JUNIATA VALLEY FINANCIAL CORP - Quarter Report: 2007 March (Form 10-Q)

 

2

3

4

5

6

7

8

9

10

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward Looking Statements:

The Private Securities Litigation Reform Act of 1995 contains safe harbor provisions regarding forward-looking statements. When used in this discussion, the words “believes,” “anticipates,” “contemplates,” “expects,” and similar expressions are intended to identify forward-looking statements. Such statements are subject to certain risks and uncertainties which could cause actual results, performance or achievements expressed or implied by such forward-looking statements to differ materially from those projected. Those risks and uncertainties include changes in interest rates and their impact on the level of deposits, loan demand and value of loan collateral, increased competition from other financial institutions, governmental monetary policy, legislation and changes in banking regulations, risks associated with the effect of opening a new branch, the ability to control costs and expenses, and general economic conditions. The Corporation undertakes no obligation to publicly release the results of any revisions to those forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events.

Critical Accounting Policies:

Disclosure of the Corporation’s significant accounting policies is included in the notes to the consolidated financial statements of the Corporation’s Annual Report on Form 10-K for the year ended December 31, 2006. Some of these policies require significant judgments, estimates, and assumptions to be made by management, most particularly in connection with determining the provision for loan losses and the appropriate level of the allowance for loan losses.

General:

The following discusses the consolidated financial condition of the Corporation as of March 31, 2007, as compared to December 31, 2006, and the consolidated results of operations for the three months ended March 31, 2007, compared to the same period in 2006. This discussion should be read in conjunction with the interim consolidated financial statements and related footnotes included herein.

Introduction:

Juniata Valley Financial Corp. is a Pennsylvania corporation organized in 1983 to become the holding company of The Juniata Valley Bank (“Bank”). The Bank is a state-chartered bank headquartered in Mifflintown, Pennsylvania. Juniata Valley Financial Corp. and its subsidiary bank derive substantially all of their income from banking and bank-related services, including interest earned on residential real estate, commercial mortgage, commercial and consumer loans, interest earned on investment securities and fee income from deposit services and other financial services to its customers through 12 locations in central Pennsylvania.

Financial Condition:

As of March 31, 2007, total assets increased by $10,780,000, or 2.6%, as compared to December 31, 2006. The increase was primarily attributable to an increase in deposits and commitments to purchase $4 million in investment securities as of the end of the period.

Since December 31, 2006, approximately $9.5 million of investment securities matured and $6.5 million in new deposits were generated. Loan payments and payoffs exceeded new loan volume in the first quarter of 2007 by approximately $5.7 million. This $21.7 million aggregate of cash was invested in the Corporation’s securities portfolio and in overnight federal funds.

The table below shows changes in deposit volumes by type of deposit (in thousands of dollars) between December 31, 2006 and March 31, 2007. Only the category of time deposits of $100,000 or more had a significant decrease, and this decrease was due to a deliberate decision by management to reduce higher-cost, non-core deposits. Management’s focus has been to increase levels of core transaction deposit accounts, and as a result, non-interest bearing demand account balances increased by 4.5% and NOW and money market account balances grew by 9.4% from December 31,

11

2006 to March 31, 2007. Excluding jumbo ($100,000 and over) time deposit accounts, deposit growth was $10,206,000, or 3.2%.

		March 31,				December 31,				Change
		2007				2006				$				%
Deposits:
Demand, non-interest bearing		$	44,765			$	42,829			$	1,936				4.5	%
NOW and money market			82,289				75,186				7,103				9.4	%
Savings			36,190				36,217				(27	)			(0.1	%)
Time deposits, $100,000 and			34,305				38,032				(3,727	)			(9.8	%)
more
Other time deposits			164,099				162,905				1,194				0.7	%
Total deposits		$	361,648			$	355,169			$	6,479				1.8	%

Overall, loans, net of unearned interest, decreased by $5,695,000, or 1.9%, between December 31, 2006 and March 31, 2007. As shown in the table below, the decline in outstanding loans since December 31, 2006 has been related to consumer activity (in thousands of dollars).

		March 31,				December 31,				Change
		2007				2006				$				%
Loans:
Commercial		$	91,476			$	90,712			$	764				0.8	%
Mortgage			134,561				138,654				(4,093	)			(3.0	%)
Installment, net of unearned			74,086				76,452				(2,366	)			(3.1	%)
Total loans		$	300,123			$	305,818			$	(5,695	)			(1.9	%)

As of March 31, 2007, the Corporation had one large loan relationship, with a carrying balance of $568,000, considered to be impaired for which there is a specific allocation of $125,000 within the loan loss reserve that management believes is adequate to cover potential future losses. Otherwise, there are no material loans classified for regulatory purposes as loss, doubtful, substandard, or special mention which management expects to significantly impact future operating results, liquidity or capital resources. Following is a summary of the Bank’s non-performing loans on March 31, 2007 as compared to December 31, 2006.

(Dollar amounts in thousands)

		March 31, 2007				December 31, 2006
Non-performing loans
Nonaccrual loans		$	1,240			$	1,240
Accruing loans past due 90 days or more			859				214
Restructured loans			—				—
Total		$	2,099			$	1,454
Average loans outstanding		$	302,148			$	303,988
Ratio of non-performing loans to average loans outstanding			0.69	%			0.48	%

Stockholders’ equity increased by $236,000, or 0.5%, from December 31, 2006 to March 31, 2007. Net income of $1,279,000 was offset by dividends of $757,000 and net purchases of treasury stock of $334,000. The Corporation repurchased stock into treasury pursuant to its treasury repurchase program. During the first three months of 2007, the Corporation purchased 17,200 shares, of which 1,522 shares were reissued in connection with options exercised under

12

13

Interest earned on investment securities and money market investments increased $105,000 in the first quarter of 2007 as compared to 2006, although average balances were $2.0 million less during the period. More than offsetting the decline in average balances, the average yield on the investment securities and the money market investments rose by 55 basis points and 47 basis points, respectively.

In the first quarter of 2006, the Corporation had an average balance of $12,854,000 in long and short-term debt, costing approximately 3.95% on average for the period. This level of debt had been needed to fund the loan demand during that period. In the third quarter of 2006, the Corporation purchased a branch office and assumed its deposit liabilities, whose balances exceeded purchased loans by approximately $16 million. This excess allowed the repayment all of the Corporation’s debt. Since then, there have been no short or long-term borrowings needed to fund asset growth. Interest expense on deposits increased $440,000, or 20.4%, in the first quarter of 2007 as compared to 2006, reflecting the growth in interest-bearing deposits and generally higher interest rates. This growth in deposit balances was partially offset by the reduction in interest paid on debt of $127,000. The average balance of interest-bearing deposits increased $14,886,000, or 5.0%, while the average interest rate paid on deposits increased to 3.35% in 2007 from 2.92% in 2006.

Total average earning assets during the first quarter of 2007 were $381,956,000, compared to $382,232,000 during the first quarter of 2006, yielding 6.80% in 2007 versus 6.25% in 2006. Funding costs for the earning assets were 2.83% and 2.47%, for the first quarters of 2007 and 2006, respectively. Net interest margin on a fully tax-equivalent basis for the first quarter of 2007 was 4.09%. For the same period in 2006, the fully-tax equivalent net interest margin was 3.89%.

Provision for Loan Losses:

In the first quarter of 2007, the provision for loan losses was $67,000. Management regularly reviews the adequacy of the loan loss reserve and makes assessments as to specific loan impairment, historical charge-off expectations, general economic conditions in the Bank’s market area, specific loan quality and other factors. In the first quarter of 2006, the recorded loan loss provision was $30,000.

Non-interest Income:

Non-interest income in the first quarter of 2007, exclusive of gains recorded on securities, exceeded non-interest income in the previous year’s first quarter by $235,000, or 29.3%. Fees for customer service on deposit accounts in the first quarter of 2007 increased compared to the same period in 2006 by $45,000, or 13.2%, due in part to the increased depositor base added with the branch acquisition. Fee income from the Bank’s alternative investment program increased by $143,000, or 172.3%, due in part to an expanded business referral program. Income from bank owned life insurance and annuities increased in the first quarter of 2007 compared to the first quarter of 2006 by $12,000, or 13.0%. Income from trust services decreased by $19,000, or 14.0%, in the first quarter of 2007 from the first quarter of 2006, when fees from estate settlements were higher. Income from unconsolidated subsidiary was $41,000, representing earnings recorded under the equity method of accounting for the ownership of 39.16% of the First National Bank of Liverpool during the period. The acquisition of the ownership position in Liverpool was completed in the third quarter of 2006. In other non-interest income, increased debit card activity was primarily the reason for the $14,000, or 10.2% increase. The Corporation recognized no gains on sales of securities in the first quarter of 2007 as compared to gains of $67,000 in the same quarter of 2006.

As a percentage of average assets, annualized non-interest income, exclusive of net gains on the sale of securities, was 0.99% in the first quarter of 2007 as compared to 0.77% in the same period of 2006.

Non-interest Expense:

Total non-interest expense increased $224,000, or 8.2%, in the first quarter of 2007 as compared to 2006. Employee compensation and benefits costs increased by $127,000, or 8.7%, in the first quarter of 2007 compared to the first quarter of 2006 due primarily to the addition of staff for both the new branch office and other internal positions. Professional fees in the first quarter of 2007 were 20.9% higher than in the first quarter of 2006, due to additional consulting fees. Increased costs relating to occupancy, equipment and data processing are directly related to the addition of a branch office.

As a percentage of average assets, annualized noninterest expense was 2.85% as compared to 2.66% in the same period of 2006.

Liquidity:

The objective of liquidity management is to ensure that sufficient funding is available, at a reasonable cost, to meet the ongoing operational cash needs of the Corporation and to take advantage of income producing opportunities as they arise. While the desired level of liquidity will vary depending upon a variety of factors, it is the primary goal of the Corporation to maintain a high level of liquidity in all economic environments. Principal sources of asset liquidity are provided by securities maturing in one year or less, other short-term investments such as federal funds sold and cash and due from banks. Liability liquidity, which is more difficult to measure, can be met by attracting deposits and maintaining the core deposit base. The Corporation is a member of the Federal Home Loan Bank of Pittsburgh for the purpose of providing short-term liquidity when other sources are unable to fill these needs. During the first three months of 2007, there were no short-term borrowings from the Federal Home Loan Bank. As of March 31, 2007, the Corporation had no long-term debt and had unused borrowing capacity with the Federal Home Loan Bank of $157 million.

Funding derived from securities sold under agreements to repurchase is available through corporate cash management accounts for business customers. This product allows the Corporation an ability to pay interest on corporate checking accounts.

In view of the sources previously mentioned, management believes that the Corporation’s liquidity is capable of providing the funds needed to meet loan demand.

Off-Balance Sheet Arrangements:

The Corporation’s consolidated financial statements do not reflect various off-balance sheet arrangements that are made in the normal course of business, which may involve some liquidity risk, credit risk, and interest rate risk. These commitments consist mainly of loans approved but not yet funded, unused lines of credit, and letters of credit issued using the same credit standards as on-balance sheet instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Letters of credit are conditional commitments issued to guarantee the financial performance obligation of a customer to a third party. Unused commitments and letters of credit at March 31, 2007, were $58,622,000 and $757,000, respectively. Because these instruments have fixed maturity dates, and because many of them will expire without being drawn upon, they do not generally present any significant liquidity risk to the Corporation. Management believes that any amounts actually drawn upon can be funded in the normal course of operations.

The Corporation has no investment in or financial relationship with any unconsolidated entities that are reasonably likely to have a material effect on liquidity or the availability of capital resources.

Interest Rate Sensitivity:

Interest rate sensitivity management is the responsibility of the Asset/Liability Management Committee. This process involves the development and implementation of strategies to maximize net interest margin, while minimizing the earnings risk associated with changing interest rates. Traditional gap analysis identifies the maturity and re-pricing terms of all assets and liabilities. A simulation analysis is used to assess earnings and capital at risk from movements in interest rates. Based on the most recent rate shock simulations, the Corporation is exposed to a modest loss of income if interest rates fall and if they rise. See Item 3..

Capital Adequacy:

Bank regulatory authorities in the United States issue risk-based capital standards. These capital standards relate a banking company’s capital to the risk profile of its assets and provide the basis by which all banking companies and banks are evaluated in terms of capital adequacy. The risk-based capital standards require all banks to have Tier 1 capital of at least 4% and total capital, including Tier 1 capital, of at least 8% of risk-adjusted assets. Tier 1 capital

includes common stockholders’ equity and qualifying perpetual preferred stock together with related surpluses and retained earnings. Total capital is comprised of Tier 1 capital, limited life preferred stock, qualifying debt instruments, and the reserves for possible loan losses. Banking regulators have also issued leverage ratio requirements. The leverage ratio requirement is measured as the ratio of Tier 1 capital to adjusted average assets.

At March 31, 2007, the Bank exceeded the regulatory requirements to be considered a “well capitalized” financial institution, i.e., a leverage ratio exceeding 5%, Tier 1 capital exceeding 6% and total capital exceeding 10%.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk is the risk of loss arising from changes in the fair value of financial instruments due to changes in interest rates, currency exchange rates, commodity prices or equity prices. The Corporation’s market risk is composed primarily of interest rate risk. The primary objective of the Corporation’s asset-liability management process is to maximize current and future net interest income within acceptable levels of interest rate risk while satisfying liquidity and capital requirements. Management recognizes that a certain amount of interest rate risk is inherent, appropriate and necessary to ensure profitability. The most recent financial simulation performed by the Bank as of December 31, 2006, showed a possible decline in net interest income of $190,000 in a -100 basis point rate shock over a one-year period. If rates increase, in a +100 basis point shock over a one-year period, the simulation performed shows a possible $47,000 decrease to net interest income. The Bank is slightly liability sensitive if rates rise and slightly asset sensitive if rates decline. This position occurs because of optionality within the balance sheet. Optionality is the right of customers and issuers of securities to react to a changing-rate environment, by re-financing loans, changing deposit types or exercising call features on investment securities. The net interest income at risk position remained within the guidelines established by the Bank’s asset/liability policy. The Bank continues to monitor and manage its rate sensitivity.

No material change has been noted in the Bank’s equity value at risk. Please refer to the Annual Report on Form 10-K as of December 31, 2006 for further discussion of this matter.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of March 31, 2007, the Corporation carried out an evaluation, under the supervision and with the participation of the Corporation’s management, including the Corporation’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to the Securities Exchange Act of 1934 (“Exchange Act”), Rule 13a-15(e). Disclosure controls and procedures are controls and procedures that are designed to ensure that information required to be disclosed in Corporation reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. These controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Based upon that evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer concluded that the Corporation’s disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

It should be noted that any system of controls, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the system are met. In addition, the design of any control system is based in part upon certain assumptions about the likelihood of future events. Because of these and other inherent limitations of control systems, there can be no assurance that any design will succeed in achieving its stated goals under all potential conditions, regardless of how remote.

Attached as Exhibits 31 and 32 to this quarterly report are certifications of the Chief Executive Officer and the Chief Financial Officer required in accordance with Rule 13a-14(a) of the Exchange Act. This portion of the Corporation’s quarterly report includes the information concerning the controls evaluation referred to in the certifications and should be read in conjunction with the certifications for a more complete understanding of the topics presented.

(1)		On March 23, 2001, the Corporation announced plans to buy back 100,000 (200,000 on a post-split basis) shares of its common stock. There is no expiration date to this buyback plan, but subsequent to the initial plan, the repurchase of 400,000 additional shares were authorized by the Board of Directors. As of May 5, 2007, the number of shares that may yet be purchased under the program was 125,466. No repurchase plan or program expired during the period covered by the table. The Corporation has no stock repurchase plan or program that it has determined to terminate prior to expiration or under which it does not intend to make further purchases.

17

	Juniata Valley Financial Corp.      (Registrant)
Date 05-09-2007	By	/s/ Francis J. Evanitsky
		Francis J. Evanitsky, President
		and Chief Executive Officer
Date 05-09-2007	By	/s/ JoAnn N. McMinn
		JoAnn N. McMinn, Chief Financial
		Officer

18