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

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

Thank you. Good morning. My name is Martin Dreibelbis. And as Chairman, it's my privilege to call to order the 2024 Annual Shareholders Meeting of the Juniata Valley Financial Corp. 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 shareholders 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 control number. [Operator Instructions] For your convenience, links to the annual report and proxy statement are also provided in the document folder. At this time, I'd like to welcome and introduce other members of the Board of Directors. Vice Chairman, Gary Kelsey; Marcie Barber; Michael Buffington; Christina Calkins-Mazur; Joseph Scarnati; Steven Sliver; Bradley Wagner. In addition to the Board members and management personnel, representatives from Crowe, our independent accounting firm, from Barley Snyder, our legal advisers, and from Cherry Bekaert, our internal audit firm are in attendance of this meeting. 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 to the shareholders of 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 16, 2023, has been inspected and bound to be accurate and will be entered into permanent record. I now appoint individuals to serve as judges of election for today's meeting. Lisa Snyder, Inspector of Election; Christi Burdge; Renee Williamson. There are 3 matters to be voted on today. First, the election of directors. The nominating committee of the Board of Directors has nominated Michael Buffington, Christina Calkins-Mazur and Martin Dreibelbis to serve as Class A directors and continue in office until the 2027 Annual Meeting. The second matter voted on today is the nonbinding Say on Pay proposal to approve the compensation of the named executive officers as set forth in the proxy statement. The third matter to be determined today is the frequency at which the Say on Pay proposal should be presented to shareholders. 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 at 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 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 the 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, Martin. Last year, we shared the onset of margin compression evidenced in the first quarter of 2023. We anticipated funding pressure in both volume and expense and throughout the year, we attempted to balance liquidity and funding costs with earning asset growth. We grew loans approximately $41 million with new production at market rates, helping to lift the portfolio yields from the previous 10-year low rate environment. Our strategic branch and deposit purchase during the second quarter in Path Valley contributed to our success in funding all loan growth from deposits and scheduled security amortization as total borrowings were actually down $3 million from year-end 2022. Nonetheless, the cost of funds from all sources rose throughout the year at a pace far exceeding contractual asset repricing resulting in the margin compression, which plagued much of our industry in the past 18 months. Despite the fact that earnings lagged the previous record year, we are very pleased with our financial performance in this extremely challenging environment. Mike, would you summarize the earnings results for 2023?

Thank you. As Marcie mentioned, 2023 presented many challenges for us in the banking industry as a whole. We reported net income of $6.6 million, which was a decrease from last year's record net income. Our 2022 results were driven by 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 into the fourth quarter of 2022 to begin impacting our cost of funds on the liability side as evidenced by a 75 basis point increase in interest-earning assets and an increase of only 2 basis points on interest-bearing liabilities. During 2023, the lag and increase to the cost of funds came to an end as the cost of our interest-bearing liabilities increased by 115 basis points, while interest earning assets increased by 46 basis points. The primary cause for the increase in the cost of funds was competition for deposits as more than $800 billion left the banking industry during 2023. To help mitigate the net interest margin compression in 2023. We placed added emphasis on generating fee income, which led to a 2% increase in noninterest income while simultaneously maintaining total noninterest expense at the same level as 2022, net of onetime costs related to the purchase of the Path Valley branch and our core conversion. While we continue to prudently price loan and deposit relationships, the net interest margin compression felt in 2023 is anticipated to continue throughout most of 2024. Given the dynamics just discussed, our return on average assets and earnings per share decreased during 2023. The return on average equity remains skewed due to the unrealized losses in our debt securities portfolio, which reduces our GAAP equity. In October 2022, we transferred approximately 3/4 of the investment portfolio to held to maturity designation, where they are no longer subject to market value fluctuation. Due to this strategy, unrealized losses were reduced by more than $3 million during 2023. This slide presents asset growth over a 10-year period. During the 2-year period of 2020 and '21, assets increased by more than 20% due in large part the government stimulus money, which primarily funded the purchase of investment securities and muted loan growth during those years. After modest growth in 2022, assets grew by nearly 5% in 2023 due primarily to loan growth of more than 8% and on balance sheet cash reserves. Deposits have grown significantly over the past several years, especially in 2020 and '21, again, due to the government stimulus programs. In 2022, we experienced modest deposit growth, while in 2023, deposits grew by more than 5%. This increase was augmented by our purchase of the Path Valley branch. 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 for more liquid transaction accounts due to the rising interest rate environment of the last 2 years despite the high profile bank failures in early 2023 and subsequent flight of deposits from the banking industry, many community banks, subsequent flight of deposits for many community banks, we experienced deposit growth of more than $37 million during 2023 primarily through acquisition and targeted marketing efforts. Our earnings are largely driven by new loan production despite the challenging interest rate environment, total loans increased by more than 8% in 2023 and by more than 20% over the past 2 years. In 2023, we saw increases in real estate secured loans of more than 10%. Commercial real estate loan balances increased by more than $27 million due in part to our focus on originating loans in markets outside of our retail branch footprint. This focus was also applied to commercial and industrial loans, resulting in an increase of nearly $5 million during 2023. Residential real estate loan balances increased by nearly $12 million which marked the second straight year of double-digit percentage growth after a multiyear trend of declining balances. This growth was accomplished without lowering our underwriting standards or at the expense of credit quality. Marcie will give us an overview of our credit quality.

Thank you, Mike. We are pleased to share this slide, which illustrates continued high credit quality. At year-end, we carried a $4.7 million nonperforming loan which was placed on nonaccrual in November 2023. As anticipated, this loan was paid in full by the end of the first quarter of 2024. We fully expect the pressures of inflation and higher borrowing rates to impact credit quality. However, we review portfolio metrics and industry trends monthly to identify and manage potential credit weaknesses. Our allowance for credit losses at year-end was 1.08% of the loan portfolio, additions of $500,000 throughout 2023, were based on portfolio growth, not increasing risk in the portfolio. Mike will now discuss capital and liquidity.

Thank you, Marcie. Our company's strength is dependent upon the strength of its capital and while our GAAP capital has been reduced by the unrealized losses in our investment portfolio, Juniata Valley Bank's regulatory capital remains strong and well above statutory minimums. Liquidity has become a topic of great interest to bank management and the regulatory agencies who supervise them. Due to the rising interest rates over the past 2 years, available-for-sale investment portfolios were typically marked with large unrealized losses, and we're 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, a line of credit with a correspondent bank access the broker deposits and the Federal Reserve Bank, Bank Term Funding Program, which was started last spring. These sources provide ample liquidity that thus far have been little used due to our ability to retain and expand our core deposits. In 2023, we had a dividend payout ratio of approximately 67% and at year-end, provided a dividend yield of 6.7% to our shareholders while retaining sufficient capital to weather any potential storms and continue to pay dividends. Marcie will now give us a look ahead at 2024.

We anticipate more of the same in 2024 as competitive and economic pressures on deposit rates continue to be intense. Many tenured loans are repricing, and we are actively sourcing new market rate opportunities to lessen the impact of underpriced loans and underpriced securities. We're optimistic about our ability to execute our business plan in 2024 as we successfully completed a complicated full core conversion in the first quarter. This effort consumed countless hours in training and data mapping throughout much of 2023 and throughout the first quarter of 2024. With this effort behind us, we can now focus all of our energies in serving customers and seeking new ones. We are relocating our loan production office in Centre County. The new location will provide easier access, greater visibility and more functional space. The improved access will allow us to deliver not only loan production, but trust and investment services as well to the center region market. At this time, we will address any questions or comments that have been submitted during the presentation. If there are no questions, I'd like to thank you again for joining us today and for your support of Juniata Valley Financial Corp. We will now bring back our Chairman to wrap up the business meeting. Martin?

Thank you, Marcie. At this time, I'll ask Lisa Snyder, Judge of Election through -- for a report on the results of the voting. Lisa?

All votes have been tabulated and resolved are as follows: There are 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 nonbinding Say on Pay Proposal. A majority of votes cast selected 1 year as the frequency with which the advisory Say on Pay proposal is to be held.

Thank you, Lisa. There's no further business to be brought before the group. Thank you all for your investment and trust in the Juniata Valley Financial Corp. The 2024 Annual Meeting is now adjourned.

This concludes the meeting. You may now disconnect.