Juniata Valley Financial Corp. (JUVF) Earnings Call Transcript & Summary

Hello, and welcome to the Annual Meeting of Shareholders of Juniata Valley Financial Corp. Please note that today's meeting is being recorded. [Operator Instructions] It is now my pleasure to turn today's meeting over to Mr. Tim Havice, Chairman of the Board. Mr. Havice, the floor is yours.

Thank you. Good morning, ladies and gentlemen. My name is Tim Havice, and that as Chairman, it is my privilege to call to order the 2022 Shareholders' Meeting of the Juniata Valley Financial Corp. Today's virtual-only meeting is a live webcast. We believe in engaging with our shareholders, and this type of meeting can maximize participation of shareholders regardless of their locations. This technology enables us to reach a potentially larger audience than with an in-person meeting. Thank you for participating in this virtual-only meeting. I call your attention to the rules of conduct set forth for this meeting. They were made available to each shareholder in the proxy statement and are under the documents tab in the upper right-hand corner of your screen. Comments and/or questions will be received only from shareholders who have signed in with a control number. [Operator Instructions] For your convenience, links to the annual report and proxy statement are also provided on the left side of the meeting center window. At this time, I'd like to welcome and introduce other members of the Board of Directors, Vice Chairman, Martin L. Dreibelbis; Bradley J. Wagner; Marcie A. Barber; Gary E. Kelsey; Michael A. Buffington; and Dr. Richard M. Scanlon. At this time, I'd like to also recognize with the utmost respect, the contribution that Philip Gingerich has made to our company through his service as a Board member over the past 38 years. Phil passed away on April 1, and we will miss him in the boardroom and as a friend. In addition to the Board members and key management personnel, representatives from Crowe LLP, our independent public accounting firm; and from Barley Snyder, our legal advisers; and from [ Accume ], our internal audit firm, are also in virtual attendance of this meeting. The first order of business is to determine the presence of a quorum. I have been presented with a certified list of the shareholders of record who are entitled to vote at this meeting. I am also in possession of copies of the notice of meeting, proxy statement and proxy card, together with an affidavit as to the timely mailing of such material to the shareholders, all of which will be filed with the minutes of this meeting. I further report that at least 50% of outstanding shares are represented by person and by proxy at this Annual Meeting, and therefore, I declare a quorum to be present today. The meeting will proceed. A copy of the minutes of the Annual Shareholders' Meeting held May 18, 2021 has been inspected and found to be accurate and will be entered into permanent record. I will now appoint individuals to serve as judges of election for today's meeting; Lisa M. Snyder, Inspector of Election, Kristi J. Burdge and Renee D. Williamson. There are 2 matters to be voted on today. First, the Election of Directors. The nominating committee of the Board of Directors has nominated Marcie A. Barber; Timothy I. Havice; and Bradley J. Wagner to serve as Class B Directors and continue in office until the 2025 Annual Meeting. The second matter on which we will vote today is the non-binding Say on Pay proposal to approve the compensation of the named Executive Officers as set forth in the proxy statement. All proxies filed with the Inspector of Election will be voted as indicated thereon. If you have not yet voted or wish to change your vote, you may do so now by clicking on the vote tab on the top left of the screen. If you have previously voted online by telephone or mail and are satisfied with your vote, there is no need to cast another vote at this time unless you wish to change it. Your last vote will be the one that is counted. I will pause for 1 minute to allow time for any further voting to take place. [Voting]

I now declare the polls closed and call on the appointed judges to tabulate the results. I call your attention to our disclosure regarding forward-looking statements that may be made in management's following presentation. These statements are to be regarded as management's current view, which is subject to change as facts and circumstances change in the future. I will now turn the meeting over to Marcie Barber, our President and Chief Executive Officer; and JoAnn McMinn, our Chief Financial Officer.

Good morning, and thank you for joining our Annual Meeting. During 2021, we all continued to face challenges as the pandemic strike the country for the second year. Like many community banks, we filtered through rapidly changing public health guidance, which impacted customers, the economy and our JVB work family. But our financial performance evidenced by posting record earnings and maintaining exceptional credit quality demonstrated the focus and commitment of the JVB team, even in uncertain and stressful times. JoAnn, would you summarize the earnings results for 2021 as compared to the prior year?

Of course, Marcie. Good morning, all. While very detailed comparative information is included in the meeting materials available on this site and on our Investor Relations site, we wanted to share with you today just a summary of earnings highlights for the most recent 2 years. As Marcie mentioned, 2021 was a banner year for us as we reported Juniata Valley's highest annual earnings on record at $6.6 million net income in 2021, exceeded the prior year by approximately $1 million or 18%. Return on average assets in 2021 as compared to 2020, increased by 5 basis points to 0.81% and return on equity by 160 basis points to 8.97%. Earnings per share increased by 20% to $1.32. Key influencers for the strong showing in 2021 include active balance sheet management, pandemic-related effects and significant recoveries of previous loan losses. We'll elaborate on those items over the next few slides, but please take note of a few more of the results here. In March 2020, the Fed funds target rate and prime dropped by a total of 150 basis points and remained unchanged until just a few weeks ago. With rates at those low levels, Bank net interest margins generally are tightened as evidenced by the decline in our margin from 3% in 2020 to 2.83% in 2021 as the full year's impact was felt. Although the margin declined, net interest income in 2021 exceeded that in 2020 by $1.1 million as average earning assets increased by $81 million during that period. This slide depicts the growth in assets over a 10-year period through the end of 2021. In 2015, we experienced a 21.5% increase over 2014 due to the Bank acquisition we executed that year. Otherwise, annual growth levels have been steady, but well under the 18.4% increase seen in 2020. Some of the growth that year is attributed to leverage transactions, but the bulk of the increase was due to organic deposit growth. The asset growth in 2021 was the result of those increased deposit levels. Deposits have grown significantly over the past several years with heightened increases in 2020 and in 2021. Most recently, deposits have been boosted because of the government stimulus programs, including business deposits of PPP loan proceeds and direct stimulus payments to individuals, which, to a large degree, are resulting in household savings. The deposits initially generated by government stimulus were expected to diminish during 2021, but instead have grown and have continued to increase into the first quarter of 2022 fueling asset growth. With year-over-year deposit growth of $86 million or 14%, and loan balances declining by $4 million, asset liability management strategies were executed to effectively use the additional funding. Since most of the increased deposits were invested in securities, we restructured our portfolio at 3 strategic points in time during 2021, resulting in the replacement of underperforming bonds with higher-yielding instruments, while avoiding net losses in the transactions, planning for favorable net interest margin results in 2022 and beyond. We prepaid $15 million of outstanding debt and replaced it with lower cost deposit funding. Prepayment penalties were incurred in 2021, but positioned us more favorably for an improved 2022 net interest margin. As noted on the previous slide, the Juniata Valley Bank has a stable and growing core deposit base. All our deposits are considered core deposits as JVB carries no volatile jumble -- excuse me, jumbo CDs. Deposit stratification has remained relatively consistent over time, with some trending from time deposits to more liquid transaction accounts, particularly in the low rate environment over the past 2 years and into the first quarter of 2022. There is no way of knowing how long the excess stimulus monies will remain on deposit, but JVB is sufficiently liquid to handle reductions in deposits to more normal balance levels should that occur. Cash inflows from PPP loan forgiveness have been used to fund new loan generation. All told, the bankers helped 769 businesses withstand the economic pressures of the pandemic by processing about $51 million in PPP loans from mid-2020 through the first quarter of 2021. As of March 31, 2022, only about $5 million of PPP loans remain outstanding, and we expect the remainder to be forgiven or repaid over the next few months. Nearly all the paid off PPP loan balances approximately $46 million have been replaced by new traditional lending activity. Please note the diversification and relative consistency of the mix of loan types over time. The exception is the real estate mortgage segment, which has been consistently declining due to accelerated prepayments of existing loans in the low rate environment and movement of new mortgages to the secondary market. Marcie, would you like to give us an overview of credit quality as it has trended over the last several years?

Yes. Thanks, JoAnn. To understand credit quality in 2021, we need to discuss prior years. You see modest nonperforming loan balances pre-pandemic, but then almost nothing by the end of 2021. The pandemic did not resolve those credit issues, but we have been working down nonperforming loans since 2011 when nonperforming assets were $10.7 million. So while it may look unusual that in 2020, our NPAs were at their lowest level and our loan loss allowance was at its highest. The answer is the vast unknown. The only constant throughout the pandemic was the perpetual state of unknown. We did not know and we still don't really know the longer-term economic and sector-specific effects of the business interruptions, remote work environments and forced behavioral changes. As the allowance for loan and lease loss graph illustrates, we increased the loan loss reserve in 2020 to 1.23% of total loans. Under the CARES Act, payment deferrals were granted on over $90 million in loan balances by September of 2020. Delinquency was negligible, but credit issues were unidentifiable under the cover of stimulus payments and PPP funding. Throughout 2021, JoAnn will explain this in more detail shortly, we began to see businesses opening up, the industry seeming to rebound to or even beyond pre-pandemic levels. We were gratified to see that all deferments were caught up and despite the reduction and ultimate elimination of PPP programs, delinquency has remained minimal in all sectors. But I'll stand on the premise that we still don't know what lies ahead, and we continue to watch all sectors carefully. JoAnn, would you take us through the remainder of the data on this slide, please?

Of course. Next slide is designed to exhibit the strength of our reserve for loan loss. In 2021, we relaxed the additional reserve put in place in 2020 to capture the risk inherent in the COVID-related payment deferrals granted to borrowers since all deferrals has expired and all the affected loans are current and performing. However, as Marcie indicated, we continue to recognize the elevated risk due to ongoing economic concerns such as increasing interest rates and inflation. Moving to the middle of the screen, you'll see evidence of Marcie's comments, showing that over the past 5 years, we've achieved a considerable reduction in nonperforming loans, which are defined as non-accrual loans plus both delinquent loans over 90 days and troubled debt restructured loans in default. Then finally, on this screen, you can see our experience with net charge-offs or recoveries from 2018 through the first quarter of 2022. In 2018, net charge-offs were only 0.06% of average loans. In every period since then, we have actually realized net recoveries, which helped to fund the loan loss reserve.

This is an interesting slide. Non-interest revenues grew by 10% in 2021 as compared to 2020, and it illustrates some of the behavioral changes that occurred during the pandemic. Trust and wealth management fees grew nicely by 14% in 2021. Interest rates were at an all-time low and the stock market performed very well. The second block illustrates the trends and levels of debit card fees and NSF fees. The steep decline in NSF fees from 2019 to 2020 is pretty easily understood. Stores were closed and consumers and businesses had extra money. But despite the fact that the world was much more open in 2021 summer especially, NSF fees continued to decline. Conversely, debit card activity, likely from online shopping, increased in 2020 and continued an even more dramatic increase in 2021, consumer behaviors have changed. Non-interest loan revenue, including title insurance, letter of credit fees, documentation fees, the 48% increase since 2020 evidences pent-up demand and stepped up borrowing activity encouraged by low interest rates and government seed money. With the first quarter behind us, we are looking forward to a prosperous year, and very shortly, JoAnn will share the complete overview of the first quarter. But first, I'd like to share another noteworthy event with you. JoAnn McMinn will be retiring from the Bank on June 21. This June caps off a remarkable 46-year career in the banking industry. Mrs. McMinn's career progression is the perfect example of a capable and committed professional advancing to the top. With a bachelor's degree in Mathematics and Computer Science, JoAnn began her career with Russell National Bank in 1976 as a computer programmer. After numerous promotions and career redirections, she was promoted to Corporate Controller of Russell Bank's successor, Omega Financial Corporation. She joined JVB in 2005 as Chief Financial Officer and has helped to lead our company since then. Her background made it possible for us to successfully complete 2 acquisitions, FNB Port Allegany in 2015 and Liverpool Community Bank in 2018. JoAnn and I have learned a lot from each other, but I'm sure I've learned more from her than she has from me. Her contribution here span the entire organization, and she will be missed by all. Michael Wolf joined JVB in September 2021 and has been working closely with JoAnn and her team for the past 8 months. Mike's broad experience in the financial sector is a solid complement to JVB's financial team. His background includes public accounting and internal audit. Mike has served as a Controller at several community banks. Most recently, he served as Vice President at Northwest Bancshares and Dollar Bank. His wide range of financial experience and depth of knowledge will be invaluable as a senior officer of the Juniata Valley Bank. Mr. Wolf holds a bachelor's degree in Economics and Finance from the University of Pittsburgh and a Certificate of Accounting from Robert Morris University. We've already grown to respect, Mike, and we heartily welcome him to the senior team. Mr. Wolf will officially take over as Chief Financial Officer, June 1.

Thank you, Marcie. I'm very happy to be part of the JVB team. Since starting in September, I've been very impressed by the commitment and caring nature of the employees and Board members, all working to provide outstanding customer experiences, while growing and strengthening the Bank. I truly appreciate this opportunity to be part of such an outstanding organization. Thank you.

Thank you, Mike. In addition to welcoming a new CFO in 2022, we are in the early stages of evaluating a core processing platform. We're seeking a system which will enable seamless integration with fintech partners and one which will facilitate robust digital delivery. We're watching the interest rate hikes and changes in the yield curve. We're continually evaluating the potential for further inflation, supply chain issues and change in consumer demand, which could adversely impact our credit quality. But we are quite pleased with our first quarter financial results, and as promised, JoAnn will review them now.

2022 has started off very strong for our company with net income of $2.1 million in the first quarter, we achieved an annualized return on average assets of 1.04% and an annualized return on average equity of 12.55%. The first quarter's increased net interest margin at 3.17% was achieved as a result of the balance sheet restructuring done during 2021 and was further boosted by the collection of a significant amount of interest on a loan that had been previously on non-accrual. As reservable loans grew, we returned to booking a provision for expense for loan losses in 2022 as opposed to the provision credits recorded throughout 2021. Non-interest income is trending upwards as fees derived from trust and wealth management services, lending activities and deposit products in quarter 1 2022 are exceeding the 2021 quarter 1 results. At $0.42, earnings per share in the first quarter of 2022 was 27% higher than the first quarter of 2021. While first quarter results do not guarantee a similar outcome for the remainder of the year, we as management are well pleased with the results thus far. Our company's strength is dependent upon strength of its capital and liquidity positions as well. As can be seen on this screen, the Bank's capital ratio is more than qualified to be considered well capitalized based on Basel III standards. And the Bank is sufficiently liquid to withstand cash needs as they may arise. We maintain capital policies and regularly perform stress testing of our capital and liquidity to ensure that we can sustain these favorable ratios. With a dividend payout ratio of approximately 67%, we are pleased to be providing a current dividend yield of 5.5% to shareholders. We believe we have a good story to tell about our company, but I'll determine that the trading platform we are currently using is not conducive to connecting with a broader network of potential investors. Therefore, I'm excited to announce that we have been accepted and began trading today on the OTCQX Best Market. Graduating to the OTCQX Market marks an important milestone for banks such as ours in the U.S. public markets. The OTCQX Market enables banks to maximize the value of being a public company by providing transparent trading and easy access to company information to shareholders. Juniata Valley Financial Corp. qualified by meeting high financial standards following best practices of corporate governance and by maintaining compliance with securities laws. We think that our story should be told on a national stage to increase visibility and liquidity in our stock and to achieve a broader recognition among investors.

This is truly an exciting time for our company as we move forward into 2022 with a new beginning. At this time, we will address questions or comments that have been submitted. And I do believe we have one question.

The question that has come in is, what is the company plan to -- excuse me, what does the company plan to remediate the temporarily impaired securities? The mark-to-market losses are growing at a non-linear rate, and we trail our geographic peers in this financial area.

I think you're referring to the impairment recognized in the first quarter was as a result of changes in the stock portfolio, the stock market valuation and to some extent, the bond portfolio reevaluation. We hold everything to maturity.

Yes. I believe the question is concerning our stock price, though, I believe. Oh, I'm sorry, impaired -- I'm sorry, I misread that myself. The impaired securities has all to do with the rate structure. We have built our investment portfolio over the past couple of years to a higher level than had previously been experienced. And this is because of the large influx of deposits that we had that exceeded the loan demand during the last 1.5 years. So what has happened is as with many of our other peers, the same thing is happening, we're seeing an adjustment to capital for that because of the rise in -- the recent rise in interest rates over the last couple of weeks has then shown the market value of our securities to be significantly less. While we don't -- are not happy about what is happening, it's diminishing our capital because of the way the accounting rules require us to record that temporary loss, it is, in fact, temporary. All of our securities in our portfolio are government-grade, investment-grade, most all AAA securities. We do not have the intent to sell those securities to realize those losses, they are strictly temporary and move with the movement in rates. I hope that answers your question.

Thank you, JoAnn. See how much we're going to miss, JoAnn. Very good. Are there any other questions, Daniel? Okay. If there are no other questions, I'd like to thank you again for joining us today and for your continued support of Juniata Valley Financial Corp. This presentation has been filed as of this morning on a Form 8-K with the SEC. We will now bring back our Chairman to wrap up the business meeting. Tim?

Thank you, Marcie. At this time, I will ask Lisa Snyder, Judge of Election for a report on the results of the voting.

All votes have been tabulated and results are as follows. There were sufficient votes for each of the nominated individuals to be elected as Directors of Juniata Valley Financial Corp. A majority of votes cast approved the non-binding Say on Pay proposal.

Thank you, Lisa. There is no further business to be brought before the Group. Thank you all for your investment and trust in the Juniata Valley Financial Corp. The 2022 Annual Meeting is now adjourned.

This concludes the meeting. You may now disconnect.