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 as Chairman, it is my privilege to call to order the 2023 Annual Shareholders Meeting of the Juniata Valley Financial Corp. Today's virtual meeting is a live webcast. We believe in engaging with our shareholders in this type of meeting can maximize shareholder attendance regardless of their location. Thank you for participating in today's 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 in the documents folder 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 controlled number. These questions and comments can be submitted by clicking on the Q&A icon and typing in the space provided. Please keep your questions and comments brief and limit them to one per shareholder. All appropriate questions and comments will be addressed at the end of the presentation. For your convenience, links to the annual report and proxy statement are also provided in the documents folder. At this time, I'd like to welcome and introduce the other members of the Board of Directors. Vice Chairman, Martin L. Dreibelbis, Bradley J. Wagner, Marcie A. Barber; Gary E. Kelsey and Michael A. Buffington and Dr. Richard M. Scanlon. And it is my pleasure to introduce our 3 newest Board members who have joined us since our last annual meeting: Joseph B. Scarnati III, Stephen C. Sliver and Christina Calkins-Mazur. In addition to the Board members and key management personnel, representatives from Crowe LLP, our independent public accounting firm; from Barley Snyder, our legal advisers; and from Cherry Bekaert, our internal audit firm, are in 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 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, and the meeting will proceed. A copy of the minutes of the annual shareholders' meeting held May 17, 2022, has been inspected and bound to be accurate and will be entered into permanent record. I will now appoint individuals to serve as judges for election for today's meeting: Lisa M. Snyder, Inspector of Election; Christi J. Burdge; and Renee De 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 Gary E. Kelsey and Joseph B. Scarnati III to serve as Class C directors and continue in office until the 2026 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 elections 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 Mike Wolf, our Chief Financial Officer.

Thank you, Tim. We're very pleased to have reported record earnings and exceptional credit quality metrics for 2022. Most community banks' earnings are negatively impacted by rapid increases in interest rates as funding costs contractually can and do rise more rapidly than asset rates, and we will see that dynamic play out in 2023 when we discuss Q1. Last year, however, we benefited from interest rate increases up to about 200 basis points as deposit rates were well above their appropriate floors due to the sustained record low interest rate environment of nearly a decade. Late summer, continued rate hikes impacted funding costs profoundly as consumers finally could rationally invest and deposit pricing became highly competitive. But for the year, the positive impact of variable loan rate increases outpaced the deposit rate increases of the latter part of the year. And the net impact was as strong and improved net interest margin, which contributed largely to the increased earnings. Mike Wolf will provide more detail on the components and history of our financial performance, and I will discuss credit quality shortly. Mike, would you summarize the earnings results for 2022?

Thank you. As Marcie mentioned, 2022 was an outstanding year. We reported record net income of $8.3 million, exceeding last year by $1.7 million or 26%. Our return on average assets increased by 21 basis points to 1.02%, and earnings per share increased to $1.66 per share. The return on average equity is skewed due to the unrealized losses in our debt securities portfolio, which reduced our GAAP equity. As a result of these unrealized losses in October, we transferred approximately 3/4 of our investments from available to sale to held to maturity, where they are no longer subject to market value fluctuations. Influencing our strong performance in 2022 was double-digit loan growth, coupled with rising interest rates. The rising rate environment had an immediate positive impact on our variable rate assets but took well into the second half of the year to negatively impact our cost of funds, as evidenced by the 27 basis points increase in our net interest margin. We also benefited from a large recovery on a previously charged-off loan and fee income from PPP loan forgiveness. In the fourth quarter of 2022, we saw a shift in our deposit mix towards higher-paying time deposits and some deposit outflow primarily to brokerage firms necessitating some short-term borrowings to fund our continued loan growth. Also, we actively manage noninterest expense, which led to an improvement of our efficiency ratio of more than 11%. This slide depicts asset growth over a 10-year period. During the 2-year period of 2020 and 2021, assets increased by more than 20% due in large part to government stimulus money, which primarily funded the purchase of investments and modest loan growth in those years. In 2022, we saw asset growth of 2.5%, which was fueled by robust loan growth. Deposits have grown significantly over the past several years, especially in 2020 and 2021, again, due to the government stimulus programs. The deposits initially generated from these programs were expected to diminish by early 2022. However, we experienced modest deposit growth during 2022, which helped fund new loan production. As noted on the previous slide, we have a stable and growing deposit base. Deposit stratification has remained relatively consistent over time with recent trends towards time deposits from more liquid transaction accounts due to the rising interest rate environment during 2022 and into the first quarter of 2023. Despite the bank failures of March and April of this year and the subsequent flight of deposits from many community banks, we have actually experienced deposit growth of nearly 2% during the first quarter of 2023. Our record earnings were driven primarily by exceptional loan production in 2022. The total loans increased by nearly 16% during the year and by more than 18% when PPP loan forgiveness is removed from that equation. We saw large increases in real estate secured loans. Commercial real estate loan balances increased nearly 25% due in large part to strategic partnerships with other community banks providing access to markets outside of our retail branch footprint. Residential real estate loan balances increased by 14%, which holded a long-standing trend of declining balances. To keep pace with this growth, we've enhanced our monitoring of participation loans and credit concentrations by industry and geography. This growth was accomplished without changing our underwriting standards or at the expense of credit quality. Marcie will provide us with an overview of credit quality.

Yes. Thanks, Mike. The data presented here illustrates positive trends in extremely strong credit quality at year-end and extending through Q1 2023. The reduction of net recoveries over the past 4 years represents the nearly total recovery of a commercial real estate charge-off from the Great Recession. Our [ AOL ] coverage ratio has generally trended downward over the past 5 years, consistent with continued improvement in credit quality. But the heightened allowance at year-end 2020 included a COVID overlay reserve, which was released throughout 2021 as concerns about the pandemic's impact on specific sectors gradually subsided. The increased reserve at Q1 2023 reflects our conversion to CECL, a mandated methodology change in the calculation of the reserve and is not related to credit quality concerns nor risk rating downgrades. Having said that, we are extremely attentive to the potential for credit quality declines, especially in credit sectors vulnerable to the credit interest rate environment, recession or post-COVID behavioral changes in demand. Mike will now discuss capital and liquidity.

Thank you, Marcie. A company's strength is dependent upon the strength of its capital. And while our GAAP capital was greatly reduced by the unrealized losses in our investment portfolio, our regulatory capital remains strong and well above the statutory minimums. As with most community banks, on-balance sheet liquidity became a hot topic in the second half of 2022. Due to rapidly rising interest rates available for sale securities, we're marked with large unrealized losses and no longer the liquidity source of choice. Fortunately, we have multiple contingent liquidity sources, including a large borrowing capacity with the Federal Home Loan Bank, lines of credit with correspondent banks, access to broker deposits and the new Federal Reserve Bank, Bank Term Funding Program. These sources provide ample liquidity that thus far have been little used due to our ability to retain and expand our core deposits. In 2022, we had a dividend payout ratio of approximately 53%, and we are pleased to be providing a current dividend yield of 5.5% to our shareholders while retaining sufficient capital to weather any potential storms and continue to pay dividends. Marcie will provide an overview of 2023 so far.

Most banks experienced sticker shock late last summer when money was suddenly worth something, and Mike will provide more detail on how that dynamic is expected to play out in 2023. It's important to maintain balance, though, when pricing loans and deposits in a dynamic environment. We are carefully monitoring funds movement and competitive pricing so that our decisions are based on facts. We will experience margin compression. But if we are careful, it will be short-lived, and our margin will recover as loans reprice deposit rates moderate and older loans paid down. We just completed a branch and deposit acquisition in Path Valley, Franklin County over the weekend. This branch replaced a smaller existing branch approximately 10 miles north and less centrally located. This branch relocation and deposit acquisition will provide business development opportunities throughout the valley. We're preparing for a full core conversion in March 2024, and this core will more easily facilitate fintech enhancements and other peripheral applications and will streamline workflows, positively impacting customers and employees. 2023 is presenting new challenges. And yet, as has been our experience in the past, our people's commitment makes the difference. Over the past 12 months, we have appointed Joseph B. Scarnati III, Stephen C. Sliver and Christina Calkins-Mazur to our Board of Directors. These professionals bring a wealth of diversified experience and market intelligence. We are very privileged to benefit from their commitment and service. Mike Wolf has just completed his first full year as our Chief Financial Officer and was appointed Executive Vice President this February. Thomas Weldon had a very successful first year as Senior Vice President of our Trust and Wealth Management division. But in addition to the contributions of our Board and management team, Juniata Valley Bank acknowledges the importance of the whole team and the criticality of goal alignment and the communication of culture. With the whole team, we are looking forward to a challenging but rewarding 2023. Mike, would you share some of the challenges of the first quarter?

Yes. Thank you. The results for the first quarter of 2023 can be summed up in 4 words: net interest margin compression. Unsurprisingly, giving -- given the current interest rate environment, the cost of our interest-bearing liabilities increased by 93 basis points, while the rate on interest-earning assets increased by only 36 basis points when compared to the first quarter of 2022. This compression negatively affected all of our performance metrics. Fortunately, we were able to partially mitigate some of this impact by managing noninterest expense. While the first quarter results do represent a step back from 2022, this contraction was anticipated given the headwinds facing the banking industry going into 2023, and we are continually exploring avenues to improve efficiencies and maximize profitability.

Before we open the meeting up to questions, I'd like to acknowledge the commitment and service of our Chairman, Timothy Havice. Tim will be retiring from the Board next month after having served as our Chairman for the past 10 years and as a director for the 18 years preceding. Tim has always been committed to his responsibility to govern and support. He has always been approachable, reachable and always focused on the good of the bank. Tim loved the job and the bank. This was always evident in his manner as he presided over meetings and guided the organization through victories and through challenges. The bank has benefited from Tim's steady and thoughtful leadership, and we will miss him. At this time, we will address any questions or comments that have been submitted during the presentation. There are no questions. So I'd like to thank you again for joining us today and for your support of Juniata Valley Financial Corp. This presentation will be filed 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 ask Lisa Snyder, judge of election for a report on the results of the voting.

All those have been tabulated and the 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 2023 Annual Meeting is now adjourned.

This concludes the meeting. You may now disconnect.