Financial Officer
Date: March 15, 2001 Chief Accounting Officer
March 15, 2001
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
DECEMBER 31, 2000
MISSION STATEMENT
The Juniata Valley Bank, as an independent community bank, will endeavor to
identify customers' financial needs and exceed their expectations in delivering
quality products and services at a fair price to assure shareholders an above
average return and employees competitive salaries and benefits. The business of
the bank will be conducted with integrity and responsiveness to the communities
served.
CONTENTS
Page
Stock, Dividend and Broker Information---------------------------------------- 2
Letter to Shareholders-------------------------------------------------------- 3
Corporation Officers and Directors-------------------------------------------- 4
Advisory Board Members-------------------------------------------------------- 5
Bank Officers----------------------------------------------------------------- 6
Business----------------------------------------------------------------- 7 - 15
Financial Highlights--------------------------------------------------------- 16
Management's Discussion and Analysis of Financial Condition and
Results of Operations--------------------------------------------- 17 - 32
Report of Independent Auditors----------------------------------------------- 33
Financial Statements:
Consolidated Balance Sheets--------------------------------------------- 34
Consolidated Statements of Income--------------------------------------- 35
Consolidated Statements of Stockholders' Equity------------------------- 36
Consolidated Statements of Cash Flows----------------------------------- 37
Notes to Consolidated Financial Statements------------------------- 38 - 53
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 2000 and 1999 are provided in the
table below.
2000 1999
---- ----
Dividends Dividends
Quarter High Low per share Quarter High Low per share
- ------- ---- --- --------- ------- ---- --- ---------
First $33.00 $31.25 .50 First $37.50 $35.25 .50
Second 31.25 27.50 .41 Second 35.25 34.75 .38
Third 27.50 26.00 Third 34.75 34.50
Fourth 26.00 25.00 .42 Fourth 34.50 33.00 .40
For further information, we refer you to:
Ferris Baker Watts, Inc. F.J. Morrissey & Co., Inc.
100 Light Street 1700 Market St., Suite 1420
Baltimore, MD 21202 Philadelphia, PA 19103-3913
(800) 638-7411 (800) 842-8928
Ryan, Beck & Co.
150 Monument Road, Suite 106
Bala Cynwyd, PA 19004
(800) 223-8969
Janney, Montgomery, Scott, Inc. Sandler O'Neil & Partners, L.P.
48 E. Market St., P.O. Box 2246 Two World Trade Center 104th Floor
York, PA 17405-2246 New York, NY 10048
(717) 845-5611 (800) 635-6851
DIVIDEND REINVESTMENT AND STOCK PURCHASE PLAN
Information regarding the Corporation's Dividend Reinvestment and Stock Purchase
Plan may be obtained by calling (717) 436-8211 or by writing to:
Ms. Linda L. Engle
Juniata Valley Financial Corp.
P.O. Box 66
Mifflintown, PA 17059
DIVIDEND DIRECT DEPOSIT PROGRAM
Juniata Valley Financial Corp. now offers a dividend direct deposit program
whereby shareholders with registered stock in their own names may choose to have
their dividends deposited directly into the bank account of their choice on
dividend payment date. Information concerning this optional program is available
by calling (717) 436-8211 or writing to:
Ms. Linda L. Engle
Juniata Valley Financial Corp.
P.O. Box 66
Mifflintown, PA 17059
- -2-
[LOGO]
JUNIATA VALLEY
FINANCIAL CORP.
-------------------------------
MIFFLINTOWN, PENNSYLVANIA 17059
-------------------------------
POST OFFICE BOX 66
TELEPHONE (717) 436-8211
To Our Shareholders,
The year 2000 indeed was a challenging and exciting year for the Juniata
Valley Financial Corp. A year filled with challenges, opportunities and change.
In May we celebrated the grand reopening of our remodeled and expanded
Burnham Office. The branch now features two drive-up window lanes, as well as a
drive-up ATM. This facility now affords our customers significantly improved
ease of access, while improving on our already high level of customer service.
The month of June was an exciting month for your bank as we implemented and
very successfully introduced our state-of-the-art Internet banking program. This
program allows ease of banking activities for individuals as well as business
customers from the convenience of your home or office. In addition to normal
banking activities our system offers an efficient and highly regarded bill
payment feature. For more information regarding The Juniata Valley Bank, our
products and services, please visit our website at www.jvbonline.com.
In December we relocated our proof, bookkeeping and computer areas to our
new center in Mifflintown. This facility provides ample room for these operation
areas, and affords us room for growth. Additionally, it houses a much needed
training facility. This facility will enable us to provide quality training in a
quality environment. As we continue on our journey to become a highly regarded
one stop financial services provider, having trained, qualified, and
understanding employees is paramount.
Two thousand marked improved performance over nineteen ninety-nine for the
Juniata Valley Financial Corp. Net income increased 2.5% to $4,387,000 primarily
as a result of loan growth and expense control. Our net loan growth of 7.6% to
$219,819,000 from $204,336,000 resulted in an increase in net interest income of
$295,000 over 1999. Despite the projects and programs mentioned earlier, non
interest expense only increased $152,000 over 1999, or 1.9%, a very commendable
percentage. Another factor instrumental in our earnings improvement was the
increase in non interest income of $91,000 or 7.04% over 1999.
As a result of this financial improvement, earnings per share increased
from $1.87 per share in 1999 to $1.99 per share in 2000, or 6.4%. Additionally,
return on average assets improved from 1.26% in 1999 to 1.31% in 2000 and return
on average equity improved from 9.61% to 10.42%.
We would like to take this opportunity to thank Edward R. "Dusty" Rhodes
for his years of dedicated service to the bank. Mr. Rhodes retired as a Director
in August, 2000.
We would also like to pay a special thanks to A. Jerome "Jerry" Cook who
retired in September, 2000 after serving as President, CEO for twenty-eight
years. Mr. Cook's thirty-five years of dedication and support to the bank, as
well as his commitment to the community, was greatly appreciated.
As always, we would like to thank you, our shareholders, for your continued
loyalty and support. Further, we want to assure you that the officers, directors
and employees will continue to work diligently to ensure that the Juniata Valley
Financial Corp. continues to be a quality financial institution.
Sincerely,
[SIGNATURE]
Francis J. Evanitsky
President and CEO
-3-
JUNIATA VALLEY FINANCIAL CORP. OFFICERS
A. JEROME COOK RONALD H. WITHERITE
Chairman Vice Chairman, Secretary
FRANCIS J. EVANITSKY LINDA L. ENGLE
President Treasurer
DIRECTORS
JOE E. BENNER ROBERT K. METZ, JR.
Owner, Benner Automotive President, Metz Poultry Farms, Inc.
A. JEROME COOK DALE G. NACE
Chairman, Juniata Valley Financial Corp. Owner, Glenn Nace Plumbing & Heating;
GlenDale Storage
MARTIN L. DREIBELBIS JOHN A. RENNINGER
Self-Employed, Petroleum Consultant President, A. D. Renninger
Lumber Company
FRANCIS J. EVANITSKY RICHARD M. SCANLON, DMD
President & CEO, The Juniata Valley Bank Self-Employed Dentist
PHILIP E. GINGERICH, JR HAROLD B. SHEARER
President, Central Insurers Group, Inc. Self-employed Farmer
MARSHALL L. HARTMAN JAN G. SNEDEKER
Retired President, Lewistown Trust Co. President, Snedeker Oil Co., Inc.
DON E. HAUBERT JOHN M. WILSON
President, Haubert Homes Retired President, Wilson Oil, Co.
TIMOTHY I. HAVICE RONALD H. WITHERITE
Real Estate Developer Owner, Ron's IGA Fruit Market, Inc.
CHARLES L. HERSHBERGER
President, Hoenstine Funeral Homes, Inc.
NOTE: Above Directors also comprise the Board of Directors
for The Juniata Valley Bank
- -4-
ADVISORY BOARD MEMBERS
MILLERSTOWN OFFICE MONUMENT SQUARE/WAL-MART OFFICES
R. Franklin Campbell William H. Bradford
Lowell R. Frantz, C.L.U. William R. Carter
Gregory J. Gordon Lee Ellen Foose
Gerald M. Lyter Sharon Havice
James A. Witmer J. Neal Shawver
Gary G. Wright Harry F. Stimely
Frank A. Zampelli
PORT ROYAL OFFICE GARDENVIEW OFFICE
Kim Bomberger David B. Esh
Richard J. Junk M. Randall French
N. Jeffrey Leonard H. Ross Harshbarger
Dennis A. Long Donald R. Hartzler
Freeburn Love Jerry L. Wagner
McALISTERVILLE OFFICE MARKET STREET/WATER STREET OFFICES
Mark Apple George W. Anderson
Clair Ehrenzeller Catherine J. Laub
Samuel E. Knouse Susan M. McCartney
Joseph D. Ritzman Steve R. Watson
Richard J. Sankey Lou Ann Wilson
BLAIRS MILLS OFFICE BURNHAM OFFICE
Robert G. Allison Mark S. Elsesser
Wayde H. Cisney Daniel B. Firth
William R. Goshorn Leann M. Fisher
C. Roger Searer David E. Walker
Clair L. Yohn
-5-
THE JUNIATA VALLEY BANK OFFICERS
A Wholly-Owned Subsidiary of Juniata Valley Financial Corp.
MIFFLINTOWN OFFICE
Francis J. Evanitsky------------------------------------President & C.E.O
Linda L. Engle----------------------------Executive Vice President, C.O.O
Betty D. Ryan-------------------Vice President & Community Office Manager
Jeffrey A. Pottorff----------Vice President, Auditor & Compliance Officer
Paul M. Lipka-----------------Assistant Vice President, Marketing Officer
Ruth H. Nace------------------------------------------Executive Secretary
ADMINISTRATION
Donald L. Musser .Sr.---------------Vice President, Branch Administration
Pamela S. Eberman------------------Vice President, Human Resource Manager
CONTROLLER
Kristi J. Burdge-----------------------------------------------Controller
Anna Mae Peoples---------------------Vice President, Assistant Controller
LOANS
Edward L. Kauffman----------------Sr. Vice President, Loan 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
R. Jack Morgan-----------------------------------------------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
Deborah A. Sheaffer--------------------Vice President, Operations Officer
Sherise Pelizzari------------Assistant Vice President, Operations Manager
TRUST
James C. Dillman------------------------Sr. 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------------------Vice President, Community Office Manager
GARDENVIEW OFFICE
M. Randall French----------------Vice President, Community Office Manager
MARKET STREET OFFICE
Lou Ann Wilson-------------------Vice President, Community Office Manager
Brenda A. Brubaker-------------------------------Customer Service Officer
McALISTERVILLE OFFICE
Joseph D. Ritzman----------------Vice President, Community Office Manager
Leslie A. Miller---------------------------------Customer Service Officer
MILLERSTOWN OFFICE
James A. Witmer------------------Vice President, Community Office Manager
Barbara I. Seaman--------------------------------Customer Service Officer
MONUMENT SQUARE OFFICE
Lee Ellen Foose------------------Vice President, Community Office Manager
Suzanne Booher-----------------------------------Customer Service Officer
MOUNTAIN VIEW OFFICE
Connie C. Benner-----------------Vice President, Community Office Manager
PORT ROYAL OFFICE
Larry B. Cottrill, Jr.---------------------------Community Office Manager
Lona Rae Hawthorne-------------------------------Customer Service Officer
WAL-MART SUPERCENTER OFFICE
J. Neal Shawver------------------Vice President, Community Office Manager
WATER STREET OFFICE
Catherine J. Laub----------------Vice President, Community Office Manager
- -6-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
DESCRIPTION OF BUSINESS
On April 19,1983, the shareholders of The Juniata Valley Bank (The Bank)
approved a plan of merger and reorganization. The plan was approved by the
various regulatory agencies on June 7, 1983 and the Juniata Valley Financial
Corp., a one bank holding company, registered under the Bank Holding Company Act
of 1956, as amended, was organized. The Bank is the oldest independent
commercial bank in Juniata and Mifflin County having originated under a state
bank charter in 1867.
The Juniata Valley Bank operates twelve branch banking offices and two trust
service offices. At December 31, 2000, the Bank had 136 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,
2000, 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, 2000.
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.
New banking legislation passed in November of 1999, modifies the 43-year old
Bank Holding Company Act of 1956 to permit a Bank Holding Company that owns a
commercial bank to engage in any type of financial activity. The commercial bank
has to be well-capitalized, well-managed and CRA-rated satisfactory or better.
Financial activities include securities, insurance, merchant banking/equity
investment, financial in nature, and complimentary activities.
-7-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
SUPERVISION AND REGULATION (CONTINUED)
The deposits of The Juniata Valley Bank are insured by the Bank Insurance Fund
of the Federal Deposit Insurance Corporation (FDIC). Consequently, the Bank is
subject to regulations and reviews under the provisions of the Federal Deposit
Insurance Act, but the primary regulatory body is the Pennsylvania Department of
Banking. The Pennsylvania Department of Banking conducts regular reviews which
have resulted in satisfactory evaluations to date.
In 1991, the Federal Deposit Insurance Corporation Act (FDICIA) was signed into
law. FDICIA established five different levels of capitalization of financial
institutions, with prompt corrective actions and significant operational
restrictions imposed on institutions that are capital deficient. The five
categories are: well capitalized, adequately capitalized, undercapitalized,
significantly undercapitalized and critically undercapitalized.
To be considered well capitalized, an institution must have a total risk-based
capital ratio of at least 10%, a Tier I risk based capital ratio of at least 6%,
a leverage capital ratio of 5% and must not be subject to any order or directive
requiring the institution to improve its capital level. An institution falls
within the adequately capitalized category if it has a total risk-based capital
ratio of at least 8%, a Tier I risk-based capital ratio of at least 4%, and a
leverage capital ratio of at least 4%. Institutions with lower capital levels
are deemed to be undercapitalized, significantly undercapitalized, or critically
undercapitalized, depending on their actual capital levels.
The following table sets forth the computation of the Bank's regulatory capital
ratios. The Bank exceeded the minimum capital levels of the well capitalized
category. The Corporation's ratios were not materially different from those of
the Bank.
December 31,
-----------
2000 1999 1998
---- ---- ----
Risk-weighted assets ratio:
Tier I 18.46% 19.59% 21.16%
Total 19.59% 20.76% 22.36%
Total assets leverage ratio:
Tier I 12.30% 12.33% 13.12%
SECURITIES PORTFOLIO
The following table sets forth the carrying amount of securities at the dates
indicated:
December 31,
-----------
2000 1999 1998
---- ---- ----
(In Thousands)
Available for sale securities (at fair value):
U.S. Treasury and other U.S. government obligations $ 6,035 $ 6,441 $ 8,873
States and political subdivisions 15,341 23,448 28,123
Other corporate 5,042 5,992 4,872
Mortgage-backed 5,823 7,244 11,046
Equity 2,090 1,975 1,806
------- -------- --------
34,331 45,100 54,720
------- -------- --------
Held to maturity securities (at amortized cost):
U.S. Treasury and other U.S. government obligations 13,071 14,448 16,042
States and political subdivisions 27,201 30,223 30,297
Other corporate 10,968 14,879 22,446
------- -------- --------
51,240 59,550 68,785
------- -------- --------
Total securities $85,571 $104,650 $123,505
======= ======== ========
- -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, 2000
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, 2000, 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 $ 1,349 6.36% $ 4,559 6.16% $ 99 6.71% $ 28 6.37%
State and political
subdivisions 6,831 4.96 7,833 5.00 414 4.71 263 6.50
Other corporate 1,999 6.72 3,043 6.34 -- -- -- --
Mortgage-backed -- -- -- -- 143 7.87 5,680 6.28
------- ------- ---- ------
10,179 15,435 656 5,971
------- ------- ---- ------
Held to maturity:
U.S. Treasury and other U.S.
government agencies 2,072 5.10 10,999 5.97 -- -- -- --
State and political
subdivisions 400 3.70 26,527 4.02 -- -- 274 4.23
Other corporate 2,514 6.38 7,953 5.97 -- -- 501 5.90
------- ------- ---- ------
4,986 45,479 -- 775
------- ------- ---- ------
Total $15,165 $60,914 $656 $6,746
======= ======= ==== ======
Securities classified as available for sale are those debt securities that the
Bank intends to hold for an indefinite period of time, but not necessarily to
maturity. Securities available for sale are carried at fair value. Unrealized
gains or losses are reported in other comprehensive income, net of the related
deferred tax effect. Securities classified as held to maturity are those debt
securities the Bank has both the intent and ability to hold to maturity. These
securities are carried at cost adjusted for amortization of premium and
accretion of discount.
-9-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY,
THE JUNIATA VALLEY BANK
BUSINESS
LOAN PORTFOLIO
The highest loan concentration by activity type continues to be the trucking
industry. The percentage of these loans to total loans was approximately four
percent at the latest review. This industry services many other industries and
no potential significant risk is evident.
As with any lending activity, potential risk exists. Loans in the commercial,
financial and industrial category have increased as a percentage of total loans
for the second consecutive year. The Bank prudently evaluates loans in this
category and generally secures such lending with collateral consisting of real
and/or tangible personal property.
All lending is granted on a variable rate basis except consumer loans which are
fixed rate. Consumer loans, consisting of approximately twenty-three percent of
total loans, average a three to four year repayment period and are fixed at such
a rate that rate sensitivity is considered to be limited.
The following table shows the Bank's loan distribution at the end of each of the
last five years:
December 31,
------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Commercial, financial and agricultural $ 23,327 $ 18,784 $ 15,047 $ 16,110 $ 15,531
Real estate mortgage 142,897 139,163 133,047 142,216 130,865
Consumer (less unearned discount) 52,991 46,419 41,049 32,428 30,822
All other 3,101 2,456 2,819 2,945 3,674
-------- -------- -------- -------- --------
Total loans $222,316 $206,822 $191,962 $193,699 $180,892
======== ======== ======== ======== ========
This table shows the maturity of loans (excluding residential mortgages of 1-4
family residences and consumer loans) outstanding as of December 31, 2000.
Commercial, agricultural and financial $ 23,327 $ -- $ -- $ 23,327
All other 3,101 -- -- 3,101
-------- -------- -------- --------
Total loans $ 26,428 $ -- $ -- $ 26,428
======== ======== ======== ========
- -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,
------------
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Average loans outstanding $212,270 $193,305 $189,778 $186,510 $174,575
======== ======== ======== ======== ========
Nonaccrual loans $ 364 $ 164 $ -- $ 239 $ 482
Accruing loans past due
90 days or more 440 262 386 395 408
Restructured loans -- -- -- 173 --
-------- -------- -------- -------- --------
Total $ 804 $ 426 $ 386 $ 807 $ 890
======== ======== ======== ======== ========
Ratio of non-performing loans
to average loans outstanding .39% .22% .20% .43% .51%
Information with respect to nonaccrual and restructured loans at December 31,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Nonaccrual loans $ 364 $ 164 $ -- $ 239 $ 482
Restructured loans -- -- -- 173 --
Interest income that would have been
recorded under original terms 38 16 -- 20 56
Interest income recorded
during the period -- -- -- 24 4
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,
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
Average loans outstanding $212,270 $193,305 $189,778 $186,510 $174,575
======== ======== ======== ======== ========
Allowance for loan loss at January 1 $ 2,486 $ 2,477 $ 2,390 $ 2,350 $ 2,228
Losses charged to allowance
Commercial 155 2 37 60 58
Real estate -- 27 13 12 --
Consumer 89 100 93 161 98
-------- -------- -------- -------- --------
244 129 143 233 156
-------- -------- -------- -------- --------
Recoveries credited to allowance
Commercial 13 -- 1 17 2
Real estate -- -- -- -- --
Consumer 12 18 19 36 46
-------- -------- -------- -------- --------
25 18 20 53 48
-------- -------- -------- -------- --------
Net charge-offs 219 111 123 180 108
Provision for possible loan losses 230 120 210 220 230
-------- -------- -------- -------- --------
Allowance for loan losses at December 31 $ 2,497 $ 2,486 $ 2,477 $ 2,390 $ 2,350
======== ======== ======== ======== ========
Ratio of net charge-offs to
average loans outstanding .10% .06% .06% .10% .06%
The amount charged to operations and the related balance in the allowance for
loan losses is based upon periodic evaluations of the loan portfolio by
management. These evaluations consider several factors including, but not
limited to, general economic conditions, loan portfolio composition, prior loan
loss experience and management's estimate of future potential losses.
This table shows an allocation of the allowance for loan losses as of the end of
each of the last five years.
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
(In Thousands)
% OF % of % of % of % of
AMOUNT LOAN Amount Loan Amount Loan Amount Loan Amount Loan
Commercial $ 670 12.4% $ 577 10.3% $ 537 9.3% $ 482 9.9% $ 569 10.6%
Real estate 472 64.3 468 67.3 483 69.3 483 73.4 436 72.3
Consumer 770 23.3 750 22.4 741 21.4 694 16.7 617 17.1
Unallocated 585 -- 691 -- 716 -- 731 -- 728 --
------ ---- ------ ---- ------ ---- ------ ---- ------ ----
Total $2,497 100% $2,486 100% $2,477 100% $2,390 100% $2,350 100%
====== ==== ====== ==== ====== ==== ====== ==== ====== ====
- -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 64% of the
total loan portfolio, historically these accounts have resulted in marginal
loss. Therefore management's evaluation of the loan portfolio indicates a
relatively low allocation of the allowance for this category of loans.
In addition to management's regular reviews, the results of normal examination
of the loan portfolio by representatives of regulatory agencies 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, 2000, 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:
2000 1999 1998
---- ---- ----
AMOUNT RATE Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(In Thousands)
Non-interest bearing demand $ 34,827 $ 34,728 $ 30,719
Interest bearing demand 46,221 2.95% 46,212 2.67% 49,199 2.87%
Savings deposits 31,033 2.67 33,494 2.72 32,796 2.92
Time deposits 175,535 5.52 175,455 5.24 176,905 5.52
-------- -------- --------
Total $287,616 $289,889 $289,619
======== ======== ========
As of December 31, 2000, certificates of deposit outstanding in an individual
amount of $100,000 or more totalled $25,102,000.
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)
$6,810 $5,832 $3,363 $9,097
====== ====== ====== ======
- -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 2000
Interest income $ 5,946 $ 6,094 $ 6,288 $ 6,351
Interest expense (2,785) (2,880) (3,064) (3,151)
------- ------- ------- -------
Net interest income 3,161 3,214 3,224 3,200
Provision for loan losses (45) (45) (45) (95)
Other income 330 339 304 404
Other expenses (2,058) (2,023) (2,025) (2,078)
------- ------- ------- -------
Income before income taxes 1,388 1,485 1,458 1,431
Income taxes (360) (376) (336) (303)
------- ------- ------- -------
Net income $ 1,028 $ 1,109 $ 1,122 $ 1,128
======= ======= ======= =======
Per-share data:
Basic earnings $ .46 $ .50 $ .51 $ .52
Cash dividends .50 .41 -- .42
Three Months Ended
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In Thousands,except per share data)
FOR THE YEAR 1999
Interest income $ 5,977 $ 6,025 $ 5,929 $ 5,927
Interest expense (2,877) (2,849) (2,809) (2,819)
------- ------- ------- -------
Net interest income 3,100 3,176 3,120 3,108
Provision for loan losses (30) (30) (30) (30)
Other income 277 307 263 439
Other expenses (2,037) (2,015) (1,999) (1,981)
------- ------- ------- -------
Income before income taxes 1,310 1,438 1,354 1,536
Income taxes (312) (357) (345) (346)
------- ------- ------- -------
Net income $ 998 $ 1,081 $ 1,009 $ 1,190
======= ======= ======= =======
Per-share data:
Basic earnings $ .43 $ .47 $ .44 $ .53
Cash dividends .50 .38 -- .40
-15-
JUNIATA VALLEY FINANCIAL CORP. AND ITS WHOLLY-OWNED SUBSIDIARY
THE JUNIATA VALLEY BANK
FIVE YEAR FINANCIAL HIGHLIGHTS o SELECTED FINANCIAL DATA
2000 1999 1998 1997 1996
---- ---- ---- ---- ----
BALANCE SHEET DATA (In Thousands)
Assets $334,914 $336,119 $343,857 $332,440 $318,708
Deposits 287,221 283,350 293,890 285,138 274,670
Loans receivable, net 219,819 204,336 189,485 191,309 178,542
Securities 85,571 104,650 123,505 113,757 116,956
Stockholders' equity 43,082 43,255 45,980 42,695 39,862
Average equity 42,106 44,526 44,448 41,449 38,072
Average assets 334,685 339,364 338,295 327,068 317,384
EARNINGS DATA (In Thousands)
Interest income $ 24,679 $ 23,858 $ 24,864 $ 24,317 $ 23,613
Interest expense 11,880 11,354 12,136 11,862 11,697
-------- -------- -------- -------- --------
Net interest income 12,799 12,504 12,728 12,455 11,916
Provision for loan losses 230 120 210 220 230
-------- -------- -------- -------- --------
Net interest income after
provision for loan losses 12,569 12,384 12,518 12,235 11,686
Other income 1,377 1,286 1,182 1,273 1,025
Other expenses 8,184 8,032 7,986 7,531 7,026
-------- -------- -------- -------- --------
Income before income taxes 5,762 5,638 5,714 5,977 5,685
Federal income taxes 1,375 1,360 1,313 1,405 1,356
-------- -------- -------- -------- --------
Net income $ 4,387 $ 4,278 $ 4,401 $ 4,572 $ 4,329
======== ======== ======== ======== ========
RATIOS
Return on average assets 1.31% 1.26% 1.30% 1.40% 1.36%
Return on average equity 10.42 9.61 9.90 11.03 11.37
Equity to assets (year end) 12.86 12.87 13.37 12.84 12.51
Loans to deposits (year end) 76.53 72.11 64.47 67.09 65.00
Dividend payout (percentage
of income) 66.90 68.61 37.99 32.68 31.21
PER SHARE DATA
Basic earnings 1.99 1.87 1.90 1.96 1.86
Cash dividends 1.33 1.28 .74 .66 .60
Book value 19.90 19.35 19.73 18.43 17.09
Average shares outstanding 2,200,878 2,290,728 2,321,739 2,328,101 2,324,964
Approximate number
of stockholders 1,725 1,696 1,607 1,603 1,417
- -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
2000 1999 1998
AVERAGE Increase (Decrease) Average Increase (Decrease) Average
BALANCE Amount % Balance Amount % Balance
------- ------ --- ------- ------ --- -------
Funding uses:
Interest earning assets:
Loans:
Commercial $ 64,744 $ 6,058 10.32% $ 58,686 $(1,118) (1.87)% $ 59,804
Mortgage 99,793 7,841 8.53 91,952 419 .46 91,533
Consumer 47,733 5,066 11.87 42,667 4,226 10.99 38,441
-------- ------- -------- ------- --------
212,270 18,965 9.81 193,305 3,527 1.86 189,778
Less: Allowance for loan losses (2,519) (27) 1.08 (2,492) (46) 1.88 (2,446)
-------- ------- -------- ------- --------
209,751 18,938 9.92 190,813 3,481 1.86 187,332
Interest bearing deposits
with banks 672 5 .75 667 153 29.77 514
Securities 98,796 (22,581) (18.60) 121,377 (348) (.29) 121,725
Funds sold 3,570 (1,985) (35.73) 5,555 (5,164) (48.18) 10,719
-------- ------- -------- ------- --------
103,038 (24,561) (19.25) 127,599 (5,359) (4.03) 132,958
Total interest earning
assets 312,789 (5,623) 1.77 318,412 (1,878) (.59) 320,290
Other assets 21,896 944 4.51 20,952 2,947 16.37 18,005
-------- ------- -------- ------- --------
Total uses $334,685 $(4,679) 1.38 $339,364 $ 1,069 .32 $338,295
======== ======= ======== ======= ========
Funding sources:
Deposits:
Demand $ 34,827 $ 99 .29 $ 34,728 $ 4,009 13.05 $ 30,719
Interest bearing demand 46,221 9 .02 46,212 (2,987) (6.07) 49,199
Savings 31,033 (2,461) 7.35 33,494 698 2.13 32,796
Time under $100,000 150,426 (49) (.03) 150,475 (3,453) (2.24) 153,928
-------- ------- -------- ------- --------
Total core deposits 262,507 (2,402) (.91) 264,909 (1,733) (.65) 266,642
Time over $100,000 25,109 129 .52 24,980 2,003 8.72 22,977
-------- ------- -------- ------- --------
Total deposits 287,616 (2,273) (.78) 289,889 270 .09 289,619
Other liabilities 4,963 301 6.46 4,662 434 10.26 4,228
Short-term borrowings -- (287) (100.00) 287 287 100.00 --
Stockholders' equity 42,106 (2,420) (5.44) 44,526 78 .18 44,448
-------- ------- -------- ------- --------
Total sources $334,685 $(4,679) (1.38) $339,364 $ 1,069 .32 $338,295
======== ======= ======== ======= ========
-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 experienced a decline during 2000, reaching the level
of $334,685,000 a decrease of $4,679,000 or 1.38% compared to 1999. However, the
Corporation experienced a robust increase in average balances of loans of
$18,965,000 or 9.81% from 1999 to 2000. The decline in the average balance of
securities of $22,581,000 or 18.60% was used to fund these loans. This occurred
because normal funding sources in the way of average balances of core deposits
also declined by $2,776,000 or 1.05% from 1999 to 2000.
Commercial loans increased $6,058,000 or 10.32% in 2000 over 1999. This increase
was preceded by a decline from 1998 to 1999 of $1,118,000. Mortgage loans
increased $7,841,000 or 8.53% from 1999 to 2000. From 1998 to 1999 the increase
was $419,000. Consumer loans increased $5,066,000 or 11.87% in 2000 over 1999.
This followed an increase of $4,226,000 from 1998 to 1999.
Because deposits declined, new securities were not purchased as they matured or
were called to fund the loan growth. Demand and interest bearing demand deposits
increased only slightly. Savings deposits declined by $2,461,000 or 7.35% from
1999 to 2000. This followed a slight increase of $698,000 in 1999 over 1998.
Time deposits under $100,000 decreased slightly by $49,000 from 1999. Time
deposits over $100,000 increased modestly by $129,000 in 2000 over 1999. The
decline in stockholders' equity was a result of the stock repurchase program and
the special $.50 dividend payed in 2000. The Corporation also had a decline in
funds sold of $1,985,000 or 35.73% from 1999 to 2000. This followed a decline of
$5,164,000 in 1999 over 1998.
The intense competition from bank and nonbanks in the market area was apparent
in 2000 which lead to a decline in market share.
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Juniata Valley Financial Corp. reported net income
for 2000 of $4,387,000 which was $109,000 or 2.55%
more than the $4,278,000 reported in 1999 and
$14,000 or .32% less than the $4,401,000 reported
[NET INCOME GRAPHIC OMITTED] in 1998. Basic earnings per share was $1.99 in
2000. This is an increase of $.12 from 1999 and an
increase of $.09 over 1998. This increase in
earnings per share is a result of both increased
income but also a decline in weighted shares
outstanding due to the stock repurchase program.
- -18-
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
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
return on average equity ratio presents the net income AVERAGE EQUITY
to average equity maintained throughout the year. GRAPHIC OMITTED]
The return on average equity was 10.42% in 2000,
compared to 9.61% in 1999 and 9.90% in 1998.
[RETURN ON Return on average assets presents the income for the year
AVERAGE ASSETS compared to the average assets maintained throughout the
GRAPHIC OMITTED] year. The return on average assets was 1.31% in 2000
compared to 1.26% in 1999 and 1.30% in 1998.
The Board of Directors continued to increase
the cash dividends paid to shareholders. On
a per share basis $1.33 was paid in 2000 up
3.91% from the $1.28 paid in 1999 and up 79.73%
from the $.74 paid in 1998. The increase of [CASH DIVIDENDS
cash dividends in 2000 and 1999 was to help PER SHARE
increase the return on equity ratio by GRAPHIC OMITTED]
returning cash value to stockholders. The
Board of Directors declared a $.50 special
dividend to be paid in the spring of 1999
and 2000.
[EQUITY TO ASSETS Stockholders' equity to total assets (the capital
GRAPHIC OMITTED] ratio) decreased at December 31, 2000 to 12.86% from
12.87% in 1999 and 13.37% in 1998.
The Corporation had a decline in total assets
at December 31, 2000. Assets for the year ended
December 31, 2000, were $334,914,000 a decrease
of $1,205,000 or .36% compared to assets of [ASSETS GRAPHIC OMITTED]
$336,119,000 at December 31, 1999. There was
however short-term borrowings of $5,300,000 at
December 31, 1999, to fund the necessary
increase in cash reserves for the year 2000.
-19-
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
RESULTS OF OPERATIONS (CONTINUED)
- --------------------------------------------------------------------------------
The Juniata Valley Bank's allowance for loan losses was $2,497,000 in 2000,
$2,486,000 in 1999 and $2,477,000 in 1998. The provision provided in each of
those years was $230,000 in 2000, $120,000 in 1999 and $210,000 in 1998. The
provision for loan losses exceeded net charge-offs by 5.02%, 8.11%, and 70.73%
in 2000, 1999 and 1998, respectively. In 2000 net charge-offs were .10% of
average loans outstanding. In 1999 and 1998 net charge-offs were .06% of average
loans outstanding each year.
Other income increased $91,000 or 7.08% from 1999 to 2000. From 1998 to 1999 the
increase was $104,000 or 8.80%. The trust department income increased $12,000 in
2000 over 1999. This was a result of estate settlements. The increase of $76,000
from 1998 to 1999 was due to the settling of estates in 1999 that did not occur
in 1998. Customer service fees increased $57,000 for 2000 compared to 1999 and
$80,000 in 1999 compared to 1998. The increases in customer service fees can be
attributed to an increase in volume and not as a result of increased fees. There
was a decrease of $39,000 in net realized gains on sales of securities in 2000
over 1999. This followed a decrease of $168,000 in 1999 over 1998. The
securities were sold in the fourth quarter of 1999 and were reflective of the
higher interest rate environment during this time period. The other income
increased in 2000 over 1999 by $61,000. This increase can be attributed to
$30,000 transfer agent fee and $20,000 interchange fee on debit cards. Both
increases can be attributed to increased usage as opposed to increased fees. The
management of The Juniata Valley Bank seeks product and service improvements
that both strengthen existing customer relationships and help attract new ones.
During 1997, sales of mutual funds were introduced through a 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 2000
was $81,000.
Other expenses increased $152,000 or 1.89% over 1999, compared to an increase of
$46,000 from 1998 to 1999. Salaries and wages decreased $19,000 from 1999 to
2000. This compares to an increase of $217,000 from 1998 to 1999. The decreases
in salaries and wages can be attributed to a decrease in full-time equivalents
from 140 to 136 in the year 2000. An early retirement option was given and six
employees took advantage of it. Employee benefits increased $116,000 from 2000
to 1999. From 1998 to 1999 this increase was $165,000. This was due to price
changes of benefits provided as opposed to increased benefits. Occupancy expense
remained the same for the years presented. Equipment expense increased $42,000
in 2000 over 1999. The increase was $11,000 from 1998 to 1999. The increase in
equipment expense is a direct result of increased technology being offered and
additional equipment needed to offer the technology. Director's compensation
declined $50,000 because of deferred compensation arrangements reaching
maturity. Taxes, other than income is an increase in the Pennsylvania shares tax
of $27,000 from 1999 to 2000 and $39,000 from 1998 to 1999. The $37,000 increase
in other expenses for the year 2000 and $89,000 increase in 1999 can be
attributed to an increase in postage because of increased volume in both years
and rates in 1999.
On November 12, 1999, The Gramm-Leach-Bliley Act was signed into law. The Act
permits commercial banks to affiliate with investment banks. It permits bank
holding companies to engage in any type of financial activity which includes,
securities, insurance, merchant banking/equity investment, financial in nature,
and complimentary activities. The merchant banking provisions will allow a bank
holding company to make a controlling investment in any kind of company,
financial or commercial. These new powers allow a bank to engage in virtually
every type of activity currently recognized as financial or incidental or
complementary to a financial activity. The commercial bank has to be
well-capitalized, well-managed and CRA-rated satisfactory or better. The Act
also allows subsidiaries of banks to engage in a broad range of financial
activities that are not permitted for banks themselves. In light of this new
legislation, The Corporation and The Juniata Valley Bank will evaluate new
financial activities that would compliment the products already offered to
enhance non-interest income.
- -20-
MANAGEMENT'S DISCUSSION AND ANALYSIS
- --------------------------------------------------------------------------------
NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income is the most significant contributor to the Corporation's net
income. During 2000, net interest income increased 2.38% to $12,799,000 compared
to a decrease of 1.76% during 1999. Table 2 shows the interest income, interest
expense and net interest income with the percentage change between the years.
Table 1 presents average balances, interest income and expense and yields earned
or paid. This table summarizes the components of the net interest income growth.
Interest earning assets decreased $5,596,000 or 1.74% in 2000. The decrease for
1999 over 1998 was $1,832,000. The largest contributor to interest income is
loans. The yield on loans has declined from 1999 to 2000 by 5 basis points. From
1998 to 1999 the rate declined 29 basis points. The yield on taxable securities
increased 7 basis points in 2000 and the yield on tax free securities increased
23 basis points. In 1999 the taxable securities increased 20 basis points and
tax free securities decreased 49 basis points. Federal funds sold had an
increase of 61 basis points in 2000 over 1999 while the Corporation had a
decline of 36 basis points from 1998 to 1999. The overall yield on these
interest earning assets for 2000 was an increase of 26 basis points. This
followed a decline of 27 basis points from 1998 to 1999.
Interest bearing liabilities decreased $2,659,000 or 1.04% for 2000. There was a
decrease of $3,452,000 from 1998 to 1999. Saving deposits decreased $2,461,000
from 1999 to 2000 which followed an increase of $698,000. Demand deposits
bearing interest declined $9,000 and time deposits increased $80,000 from 1999
to 2000. Demand deposits bearing interest decreased $2,987,000 and time deposits
decreased by $1,450,000 in 1999 over 1998. Rates paid increased by 26 basis
points in 2000. The decline for 1999 of rates paid was 25 basis points.
The Corporation's net spread was 2.99% in 1999 and 3.15% in 2000 compared to the
3.01% in 1998. Interest spread measures the absolute difference between average
rates earned and average rates paid while net interest margin reflects the
relationship of interest income to earning assets versus interest expense to
earning assets. The Corporation's net interest margin was 4.06% for 2000
compared to 3.89% in 1999 and 3.94% in 1998.
From Table 3 it can be seen that the decreases in net interest income of
$127,000 during 2000 were affected by increases in volume of $421,000 however
rates declined by $548,000. Volume and rate both increased on interest income
and volume decreased while rates increased on interest expense. In 1999 a
decrease in interest income was due to an overall decrease in both volume and
rate. Decreases in volume and rates offered on interest bearing liabilities
caused the change in interest expense during 1999. In 2000 interest income
increased by $399,000; $344,000 can be attributed to an increase in volume.
Loans added $1,685,000 to income in volume while the volume of all the
securities declined. In 1999, the decrease in interest income of $1,006,000 can
be attributed to the decline in taxable securities of $1,123,000. The $526,000
increase in interest expense in 2000 can be attributed to an increase in time
deposit rates. The $782,000 change in interest expense in 1999 can be attributed
to a decrease in both volume and rate on demand deposits bearing interest and
time deposits.
-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".
2000
INTEREST
AVERAGE INCOME %
BALANCES (EXPENSE) RATE
-------- --------- ----
(IN THOUSANDS)
INTEREST EARNING ASSETS
Interest bearing deposits in other banks $ 672 $ 48 7.14%
Securities (taxable) 52,339 3,287 6.30
Securities (tax exempt) 46,457 1,785 3.84
Federal funds sold and other 3,570 295 8.26
Loans 212,270 19,264 9.08
-------- --------
Total interest earning assets 315,308 24,679 7.83
----
NON-INTEREST EARNING ASSETS
Cash and due from banks 9,243
Other assets 12,653
Less: allowance for loan losses (2,519)
--------
Total assets $334,685
========
INTEREST BEARING LIABILITIES
Demand deposits bearing interest $ 46,221 (1,363) 2.95%
Savings deposits 31,033 (828) 2.67
Time deposits 175,535 (9,689) 5.52
Short-term borrowings -- -- --
-------- --------
Total interest bearing liabilities 252,789 (11,880) 4.70
-------- ----
NON-INTEREST BEARING LIABILITIES
Demand deposits 34,827
Other liabilities 4,963
STOCKHOLDERS' EQUITY 42,106
--------
Total liabilities and stockholders' equity $334,685
========
NET INTEREST INCOME/SPREAD $12,799 3.13%
======= ====
MARGIN ANALYSIS
Interest income/earning assets 7.83%
Interest expense/earning assets 3.77
----
Net interest margin 4.06%
====
- -22-
- --------------------------------------------------------------------------------
TABLE 1 (CONTINUED)
- --------------------------------------------------------------------------------
1999 1998
Interest Interest
Average Income % Average Income %
Balances (Expense) Rate Balances (Expense) Rate
-------- --------- ---- -------- -------- ----
(In Thousands) (In Thousands)
$ 667 $ 44 6.60% $ 514 $ 28 5.45%
66,942 4,171 6.23 85,572 5,159 6.03
54,435 2,147 3.94 36,153 1,603 4.43
5,555 324 5.83 10,719 664 6.19
193,305 17,172 8.88 189,778 17,410 9.17
-------- -------- -------- --------
320,904 23,858 7.43 322,736 24,864 7.70
---- ----
9,209 8,663
11,743 9,342
(2,492) (2,446)
-------- --------
$339,364 $338,295
======== ========
$ 46,212 (1,233) 2.67% $ 49,199 (1,411) 2.87
33,494 (912) 2.72 32,796 (958) 2.92
175,455 (9,194) 5.24 176,905 (9,767) 5.52
287 (15) 5.23 -- -- --
-------- -------- -------- --------
255,448 (11,354) 4.44 258,900 (12,136) 4.69
-------- ---- -------- ----
34,728 30,719
4,662 4,228
44,526 44,448
-------- --------
$339,364 $338,295
======== ========
$ 12,504 2.99% $ 12,728 3.01%
======== ==== ======== ===
7.43% 7.70%
3.54 3.76
---- ----
3.89% 3.94%
==== ====
-23-
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
TABLE 2 --- NET INTEREST INCOME
- --------------------------------------------------------------------------------
Net interest income, defined as interest income less interest expense, is shown
in the following table:
2000 % Change 1999 % Change 1998
---- -------- ---- -------- ----
(In Thousands)
Interest income $24,679 3.44% $23,858 (4.05)% $24,864
Interest expense 11,880 4.63 11,354 (6.44) 12,136
------- ------- -------
Net interest income $12,799 2.36 $12,504 (1.76) $12,728
======= ======= =======
- --------------------------------------------------------------------------------
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.
2000/1999 Increase (Decrease) 1999/1998 Increase (Decrease)
Due to Change in Due to Change in
Volume Rate Net Volume Rate Net
------ ---- --- ------ ---- ---
Interest bearing deposits
in other banks $ 0 $ 4 $ 4 $ 8 $ 8 $ 16
Securities (taxable) (931) 47 (884) (1,123) 135 (988)
Securities (tax free) (487) 125 (362) 811 (267) 544
Federal funds sold (63) 34 (29) (320) (20) (340)
Loans 2,188 (96) 2,092 324 (562) (238)
------ ----- ------ ------- ----- -------
Interest income 707 114 821 (300) (706) (1,006)
------ ----- ------ ------- ----- -------
Demand deposits
bearing interest -- 130 130 (86) (92) (178)
Savings deposits (67) (17) (84) 20 (66) (46)
Time deposits 4 491 495 (80) (493) (573)
Short-term borrowings (15) -- (15) 15 -- 15
------ ----- ------ ------- ----- -------
Interest expense (78) 604 526 (131) (651) (782)
------ ----- ------ ------- ----- -------
Increase (decrease)
in net interest income $ 785 $(490) $ 295 $ (169) $ (55) $ (224)
====== ===== ====== ======= ===== =======
- --------------------------------------------------------------------------------
LOAN PORTFOLIO
- --------------------------------------------------------------------------------
At December 31, 2000, net loans increased
$15,483,000 or 7.58% over 1999. This follows an
increase in 1999 over 1998 in net loans of
$14,851,000 or 7.84%. The loan to deposit ratio
fluctuated throughout 2000; monthly averages were
at a low in April of 72.6% and a high in November
of 76.0%. Residential mortgages increased by
$3,619,000 or 3.27% from 1999 to 2000. Residential
mortgages increased by $3,019,000 from 1998 to
1999. Real estate loans still remain a very
attractive option due to the tax deductibility of
mortgage interest. Consumer loans increased
[NET LOANS GRAPHIC OMITTED] $8,581,000 or 15.77% in 2000 over 1999. This
follows a year with an increase of $7,773,000 from
1998 to 1999.
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 1999. For the year, the net
charge-offs were $219,000 or .10% of average loans
outstanding. The increase in 2000 was due to a
growing loan portfolio and not as a result of
relaxation of underwriting standards. This
compares with $111,000 or .06% for 1999 and
$123,000 or .10% for 1998.
- -24-
MANAGEMENT'S DISCUSSION AND ANALYSIS (CONTINUED)
- --------------------------------------------------------------------------------
LOAN PORTFOLIO (CONTINUED)
- --------------------------------------------------------------------------------
The allowance for loan losses is based upon quarterly loan portfolio reviews by
management and a committee of the Board. The purpose of the review is to assess
loan quality, identify impaired loans, analyze delinquencies, ascertain loan
growth, evaluate potential charge-offs and recoveries and assess general
economic conditions in the market served.
Commercial and real estate loans are rated, periodically by loan review
personnel. Consumer and residential real estate loans are generally reviewed in
the aggregate as they are of relative small dollar size and homogenous in
nature.
In addition to economic conditions, loan portfolio diversification, delinquency,
and historic loss experience, consideration is also given to examinations
performed by the regulatory authorities.
To determine the allowance and corresponding provision, the amount required for
specific allocation is first determined. For all types of commercial and
construction loans, this amount is based upon specific borrower data determined
by reviewing non-performing, delinquent, or potentially troubled credits. In
addition, a general allocation is also determined using the same criteria
applied to the total commercial portfolio. Consumer and residential real estate
allowances, which may include specific allocations, generally are based upon
recent charge-off and delinquency history, other known trends, and expected
losses over the remaining lives of these loans, as well as the condition of
local, regional, and national economies.
The unallocated portion of the allowance is the amount which, when added to
these allocated amounts, brings the total to the amount deemed adequate by
management at that time. This unallocated portion is available to absorb losses
sustained anywhere within the portfolio.
Determining the level of the allowance for possible loan losses at any given
period is difficult, particularly during deteriorating or uncertain economic
periods. Management must make estimates using assumptions and information which
is often subjective and changing rapidly. The review of the loan portfolio is a
continuing event in light of a changing economy and the dynamics of the banking
and regulatory environment. It is Management's opinion that the allowance for
loan losses for 2000 of $2,497,000 or 1.14% of outstanding loans is adequate to
meet any foreseeable loan loss contingency. The ratio for 1999 was 1.22% and for
1998 it was 1.31%.
At December 31, 2000 and 1999, total non-performing loans were $804,000 and
$426,000, respectively; non-performing loans as a percentage of the allowance
for loan losses were 32.20% and 17.14%, respectively.
In addition, regulatory authorities, as an integral part of their examinations,
periodically review the allowance for possible loan losses. They may require
additions to allowances based upon their judgements about information available
to them at the time of examination.
It is the policy of the Corporation not to renegotiate the terms of a loan
simply because of delinquency status. Rather a loan is transferred to
non-accrual status if it is not well secured and in process of collection and is
delinquent in payment of either principal or interest beyond 90 days. Interest
income received on non-accruing loans in 2000 and 1999 was $0.
Real estate acquired through foreclosure is carried at the lower of the recorded
amount of the loan for which the foreclosed property served as collateral or the
fair market value of the property as determined by a current appraisal less
estimated costs to sell (fair value). Prior to foreclosure, the recorded amount
of the loan is reduced, if necessary, to fair value by charging the allowance
for loan losses. Subsequent to foreclosure, gains or losses on the sale of real
estate acquired through foreclosure are recorded in operating income and any
losses determined as a result of periodic valuations are charged to other
operating expense.
Loans with principal and/or interest delinquent 90 days or more which are still
accruing interest were $440,000 at December 31, 2000 up from the $262,000 at
December 31, 1999. Although the economy is stable, softness in certain areas of
the economy may adversely affect certain borrowers and may cause additional
loans to become past due beyond 89 days or to be placed on non-accrual status
because of uncertainty of receiving full payment of either principal or interest
on these loans.
Potential problem loans consist of loans which are performing but for which
potential credit problems have caused the Corporation to place them on its
internally monitored loan list. At December 31, 2000, such loans amounted to
$646,000. Depending upon the state of the economy and the impact thereon to
these borrowers, as well as future events such as regulatory examination
assessment, these loans and others not currently so identified could be
classified as non-performing assets 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 2000
the Corporation funded approximately 78% of its assets with core deposits
acquired in local communities. This core deposit base, combined with
stockholders' equity, funded more than 90% of average assets in 2000 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, 2000, these liquid assets amounted to $55,014,000 compared to
liquid assets at December 31, 1999, of $79,676,000. 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 available for additional
liquidity a maximum borrowing capacity of $118,572,000 at December 31, 2000,
from the Federal Home Loan Bank of which $0 was outstanding.
Liability liquidity, which is more difficult to measure, can be met by
attracting deposits and maintaining the core deposit base. The Corporation's
ability to attract deposits depends primarily on several factors including sales
efforts, competitive interest rates, and other conditions which help maintain
consumer confidence in the stability of the financial institution. This
confidence is evaluated by such factors as profitability, capitalization and
overall financial condition.
The Corporation's primary funding requirement is loan demand. From the statement
of cash flows in 2000 loan demand increased by $15,712,000. This was easily
funded by maturities and repayments of securities which exceeded purchases by
$19,327,000.
- -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 2000 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.
In September 2000, the Financial Accounting Standards Board issued Statement No.
140, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities". This statement replaces SFAS No. 125 of the
same name. It revises the standards of securitizations and other transfers of
financial assets and collateral and requires certain disclosures, but carries
over most of the provisions of SFAS No. 125 without reconsideration. SFAS No.
140 is effective for transfers and servicing of financial assets and
extinguishments of liabilities occurring after March 31, 2001. The statement is
effective for recognition and reclassification of collateral and for disclosures
relating to securitization transactions and collateral for fiscal years ended
December 15, 2000. This statement is to be applied prospectively with certain
exceptions. Other than these exceptions, earlier or retroactive application of
its accounting provision is not permitted. The adoption of the statement is not
expected to have a significant impact on 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 re-price in specified periods. The
principal objective of the Bank's asset/liability management activities is to
provide consistently higher levels of net interest income while maintaining
acceptable levels of interest rate and liquidity risk and facilitating the
funding needs of the 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.
The Corporation uses several tools to measure and evaluate interest rate risk.
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.
Another tool for analyzing interest rate risk is financial simulation modeling
which captures the impact of not only changing interest rates but also other
sources of cash flow variability including loan and securities prepayments, loan
repricing, and deposit pricing. Financial simulation modeling forecasts both net
interest income and the economic value of liabilities. The Corporation regularly
measures the effects of an up or down 200-basis point "rate shock" which is
deemed to represent the outside limits of any reasonably probable movement in
market interest rates during a one-year time frame. As indicated in Table 5, the
financial simulation analysis revealed that projected net interest income over a
one-year time period is positively affected by higher market interest rates,
while the economic value of equity is adversely affected by higher interest
rates. In a lower interest rate environment the opposite is presented as
projected net interest income is adversely affected by and economic value of
equity is f