JUNIATA VALLEY FINANCIAL CORP. Forward Looking Statements:
The information contained in this Quarterly Report on Form 10-Q contains forward looking statements (as such term is defined in the Securities Exchange Act of 1934 and the regulations thereunder). These forward-looking statements may include projections of, or guidance on, the Company's future financial performance, expected levels of future expenses, including future credit losses, anticipated growth strategies, descriptions of new business initiatives and anticipated trends in the Company's business or financial results. When words such as "may", "should", "will", "could", "estimates", "predicts", "potential", "continue", "anticipates", "believes", "plans", "expects", "future", "intends", "projects", the negative of these terms and other comparable terminology are used in this report,Juniata is making forward-looking statements. Any forward-looking statement made by the Company in this document is based only onJuniata's current expectations, estimates and projections about future events and financial trends affecting the financial condition of its business based on information currently available to the Company and speaks only as of the date when made.Juniata undertakes no obligation to publicly update or revise forward-looking information, whether as a result of new or updated information, future events, or otherwise. Forward-looking statements are not historical facts or guarantees of future performance. Because forward-looking statements relate to the future, they are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict and many of which are outside of the Company's control, and actual results may differ materially from this forward-looking information and therefore, should not be unduly relied upon. Many factors could cause our actual results and financial condition to differ materially from those indicated in the forward-looking statements, including, but not limited to: (i) the factors set forth in the sections ofJuniata's Annual Report on Form 10-K for the year endedDecember 31, 2021 , titled "Risk Factors" and "Management's Discussion and Analysis of Financial Condition and Results of Operations" and factors set forth in other current and periodic reports whichJuniata has or will file with theSecurities and Exchange Commission , and (ii) the following factors:
? short- and long-term effects of inflation and rising costs;
? the impact of labor shortages and supply chain disruptions;
? the impact of rising interest rates;
changes in general economic, business and political conditions, including those
? resulting from COVID-19 or other pandemics, a recession or intensified
international hostilities;
? the impact of adverse changes in the economy and real estate markets, including
protracted periods of low-growth and sluggish loan demand;
the effect of market interest rates and uncertainties, and relative balances of
? rate-sensitive assets to rate-sensitive liabilities, on net interest margin and
net interest income;
? the effect of competition on rates of deposit and loan growth and net interest
margin;
increases in non-performing assets, which may result in increases in the
? allowance for credit losses, loan charge-offs and elevated collection and
carrying costs related to such non-performing assets;
? other income growth, including the impact of regulatory changes which have
reduced debit card interchange revenue;
? investment securities gains and losses, including other than temporary declines
in the value of securities which may result in charges to earnings;
? the effects of changes in the applicable federal income tax rate;
? the level of other expenses, including salaries and employee benefit expenses;
? the impact of increased regulatory scrutiny of the banking industry;
? the impact of governmental monetary and fiscal policies, as well as legislative
and regulatory changes;
? the results of regulatory examination and supervision processes;
the failure of assumptions underlying the establishment of reserves for loan
? and lease losses, and estimations of collateral values and various financial
assets and liabilities;
? the increasing time and expense associated with regulatory compliance and risk
management;
? the ability to implement business strategies, including business acquisition
activities and organic branch, product, and service expansion strategies;
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? capital and liquidity strategies, including the impact of the capital and
liquidity requirements modified by the Basel III standards;
the effects of changes in accounting policies, standards, and interpretations
? on the presentation in the Company's consolidated balance sheets and
consolidated statements of income;
? the Company's failure to identify and to address cyber-security risks;
? the Company's ability to keep pace with technological changes;
? the Company's ability to attract and retain talented personnel;
? the Company's reliance on its subsidiary for substantially all its revenues and
its ability to pay dividends;
? acts of war or terrorism;
? disruptions due to flooding, severe weather, or other natural disasters;
? failure of third-party service providers to perform their contractual
obligations; and
the possibility of a new COVID-19 variant and the related actions taken by
? governmental authorities and the direct and indirect impacts on the Company,
its customers and third parties.
Critical Accounting Policies:
Disclosure of the Company's significant accounting policies is included in the Company's critical accounting policies in its Annual Report on Form 10-K for the year endedDecember 31, 2021 . 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 discussion relates to the consolidated financial condition of the Company as ofSeptember 30, 2022 , compared toDecember 31, 2021 , and the consolidated results of operations for the three and nine months endedSeptember 30, 2022 , compared to the same periods in 2021. This discussion should be read in conjunction with the interim consolidated financial statements and related notes included herein. Overview:Juniata Valley Financial Corp. is aPennsylvania corporation organized in 1983 to be the holding company ofThe Juniata Valley Bank . The Bank is a state-chartered bank headquartered inMifflintown, Pennsylvania .Juniata Valley Financial Corp. and its subsidiary bank derive substantially all 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 provided to its customers.
Financial Condition:
Total assets as ofSeptember 30, 2022 , were$815.2 million , an increase of$4.7 million , or 0.6%, compared toDecember 31, 2021 . Comparing asset balances as ofSeptember 30, 2022 andDecember 31, 2021 , total interest bearing time deposits with other banks decreased by$735,000 , or 100.0%, as all remaining time deposits with banks matured in 2022. Over the same period, total loans increased by$44.1 million , or 10.5%, while debt securities available for sale decreased by$48.2 million , or 14.4%, primarily due to a decline in fair value caused by an increase in market interest rates, as well as the sales of debt securities. Cash flows, as well as the proceeds from the sales of debt securities, were used to repay a$10.0 million brokered demand deposit and to fund loan growth in 2022. Bank owned life insurance and annuities decreased by$1.7 million , or 10.2%, as ofSeptember 30, 2022 compared to year-end 2021 due to the passing of one active and two former directors in 2022. Additionally, accrued interest receivable and other assets increased$11.7 million , or 200.0% over the same period, primarily due to an increase in the deferred tax asset for unrealized losses on available for sale debt securities. As ofSeptember 30, 2022 , total deposits increased by$9.4 million , or 1.3%, compared toDecember 31, 2021 , and short-term borrowings and repurchase agreements increased by$31.6 million , or 748.6%, over the same period primarily 40
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becauseJuniata reverted to using$20.0 million in FHLB short-term advances to supplement core deposits to satisfy its funding needs in lieu of brokered demand deposits.
The table below shows changes in deposit volumes by type of deposit between
(Dollars in thousands) September 30, December 31, Change
2022 2021 $ %
Deposits:Demand, non-interest bearing$ 202,493 $ 182,022 $ 20,471 11.2 % Interest bearing demand and money market 231,786 240,974 (9,188) (3.8) Savings 150,671 142,187 8,484 6.0 Time deposits,$250,000 and more 11,923
13,547 (1,624) (12.0) Other time deposits 120,961 129,717 (8,756) (6.8) Total deposits$ 717,834 $ 708,447 $ 9,387 1.3 %
As shown in the table below, total loans increased
(Dollars in thousands) September 30, December 31, Change
2022 2021 $ %
Loans:
Commercial, financial and agricultural $ 58,585 $
62,639 $ (4,054) (6.5) %
Real estate - commercial 189,860 159,806 30,054 18.8
Real estate - construction 48,108 43,281 4,827 11.2
Real estate - mortgage 142,149 131,754 10,395 7.9Obligations of states and political subdivisions 19,761
16,323 3,438 21.1
Personal 3,967 4,500 (533) (11.8)
Total loans $ 462,430 $ 418,303 $ 44,127 10.5 %
A summary of the activity in the allowance for loan losses for the nine month
periods ended September 30, 2022 and 2021, respectively, is presented below.
(Dollars in thousands) Nine months ended September 30,
2022 2021
Balance of allowance - January 1 $ 3,508 $ 4,094
Loans charged off (32) (10)
Recoveries of loans previously charged off 79 177 Net recoveries 47 167 Provision for loan losses 350 (536) Balance of allowance - end of period $
3,905 $ 3,725
Ratio of net recoveries during period to average loans outstanding
(0.01) % (0.04) %
While Juniata continued to experience favorable asset quality trends and net
recoveries during the nine months ended September 30, 2022 , qualitative risk
factors, including continued uncertainty in the economic outlook caused by
inflation, labor shortages and supply chain disruptions, were considered in its
allowance for loan loss analysis for certain loan segments. Due to these
factors, including loan growth of 10.5% during the period, the analysis resulted
in a loan loss
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provision expense of$350,000 in the nine months endedSeptember 30, 2022 . In contrast, a provision credit of$536,000 was recorded for the nine months endedSeptember 30, 2021 resulting from the removal of the additional level of risk on loans previously placed in COVID deferment as those borrowers showed the ability to continue making payments under contractual debt service. As ofSeptember 30, 2022 , fifteen loans (excluding loans acquired with existing credit deterioration) with aggregate outstanding balances of$2.4 million were individually evaluated for impairment. A collateral analysis was performed on each of the loans individually evaluated for impairment to evaluate whether a reserve was required based upon the fair value of the collateral securing such loans. Following the analysis, no specific reserve was determined to be required because there were no loans determined to have insufficient collateral atSeptember 30, 2022 . As ofSeptember 30, 2022 , there were$13.7 million of loans classified as special mention compared to$17.3 million atDecember 31, 2021 ,$3.3 million classified as substandard loans atSeptember 30, 2022 compared to$8.2 million atDecember 31, 2021 , and no loans classified as doubtful at eitherSeptember 30, 2022 orDecember 31, 2021 . Management believes that the reserves carried are adequate to cover probable incurred losses related to these relationships as ofSeptember 30, 2022 . Management believes the Company has sufficient liquidity and capital and an adequate allowance for loan losses to withstand losses that may occur but continues to closely monitor the financial strength of borrowers whose ability to comply with repayment terms may become permanently impaired. The following table summarizes the Bank's non-performing loans, excluding loans acquired with credit deterioration, onSeptember 30, 2022 compared toDecember 31, 2021 . (Dollar amounts in thousands) September 30, 2022 December 31, 2021 (Dollars in thousands) 2022 2021 Non-performing loans Non-accrual loans $ 142 $ 141
Accruing loans past due 90 days or more 8
85
Total $ 150 $ 226
Loans outstanding $ 462,430 $ 418,303
Ratio of non-performing loans to loans outstanding 0.03 % 0.05 % Ratio of non-accrual loans to loans outstanding 0.03 % 0.03 % Allowance for loan losses to non-accrual loans 2,750.00 % 2,487.94 % Total non-performing loans as ofSeptember 30, 2022 decreased$76,000 over total non-performing loans as ofDecember 31, 2021 , due to a decline in accruing loans past due 90 days or more. Stockholders' equity decreased by$36.4 million , or 51.0%, fromDecember 31, 2021 toSeptember 30, 2022 due to an increase in unrealized losses on the debt securities available for sale portfolio caused by a decline in market values resulting from changes in market interest rates.
Subsequent to
OnOctober 18, 2022 , the Board of Directors declared a cash dividend of$0.22 per share to shareholders of record onNovember 15, 2022 , payable onDecember 1, 2022 . 42 Table of Contents Comparison of the Three Months EndedSeptember 30, 2022 and 2021
Operations Overview:
Net income for the three months endedSeptember 30, 2022 was$2.1 million , an increase of$223,000 , or 11.8%, compared to the three months endedSeptember 30, 2021 . Basic and diluted earnings per share increased 10.5%, to$0.42 , for the three months endedSeptember 30, 2022 compared to basic and diluted earnings per share of$0.38 for the comparable 2021 period. Annualized return on average assets for the three months endedSeptember 30, 2022 was 1.03%, compared to the annualized return on average assets of 0.91% for the same period in 2021. For the three months endedSeptember 30 , annualized return on average equity was 17.90% in 2022 compared to 10.19% in 2021.
Presented below are selected key ratios for the two periods:
Three Months Ended
September 30,
2022 2021Return on average assets (annualized) 1.03 % 0.91 % Return on average equity (annualized) 17.90 % 10.19 % Average equity to average assets 5.74 %
8.94 % Non-interest income, as a percentage of average assets (annualized)
0.63 % 0.63 % Non-interest expense, as a percentage of average assets (annualized)
2.42 % 2.37 %
The discussion that follows further explains changes in the components of net income when comparing the three months endedSeptember 30, 2022 with the three months endedSeptember 30, 2021 .
Net Interest Income:
Net interest income was$6.0 million during the three months endedSeptember 30, 2022 , an increase of$595,000 , or 11.0%, compared to$5.4 million during the three months endedSeptember 30, 2021 . Average earning assets increased$26.5 million , or 3.4%, to$805.1 million during the three months endedSeptember 30, 2022 , compared to the same period in 2021. The increase in average earning assets between periods was primarily due to an increase of$34.4 million , or 8.2%, in average loans, net of a$21.0 million , or 96.3%, decrease in average PPP loan balances between periods. The increase in average loans was partially offset by a$1.3 million , or 0.4%, decrease in average investment securities and a$6.6 million , or 51.2%, decrease in average interest bearing deposits and federal funds sold. The yield on earning assets increased 23 basis points, to 3.39%, during the three months endedSeptember 30, 2022 compared to same period in 2021, while the cost to fund interest earning assets with interest bearing liabilities increased 6 basis points, to 0.61%, over the same period, primarily due to the increase in market interest rates as both the prime rate and federal funds target range increased by 300 basis points in the 2022 period. During the three months endedSeptember 30, 2022 , average interest bearing liabilities increased by$1.7 million , or 0.3%, compared to the comparable 2021 period, mainly due to growth in average short-term borrowings, as well as savings deposits, which was partially offset by declines in interest bearing demand and time deposits.
The net interest margin, on a fully tax equivalent basis, increased from 2.79%
during the three months ended
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The table below shows the net interest margin on a fully tax-equivalent basis
for the three months ended
Average Balance Sheets and Net Interest Income Analysis
Three Months Ended Three Months Ended
(Dollars in thousands) September 30, 2022 September 30, 2021 Increase (Decrease) Due To (6)
Average Yield/ Average Yield/
Balance(1) Interest Rate Balance(1) Interest Rate Volume Rate Total
ASSETS
Interest earning assets:
Taxable loans (5) $ 426,166 $ 5,075 4.72 %
28,849 211 2.91 29,241 213 2.89 (3) 1 (2)
Total loans 455,015 5,286 4.61 420,600 4,800 4.53 402 84 486Taxable investment securities 336,705 1,493 1.77
339,222 1,350 1.59 (10) 153 143
Tax-exempt investment
securities 7,092 37 2.09 5,899 36 2.44 7 (6) 1
Total investment securities 343,797 1,530 1.78 345,121 1,386 1.61 (3) 147 144
Interest bearing deposits 6,310 55 3.43 8,364 8 0.36 (2) 49 47
Federal funds sold - - 0.01 4,571 - 0.00 - - -Total interest earning assets 805,122 6,871 3.39
778,656 6,194 3.16 397 280 677
Other assets (7) 20,531 54,697
Total assets $ 825,653 $ 833,353
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Interest bearing demand
deposits (2) $ 235,203 317 0.53 $ 237,366 73 0.12 $ (1) $ 245 $ 244
Savings deposits 153,443 20 0.05 142,294 18 0.05 2 - 2
Time deposits 133,824 343 1.02 148,666 464 1.24 (46) (75) (121)
Short-term and long-term
borrowings and other interest
bearing liabilities 48,508 192 1.57 40,905 235 2.28 43 (86) (43)
Total interest bearing
liabilities 570,978 872 0.61 569,231 790 0.55 (2) 84 82
Non-interest bearing
liabilities:
Demand deposits 201,615 184,318
Other 5,689 5,334
Stockholders' equity 47,371 74,470
Total liabilities and
stockholders' equity $ 825,653 $ 833,353
Net interest income and net
interest rate spread $ 5,999 2.78 % $ 5,404 2.61 % $ 399 $ 196 $ 595
Net interest margin on interest
earning assets (3) 2.96 % 2.75 %
Net interest income and net
interest margin - Tax
equivalent basis (4) $ 6,065 2.99 % $ 5,470 2.79 %
Notes:
1) Average balances were calculated using a daily average.
2) Includes interest-bearing demand and money market accounts.
3) Net margin on interest earning assets is net interest income divided by
average interest earning assets.
Interest on obligations of states and municipalities is not subject to federal 4) income tax. To make the net yield comparable on a fully taxable basis, a tax
equivalent adjustment is applied against the tax-exempt income utilizing a
federal tax rate of 21%.
5) Non-accruing loans are included in the above table until they are charged off.
The change in interest due to rate and volume has been allocated to volume and 6) rate changes in proportion to the relationship of the absolute dollar amounts
of the change in each.
7) Includes gross unrealized gains (losses) on securities available for sale.
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Provision for Loan Losses:
During the three months ended September 30, 2022 , a $100,000 loan loss provision
expense was recorded, compared to a provision credit of $257,000 during the
three months ended September 30, 2021 . Loan growth, coupled with the continued
uncertainty in the economic outlook due to inflation, labor shortages and supply
chain disruptions, resulted in an increased loan loss provision, despite
favorable asset quality trends during the three months ended September 30, 2022 .
Management regularly reviews the adequacy of the allowance for loan losses and
makes assessments as to specific loan impairment, charge-off expectations,
general economic conditions in the Bank's market area, specific loan quality and
other factors. See the earlier discussion in the Financial Condition section
explaining the information used to determine the provision.
Non-interest Income:
Non-interest income during the three months endedSeptember 30, 2022 was$1.3 million in both three month periods endedSeptember 30, 2022 and 2021. Most significantly impacting non-interest income in the comparative three month periods was a$378,000 loss on sales and calls of securities due to the execution of a balance sheet and regulatory capital management strategy, as well as a$68,000 decline in the value of equity securities during the three months endedSeptember 30, 2022 . These declines were partially offset by receipt of$329,000 in life insurance proceeds and an$83,000 increase in fees derived from loan activity during the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . As a percentage of average assets, annualized non-interest income was 0.63% in each of the three months endedSeptember 30, 2022 and 2021. Excluding the gain/loss on sales and calls of securities, change in fair value of equity securities and life insurance proceeds, annualized non-interest income as a percentage of average assets was 0.67% for the three months endedSeptember 30, 2022 compared to 0.61% for the three months endedSeptember 30, 2021 .
Non-interest Expense:
Non-interest expense was$5.0 million for the three months endedSeptember 30, 2022 , compared to$4.9 million for the same period in 2021, an increase of$59,000 , or 1.2%. Most significantly impacting non-interest expense in the comparative three month periods was a$63,000 increase inFDIC insurance premiums, which was partially offset by a decline of$44,000 in data processing expense primarily from a reduction in core processing expenses for the three months endedSeptember 30, 2022 compared to the three months endedSeptember 30, 2021 . As a percentage of average assets, annualized non-interest expense was 2.42% during the three months endedSeptember 30, 2022 compared to 2.37% during the three months endedSeptember 30, 2021 .
Provision for income taxes:
An income tax provision of$102,000 was recorded in the three months endedSeptember 30, 2022 , compared to an income tax provision of$142,000 recorded during the three months endedSeptember 30, 2021 as taxable income was lower for the 2022 period primarily due to the receipt of non-taxable life insurance proceeds during the 2022 period. The Company qualifies for a federal tax credit for low-income housing project investments, and the tax provisions for each period reflect the application of the tax credit. For the three months endedSeptember 30, 2022 and 2021, the tax credit was$225,000 , offsetting$327,000 and$367,000 in tax expense in the 2022 and 2021 periods, respectively. For the three months endedSeptember 30, 2022 , the tax credit lowered the effective tax rate from 14.7% to 4.6% compared to the same period in 2021, when the tax credit lowered the effective tax rate from 18.0% to 7.0%. 45 Table of Contents Comparison of the Nine Months EndedSeptember 30, 2022 and 2021
Operations Overview:
Net income for the nine months endedSeptember 30, 2022 was$6.2 million , an increase of$947,000 , or 18.0%, compared to the nine months endedSeptember 30, 2021 , while basic and diluted earnings per share increased by 18.1%, to$1.24 , during the first nine months of 2022 compared to basic and diluted earnings per share of$1.05 during the comparable 2021 period. Annualized return on average assets for the nine months endedSeptember 30, 2022 was 1.01%, compared to 0.86% for the same period in 2021. For the nine months endedSeptember 30 , annualized return on average equity was 15.02% in 2022, compared to 9.47% in 2021.
Presented below are selected key ratios for the two periods:
Nine Months Ended
September 30,
2022 2021Return on average assets (annualized) 1.01 % 0.86 % Return on average equity (annualized) 15.02 % 9.47 % Average equity to average assets 6.74 %
9.10 % Non-interest income, as a percentage of average assets (annualized)
0.65 % 0.63 % Non-interest expense, as a percentage of average assets (annualized)
2.42 % 2.35 %
The discussion that follows further explains changes in the components of net
income when comparing the nine months ended
Net Interest Income:
Net interest income was$18.0 million during the nine months endedSeptember 30, 2022 , an increase of$2.5 million , or 15.6%, compared to$15.5 million recorded during the nine months endedSeptember 30, 2021 . Average earning assets increased$26.6 million , or 3.5%, to$788.8 million , during the nine months endedSeptember 30, 2022 , compared to the same period in 2021, primarily due to an increase of$28.5 million , or 8.9%, in average investment securities, as well as a$5.1 million , or 1.2%, increase in average loans, net of a$22.2 million , or 85.8%, decrease in average PPP loan balances between periods. The yield on earning assets during the nine months endedSeptember 30, 2022 increased by 24 basis points, to 3.41%, compared to same period in 2021 due to several factors, including the increase in market interest rates, driven by an increase of 300 basis points in the federal funds target range and prime rate during the current 2022 period, as well as the growth in taxable investment securities and the collection of$645,000 in interest on a previously charged off nonaccrual loan during the nine months endedSeptember 30, 2022 . Over the same periods, the cost to fund interest earning assets with interest bearing liabilities decreased nine basis points, to 0.51%, primarily due to the decline in higher cost average time deposits and long-term borrowings during the period. During the nine months endedSeptember 30, 2022 , average interest bearing liabilities increased by$7.1 million , or 1.3%, compared to the comparable 2021 period, due to growth in average interest-bearing demand and savings deposits, which was partially offset by decreases in average time deposits, long-term debt and FRB advances. The net interest margin, on a fully tax equivalent basis, increased from 2.76% during the nine months endedSeptember 30, 2021 to 3.08% during the nine months endedSeptember 30, 2022 . 46 Table of Contents
The table below shows the net interest margin on a fully tax-equivalent basis
for the nine months ended
Nine Months Ended Nine Months Ended
(Dollars in thousands) September 30, 2022 September 30, 2021 Increase (Decrease) Due To (6)
Average Yield/ Average Yield/
Balance(1) Interest Rate Balance(1) Interest Rate Volume Rate Total
ASSETS
Interest earning assets:
Loans:
Taxable loans (5) $ 404,863 $ 14,853 4.90 % $ 396,684 $ 13,680 4.61 % $ 283 $ 890 $ 1,173
Tax-exempt loans 27,669 593 2.87 30,763 691 3.00 (70) (28) (98)
Total loans 432,532 15,446 4.77 427,447 14,371 4.50 213 862 1,075
Investment securities:Taxable investment securities 341,864 4,479 1.75 314,501 3,543 1.50 308 628 936 Tax-exempt investment securities 7,313 117 2.13 6,165 112 2.42 21 (16) 5 Total investment securities 349,177 4,596 1.75
320,666 3,655 1.52 329 612 941 Interest bearing deposits 7,122 80 1.50 8,439 18 0.29 (2) 64 62 Federal funds sold - - - 5,680 1 0.01 (1) - (1)
Total interest earning assets 788,831 20,122 3.41 762,232 18,045 3.17 539 1,538 2,077 Other assets (7) 30,702 54,007 Total assets$ 819,533 $ 816,239 LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Interest bearing demand deposits (2)$ 239,399 593 0.33$ 215,489 227 0.14$ 25 $ 341 $ 366 Savings deposits 150,739 57 0.05 136,906 51 0.05 5 1 6 Time deposits 137,341 1,042 1.01 151,123 1,493 1.32 (136) (315) (451) Short-term and long-term borrowings and other interest bearing liabilities 38,892 463 1.59 55,798 734 1.76 (223) (48) (271) Total interest bearing liabilities 566,371 2,155 0.51 559,316 2,505 0.60 (329) (21) (350) Non-interest bearing liabilities: Demand deposits 192,661 177,646 Other 5,291 5,028 Stockholders' equity 55,210 74,249 Total liabilities and stockholders' equity$ 819,533 $ 816,239 Net interest income and net interest rate spread$ 17,967 2.90 %$ 15,540 2.57 %$ 868 $ 1,559 $ 2,427 Net interest margin on interest earning assets (3) 3.05 % 2.73 % Net interest income and net interest margin - Tax equivalent basis (4)$ 18,155 3.08 %$ 15,753 2.76 % Notes:
1) Average balances were calculated using a daily average.
2) Includes interest-bearing demand and money market accounts.
3) Net margin on interest earning assets is net interest income divided by
average interest earning assets.
Interest on obligations of states and municipalities is not subject to federal 4) income tax. To make the net yield comparable on a fully taxable basis, a tax
equivalent adjustment is applied against the tax-exempt income utilizing a
federal tax rate of 21%.
5) Non-accruing loans are included in the above table until they are charged off.
The change in interest due to rate and volume has been allocated to volume and 6) rate changes in proportion to the relationship of the absolute dollar amounts
of the change in each.
7) Includes gross unrealized gains (losses) on securities available for sale.
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Provision for Loan Losses:
A loan loss provision expense of $350,000 was recorded during the nine months
ended September 30, 2022 , compared to a provision credit of $536,000 in the nine
months ended September 30, 2021 . While Juniata continued to experience favorable
asset quality trends and net recoveries during the nine months ended September
30, 2022 , elevated qualitative risk factors were considered in its allowance for
loan loss analysis for certain loan segments due to the uncertainty in the
economy and the potential for a recession as inflation, labor shortages and
supply chain disruptions remain prevalent. Additionally, loan growth of 10.5% as
of September 30, 2022 compared to December 31, 2021 was also a factor in the
increase in Juniata's loan loss provision for the nine months ended September
30, 2022 .
Management regularly reviews the adequacy of the allowance for loan losses and
makes assessments as to specific loan impairment, charge-off expectations,
general economic conditions in the Bank's market area, specific loan quality and
other factors. See the earlier discussion in the Financial Condition section
explaining the information used to determine the provision.
Non-interest Income:
Non-interest income was$4.0 million during the nine months endedSeptember 30, 2022 compared to$3.9 million during the nine months endedSeptember 30, 2021 , an increase of$88,000 , or 2.3%. Most significantly impacting the comparative nine month periods was a$1.5 million loss on sales and calls of securities in the 2022 period due to the execution of a balance sheet and regulatory capital management strategy in which the security losses were partially offset by$1.2 million in gains from the termination of two derivatives contracts, recorded in other non-interest income. See Notes 5 and 12 in the Notes to Consolidated Financial Statements. Additionally, the change in value of equity securities during the nine months endedSeptember 30, 2022 decreased by$249,000 compared to the nine months endedSeptember 30, 2021 due to declines in bank stock market values, which was partially offset by increases of$119,000 in fees derived from loan activity and$380,000 in life insurance proceeds in the 2022 period. As a percentage of average assets, annualized non-interest income was 0.65% for the nine months endedSeptember 30, 2022 compared to 0.63% for the comparable 2021 period. Excluding the gain/loss on sales and calls of securities, change in fair value of equity securities and life insurance proceeds, annualized non-interest income as a percentage of average assets was 0.84% for the nine months endedSeptember 30, 2022 compared to 0.60% for the nine months endedSeptember 30, 2021 .
Non-interest Expense:
Non-interest expense was$14.9 million during the nine months endedSeptember 30, 2022 compared to$14.4 million during the nine months endedSeptember 30, 2021 , an increase of$496,000 , or 3.4%. Most significantly impacting non-interest expense in the comparative nine month periods was a$307,000 increase in employee compensation and benefits expense due to temporary duplication of compensation and benefits expense because of employee transitions, as well as increased medical claims expenses. Also contributing to the increase in non-interest expense was a$76,000 increase inFDIC insurance premiums and a$42,000 decline in the gain on other real estate owned for the nine months endedSeptember 30, 2022 versus the comparable 2021 period. These increases were partially offset by a$71,000 decline in data processing expense. As a percentage of average assets, annualized non-interest expense was 2.42% during the nine months endedSeptember 30, 2022 compared to 2.35% during the nine months endedSeptember 30, 2021 . 48 Table of Contents Provision for income taxes: An income tax provision of$488,000 was recorded during the nine months endedSeptember 30, 2022 compared to an income tax expense of$302,000 recorded during the nine months endedSeptember 30, 2021 , primarily due to higher taxable income earned in the 2022 period. The Company qualifies for a federal tax credit for a low-income housing project investment, and the tax provisions for each period reflected the application of the tax credit. For the first nine months of 2022 and 2021, the tax credits were$676,000 in both periods, offsetting$1.2 million in tax expense recorded during the nine months endedSeptember 30, 2022 and$978,000 in tax expense recorded in the comparable 2021 period. The tax credit lowered the effective tax rate from 17.4% to 7.3% during the first nine months of 2022 compared to the same period in 2021, when the tax credit lowered the effective tax rate from 17.5% to 5.4%.
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 Company 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 a primary goal of the Company to maintain an adequate level of liquidity in all economic environments. Principal sources of asset liquidity are provided by loans and securities maturing in one year or less, and 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 Company is a member of theFederal Home Loan Bank of Pittsburgh for the purpose of providing short-term liquidity to supplement other sources of liquidity liability. During the nine months endedSeptember 30, 2022 , overnight borrowings from theFederal Home Loan Bank averaged$739,000 . As ofSeptember 30, 2022 , the Company had$29.0 million in short-term borrowings and$20.0 million in long-term debt with theFederal Home Loan Bank with a remaining unused borrowing capacity of$148.9 million with the FHLB.
The Company may use brokered deposits as an additional funding alternative.
Brokered deposits of
Funding derived from securities sold under agreements to repurchase (accounted for as collateralized financing transactions) is available through corporate cash management accounts for business customers. This product provides the Company with the ability to pay interest on corporate checking accounts.
In view of the sources previously mentioned, management believes that the Company's liquidity can provide the funds needed to meet operational cash needs.
Off-Balance Sheet Arrangements:
The Company'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 outstanding letters of credit. Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third-party. Generally, financial and performance letters of credit have expiration dates within one year of issuance, while commercial letters of credit have longer term commitments. The credit risk involved in issuing letters of credit is essentially the same as the risks that are involved in extending loan facilities to customers. The Company generally holds collateral and/or personal guarantees supporting these commitments. As ofSeptember 30, 2022 andDecember 31, 2021 , the Company had$3.7 million and$5.7 million , respectively, of financial and performance letters of credit commitments outstanding. Commercial letters of credit as ofSeptember 30, 2022 andDecember 31, 2021 totaled$9.9 million and$9.5 million , respectively. 49
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Management believes the proceeds obtained through a liquidation of collateral and the enforcement of guarantees would be sufficient to cover the potential amount of future payments required under the corresponding letters of credit. The current amount of the liability as ofSeptember 30, 2022 for payments under letters of credit issued was not material. 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. Additionally, the Company has sold qualifying residential mortgage loans to the FHLB as part of its Mortgage Partnership Finance Program ("Program"). Under the terms of the Program, there is limited recourse back to the Company for loans that do not perform in accordance with the terms of the loan agreement. Each loan sold under the Program is "credit enhanced" such that the individual loan's rating is raised to "BBB", as determined by the FHLB. The Program can be terminated by either the FHLB or the Company, without cause. The FHLB has no obligation to commit to purchase any mortgage through, or from, the Company.
Interest Rate Sensitivity:
Interest rate sensitivity management is overseen by 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.
Capital Adequacy:
Bank regulatory authorities inthe 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 Basel III risk-based capital standards require financial institutions to maintain: (a) a minimum ratio of common equity tier 1 ("CET1") to risk-weighted assets of at least 4.5%, (b) a minimum ratio of tier 1 capital to risk-weighted assets of at least 6.0%; (c) a minimum ratio of total (that is, tier 1 plus tier 2) capital to risk-weighted assets of at least 8.0%); and (d) a minimum leverage ratio of 4.0%, calculated as the ratio of tier 1 capital balance sheet exposures plus certain off-balance sheet exposures (computed as the average for each quarter of the month-end ratios for the quarter). In addition, the rules also limit a banking organization's capital distributions and certain discretionary bonus payments if the banking organization does not hold a "capital conservation buffer" of 2.5% above the minimum risk-based standards stated in (a) - (c) above.
At
The Company's principal source of funds for dividend payments is dividends received from the Bank. Certain regulatory restrictions exist regarding the ability of the Bank to transfer funds to the Company in the form of cash dividends, loans or advances. AtSeptember 30, 2022 ,$33.9 million in undistributed earnings of the Bank, included in the consolidated stockholders' equity, was available for distribution to the Company as dividends without prior regulatory approval, subject to regulatory capital requirements. 50
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