JUNIATA VALLEY FINANCIAL CORP. THREE-YEAR FINANCIAL SUMMARY
(Dollars in thousands, except share and per share data)
2022 2021 2020
BALANCE SHEET INFORMATION atDecember 31 Assets$ 830,875 $ 810,518 $ 793,718 Deposits 711,512 708,447
622,866
Loans, net of allowance for loan losses 480,485 414,795
418,567
Investments 287,966 339,997 321,417
Goodwill 9,047 9,047 9,047
Short-term borrowings and repurchase
agreements 55,710 4,227 24,750
Long-term debt 20,000 20,000 35,000
Stockholders' equity 36,949 71,290 76,597
Number of shares outstanding 5,003,059 4,988,542 5,029,841
Average for the year
Assets 819,153 816,989 740,111
Stockholders' equity 50,151 73,638 76,056
Weighted average shares outstanding for the
year - basic 4,999,980 5,004,051 5,073,840
Weighted average shares outstanding for the year - diluted 5,008,512 5,013,460 5,080,455 INCOME STATEMENT INFORMATION Years EndedDecember 31 Total interest income$ 27,555 $ 24,553 $ 24,283 Total interest expense 3,422 3,218 4,037 Net interest income 24,133 21,335 20,246 Provision for loan losses 455 (769) 721 Non-interest income 5,225 5,154 5,320 Non-interest expense 19,941 20,370 19,293 Income before income taxes 8,962 6,888 5,552
Federal income tax (benefit) expense 642 284
(50)
Net income $ 8,320 $ 6,604 $ 5,602
PER SHARE DATA
Earnings per share - basic $ 1.66 $ 1.32 $ 1.10
Earnings per share - diluted 1.66 1.32 1.10
Cash dividends 0.88 0.88 0.88
Book value 7.39 14.29 15.23
FINANCIAL RATIOS
Return on average assets 1.02 % 0.81 % 0.76 %
Return on average equity 16.59 8.97 7.37
Dividend payout 52.90 66.66 79.71Average equity to average assets 6.12 9.01
10.28
Loans to deposits (year-end) 67.53 58.55 67.20
Yield on earning assets 3.50 3.21 3.55
Cost to fund earning assets 0.60 0.58 0.80
Non-interest income [excluding gains
(losses) on sales or calls of securities]
to average assets 0.82 0.63 0.60
Non-interest expense to average assets 2.43 2.49
2.61
Net non-interest expense to average assets 1.62 1.87
2.00
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FORWARD-LOOKING STATEMENTS
The information contained in this Annual Report on Form 10-K 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 Corporation'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 Corporation'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 document, Juniata is making
forward-looking statements. Any forward-looking statement made by the Company in
this document is based only on Juniata'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, without limitation:
? changes in general economic, business and political conditions, including
inflation, 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;
? 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, climate change, severe weather, or other natural
disasters;
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? failure of third-party service providers to perform their contractual
obligations; and
? the impact of increase unrealized losses on debt securities on stockholders'
equity. OVERVIEW
This discussion relates to
The overview is intended to provide a context for the following Management's Discussion and Analysis of Financial Condition and Results of Operations. Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our consolidated financial statements, including the notes thereto, included in this Annual Report on Form 10-K. We have attempted to identify the most important matters on which our management focuses in evaluating our financial condition and operating performance and the short-term and long-term opportunities, challenges and risks (including material trends and uncertainties) that we face. We also discuss the actions we are taking to address these opportunities, challenges and risks. The Overview is not intended as a summary of, or a substitute for review of, Management's Discussion and Analysis of Financial Condition and Results of Operations.
ECONOMIC AND INDUSTRY-WIDE FACTORS RELEVANT TO
As a financial services organization,Juniata's core business is most influenced by the level of, and movement of, interest rates. Lending and investing are done daily, using funding from deposits and borrowings, resulting in net interest income, the most significant portion of operating results. Using asset/liability management tools, the Company continually evaluates the effects that possible changes in interest rates could have on operating results and balance sheet growth. Using this information, along with analysis of competitive factors, management designs and prices its products and services.
General economic conditions are relevant to
FOCUS OF MANAGEMENT
The management of Juniata believes that it is important to know who and what we
are to be successful. We must be aligned in our efforts to achieve goals. We
have identified the four characteristics that define the Company and the
personnel that support it. We are Committed, Capable, Caring and Connected.
Management seeks to be the preeminent financial institution in its market area
and measures its success in achieving our goals by the five key elements
described below.
SHAREHOLDER SATISFACTION
Above all else, management is committed to maximizing the value of our
shareholders' investment, through both stock value appreciation and dividend
returns. Remaining connected to our communities will allow us to identify the
financial needs of our market and to deliver those products and services
capably. In doing so, we will seek to profitably grow the balance sheet and
enhance earnings, while maintaining capital and liquidity levels that exceed all
regulatory guidelines.
CUSTOMER RELATIONSHIPS
We are committed to maximizing customer satisfaction. We are sensitive to the
expanding array of financial services and financial service providers available
to our customers, both locally and globally. We are committed to fostering a
complete customer relationship by helping clients identify their current and
future financial needs and offering practical and affordable solutions to both.
As our customers' lifestyles change, the channels through which we deliver our
services must change as well. One element of the Company's strategic plan is to
provide connection through every means available, wherever we are needed,
whether through a stand-alone branch, in-store boutique, ATM or via online and
mobile banking anywhere internet or cell phone signals can be received. In 2022,
we continued to make advances in technological resources, offering a mobile
wallet to consumers because we are committed to optimizing the customer
experience.
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BALANCE SHEET GROWTH
We are capable of profitable balance sheet growth. Rapid growth should not be a substitute for careful fiscal and strategic management. It is our goal to continue quality growth despite intense competition by paying careful attention to the needs of our customers. We will continue to maintain high credit standards, knowing that lending under the right circumstances is the proper way to maintain soundness and profitability. We believe we consistently pay fair market rates on all deposits and have invested wisely and conservatively in compliance with self-imposed standards, minimizing risk of asset impairment. We aspire to increase our market share within the current communities that we serve, and to expand in contiguous areas through acquisition and investment. As part of our strategic plan for growth, we continue to actively seek opportunities for acquisitions of branches or stakes in other financial institutions, similar to those that have occurred in prior years, and most recently inApril 2018 with the acquisition of the remaining shares of theLiverpool Community Bank ("LCB").
OPERATING RESULTS
We are capable of producing profitability ratios that exceed those of many of our peers. Recognizing that net interest margins have narrowed for banks in general and that these margins may not return to the ranges experienced in the past, we also focus on the importance of providing fee-generating services in which customers find value. Offering a broad array of services prevents us from becoming too reliant on one form of revenue. It has also been our philosophy to spend conservatively and to implement operating efficiencies where possible to keep non-interest expense from escalating in areas that can be controlled.
CONNECTION TO THE COMMUNITY
We are active corporate citizens, connected to the communities we serve.
Although the world of banking has transitioned to global availability through
electronics, we believe that our community banking philosophy is not only still
valid, but essential. Despite technological advances, banking is still a
personal business, particularly in the rural areas we serve. We believe that our
customers shop for services and value a relationship with an institution
involved in the same community, with the same interests in its prosperity. We
have a foundation and a history in each of the communities we serve. Management
takes an active role in local business and industry development organizations to
help attract and retain commerce in our market area. We provide businesses,
large and small, with financial tools and financing needed to grow and prosper.
And though these tools are electronically driven, they are custom-designed by
relationship managers who take time to understand the need. We have always been
committed to responsible lending practices. We invest locally by including local
municipal bonds in our investment portfolio and participating in funding for
such projects as low income and elderly housing. We support charitable programs
that benefit the local communities, not only with monetary contributions, but
also through the personal involvement of our caring employees. We were
privileged to support our local business clients with Paycheck Protection Loans,
when they needed it most, and maintained a physical presence at service
locations throughout the pandemic.
JUNIATA'S OPPORTUNITIES
SOUNDNESS AND STABILITY
Our financial condition is strong. We enjoy strong capital and liquidity ratios that exceed regulatory guidelines. Our business model includes a plan for growth without sacrificing profitability or integrity. We believe an opportunity exists for banks such as ours to offer the trusted, personal service of a locally managed institution that has roots in the community reaching back over 150 years.
EXPANSION OF CUSTOMER BASE
Our strategic focus is based on leveraging our collective knowledge of the
Company's primary and contiguous markets to identify lending or fee-based
opportunities consistent with our risk parameters and profitability targets. We
continue to develop our sales team through mentoring and by making employee
education paramount. We continually seek and implement back-room efficiencies.
We recognize change is taking place in a world where convenience and mobility
are priorities for consumers and businesses when choosing a financial
institution with whom to do business. We offer full-featured secure mobile
banking that includes remote check deposit for use on home computers and all
mobile devices for consumers. For businesses, we provide options for cash
management and remote deposit. We offer identity protection to the families of
our customers, which we believe to be a true value-added service, with features
that go far beyond traditional banking services, and sets us apart from other
financial institutions in our market area. With the acquisition of First
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National Bank of Port Allegheny ("FNBPA") in 2015, we expanded our market into the northern tier region ofPennsylvania and integrated the JVB brand there and have since expanded our footprint inPerry County, Pennsylvania , through the consummation of the acquisition of remaining shares of LCB inApril 2018 .
DELIVERY SYSTEM ENHANCEMENTS
We seek to continually enhance our customer delivery system, both through technology and physical facilities. We actively seek opportunities to expand our branch network through acquisitions. We believe that it is imperative that our customers have convenient and easy access to personal financial services that complement their lifestyle, whether it is through electronic or personal delivery. We achieved an early entry into the mobile banking arena and have since expanded online delivery, offering consumer remote deposit and Touch ID, and most recently online consumer loan and deposit accounting opening. Through the www.JVBonline.com website, we offer a suite of online services including the convenience of online loan applications for residential mortgages, home equity, vehicle and other personal loans. Online and mobile banking features include full bill-pay and monetary transfers between internal and external accounts. Our ATM network is equipped with state-of-the art machines. OurCustomer Care Center provides a dedicated service to address all customer inquiries, including expanded service times and on-line chat, and provides outreach through our social media sites. Our updated branch facilities feature a highly interactive and complete customer experience.JUNIATA'S CHALLENGES
NET INTEREST MARGIN COMPRESSION
The increasing interest rate environment in 2022 improved the net interest margin for most banks, includingJuniata . Loans have been originated, acquired or repriced at higher rates, increasing the average rate earned on those assets. While the average rate paid on interest bearing liabilities, such as deposits and borrowings, has also increased, the increase has not always occurred at the same pace as the increase in the average rate earned on interest-earning assets until late in the fourth quarter of 2022. We believe the increased cost of funding will impact the net interest margin and that increasing the net interest margin will continue to be a challenge as general market rates, particularly funding costs, rise. COMPETITION Each year, competition becomes more intense and global in nature. To meet this challenge, we attempt to stay in close contact with our customers, monitoring their satisfaction with our services through surveys, personal visits and networking in the communities we serve. We strive to meet or exceed our customers' expectations and deliver consistent high-quality service. We believe that our customers have become acutely aware of the value of local service, and we strive to maintain their confidence.
RATE ENVIRONMENT
We intend to continue making what we believe to be rational pricing decisions for loans, deposits and non-deposit products. This strategy can be difficult to maintain, as many of our peers appear to continue pricing for growth, rather than long-term profitability and stability. We believe that a strategy of "growth for the sake of growth" results in lower profitability, and such actions by large groups of banks have had an adverse impact on the entire financial services industry. We intend to maintain our core pricing principles, which we believe protect and preserve our future as a sound community financial services provider, proven by results. REGULATIONS
The Company is subject to banking regulation, as well as regulation by theSEC and, as such, must comply with many laws, including theUSA Patriot Act, the Sarbanes-Oxley Act of 2002 ("Sarbanes-Oxley") and theDodd-Frank Wall Street Reform and Consumer Protection Act. Management has established aDisclosure Committee for Financial Reporting , an internal group atJuniata that seeks to ensure that current and potential investors in the Company receive full and complete information concerning our financial condition.Juniata has incurred direct and indirect costs associated with compliance with theSEC's filing and reporting requirements imposed on public companies by the Sarbanes-Oxley Act, as well as adherence to new and existing banking regulations and stronger corporate governance requirements. Regulatory burdens continue to increase as evidenced by the provisions in the Dodd-Frank Act that impact the Company in the areas of corporate governance, capital requirements and restrictions on fees that may be charged to consumers. 27 Table of Contents APPLICATION OF CRITICAL ACCOUNTING POLICIES
The Company's consolidated financial statements are prepared based upon the application of accounting principles generally accepted inthe United States of America ("GAAP"), the most significant of which are described in Note 2 of The Notes to Consolidated Financial Statements - Summary of Significant Accounting Policies. Certain of these policies, particularly with respect to allowance for loan losses and the investment portfolio, require numerous estimates and economic assumptions, based upon information available as of the date of the consolidated financial statements. As such, over time, these assumptions may prove to be inaccurate or vary and may significantly affect the Company's reported results and financial position in future periods. The accounting policy for establishing the allowance for loan losses relies to a greater extent on the use of estimates than other areas and, as such, has a greater possibility of producing results that could be different from those currently reported. Changes in underlying factors, assumptions or estimates in the allowance for loan losses could have a material impact on the Company's future financial condition and results of operations. The allowance for loan losses is maintained at a level believed to be adequate by management to absorb probable losses in the loan portfolio. Management's determination of the adequacy of the allowance for loan losses is based upon an evaluation of individual credits in the loan portfolio, historical loan loss experience, current economic conditions and other relevant factors. This determination is inherently subjective, as it requires material estimates, including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. 28 Table of Contents RESULTS OF OPERATIONS 2022 AND 2021 FINANCIAL PERFORMANCE OVERVIEW Net income forJuniata in 2022 was$8.3 million , an increase of 26.0%, compared to net income of$6.6 million for 2021. Earnings per share on a fully diluted basis increased 25.8%, to$1.66 in 2022, compared to$1.32 in 2021. Return on average assets ("ROA") for the years endedDecember 31, 2022 and 2021 was 1.02% and 0.81%, respectively, while the return on average equity ("ROE") for 2022 was 16.59% compared to 8.97% in 2021. The net interest margin, on a fully tax-equivalent basis, increased from 2.83% in 2021 to 3.10% in 2022. The yield on earning assets increased 29 basis points, to 3.50%, while the cost of funds increased two basis points, to 0.60%, in 2022 compared to 2021. In 2022,Juniata executed a balance sheet and regulatory capital management strategy by selling$24.7 million , par value, of sub debt of unconsolidated financial institutions, classified as corporate debt securities, at a loss of$1.5 million , which was partially offset by the termination of two forward starting interest rate swaps, resulting in a gain of$1.2 million . Management's intent with respect to these securities changed in 2022 due to the adverse regulatory impact of substantial (relative to capital) holdings of subordinated debt. In 2021,Juniata executed a balance sheet strategy funding the prepayment of$15.0 million in higher-cost long-term debt with proceeds from the sale of investment securities and the use of brokered deposits.Juniata strives to attain consistently satisfactory earnings levels each year by protecting the core (repeatable) earnings base through conservative growth strategies that seek to minimize shareholder and balance-sheet risk, while serving its ruralPennsylvania customer base. This approach has helped achieve solid performances year after year. The Company considers the return on assets ratio to be a key indicator of its success and constantly scrutinizes the broad categories of the income statement that impact this profitability indicator. 29 Table of Contents Summarized below are the components of net income and the contribution of each to ROA for 2022 and 2021. (Dollars in thousands) 2022 2021 Net Income % of Average Net Income % of Average Components Assets Components Assets Net interest income$ 24,133 2.95 %$ 21,335 2.61 % Provision for loan losses (455) (0.06) 769 0.09 Customer service fees 1,472 0.18 1,355 0.17 Debit card fee income 1,703 0.21 1,755 0.21 BOLI 219 0.03 246 0.03 Trust fees 472 0.06 445 0.05 Commissions from sales of non-deposit products 384 0.05 368 0.05 Fees derived from loan activity 540 0.07 441 0.05 Mortgage banking income 34 0.00 41 0.01 Security gains (losses) (1,453) (0.18) 21 0.00 Change in value of equity securities (68) (0.01) 151 0.02 Gain from life insurance proceeds 380 0.05 151 0.02 Other noninterest income 1,542 0.19 331 0.04 Total noninterest income 5,225 0.64 5,154 0.63 Employee expense (10,815) (1.32) (10,700) (1.31) Occupancy and equipment (2,018) (0.25) (2,002) (0.25) Data processing expense (2,582) (0.32) (2,693) (0.33) Professional fees (800) (0.1) (841) (0.1) Taxes, other than income (503) (0.06) (574) (0.07) FDIC insurance premiums (405) (0.05) (310) (0.04) Gain on sales of other real estate owned 28 0.00 64 0.01 Intangible amortization (54) (0.01) (66) (0.01) Amortization of investment in partnership (799) (0.10) (799) (0.10) Long-term debt prepayment penalty - - (691) (0.08) Other noninterest expense (1,993) (0.24) (1,758) (0.22) Total noninterest expense (19,941) (2.43) (20,370) (2.49) Income tax provision (642) (0.08) (284) (0.03) Net income$ 8,320 1.02 %$ 6,604 0.81 % Average assets$ 819,153 $ 816,989 NET INTEREST INCOME Net interest income is the amount by which interest income on earning assets exceeds interest expense on interest bearing liabilities. Net interest income is the most significant component of revenue, comprising approximately 78% of total revenues (the total of net interest income and non-interest income, exclusive of gains on sales and calls of securities) for 2022. Interest spread measures the absolute difference between average rates earned and average rates paid. Because some interest earning assets are tax-exempt, an adjustment is made for analytical purposes to present all assets on a fully tax-equivalent basis. Net interest margin is the percentage of net return on average earning assets, on a fully tax-equivalent basis, and provides a measure of comparability of a financial institution's performance. Both net interest income and net interest margin are impacted by interest rate changes, changes in the relationships between various rates and changes in the composition of the average balance sheet. Additionally, product pricing, product mix and customer preferences dictate the composition of the balance sheet and the resulting net interest income. Table 1 shows average asset and liability balances, average interest rates and interest income and expense for the years 2022, 2021 and 2020. Table 2 further shows changes attributable to the volume and rate components of net interest income. 30 Table of Contents TABLE 1
AVERAGE BALANCE SHEETS AND NET INTEREST INCOME ANALYSIS
Year Ended Year Ended Year Ended
(Dollars in thousands) December 31, 2022 December 31, 2021 December 31, 2020
Average Yield/ Average Yield/ Average Yield/
Balance(1) Interest Rate Balance(1) Interest Rate Balance(1) Interest Rate
ASSETS
Interest earning assets:
Loans:
Taxable loans (5) $ 414,208 $ 20,429 4.93 % $ 393,679 $ 18,579 4.72 % $ 385,425 $ 18,364 4.76 %
Tax-exempt loans 27,762 798 2.88 29,606 883 2.98 27,826 885 3.18
Total loans 441,970 21,227 4.80 423,285 19,462 4.60 413,251 19,249 4.66 Investment securities: Taxable investment securities 332,777 6,077 1.83
322,956 4,912 1.52 251,095 4,813 1.92 Tax-exempt investment securities
7,214 155 2.15 6,550 154 2.35 5,979 142 2.37
Total investment securities 339,991 6,232 1.83 329,506 5,066 1.54 257,074 4,955 1.93 Interest bearing deposits 5,423 96 1.78 7,226 24 0.33 9,831 66 0.67 Federal funds sold - - - 4,248 1 0.01 3,082 13 0.43
Total interest earning assets 787,384 27,555 3.50
764,265 24,553 3.21 683,238 24,283 3.55
Non-interest earning assets: Cash and due from banks 12,968 13,687 13,137 Allowance for loan losses (3,713) (3,972) (3,513) Premises and equipment 8,257 8,513 9,011 Other assets (7) 14,257 34,496 38,238 Total assets$ 819,153 $ 816,989 $ 740,111 LIABILITIES AND STOCKHOLDERS' EQUITY Interest bearing liabilities: Interest bearing demand deposits (2)$ 236,438 1,030 0.44$ 220,082 299 0.14$ 166,627 403 0.24 Savings deposits 149,909 75 0.05 137,899 70 0.05 108,535 69 0.06 Time deposits 136,472 1,472 1.08 149,405 1,903 1.27 152,632 2,474 1.62 Short-term and long-term borrowings and other interest bearing liabilities 45,326 845 1.86 51,596 946 1.83 75,737 1,091 1.44 Total interest bearing liabilities 568,145 3,422 0.60 558,982 3,218 0.58 503,531 4,037 0.80 Non-interest bearing liabilities: Demand deposits 195,301 179,202 155,090 Other 5,556 5,167 5,434 Stockholders' equity 50,151 73,638 76,056 Total liabilities and stockholders' equity$ 819,153 $ 816,989 $ 740,111 Net interest income and net interest rate spread$ 24,133 2.90 %$ 21,335 2.63 %$ 20,246 2.75 % Net interest margin on interest earning assets (3) 3.06 % 2.79 % 2.96 % Net interest income and net interest margin - Tax equivalent basis (4)$ 24,386 3.10 %$ 21,610 2.83 %$ 20,519 3.00 % 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 (4) federal income tax. In order to make the net yield comparable on a fully
taxable basis, a tax equivalent adjustment is applied against the tax-exempt
income using a federal tax rate of 21%.
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TABLE 2
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
(Dollars in thousands) 2022 Compared to 2021
2021 Compared to 2020
Increase (Decrease) Due To (6) Increase (Decrease) Due To (6)
Volume Rate Total Volume Rate Total
ASSETS
Interest earning assets:
Loans:
Taxable (5) $ 969 $ 881 $ 1,850 $ 395 $ (180) $ 215
Tax-exempt (55) (30) (85) 57 (59) (2)
Total loans (8) 914 851 1,765 452 (239) 213
Investment securities:
Taxable 149 1,016 1,165 1,377 (1,278) 99
Tax-exempt 16 (15) 1 14 (2) 12
Total investment securities 165 1,001 1,166 1,391 (1,280) 111
Interest bearing deposits (6) 78 72 (18) (24) (42)
Federal funds sold (1) - (1) 6 (18) (12)
Total interest earning assets 1,072 1,930 3,002 1,831 (1,561) 270
LIABILITIES AND STOCKHOLDERS'
EQUITY
Interest bearing liabilities:
Demand deposits (2) $ 22 $ 709 $ 731 $ 129 $ (233) $ (104)
Savings deposits 6 (1) 5 19 (18) 1
Time deposits (165) (266) (431) (52) (519) (571)
Other, including short and
long-term borrowings, and other
interest bearing liabilities (115) 14 (101) (419) 274 (145)
Total interest bearing
liabilities (252) 456 204 (323) (496) (819)
Net interest income $ 1,324 $ 1,474 $ 2,798 $ 2,154 $ (1,065) $ 1,089
Notes:
(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 (6) and rate changes in proportion to the relationship of the absolute dollar
amounts of the change in each.
(7) Includes net unrealized gains (losses) on debt securities: (
2022,
(8) Interest income includes loan fees of
2022, 2021 and 2020, respectively.
Net interest income was$24.1 million for the year endedDecember 31, 2022 . An increase in volume and rate contributed$1.3 million and$1.5 million , respectively, to net interest income in 2022, resulting in an overall increase of$2.8 million , or 13.1%, when compared to net interest income of$21.3 million for the comparable 2021 period, which increased by$1.1 million , or 5.4%, over the 2020 period. Average earning assets increased$23.1 million , or 3.0%, to$787.4 million , during the year endedDecember 31, 2022 , compared to the same period in 2021, which increased$81.0 million , or 11.9% compared to the year endedDecember 31, 2020 . 32
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On average, total loans outstanding increased$18.7 million , or 4.4%, in 2022 compared to 2021. Average loans in 2022 included average PPP loan balances of$2.7 million compared to$23.8 million in 2021. Average total loans outstanding increased$10.0 million , or 2.4%, in 2021 compared to 2020. Average yields on loans increased by 20 basis points in 2022 compared to 2021, which was 6 basis points less than 2020. As shown in Table 2, Rate - Volume Analysis of Net Interest Income, the increase in yield in 2022 increased interest income on loans by approximately$851,000 , while the increase in volume raised interest income by$914,000 compared to 2021, resulting in a net increase in interest recorded on loans of$1.8 million . The 425 basis point increase in the prime rate, to 7.50% in 2022, impacted the yield on loans. During 2021, the decrease in yield lowered interest income on loans by approximately$239,000 , while the increase in volume increased interest income by$452,000 compared to 2020, resulting in a net increase in interest recorded on loans of$213,000 . The 150 basis point decline in the prime rate in 2020, ending at 3.25%, impacted the yield on loans. Average investment securities increased by$10.5 million , or 3.2%, during 2022. The increase in volume on investment securities in 2022 accounted for a$165,000 increase in interest income, while the increase in yield on investment securities of$1.1 million resulted in an aggregate increase in interest recorded on investment securities of$1.2 million in 2022 compared to 2021. During 2021 and 2020, cash flows from maturities, sales and repayments of investment securities were reinvested into the securities portfolio, as were the additional funds from the growth in interest bearing liabilities and non-interest bearing demand deposits. As a result, average balances of investment securities increased by$72.4 million , or 28.2%, during 2021 compared to 2020. The increases in volume accounted for a$1.4 million increase in interest income in 2021 compared to 2020, while the decline in yield on investment securities decreased net interest income by$1.3 million , resulting in an aggregate increase in interest recorded on investment securities of$111,000 in 2021 compared to 2020. Average yields on investment securities increased by 29 basis points in 2022 compared to 2021, which was 39 basis points less than 2020. Investment yields in 2022 were impacted by the 425 basis point increase in the federal funds rate during the year. In total, yield on earning assets in 2022 was 3.50% compared to 3.21% in 2021 and 3.55% in 2020. On a fully tax equivalent basis, the yield on earning assets increased 28 basis points to 3.53% in 2022, from 3.25% in 2021, which decreased 34 basis points from 3.59% in 2020. Average interest bearing liabilities increased by$9.2 million , or 1.6%, in 2022 compared to 2021, which increased$55.5 million compared to 2020. Within the categories of interest bearing liabilities, average interest bearing demand and savings deposits increased by$28.4 million in 2022 compared to 2021, while average overnight borrowings and short-term debt increased by$11.9 million . These increases were partially offset by decreases in average time deposits of$12.9 million , as well as FHLB long-term debt and FRB advances, which decreased in total by$19.1 million . During 2021, average deposits increased by$79.6 million compared to 2020, primarily due to government stimulus payments and the addition of brokered demand deposits that averaged$14.2 million in 2021. The repayment of short-term borrowings and long-term debt led to a decline in average borrowings of$24.1 million in 2021 compared to 2020. Changes in the volume and rate of total interest bearing liabilities, in the aggregate, increased interest expense by$204,000 in 2022 compared to 2021, while the aggregate changes in volume and rate in 2021 decreased interest expense by$819,000 compared to 2020. The percentage of average interest earning assets funded by average non-interest bearing demand deposits was approximately 24.8% in 2022, compared to 23.4% in 2021 and 22.7% in 2020. The total cost to fund earning assets (computed by dividing the total interest expense by the total average earning assets) in 2022 was 0.43%, compared to 0.42% in 2021 and 0.59% in 2020. 33 Table of Contents PROVISION FOR LOAN LOSSESJuniata's provision for loan losses is determined as a result of an analysis of the adequacy level of the allowance for loan losses. In order to closely reflect the potential losses within the current loan portfolio based upon current information known, the Company carries no unallocated allowance. Using the process of analysis described in "Application of Critical Accounting Policies" earlier in this discussion, the Company determined that a loan loss provision expense of$455,000 was appropriate for 2022, compared to a provision credit of$769,000 recorded in 2021. Loan growth of 15.8% as ofDecember 31, 2022 compared toDecember 31, 2021 was a factor in the increase in the loan loss provision for the year endedDecember 31, 2022 . Additionally, whileJuniata continued to experience favorable asset quality trends and net recoveries during the year endedDecember 31, 2022 , elevated qualitative risk factors were considered in the allowance for loan loss analysis for certain loan segments due to the continued uncertainty in the economy and the potential for a recession as inflation remains elevated. The discussion included in the Loans and Allowance for Loan Losses section below titled "Financial Condition" explains the information and analysis used to derive the loan loss provision for 2022.
NON-INTEREST INCOME
The Company remains committed to providing comprehensive services and products to meet the current and future financial needs of its customers.Juniata believes its responsiveness to customers' needs surpasses that of many of its competitors and measures its success by the customer acceptance of fee-based services. The Company continually explores avenues to enhance product offerings in areas beneficial to its customers, such as adding new features and services for its electronic banking clientele. Fraud protection services are made available to all consumer depositors.Juniata offers a variety of options for financing to home-buyers that includes a mortgage referral program, providing significant fee income.Juniata also provides alternative investment opportunities through an arrangement with a broker-dealer that integrates the delivery of non-traditional products withJuniata's Trust andWealth Management Division . This arrangement enablesJuniata to meet the investment needs of a varied customer base and to better identify its clients' needs for traditional trust services. Non-interest income was$5.2 million in 2022, which was$71,000 higher than in 2021. Most significantly impacting the comparative year end 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, which was partially offset by$1.2 million in gains from the termination of two derivatives contracts, recorded in other non-interest income, as well as$380,000 in life insurance proceeds recorded in the 2022 period. Fee-generated non-interest income consists of customer service fees derived from deposit accounts, trust relationships and sales of non-deposit products. In 2022, revenues from these services totaled$2.3 million , representing an increase of$160,000 , or 7.4%, from 2021 revenues. Customer service fees increased by$117,000 , or 8.6%, due to an increase in overdraft fee income. Fees from estate settlements increased by$30,000 , while non-estate trust fees decreased by$3,000 in 2022 versus 2021. Variances in fees from estate settlements arise because estate settlements occur sporadically and are not necessarily consistent year to year. Non-estate fees are repeatable revenues that generally increase and decrease in relation to movements in interest rates as market values of trust assets under management increase or decrease and as new relationships are established. Commissions from sales of non-deposit products increased in 2022, in comparison to 2021, by$16,000 , or 4.3%, as sales increased. Fees generated by debit card activity decreased by$52,000 , or 3.0%, in 2022 compared to the prior year due to decreased debit card usage, while earnings on bank-owned life insurance and annuities declined by$27,000 , or 11.0%, in 2022 compared to 2021 caused by a decline in earnings resulting from the lower rate environment. Other non-interest-related fees derived from loan activity increased by$99,000 , or 22.4%, when comparing 2022 to 2021, primarily due to recording a$104,000 purchased credit risk adjustment in 2022 for a participated loan relationship with a back-to-back swap arrangement. Additionally, the change in value of equity securities decreased$219,000 , or 145.0%, in 2022 compared to 2021 resulting from a decline in bank stock market values.
As a percentage of average assets, non-interest income (excluding securities gains/losses on sales or calls of securities, change in value of equity securities and gain from life insurance proceeds) was 0.78% and 0.61%, respectively in 2022 and 2021.
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NON-INTEREST EXPENSE
Management strives to control non-interest expense where possible in order to improve operating results. Non-interest expense was$19.9 million in 2022 compared to$20.4 million in 2021, a decrease of 2.1%. Most significantly impacting non-interest expense in the comparative year end periods was a decline of$691,000 in long-term debt prepayment penalty as$15.0 million in higher-cost FHLB long-term debt was repaid in 2021.
Data processing expense decreased by
Partially offsetting these decreases was an increase inFDIC insurance premiums of$95,000 , or 30.6%, during 2022 compared to 2021, predominantly due to a prior period assessment adjustment. Additionally, employee benefits expense increased by$84,000 , or 3.7%, during the year endedDecember 31, 2022 compared to year endDecember 31, 2022 as medical claims expense increased. As a percentage of average assets, non-interest expense was 2.43% in 2022 as compared to 2.49% in 2021. Excluding the prepayment penalty on long-term debt, non-interest expense as a percentage of average assets was 2.41% in 2021.
INCOME TAXES
Income tax expense for 2022 was$642,000 versus$284,000 in 2021. Both periods included the effect of a tax credit of$902,000 . The tax credit was available to the Company as a result of an equity investment in two low-income housing projects. Exclusive of the tax credit, the Company recorded income tax expense of$1.5 million in 2022, compared to$1.2 million in 2021.Juniata's effective tax rate in 2022 was 7.2% versus 4.1% in 2021. See Note 13 of The Notes to Consolidated Financial Statements for further information on income taxes. 35 Table of Contents FINANCIAL CONDITION BALANCE SHEET SUMMARYJuniata functions as a financial intermediary and, as such, its financial condition can be best analyzed in terms of changes in its uses and sources of funds and can also be analyzed in terms of changes in daily average balances. The table below sets forth average daily balances for the last two years and the dollar change and percentage change for the past year.
TABLE 3
CHANGES IN USES AND SOURCES OF FUNDS
(Dollars in thousands) 2022 2021
Average Increase (Decrease) Average
Balance Amount % Balance
Funding Uses:
Taxable loans $ 414,208 $ 20,529 5.2 % $ 393,679
Tax-exempt loans 27,762 (1,844) (6.2) 29,606
Taxable securities 332,777 9,821 3.0 322,956
Tax-exempt securities 7,214 664 10.1 6,550
Interest bearing deposits 5,423 (1,803) (25.0) 7,226
Federal funds sold - (4,248) (100.0) 4,248Total interest earning assets 787,384 23,119
3.0 764,265 Investment in: Low income housing 1,935 (798) (29.2) 2,733 BOLI and annuities 16,209 (492) (2.9) 16,701
Goodwill and intangible assets 9,197 (26) (0.3) 9,223 Unrealized gains (losses) on securities (25,735) (25,927) (13,503.6) 192 Other non-interest earning assets 33,876 6,029 21.7 27,847 Less: Allowance for loan losses (3,713) 259
(6.5) (3,972) Total uses$ 819,153 $ 2,164 0.3 %$ 816,989 Funding Sources:
Interest bearing demand deposits$ 236,438 $ 16,356
7.4 %$ 220,082 Savings deposits 149,909 12,010 8.7 137,899 Time deposits under$100,000 93,514 (2,436) (2.5) 95,950 Time deposits over$100,000 42,958 (10,497) (19.6) 53,455 Repurchase agreements 5,532 1,283 30.2 4,249 Short-term borrowings 18,635 11,894 176.4 6,741 FRB advances - (4,948) (100.0) 4,948 Long-term debt 20,000 (14,110) (41.4) 34,110
Other interest bearing liabilities 1,159 (389) (25.1) 1,548 Total interest bearing liabilities 568,145 9,163
1.6 558,982 Demand deposits 195,301 16,099 9.0 179,202 Other liabilities 5,556 389 7.5 5,167 Stockholders' equity 50,151 (23,487) (31.9) 73,638 Total sources$ 819,153 $ 2,164 0.3 %$ 816,989 36 Table of Contents Overall, total average assets increased by$2.2 million , or 0.3%, for the year 2022 compared to 2021. The increase in 2022 was partially due to an increase in taxable loans and investment securities, which were funding by increases in interest bearing and noninterest bearing demand deposits, as well as short-term borrowings. The ratio of average earning assets to total average assets increased from 93.5% in 2021 to 96.1% in 2022. The ratio of average interest bearing liabilities to total average assets increased in 2022 to 69.4% from 68.4% in 2021. AlthoughJuniata's investment in low income elderly housing projects and its bank owned life insurance and annuities are not classified as interest-earning assets, income is derived directly from those assets. These instruments represented 2.2% and 2.4% of total average assets in 2022 and 2021, respectively. A more detailed discussion of the Company's earning assets and interest bearing liabilities will follow in the Sections titled "Loans", "Investments" and "Deposits". Total average stockholders' equity declined$23.5 million as ofDecember 31, 2022 compared toDecember 31, 2021 primarily due to a$26.6 million increase in unrealized losses on debt securities recorded in AOCI, which was partially offset by a$2.9 million , or 6.3%, increase in retained earnings.Juniata transferred$212.3 million in debt securities from the available for sale to the held to maturity classification in the fourth quarter of 2022 reflectingJuniata's intent and ability to hold such debt securities for the foreseeable future or until maturity. LOANS
Loans outstanding at the end of each year consisted of the following:
(Dollars in thousands)
Years Ended December 31,
2022 2021 2020 2019 2018
Commercial, financial and
agricultural $ 61,458 $ 62,639 $ 73,057 $ 51,785 $ 46,563
Real estate - commercial 199,206 159,806 122,698 126,613 141,295
Real estate - construction 50,748 43,281 61,051 46,459 36,688
Real estate - mortgage 150,290 131,754 141,438 150,538 163,548
Obligations of states and political
subdivisions 18,770 16,323 18,550 16,377 19,129
Personal 4,040 4,500 5,867 8,818 10,408
Total $ 484,512 $ 418,303 $ 422,661 $ 400,590 $ 417,631
From year-end 2021 to year-end 2022, total loans outstanding increased by $66.3
million . PPP loans are included in the commercial, financial and agricultural
class and totaled $10.1 million at December 31, 2021 compared to $4,000 at
December 31, 2022 . Excluding PPP loan forgiveness and repayments, total loans
outstanding increased by $76.4 million at December 31, 2022 compared to the
prior year end. The following table summarizes how the ending balances changed
in each of the last two years.
(Dollars in thousands)
2022 2021
Beginning balance $ 418,233 $ 422,661
Net (paid off) new loans 65,821 (4,404)
Loans charged off (36) (18)Loans transferred to other real estate owned (30) (148) Loans transferred to repossessions
- (1)
Other adjustments to carrying value 524 143
Net change 66,279 (4,428)
Ending balance $ 484,512 $ 418,233
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The following table presents the maturity distribution and amount of loans with
fixed and variable interest rates as of
After 1 Year After 5 Years
(Dollars in thousands) Within But Within But Within After
1 Year 5 Years 15 Years 15 Years Total
Loans with Fixed Interest Rates
Commercial, financial, and
agricultural $ 401 $ 15,463 $ 5,937 $ 214 $ 22,015
Real estate - commercial 141 9,042 15,450 5,001 29,634
Real estate - construction 627 3,932 2,135 5,598 12,292
Real estate - mortgage 1,491 7,929 42,687 31,982 84,089 Other loans 243 4,208 11,404 13 15,868 Total$ 2,903 $ 40,574 $ 77,613 $ 42,808 $ 163,898 Loans with Variable Interest Rates Commercial, financial, and agricultural$ 2,248 $ 26,672 $ 7,841$ 2,682 $ 39,443 Real estate - commercial 1,479 9,447 88,670 69,976 169,572 Real estate - construction 15,696 15,146 1,427 6,187 38,456 Real estate - mortgage 484 2,559
31,846 31,312 66,201 Other loans - 456 2,421 4,065 6,942 Total$ 19,907 $ 54,280 $ 132,205 $ 114,222 $ 320,614 Total loans$ 22,810 $ 94,854 $ 209,818 $ 157,030 $ 484,512 The loan portfolio was comprised of approximately 31.9% consumer loans (real estate - mortgage and personal loans) and 68.1% commercial loans (commercial, financial and agricultural, real estate - commercial and construction, and obligations of states and political subdivisions) onDecember 31, 2022 compared to 32.6% consumer loans and 67.4% commercial loans onDecember 31, 2021 . Management believes that diversification in the loan portfolio is important and performs a loan concentration analysis on a quarterly basis. The highest loan concentration by activity type in 2022 was real estate - commercial loans secured by income-producing property, with debt service on this category of loans being reliant upon the cash flow generated by the property. In the aggregate, loans in this category had outstanding balances of$157.8 million atDecember 31, 2022 , or 145.93% of the Bank's capital. Components of this concentration group with balances considered for general reserve purposes are as follows:
(Dollars in thousands)
NAIC Definition Outstanding Balance % of Bank Capital
Lessors of residential buildings and dwellings $ 51,054 69.80 %
Lessors of non-residential buildings 40,880
55.89
Hotels and motels 26,583 36.34
New housing for-sale builders 23,978 32.78Continuing care retirement communities 15,293
20.91
Total $ 157,788 145.93 %
Given the reserves allocated to this sector over the years and the continued
economic and market uncertainty, management continues to assess a concentration
risk factor to this group of loans when analyzing the adequacy of the allowance
for loan losses. See Note 6 of The Notes to Consolidated Financial Statements.
During 2022, all real estate loan categories, as well as obligations of states
and political subdivision loans increased, offset by declines in commercial,
financial and agricultural, as well as personal loans. The decrease in
commercial, financial and agricultural loans in 2022 was due to SBA loan
forgiveness and repayments of PPP loans, which accounted for $10.1 million of
the decline between periods. In 2021, real estate - commercial loans increased,
but were offset by declines in all other loan categories. The decrease in
commercial, financial and agricultural loans in 2021 was due to PPP loan
forgiveness of $18.6 million , whereas the decline in real estate - construction
class was mainly due to the transfer of two large relationships to the real
estate - commercial loan class for permanent financing during 2021. Juniata's
business model closely aligns lenders and community office managers' efforts to
effectively develop referrals and existing customer relationships. Continued
emphasis is placed on responsiveness and personal attention given to customers,
which
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management believes differentiates the Bank from its competition. Nearly all
commercial loans are either variable or adjustable rate loans, while
non-mortgage consumer loans generally have fixed rates for the duration of the
loan.
Juniata strives to offer fair, competitive rates and to provide optimal service
to attract loan growth and will continue to place emphasis on attracting the
entire customer relationship of our borrowers.
The loan portfolio carries the potential risk of past due, non-performing or,
ultimately, charged-off loans. The Bank attempts to manage this risk through
credit approval standards and aggressive monitoring and collection efforts.
Where prudent, the Bank secures commercial loans with collateral consisting of
real and/or tangible personal property. The Company maintains a dedicated credit
administration division, in response to the need for heightened credit review,
both in the loan origination process and in the ongoing risk assessment process.
Juniata's lending strategy and credit standards stress quality growth,
diversified by product. A standardized credit policy is in place throughout the
Company, and the credit committee of the Board of Directors reviews and approves
all loan requests for amounts that exceed management's approval levels. The
Company makes credit judgments based on a customer's existing debt obligations,
collateral, ability to pay and general economic trends. See Note 2 of The
Notes to Consolidated Financial Statements.
The allowance for loan losses is set at an amount calculated to provide for
probable losses on existing loans. A quarterly provision or credit is charged or
credited to earnings to maintain the allowance at adequate levels. Charge-offs
and recoveries are recorded as adjustments to the allowance. The allowance for
loan losses on December 31, 2022 was 0.83% of total loans, net of unearned
interest, compared to 0.84% of total loans, net of unearned interest, at the end
of 2021.
Loans that Juniata acquired through mergers and acquisitions, such as those
acquired from Liverpool in 2018 and from FNBPA in 2015, are recorded at fair
value with no carryover of the related allowance for loan losses. Acquired loans
subsequently deemed to be impaired are included in the allowance for loan losses
as impaired loans. Through loan amortization and other scheduled payments, the
excluded balances become a smaller percentage of total outstanding loans over
time, contributing to the increase in the allowance as a percentage of total
loans.
Juniata recorded a loan loss provision expense of $455,000 in 2022 compared to a
provision credit of $769,000 in 2021. Loan growth of 15.8% as of December 31,
2022 compared to December 31, 2021 was a factor in the increase in the loan loss
provision for the year ended December 31, 2022 . Additionally, while Juniata
continued to experience favorable asset quality trends and net recoveries during
the year ended December 31, 2022 , elevated qualitative risk factors were
considered in the allowance for loan loss analysis for certain loan segments due
to the continued uncertainty in the economy and the potential for a recession as
inflation remains prevalent. Net recoveries for 2022 were 0.01% of average loans
outstanding compared to net recoveries of 0.04% in 2021.
At December 31, 2022 , non-performing loans (as defined in Table 4 below), as
a percentage of the allowance for loan losses, were 4.4%, compared to 6.4% at
December 31, 2021 . Non-performing loans were 0.04% of loans outstanding as of
December 31, 2022 and 0.05% of loans outstanding as of December 31, 2021 . All
non-performing loans were collateralized with real estate at December 31, 2022 .
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TABLE 4
NON-PERFORMING LOANS
(Dollar amounts in thousands) December 31, 2022 December 31, 2021
Non-performing loans
Non-accrual loans $ 139 $ 141Accruing loans past due 90 days or more 39
85
Total $ 178 $ 226
Loans outstanding $ 484,512 $ 418,303
Ratio of non-performing loans to loans outstanding 0.04 % 0.05 % Ratio of non-accrual loans to loans outstanding 0.03 % 0.03 % Allowance for loan losses to non-accrual loans 2,897.12 % 2,487.94 % Loans on which the accrual of interest has been discontinued are designated as non-accrual loans. Accrual of interest on loans is generally discontinued when the contractual payment of principal or interest has become 90 days past due or reasonable doubt exists as to the full, timely collection of principal or interest. However, it is the Company's policy to continue to accrue interest on loans over 90 days past due if (1) they are guaranteed or well secured and (2) there is an effective means of timely collection in process. When a loan is placed on non-accrual status, all unpaid interest credited to income in the current year is reversed against current period income, and unpaid interest accrued in prior years is charged against the allowance for loan losses. Interest received on non-accrual loans generally is either applied against principal or reported as interest income, according to management's judgment as to the collectability of principal. Generally, accruals are resumed on loans only when the obligation is brought fully current with respect to interest and principal, has performed in accordance with the contractual terms for a reasonable period and the ultimate collectability of the total contractual principal and interest is no longer in doubt. The Company's non-accrual and charge-off policies are the same, regardless of loan type. During 2022, gross interest income that would have been recorded if loans on non-accrual status had been current was$49,000 , of which$39,000 was collected and included in net income. ALLOWANCE FOR LOAN LOSSES
The amount of allowance for loan losses is determined through a critical quantitative and qualitative analysis performed by management that includes significant assumptions and estimates. It is maintained at a level deemed adequate to absorb probable estimated losses within the loan portfolio and supported by detailed documentation. To assess potential credit weaknesses, it is important to analyze observable trends that may be occurring.
Management systematically monitors the loan portfolio and the adequacy of the allowance for loan losses on a quarterly basis to provide for probable losses inherent in the portfolio. The Bank's methodology for maintaining the allowance is highly structured and contains two components: 1) specific allowances allocated to loans evaluated for impairment under theFinancial Accounting Standards Board's Accounting Standards Codification ("FASB ASC") Section 310-10-35; and 2) allowances calculated for pools of loans evaluated for impairment under FASB ASC Subtopic 450-20 (Contingencies).
Component for impaired loans:
A loan is considered impaired when, based on current information and events, it
is probable that the Company will be unable to collect the scheduled payments of
principal or interest when due according to the contractual terms of the loan
agreement. Factors considered by management in determining impairment include
payment status, collateral value and the probability of collecting scheduled
principal and interest payments when due. Loans that experience insignificant
payment delays and payment shortfalls generally are not classified as impaired.
Management determines the significance of payment delays and payment shortfalls
on a case-by-case basis, taking into consideration all the circumstances
surrounding the loans and the borrower, including the length of the delay, the
reasons for the delay, the borrower's prior payment record and the amount of the
shortfall in relation to the principal and interest owed. Impairment is measured
on a loan by loan basis by the present value of expected future cash flows
discounted at the loan's effective interest rate, the loan's observable market
price or the fair value of the collateral if the loan is collateral dependent.
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The estimated fair values of substantially all the Company's impaired loans are measured based on the estimated fair value of the loan's collateral. For commercial loans secured with real estate, estimated fair values are determined primarily through third-party appraisals. When a real estate secured loan becomes impaired, a decision is made regarding whether an updated certified appraisal of the real estate is necessary. This decision is based on various considerations, including the age of the most recent appraisal, the loan-to-value ratio based on the current appraisal and the condition of the property. Appraised values may be discounted to arrive at the estimated selling price of the collateral, which is considered the estimated fair value. The discounts also include the estimated costs to sell the property. For commercial loans secured by non-real estate collateral, estimated fair values are determined based on the borrower's financial statements, inventory reports, aging accounts receivable, equipment appraisals or invoices. Indications of value from these sources are generally discounted based on the age of the financial information or the quality of the assets. For such loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The Company generally does not separately identify individual consumer segment loans for impairment analysis unless such loans are subject to a restructuring agreement. Loans whose terms are modified are classified as troubled debt restructurings if the Company grants borrowers concessions and it is deemed that those borrowers are experiencing financial difficulty. Concessions granted under a troubled debt restructuring generally involve a below-market interest rate based on the loan's risk characteristics or an extension of a loan's stated maturity date. Non-accrual troubled debt restructurings are restored to accrual status if principal and interest payments, under the modified terms, are current for a sustained period after modification. Loans classified as troubled debt restructurings are designated as impaired. As ofDecember 31, 2022 , 14 loans, with aggregate outstanding balances of$2.4 million , were evaluated for impairment. A collateral analysis was performed on each of these loans to establish a portion of the reserve needed to carry impaired loans at no higher than fair value. As a result of this analysis, no loans were determined to have insufficient collateral and, therefore, no specific reserve was established. Loans acquired with credit impairment are considered impaired loans but are not included with this component for consideration in the allowance, and they were carried at fair value of$753,000 as ofDecember 31, 2022 .
Component for pooled loan contingencies:
A contingency is an existing condition, or set of circumstances, involving uncertainty as to possible gain or loss to the Company that will ultimately be resolved when one or more future events occur or fail to occur. These conditions may be considered in relation to individual loans or in relation to groups of similar types of loans. If the conditions are met, a provision is made even though the loans that are uncollectible may not be identifiable.
In accordance with FASB ASC Subtopic 450-20, when measuring estimated credit losses, these loans are grouped into homogenous pools with similar characteristics and evaluated collectively considering both quantitative measures, such as historical loss, and qualitative measures, in the form of environmental adjustments.
These pools are established by general loan type, or "class" as follows:
? Commercial, financial and agricultural
? Real estate - commercial ? Real estate - construction ? Real estate - mortgage
? Obligations of states and political subdivisions
? Personal
Some portfolio segments are further disaggregated and evaluated collectively for
impairment based on "class segments," which are largely based on the type of
collateral underlying each loan. For commercial, financial and agricultural
loans, class segments include commercial loans secured by other-than real estate
collateral. Real estate - commercial class segments include loans secured by
farmland, multi-family properties, owner-occupied non-farm, non-residential
properties and other nonfarm non-residential properties. Real estate -
construction loan class segments include loans secured by commercial real
estate, loans to commercial borrowers secured by residential real estate and
loans to individuals secured by residential real estate. Real estate - mortgage
includes loans secured by first and junior liens on residential real estate.
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Obligations of states and political subdivision loan class segment primarily
includes tax-anticipation notes to local municipalities and other tax-exempt
organizations. Personal loan class segments include direct consumer installment
loans, indirect automobile loans and other revolving and unsecured loans to
individuals.
Quantitative factor determination:
An average annual loss rate is calculated for each pool through an analysis of historical losses over a five-year look-back period. Using data for each loan, a loss emergence period is determined within each segmented class pool. The loss emergence period reflects the approximate length of time from the point when a loss is incurred (the loss trigger event) to the point of loss confirmation (the date of eventual charge-off). The loss emergence period is applied to the average annual loss to produce the quantitative factor for each pooled class segment.
Qualitative factor determination:
Historical loss rates computed in the quantitative component reflects an estimate of the level of incurred losses in the portfolio based on historical experience. Management considers that the current conditions may deviate from those that prevailed over the historical look-back period. Thus, the quantitative rates are an imperfect estimate, necessitating an evaluation of qualitative considerations to incorporate these risks.
Management considered qualitative risk factors including:
National, regional and local economic and business conditions, and developments
? that affect the collectability of the portfolio, including the condition of
various market segments;
? Changes in the volume and severity of past due loans, the volume of non-accrual
loans, and the volume and severity of adversely classified loans;
? Changes in the nature and volume of the portfolio and terms of loans;
? Changes in the experience, ability and depth of lending and credit management
and other relevant staff;
? Existence and effect of any concentrations of credit and changes in the level
of such concentrations;
? Changes in the quality of the loan review system;
? Changes in lending policies and procedures, including changes in underwriting
standards and collection, charge-off and recovery practices;
? Changes in the value of underlying collateral for collateral-dependent loans;
and
? Effect of external influences, including competition, legal and regulatory
requirements.
Within each loan segment, an analysis was performed over a ten-year look-back period to discover peak historical losses, and with this data, management established ranges of risk from minimal to very high, for each risk factor, to produce a supportable anchor for risk assignment. Based on the framework for risk factor evaluation and range of adjustments established through the anchoring process, a risk assessment and corresponding adjustment was assigned for each portfolio segment as ofDecember 31, 2022 . Adjustments to the factors are supported through documentation of changes in conditions in a narrative accompanying the allowance for loan loss calculation.
The combination of quantitative and qualitative factors was applied to year-end balances in each pooled segment to establish the overall allowance.
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A summary of activity in the allowance for loan losses for the last five years is shown below. The Company recorded net recoveries of$64,000 in 2022. With a provision expense greater than net recoveries and loan growth of 15.8%, the allowance for loan losses atDecember 31, 2022 increased by 14.8% over the allowance atDecember 31, 2021 . Management's analysis indicated that the allowance for loan losses of$4.0 million atDecember 31, 2022 was adequate. (Dollars in thousands) Years Ended December 31, 2022 2021 2020 2019 2018 Balance of allowance - beginning of period$ 3,508 $ 4,094 $ 2,961 $ 3,034 $ 2,939 Loans charged off: Commercial, financial and agricultural - - 7 2 - Real estate - commercial - - - 15 60 Real estate - construction - - - - - Real estate - mortgage 23 - 7 66 183 Personal 13 17 42 54 42 Total charge-offs 36 17 56 137 285 Recoveries of loans previously charged off: Commercial, financial and agricultural 2 7 1 3 10 Real estate - commercial - 36 2 314 5 Real estate - construction - 86 426 295 - Real estate - mortgage 94 61 30 7 12 Personal 4 10 9 18 16 Total recoveries 100 200 468 637 43
Net (recoveries) charge-offs (64) (183) (412) (500) 242 Provision for loan losses 455 (769) 721 (573) 337 Balance of allowance - end of period$ 4,027 $ 3,508 $ 4,094
Ratio of net (recoveries) charge-offs during period to average loans outstanding (0.01) % (0.04) % (0.10) %
(0.12) % 0.06 %
Because of the Company's low rate of charge-offs, disaggregated ratios of net charge-offs to average loans outstanding are not provided.
The following tables show how the allowance for loan losses is allocated among the various types of outstanding loans and the percent of loans by type to
total
loans.
(Dollars in thousands) Years Ended December 31,
2022 2021 2020 2019 2018
Commercial, financial and
agricultural $ 297 $ 251 $ 302 $ 321 $ 275
Real estate - commercial 1,110 1,020 908 754 1,074
Real estate - construction 1,146 884 1,586 718 558
Real estate - mortgage 1,385 1,269 1,200 1,081 1,035
Obligations of states and political
subdivisions 54 45 28 17 20
Personal 35 39 70 70 72
$ 4,027 $ 3,508 $ 4,094 $ 2,961 $ 3,034
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(Dollars in thousands) Years Ended December 31,
2022 2021 2020 2019 2018Commercial, financial and agricultural 12.7 % 15.0 % 17.3 %
12.9 % 11.1 % Real estate - commercial 41.1 % 38.2 % 29.0 % 31.6 % 33.8 % Real estate - construction 10.5 % 10.3 % 14.4 % 11.6 % 8.8 % Real estate - mortgage 31.0 % 31.5 % 33.5 % 37.6 % 39.2 %
Obligations of states and political subdivisions 3.9 % 3.9 % 4.4 %
4.1 % 4.6 %
Personal 0.8 % 1.1 % 1.4 % 2.2 % 2.5 %
100 % 100 % 100 % 100 % 100 %
The Company is adopting ASU No. 2016-13, Financial Instruments - Credit Losses
(Topic 326): Measurement of Credit Losses on Financial Instruments ("CECL")
effective January 1, 2023 . The main objective of this amendment is to provide
financial statement users with more useful information about the expected credit
losses on financial instruments and other commitments to extend credit held by
the Company. The CECL standard requires the measurement of all expected credit
losses for financial assets held at the reporting date based on historical
experience, current conditions, and reasonable and supportable forecasts. The
Company will now use forward-looking information to enhance its credit loss
estimates. The Company's CECL implementation efforts are continuing to focus on
completion of model validation, developing new disclosures, establishing formal
policies and procedures and other governance and control documentation. Based on
the Company's portfolio balances, and forecasted economic conditions as of
December 31, 2022 , management believes the adoption of the CECL standard will
result in an increase to its total current reserves of between $1.0 million to
$1.2 million . An increase to the Company's reserve levels will include
nonaccretable credit marks on PCI loans, which will be transferred into current
reserves at adoption. The impact of adoption on the allowance for credit losses
on off-balance sheet commitments and for credit losses on securities held to
maturity is not expected to be material.
INVESTMENTS
Total investments, defined to include all interest earning assets except loans (i.e. debt securities available for sale at fair value and held to maturity at amortized cost, equity securities, federal funds sold, interest bearing deposits, restricted investment in bank stock and other interest-earning assets), totaled$288.0 million onDecember 31, 2022 , a decrease of$52.0 million , or 15.3%, compared to year-end 2021. The decrease in 2022 was primarily the result of the adjustment in market value of debt securities. The following table summarizes how the ending balances changed annually in each of the last two years. (Dollars in thousands) 2022 2021 Beginning balance$ 339,997 $ 321,417
Purchases of securities available for sale 53,295
181,122
Redemption of equity securities -
(118)
Proceeds from sales, calls and maturities of debt securities available for sale (52,642)
(121,584)
Proceeds from calls and maturities of debt securities held to maturity (4,116)
-
Change in value of equity securities (68)
151
Adjustment in market value of debt securities (48,452)
(9,309)
Amortization/Accretion (408)
(1,220)
Restricted investment in bank stock, net change 1,550
(1,307)
Federal funds sold, net change -
(10,000)
Interest bearing deposits with others, net change (455)
(19,155)
Maturities of interest bearing time deposits with banks (735)
-
Net change (52,031) 18,580
Ending balance $ 287,966 $ 339,997
The investment area is managed according to internally established guidelines
and quality standards. Juniata separates its investment securities portfolio
into two classifications: those held to maturity and those available for sale.
Juniata holds no securities in the trading classification.
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Juniata reassessed classification of certain investments, and effectiveOctober 1, 2022 , transferred$28.4 million of obligations ofU.S. Government sponsored enterprises and$183.9 million in mortgage-backed securities from the available for sale to held to maturity security classification. The transfer occurred at fair value. The combined related unrealized loss of$46.8 million , included in other comprehensive income, remained in other comprehensive income to be amortized out of other comprehensive income with an offsetting entry to interest income as a yield adjustment through earnings over the remaining term of the securities. No gain or loss was recorded at the time of transfer. The Bank sold$24.7 million , par value, of subordinated debt of unconsolidated financial institutions, classified as corporate debt securities, at a loss of$1.5 million in 2022. Management's intent with respect to these securities changed in 2022 due to the adverse regulatory impact of substantial (relative to capital) holdings of subordinated debt AtDecember 31, 2022 , the market value of the investment securities portfolio was less than amortized cost by$7.5 million , compared toDecember 31, 2021 , when the market value of the investment securities portfolio was less than amortized cost by$4.5 million . The weighted average life of the investment portfolio was 8.1 years onDecember 31, 2022 and 6.7 years onDecember 31, 2021 . The weighted average maturity has remained short to achieve a desired level of liquidity. The following table sets forth the maturities of securities and the weighted average yields of such securities by scheduled maturity or call dates. Yields on obligations of states and public subdivisions are presented on a tax-equivalent basis. (Dollars in thousands) After One Year After Five Years Within One year But Within Five Years But Within Ten Years After Ten Years Total
December 31, 2022 Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield Debt securities available for sale, at fair value: Obligations of U.S. Government agencies and corporations $ - - %$ 13,705 1.27 % $ - - % $ - - %$ 13,705 1.27 % Obligations of state and political subdivisions 1,228 2.73 % 2,696 2.98 % 3,755 1.99 % - - % 7,679 2.40 % Corporate Debt Securities - - % 4,190 2.75 % 11,151 3.95 % - - % 15,341 3.63 % Mortgage-backed securities 404 2.33 % 10,314 2.64 % 24,913 3.62 % 1,180 2.56 % 36,811 3.30 %$ 1,632 - %$ 30,905 2.08 %$ 39,819 3.56 %$ 1,180 2.56 %$ 73,536 2.90 % Debt securities held to maturity, at amortized cost: Obligations of U.S. Government agencies and corporations $ - - %$ 13,039 4.30 %$ 15,561 4.34 % $ - - %$ 28,600 4.32 % Mortgage-backed securities - - % 6,711 5.22 % 126,675 4.71 % 47,579 2.93 % 180,965 4.26 % $ - - %$ 19,750 4.61 %$ 142,236 4.67 %$ 47,579 2.93 %$ 209,565 4.27 %
BANK OWNED LIFE INSURANCE AND ANNUITIES
The Company periodically ensures the lives of certain bank officers to provide split-dollar life insurance benefits to some key officers and to offset the cost of providing post-retirement benefits through non-qualified plans. Some annuities are also owned to provide cash streams that match certain post-retirement liabilities. The$1.7 million decline in cash surrender 45
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value of the Company's bank owned life insurance and annuities was due to the death of two former directors and one current director in 2022. See Note 7 of The Notes to Consolidated Financial Statements.
The following table summarizes how the cash surrender values of these instruments changed annually in each of the last two years.
(Dollars in thousands)
2022 2021
Beginning balance $ 16,852 $ 16,568
BOLI net increase in cash surrender value 216 251
BOLI receipt of death benefit (1,847) -
Annuities net increase in cash surrender value 33 33
Annuity receipt of death benefit (57) -
Net change (1,655) 284
Ending balance $ 15,197 $ 16,852 GOODWILL AND INTANGIBLE ASSETS
Branch Acquisition
OnSeptember 8, 2006 , the Company acquired a branch office inRichfield, PA. Goodwill recorded on that acquisition was$2.0 million and is measured annually for impairment. FNBPA Acquisition OnNovember 30, 2015 , the Company completed its acquisition of FNBPA.Goodwill recorded on the acquisition was$3.4 million as ofDecember 31, 2022 and 2021. In addition, a core deposit intangible in the amount of$303,000 was recorded and is being amortized over a ten-year period using a sum of the year's digits basis. Core deposit intangible amortization expense recorded in 2022 was$21,000 and, for the succeeding three years beginning 2023, is estimated to be$16,000 ,$11,000 and$5,000 per year, respectively. The core deposit intangible will be fully amortized in 2025. Core deposit and other intangible assets, net of amortization, was$32,000 as ofDecember 31, 2022 and$53,000 as ofDecember 31, 2021 . LCB Acquisition OnApril 30, 2018 ,Juniata completed the acquisition of LCB and, as a result, recorded goodwill of$3.6 million as ofDecember 31, 2022 and 2021. In addition, a core deposit intangible of$289,000 was recorded and will be amortized over a ten-year period using a sum of the years' digits basis. Core deposit intangible expense recorded in 2022 was$33,000 , and for the succeeding five years beginning 2023, is estimated to be$28,000 ,$23,000 ,$17,000 and$12,000 ,$7,000 per year, respectively, and$2,000 in total for years after 2027. Core deposit intangible, net of amortization, was$89,000 as ofDecember 31, 2022 and$122,000 as ofDecember 31, 2021 .
Mortgage Servicing Rights
Due to a strategic shift in focus to a different mortgage product, which is recorded in fees derived from loan activity, the Company did not originate and sell residential mortgage loans to the secondary market in 2022 or 2021; however, the Company retained the servicing rights on loans originated and sold in prior years. The mortgage servicing rights are valued based on the present value of estimated future cash flows on pools of mortgages stratified by rate and maturity date. The computed value is carried as an intangible asset. As ofDecember 31, 2022 andDecember 31, 2021 , the fair value of mortgage servicing rights was$92,000 and$120,000 , respectively.
DERIVATIVES
The Company entered into rate swap agreements as part of its asset liability management strategy to help manage interest rate risk. The notional amount of the interest rate swaps does not represent amounts exchanged by the parties. The amount exchanged is determined by reference to the notional amount and the other terms of the individual interest rate swap agreements. The notional amount of the Company's interest rate swaps as ofDecember 31, 2022 and 2021, were$20.0 million and$40.0 million , respectively. The Company terminated two forward-starting swaps with a notional amount of$20.0 million in 2022 as part of a capital restructure plan. The interest rate swaps were determined to be fully effective during both year-end periods. As such, no amount of ineffectiveness has been included in net income. The aggregate fair 46
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value of the swaps is recorded in either other assets or other liabilities on the Consolidated Statements of Condition with changes in fair value recorded in other comprehensive income. The Company expects the remaining hedge to remain fully effective during the remaining term of the swap. See Note 22 of The Notes to Consolidated Financial Statements.
DEFERRED TAXES
The Company accounts for income taxes under the asset/liability method. Deferred tax assets and liabilities are recognized for the future consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as operating loss and tax credit carryforwards, if applicable. A valuation allowance is established against deferred tax assets when, in the judgment of management, it is more likely than not that such deferred tax assets will not become realizable. The Company recorded net deferred tax assets of$11.8 million and$1.7 million , atDecember 31, 2022 andDecember 31, 2021 , respectively. The net deferred tax assets were carried as a non-interest earning asset. The increase in net deferred tax assets between periods was primarily due to the increase in unrealized losses on debt securities. See Note 13 of The Notes to Consolidated Financial Statements.
OTHER NON-INTEREST EARNING ASSETS
The following table summarizes the components of the non-interest earning asset category, and how the ending balances changed over the last two years.
(Dollars in thousands)
2022 2021
Beginning balance $ 29,532 $ 27,720
Cash and cash equivalents (2,072) 1,060
Premises and equipment, net (181) (437)
Other real estate owned (87) 87
Investment in low income housing (799) (799)
Deferred tax assets 10,244 1,594
Other receivables and prepaid expenses 1,330 307
Net change 8,435 1,812
Ending balance $ 37,967 $ 29,532
DEPOSITS
As ofDecember 31, 2022 , total deposits were$711.5 million , an increase of$3.1 million compared to the previous year end. The decline in interest bearing demand deposits was due to the repayment of$30.0 million in brokered demand deposits.Juniata had$127.3 million and$105.0 million in uninsured deposits as ofDecember 31, 2022 and 2021, respectively. The following table summarizes how the ending balances changed over the last two years. (Dollars in thousands) 2022 2021 Beginning balance$ 708,447 $ 622,866 Demand deposits 17,109 13,907 Interest bearing demand deposits (13,946) 64,505 Savings deposits 895 18,615 Time deposits (993) (11,446) Net change 3,065 85,581 Ending balance$ 711,512 $ 708,447 47 Table of Contents The following table shows the comparison of average transaction deposits and average time deposits as a percentage of total deposits for the last two years. Changes in Deposits (Dollars in thousands) 2022 2021 Average Increase (Decrease) Average Balance Amount % Balance Transaction deposits: Money market$ 72,383 $ 5,922 8.9 %$ 66,461 Interest bearing demand 164,055 10,434 6.8 153,621 Savings 149,909 12,010 8.7 137,899 Demand 195,301 16,099 9.0 179,202 Total transaction deposits 581,648 44,465 8.3 537,183 Time deposits:$100,000 and greater 42,958 (10,497) (19.6) 53,455 Other 93,514 (2,436) (2.5) 95,950 Total time deposits 136,472 (12,933) (8.7) 149,405 Total deposits$ 718,120 $ 31,532 4.6 %$ 686,588 Average deposits increased$31.5 million , or 4.6%, to$718.1 million in 2022. Transaction accounts increased by 8.3% in 2022, while time deposits decreased by 8.7%. The largest dollar and percentage increase in 2022 compared to the previous year was in demand accounts, which increased by$16.1 million , or 9.0%. Maturities of time deposits of$250,000 or more outstanding atDecember 31, 2022 are summarized as follows: (Dollars in thousands) 2022 Certificates of deposit of$250,000 or more Maturing within 3 months$ 1,138 Maturing within 3 to 6 months 1,970 Maturing within 6 to 12 months 1,258 Maturing 15 years 8,604 Maturing after 5 years 268$ 13,238 The consumer continues to have a need for transaction accounts, and the Bank is continuing to focus on that need to build deposit relationships. Products are geared toward low-cost convenience and ease for the customer. The Company's strategy is to aggressively seek to grow customer relationships by staying in touch with customers' changing needs and new methods of connectivity, in an effort to increase deposit (and loan) market share. The Bank offers identity protection services as an option for all consumer demand depositors. We believe this product to be a valuable and essential tool necessary to combat the upsurge in fraud and identity theft. This product provides a unique benefit to our customers as there are no other banks in our immediate market that offer a similar service. In addition to deposit products,Juniata provides alternatives to customers through the sale of wealth management (non-deposit) products. The Bank competes in the marketplace with many sources that offer products that directly compete with traditional banking products. In keeping with our desire to provide our customers with a full array of financial services, we supplement the services traditionally offered by our Trust Department by staffing our community offices with wealth management consultants who are licensed and trained to sell variable and fixed rate annuities, mutual funds, stock brokerage services and long-term care insurance. Although the sale of these products can reduce the Bank's deposit levels, these products offer solutions for our customers that traditional bank products cannot and allow us to service our customer base more completely. Fee income from the sale of non-deposit products (primarily annuities and mutual funds) was$384,000 and$368,000 in 2022 and 2021, respectively, representing approximately 7.3% and 7.1%, respectively, of total non-interest income. 48 Table of Contents
OTHER INTEREST BEARING LIABILITIES
Juniata funds its needs primarily with local deposits and, when necessary, relies on external funding sources for additional funding. External funding sources include credit facilities at correspondent banks and the FHLB ofPittsburgh .Juniata's average balances for all borrowings decreased by$6.3 million in 2022 compared to 2021. In 2021,Juniata repaid the remaining FRB advances fromJuniata's participation in the PPPLF and prepaid$15.0 million in long-term debt. Changes in Borrowings (Dollars in thousands) 2022 2021 Average Increase (Decrease) Average Balance Amount % Balance Repurchase agreements$ 5,532 $ 1,283 30.2 %$ 4,249 Short-term borrowings 18,635 11,894 176.4 6,741 FRB advances - (4,948) (100.0) 4,948 Long-term debt 20,000 (14,110) (41.4) 34,110
Other interest bearing liabilities 1,159 (389) (25.1)
1,548 Total borrowings$ 45,326 $ (6,270) (12.2) %$ 51,596 STOCKHOLDERS' EQUITY Total stockholders' equity decreased by$34.3 million , or 48.2%, in 2022 compared to 2021, primarily due to the$38.5 million adjustment to accumulated other comprehensive income ("AOCI") to record the change in fair value of debt securities and cash flow hedges. The Company was well-capitalized and had the capacity to maintain its typical dividend level in 2022. The Company's net income exceeded dividends paid by$3.9 million . Stock based compensation expense recorded pursuant to the Company's Long-Term Incentive Plan added$176,000 to stockholders' equity in 2022, while treasury stock issued for stock plans increased shareholders' equity by$69,000 . The following table summarizes how the components of equity changed in the last two years. (Dollars in thousands) 2022 2021 Beginning balance$ 71,290 $ 76,597 Net income 8,320 6,604 Dividends (4,401) (4,402)
Treasury stock issued for stock plans 69 77 Stock-based compensation 176 158 Repurchase of stock, net of re-issuance (3) (861)
Net change in unrealized security gains (losses) (38,286) (7,355) Unrealized gains (losses) on cash flow hedge
(216) 472
Net change (34,341) (5,307)
Ending balance $ 36,949 $ 71,290
Average stockholders' equity in 2022 was $50.2 million , a decrease of 31.9% from
$73.6 million in 2021, which was a 3.2% decrease from $76.1 million in 2020. At
December 31, 2022 , Juniata held 148,220 shares of stock in treasury versus
162,737 at December 31, 2021 . Return on average equity increased to 16.59% in
2022 from 8.97% in 2021 partially due to higher income in 2022 compared to 2021,
as well as the decline in average equity resulting primarily from the decrease
in AOCI. See the discussion in the 2022 Financial Overview section.
The Company periodically repurchases shares of its common stock under the share
repurchase program approved by the Board of Directors. In November of 2021, the
Board of Directors authorized the repurchase of an additional 200,000 shares of
its common stock through its share repurchase program. The program will remain
authorized until all approved shares are repurchased, unless terminated by the
Board of Directors. Repurchases have typically been accomplished through open
market transactions and have complied with all regulatory restrictions on the
timing and amount of such repurchases. Shares repurchased have been added to
treasury stock and accounted for at cost. These shares may be reissued for stock
option exercises, employee stock purchase plan purchases, restricted stock
awards, to fulfill dividend reinvestment
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program needs and to supply shares needed as consideration in an acquisition. During 2022 and 2021, 170 and 50,482 shares, respectively, were repurchased in conjunction with this program. There were also 825 and 200 restricted share awards forfeited in 2022 and 2021, respectively.Treasury shares of 15,512 and 13,783 were also redeemed for stock purchase plan purchases in 2022 and 2021, respectively. The treasury shares remaining authorized for repurchase in the program were 208,312 as ofDecember 31, 2022 .Juniata declared dividends of$0.88 per common share in each of 2022 and 2021 (See Note 14 of The Notes to Consolidated Financial Statements regarding restrictions on dividends from the Bank to the Company). The dividend payout ratio was 52.90% and 66.66% in 2022 and 2021, respectively. The dividend payout ratio in 2022 was less than 2021 due to higher net income in 2022 compared to 2021. InJanuary 2023 , the Board of Directors declared a dividend of$0.22 per share to stockholders of record onFebruary 14, 2023 , payable onMarch 1, 2023 .Juniata's book value per share atDecember 31, 2022 was$7.39 as compared to$14.29 atDecember 31, 2021 .Juniata's average equity to assets ratio for 2022 and 2021 was 6.12% and 9.01%, respectively. Refer also to the Capital Risk section in the Asset / Liability management discussion that follows.
ASSET / LIABILITY MANAGEMENT OBJECTIVES
Management believes that optimal performance is achieved by maintaining overall risks at a low level. Therefore, the objective of asset/liability management is to control risk and produce consistent, high quality earnings independent of changing interest rates. The Company has identified five major risk areas discussed below: ? Liquidity Risk ? Capital Risk ? Interest Rate Risk ? Investment Portfolio Risk ? Economic Risk Liquidity Risk Through liquidity risk management, we seek to maintain our ability to readily meet commitments to fund loans, purchase assets and other securities and repay deposits and other liabilities. Liquidity management also includes the ability to manage unplanned changes in funding sources and recognize and address changes in market conditions that affect the quality of liquid assets.Juniata has developed a methodology for assessing its liquidity risk through an analysis of its primary and total liquidity sources.Juniata relies on three main types of liquidity sources: (1) asset liquidity, (2) liability liquidity and (3) off-balance sheet liquidity. Asset liquidity refers to assets that we are quickly able to convert into cash, consisting of cash, federal funds sold and securities. Short-term liquid assets generally consist of federal funds sold and securities maturing over the next twelve months. The quality of our short-term liquidity is very good; as federal funds are unimpaired by market risk and as bonds approach maturity, their value moves closer to par value. Liquid assets tend to reduce earnings when there is not an immediate use for such funds, since normally these assets generate income at a lower rate than loans or other longer-term investments. Liability liquidity refers to funding obtained through deposits. The largest challenge associated with liability liquidity is cost.Juniata's ability to attract deposits depends primarily on several factors, including sales effort, competitive interest rates and other conditions that help maintain consumer confidence in the stability of the financial institution. Large certificates of deposit, public funds and brokered deposits are all acceptable means of generating and providing funding. If the cost is favorable or fits the overall cost structure of the Bank, then these sources have many benefits. They are readily available, come in large block size, have investor-defined maturities and are generally low maintenance. Off-balance sheet liquidity is closely tied to liability liquidity. Sources of off-balance sheet liquidity includeFederal Home Loan Bank borrowings, repurchase agreements and federal funds lines with correspondent banks. These sources provide immediate liquidity to the Bank. They are available to be deployed when a need arises. These instruments also come in large block sizes, have investor-defined maturities and generally require low maintenance. 50
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"Available liquidity" encompasses all three sources of liquidity when determining liquidity adequacy. It results from the Bank's access to short-term funding sources for immediate needs and long-term funding sources when the need is determined to be permanent. Management uses both on-balance sheet liquidity and off-balance sheet liquidity to manage its liquidity position. The Company's liquidity strategy seeks to maintain an adequate volume of high-quality liquid instruments to facilitate customer liquidity demands. Management also maintains sufficient capital, which provides access to the liability and off-balance sheet sides of the balance sheet for funding. An active knowledge of debt funding sources is important to liquidity adequacy. Contingency funding management involves maintaining contingent sources of immediate liquidity. Management believes that it must consider an array of available sources in terms of volume, maturity, cash flows and pricing. To meet demands in the normal course of business or for contingency, secondary sources of funding such as public funds deposits, collateralized loans, sales of investment securities or sales of loan receivables are considered. It is the Company's policy to maintain both a primary liquidity ratio and a total liquidity ratio greater than 10% of total assets. The primary liquidity ratio equals liquid assets divided by total assets, where liquid assets equal the sum of cash and due from banks, federal funds sold, interest bearing deposits with other banks and available for sale securities. Total liquidity is comprised of all components noted in primary liquidity plus securities classified as held-to-maturity, if any. If either of these liquidity ratios falls below 10%, it is the Company's policy to increase liquidity in a timely manner to achieve the required ratio.
It is the Company's policy to maintain available liquidity greater than 10% of total assets and contingency liquidity greater than 7.5% of total assets.
Juniata is a member of the FHLB ofPittsburgh , which provides short-term liquidity and a source for long-term borrowings. The Bank uses this vehicle to satisfy temporary funding needs throughout the year. In 2020, the Company executed a three-year cash flow hedge on$20,000,000 in rolling three-month advances from the FHLB. In 2021,Juniata replaced the$20,000,000 FHLB three-month advance with a brokered interest bearing demand deposit of the same amount. The Company repaid the$20.0 million brokered interest bearing demand deposit in 2022 and reborrowed a$20.0 million three-month FHLB advance.Juniata had$48.1 million in short-term borrowings onDecember 31, 2022 but no short-term borrowings onDecember 31, 2021 . The Bank's maximum borrowing capacity with the FHLB was$214.7 million atDecember 31, 2022 . To borrow additional amounts, the FHLB would require the Bank to purchase additional FHLB Stock. The FHLB is a source of both short-term and long-term funding. The Bank must maintain sufficient qualifying collateral to secure all outstanding advances.
Capital Risk
The Company maintains sufficient core capital to protect depositors and shareholders and to take advantage of business opportunities while ensuring that it has resources to absorb the risks inherent in the business. Federal banking regulators have established capital adequacy requirements for banks and bank holding companies based on risk factors, which require more capital backing for assets with higher potential credit risk than assets with lower credit risk. The Bank is subject to risk-based capital standards by which banks are evaluated in terms of capital adequacy. These regulatory capital requirements are administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on the consolidated financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The Bank's capital and classification are also subject to qualitative judgments by the regulators. Management believes that, as ofDecember 31, 2022 , the Bank met all capital adequacy requirements to which it is subject.
Prompt corrective action regulations provide five classifications: well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized, and critically undercapitalized, although these terms are not used to
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represent overall financial condition. If adequately capitalized, regulatory
approval is required to accept brokered deposits. If undercapitalized, capital
distributions are limited, as is asset growth and expansion, and capital
restoration plans are required. At year-end 2022 and 2021, the most recent
regulatory notifications categorized the Bank as well-capitalized under the
regulatory framework for prompt corrective action. There are no conditions or
events since that notification that management believes have changed the
institution's category.
In December 2010 , the Basel Committee released its final framework for
strengthening international capital and liquidity regulation, officially
identified by the Basel Committee as "Basel III". In July 2013 , the FRB approved
final rules to implement the Basel III capital framework which revises the
risk-based capital requirements applicable to bank holding companies and
depository institutions. The new minimum regulatory capital requirements
established by the U.S. Basel III Capital Rules were fully phased in on
January 1, 2019 and require financial institutions to maintain: (a) Common
Equity Tier 1 (CET1) to risk-weighted assets ratio 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 3.0%, 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). However, unless the Bank maintains an additional 2.5%
"capital conservation buffer" above the percentages stated above in (a) - (c),
the Company may be unable to obtain capital distributions from it, which could
negatively impact the Company's ability to pay dividends, service debt
obligations or repurchase common stock. In addition, such a failure could result
in a restriction on the Company's ability to pay certain cash bonuses to
executive officers, negatively impacting the Company's ability to retain key
personnel.
In 2019, the federal banking agencies jointly issued a final rule providing an
optional, simplified measure of capital adequacy, the community bank leverage
ratio framework ("CBLR framework"), for qualifying community banking
organizations, consistent with Section 201 of the Economic Growth Act. The final
rule became effective on January 1, 2020 . The community bank leverage ratio
removed the requirement for qualifying banking organizations to calculate and
report risk-based capital, but rather only requires compliance with a Tier 1 to
average assets ("leverage") ratio. Qualifying banking organizations that elect
to use the CBLR framework and maintain a leverage ratio of greater than required
minimums will be considered to have satisfied the generally applicable
risk-based and leverage capital requirements in the agencies' capital rules
(generally applicable rule) and, if applicable, will be considered to have met
the well-capitalized ratio requirements for purposes of Section 38 of the
Federal Deposit Insurance Act. Under the interim final rules, the community bank
leverage ratio minimum requirement is 9.0% for calendar year 2022 and beyond.
The interim rule allows for a two-quarter grace period to correct a ratio that
falls below the required amount, provided the Bank maintains a leverage ratio of
8.0% for calendar year 2022 and beyond.
Under the final rule, an eligible banking organization can opt out of the CBLR
framework and revert back to the risk-weighting framework without restriction.
As of December 31, 2022 , the Bank was a qualifying community banking
organization as defined by the federal banking agencies but elected to remain
with the risk-weighting framework under the Basel III capital requirements at
year-end 2022. See Note 14 of Notes to the Consolidated Financial Statements.
Interest Rate Risk
For most financial institutions, includingJuniata , interest rate risk primarily reflects exposures to changes in interest rates. Interest rate fluctuations affect earnings by changing net interest income and other interest-sensitive income and expense levels. Interest rate changes also affect capital by changing the net present value of a bank's future cash flows, and the cash flows themselves, as rates change. Accepting this risk is a normal part of banking and can be an important source of profitability and enhancing shareholder value. However, excessive interest rate risk can threaten a bank's earnings, capital, liquidity and solvency. The Company's sensitivity to changes in interest rate movements is continually monitored by the Asset Liability Management Committee ("ALCO"). AtDecember 31, 2022 , the Company's cumulative repricing gap analysis indicated a liability-sensitive balance sheet through one year when measured on a static basis. Investment Portfolio Risk Management considers its investment portfolio risk as the amount of appreciation or depreciation the investment portfolio will sustain when interest rates change. The securities portfolio will decline in value when interest rates rise and increase in value when interest rates decline. Securities with long maturities, excessive optionality (because of call features) and unusual indexes tend to produce the most market risk during interest rate movements. 52 Table of Contents Economic Risk Economic risk is the risk that the long-term or underlying value of the Company will change if interest rates change. Economic value of equity ("EVE") represents the change in the value of the balance sheet without regard to business continuity. Rate shocks are applied to all financial assets and liabilities, using parallel and non-parallel rate shifts of 100 to 400 basis points to estimate the change in EVE under the various hypothetical scenarios. As ofDecember 31, 2022 , in a rising rate environment, the modeling results for all basis point rate increases indicated the Company's liabilities would increase in value less than assets would lose in value, but the Company remained within EVE policy guidelines for all rate shock scenarios.
OFF-BALANCE SHEET ARRANGEMENTS
The Company has numerous off-balance sheet loan obligations that exist to meet the financing needs of its customers. These financial instruments include commitments to extend credit, unused lines of credit and letters of credit. Because many commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. These instruments involve, to varying degrees, elements of credit and interest rate risk that are not recognized in the consolidated financial statements. The Company does not expect that these commitments will have an adverse effect on its liquidity position. Exposure to credit loss in the event of non-performance by the other party to the financial instrument for commitments to extend credit and financial guarantees written is represented by the contractual notional amount of those instruments. The Company uses the same credit policies in making these commitments as it does for on-balance sheet instruments.
The Company had outstanding loan origination commitments aggregating
Letters of credit are instruments issued by the Company that guarantee payment by the Bank to the beneficiary in the event of default by the Company's customer in the non-performance of an obligation or service. Most letters of credit are extended for a one-year period. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company holds collateral supporting those commitments for which collateral is deemed necessary. The amount of the liability as ofDecember 31, 2022 and 2021 for guarantees under letters of credit issued was not material. The maximum undiscounted exposure related to these guarantees onDecember 31, 2022 was$2.6 million , and the approximate value of underlying collateral upon liquidation that would be expected to cover this maximum potential exposure
was$31.2 million . EFFECTS OF INFLATION The performance of a bank is affected more by changes in interest rates than by inflation; therefore, the effect of inflation is normally not as significant to the Company as it is to other businesses and industries. During periods of high inflation, the money supply usually increases, and banks normally experience above average growth in assets, loans and deposits. A bank's operating expenses may increase during inflationary times as the price of goods and services increase. A bank's performance is also affected during recessionary periods. In times of recession, a bank usually experiences a tightening on its earning assets and on its profits. A recession is usually an indicator of higher unemployment rates, which could mean an increase in the number of nonperforming loans because of continued layoffs and other deterioration of consumers' financial condition. 53 Table of Contents
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