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THE WILBER CORPORATION
ANNUAL REPORT ON SECURITIES AND EXCHANGE COMMISSION FORM 10-K
for the Year-Ended December 31, 2005
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The Annual Report on Form 10-K that follows is not part of the proxy
solicitation material.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2005
Commission file number: 001-31896
The Wilber Corporation
(Exact name of registrant as specified in its charter)
New York 15-6018501
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
245 Main Street, P.O. Box 430, Oneonta, NY 13820
(Address of principal executive offices) (Zip Code)
607-432-1700
(Registrant's telephone number, including area code)
None
(Former name, former address and former fiscal year, if changed since
last report)
Securities registered pursuant to 12(b) of the Act:
Title of each class Name of each exchange on which registered
Common Stock, $0.01 par value per share American Stock Exchange
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act.
Yes [ ] No [X]
Indicate by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act.
Yes [ ] No [X]
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
Indicate by check mark whether the registrant is a large accelerated filer,
accelerated filer, or a non-accelerated filer. See definition of "Large
accelerated filer and accelerated filer" in Rule 12b-2 of the Exchange Act.
(Check one).
Large accelerated filer [ ] Accelerated filer [X] Non-accelerated filer [ ]
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Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).
Yes [ ] No [X]
As of June 30, 2005, the aggregate market value of the registrant's common stock
held by non-affiliates of the registrant was $79.4 million, based upon the
closing price as reported on the American Stock Exchange ("Amex(R)"). Although
Directors and Executive Officers of the registrant were assumed to be
"affiliates" for the purposes of this calculation, the classification is not to
be interpreted as an admission of such status. There were no classes of
non-voting common stock authorized on June 30, 2005.
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
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Common Stock Outstanding at March 7, 2006
(Common Stock, $0.01 par value per share) 11,145,937 shares
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Documents Incorporated by Reference
Portions of the registrant's definitive Proxy Statement for the registrant's
Annual Meeting of Shareholders to be held on April 29, 2006 are incorporated by
reference.
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3-K
THE WILBER CORPORATION
FORM 10-K
INDEX
FORWARD-LOOKING STATEMENTS
--------------------------
PART I
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ITEM 1: BUSINESS
-------
A. General
B. Market Area
C. Lending Activities
a. Loan Products and Services
b. Loan Approval Procedures and Authority
c. Credit Quality Practices
D. Investment Securities Activities
E. Sources of Funds
F. Electronic and Payment Services
G. Trust and Investment Services
H. Insurance Services
I. Supervision and Regulation
a. The Company
b. The Bank
c. Subsidiaries
J. Competition
K. Legislative Developments
ITEM 1A: RISK FACTORS
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ITEM 1B: UNRESOLVED STAFF COMMENTS
--------
ITEM 2: PROPERTIES
-------
ITEM 3: LEGAL PROCEEDINGS
-------
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
-------
PART II
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ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
------- AND ISSUERS PURCHASES OF EQUITY SECURITIES
A. Market Information; Dividends on Common Stock; and Recent Sales of
Unregistered Securities
B. Use of Proceeds from Registered Securities
C. Purchases of Equity Securities by Issuer and Affiliated Purchasers
ITEM 6: SELECTED FINANCIAL DATA
-------
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
------- RESULTS OF OPERATIONS
A. General
B. Performance Overview
C. Financial Condition
a. Comparison of Financial Condition at December 31, 2005 and
December 31, 2004
D. Results of Operations
a. Comparison of Operating Results for the Years Ended December
31, 2005 and December 31, 2004
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b. Comparison of Operating Results for the Years Ended December
31, 2004 and December 31, 2003
E. Liquidity
F. Capital Resources and Dividends
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
-------
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
------- FINANCIAL DISCLOSURE
ITEM 9A: CONTROLS AND PROCEDURES
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ITEM 9B: OTHER INFORMATION
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PART III
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ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-------- A. Directors of the Registrant
B. Executive Officers of the Registrant Who Are Not Directors
C. Compliance With Section 16(a)
ITEM 11: EXECUTIVE COMPENSATION
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ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
-------- RELATED STOCKHOLDER MATTERS
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
--------
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
--------
PART IV
-------
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
--------
5-K
FORWARD-LOOKING STATEMENTS
When we use words or phrases like "will probably result," "we expect," "will
continue," "we anticipate," "estimate," "project," "should cause," or similar
expressions in this report or in any press releases, public announcements,
filings with the Securities and Exchange Commission (the "SEC"), or other
disclosures, we are making "forward-looking statements" as described in the
Private Securities Litigation Reform Act of 1995. In addition, certain
information we provide, such as analysis of the adequacy of our allowance for
loan losses or an analysis of the interest rate sensitivity of our assets and
liabilities, is always based on predictions of the future. From time to time, we
may also publish other forward-looking statements about anticipated financial
performance, business prospects, and similar matters.
The Private Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. We want you to know that a variety of future events
and uncertainties could cause our actual results and experience to differ
materially from what we anticipate when we make our forward-looking statements.
Factors that could cause future results to vary from current management
expectations include, but are not limited to, general economic conditions,
legislative and regulatory changes, monetary and fiscal policies of the federal
government, changes in tax policies, tax rates and regulations of federal, state
and local tax authorities, changes in consumer preferences, changes in interest
rates, deposit flows, cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines, and other economic, competitive, governmental, and
technological factors affecting the Company's operations, markets, products,
services and fees.
Please do not rely unduly on any forward-looking statements, which are valid
only as of the date made. Many factors, including those described above, could
affect our financial performance and could cause our actual results or
circumstances for future periods to differ materially from what we anticipate or
project. We have no obligation to update any forward-looking statements to
reflect future events which occur after the statements are made, and we
specifically disclaim such obligation.
6-K
PART I
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ITEM 1: BUSINESS
A. General
The Wilber Corporation (the "Company"), a New York corporation, was originally
incorporated in 1928. The Company held and disposed of various real estate
assets until 1974. In 1974, the Company and its real estate assets were sold to
Wilber National Bank (the "Bank"), a national bank established in 1874. The
Company's real estate assets were used to expand the banking house of Wilber
National Bank. The Company was an inactive subsidiary of the Bank until 1982. In
1983, under a plan of reorganization, the Company was re-capitalized, acquired
100% of the voting stock of the Bank, and registered as a bank holding company
within the meaning of the Bank Holding Company Act of 1956 ("BHCA").
The business of the Company consists primarily of the ownership, supervision,
and control of the Bank. The Bank is chartered by the Office of the Comptroller
of the Currency ("the OCC"), and its deposits are insured up to the applicable
limits of the Federal Deposit Insurance Corporation ("the FDIC"). The Company,
through the Bank and the Bank's subsidiaries (collectively "we" or "our"),
offers a full range of commercial and consumer financial products including
business, municipal, mortgage and consumer loans, deposits, trust and investment
services, and insurance. We serve our customers through twenty (20) full service
branch banking offices located in Otsego, Delaware, Schoharie, Chenango, Ulster,
and Broome counties, New York, an ATM network, and electronic / Internet banking
services. In addition, we operate an insurance sales office located in Walton,
New York (Delaware County), and two representative loan production banking
offices, one in Kingston, New York (Ulster County), and one in Syracuse, New
York (Onondaga County). The Bank's main office is located at 245 Main Street,
Oneonta, New York, 13820 (Otsego County). We employed 245 full-time equivalent
employees at December 31, 2005. Our website address is www.wilberbank.com.
The Bank's subsidiaries include Wilber REIT, Inc., Western Catskill Realty, LLC,
and Mang-Wilber, LLC. Wilber REIT, Inc. is wholly - owned by the Bank and
primarily holds mortgage related assets. Western Catskill Realty, LLC is a
wholly - owned real estate holding company, which primarily holds foreclosed
real estate. Mang-Wilber, LLC is the Bank's insurance agency subsidiary, which
is operated under a joint venture arrangement with a regional insurance agency.
At December 31, 2005, the Bank owned a 62.7% membership interest in Mang-Wilber,
LLC.
Our principal business is to act as a financial intermediary in the communities
we serve by obtaining funds through customer deposits and institutional
borrowings, lending the proceeds of those funds to our customers, and investing
excess funds in debt securities and short-term liquid investments. Our funding
base consists of deposits derived principally from the central New York
communities which we serve. To a lesser extent, we borrow funds from
institutional sources, principally the Federal Home Loan Bank of New York
("FHLBNY"). We target our lending activities to consumers and municipalities in
the immediate geographic areas and to small and mid-sized businesses in the
immediate geographic areas and broader statewide region. Our investment
activities primarily consist of purchases of U.S. Treasury, U.S. Government
Agency ("GinnieMae"), U.S. Government Sponsored Entities ("FannieMae" and
"FreddieMac"), municipal, mortgage-backed and high quality corporate debt
instruments. Through our Trust and Investment Division, we provide personal
trust, agency, estate administration and retirement planning services for
individuals, as well as custodial and investment management services to
institutions. We also offer stocks, bonds and mutual funds through a third party
broker-dealer firm. Through our subsidiary, Mang-Wilber LLC, we offer a full
line of life, health and property, and casualty insurance products.
B. Market Area
We primarily operate in the small town and rural markets to the north and west
of the Catskill Mountains in central New York. The regional economy is driven by
small not-for-profit organizations; farming; hospitals; small, independently
owned retailers, restaurants and motels; light manufacturing; several small
colleges; and tourism. The National Baseball Hall of Fame (Cooperstown, New
York), the National Soccer Hall of Fame (Oneonta, New York), several youth sport
camps, and outdoor recreation such as camping, hunting, fishing, and skiing
bring seasonal activity to several communities within our market area. The
Bank's main office in Oneonta, New York, is approximately 70 miles southwest of
Albany, New York, the state's capital, and 180 miles northwest of New York City.
Our primary market area consists of four rural counties in central New York,
namely Otsego, Delaware, Schoharie and Chenango Counties. The estimated
population of our four county primary market area is 194,000. Between 2000 and
2004, the area population increased by less than 1%. This compares to a national
average of 1.3% during the same time period. Approximately 15.9% of the
individuals that reside in our four county primary market area are over the age
of 65, as compared to a national average of 12.4%. In 1999 (the latest available
statistics) the median household income for the four county region was
approximately $34 thousand. This is approximately 80% of the United States
national average
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and 78% of the New York State average. The local unemployment rate approximates
the national average. Our management believes the demographic profile of the
primary market area in which we operate has not materially changed through 2005.
We also operate one full-service branch office in Ulster County, New York.
Although the demographic profile of that county differs from our primary
four-county market, the town in which we operate our branch is similar to our
primary market. The full-service branch located in Johnson City, New York
(Broome County), and the representative loan production offices located in
Kingston, New York (Ulster County) and Syracuse, New York (Onondaga County),
operate in more densely populated markets.
C. Lending Activities
General. The Company, through the Bank, engages in a wide range of lending
activities, including commercial lending primarily to small and mid-sized
businesses; mortgage lending for 1-4 family and multi-family properties
including home equity loans; mortgage lending for commercial properties;
consumer installment and automobile lending, and to a lesser extent,
agricultural lending.
Over the last several decades we have implemented lending strategies and
policies that are designed to provide flexibility to meet customer needs, while
minimizing losses associated with borrowers' inability or unwillingness to repay
loans. The loan portfolio, in general, is fully collateralized, and many
commercial loans are further secured by personal guarantees. We do not commonly
grant unsecured loans to our customers. Annually, we utilize the services of an
outside consultant to conduct reviews of the larger, more complex commercial
real estate and commercial loan portfolios to ensure adherence to underwriting
standards and loan policy guidelines.
We periodically participate in loan participations with other banks or financial
institutions both as an originator and as a participant. A participation loan is
generally formed when the aggregate size of a single loan exceeds the
originating bank's regulatory maximum loan size or a self-imposed loan limit. We
typically make participation loans for commercial or commercial real estate
purposes. Although we do not always maintain direct contact with the borrower,
credit underwriting procedures and credit monitoring practices associated with
participation loans are identical in all material respects to those practices
and procedures followed for loans that we originate, service, and hold for our
own account. We typically buy participation loans from other commercial banks
operating within New York State with whose management we are familiar. Our total
participation loans represent less than 10% of the total loans outstanding and
are comprised of approximately 20 borrowers.
If deemed appropriate for the borrower and for the Bank, we place certain loans
in Federal, State or Local Government agency or government sponsored loan
programs. These placements often help reduce our exposure to credit losses and
often provide our borrowers with lower interest rates on their loans.
a. Loan Products and Services
Residential Real Estate. We originate and hold residential real estate loans for
our loan portfolio. The terms on these loans are typically 15 - 30 years and are
usually secured by a first lien position on the home of the borrower. We offer
both adjustable rate and fixed rate loans and provide monthly and bi-weekly
payment options. Our 1-4 family residential loan portfolio primarily consists of
owner-occupied, primary residence properties and, to a lesser extent, rental
properties for off-campus student housing, which surround each of the local
colleges within our market. Our property appraisal process, debt-to-income
limits for borrowers, and established loan-to-value limits dictate our
residential real estate lending practices.
To be more competitive in the interest-rate sensitive 15 to 30-year fixed rate
residential mortgage market, we also originate loans on behalf of a
super-regional bank based in the Southeastern United States. During 2002 we
entered into an agreement with this bank to originate residential real estate
loans as their agent.
We originate and retain home equity loans. Our home equity loans are typically
granted as adjustable rate lines of credit. The interest rate on the line of
credit adjusts twice per year and is tied to the Wall Street Journal Prime loan
rate. The loan terms generally include a 2nd lien position on the borrower's
residence and a 10-year interest only repayment period. At the end of a 10-year
term, the home equity line of credit is either renewed by the borrower or placed
on a scheduled principal and interest payment plan by the Bank.
Commercial Real Estate. We originate commercial real estate loans to finance the
purchase of developed real estate. To a lesser extent, we will also provide
financing for the construction of commercial real estate. Our commercial real
estate loans are typically larger than those made for residential real estate.
The loans are often secured by properties whose
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tenants include "Main Street" type small businesses, retailers and motels. We
also finance properties for commercial office and owner-occupied manufacturing
space. Our commercial real estate loans are usually limited to a maximum
repayment period of 20 years. Most of our commercial real estate loans are fully
collateralized and further secured by the personal guarantees of the property
owners. Construction loans are generally granted as a line of credit whose term
does not exceed 12 months. We typically advance funds on construction loans
based upon an advance schedule, to which the borrower agrees, and physical
inspection of the premises.
Commercial Loans. In addition to commercial real estate loans, we also make
various types of commercial loans to qualified borrowers, including business
installment and term loans, lines-of-credit, demand loans, time notes,
automobile dealer floor-plan financing, and accounts receivable financing.
Business installment and term loans are typically provided to borrowers for long
term working capital or to finance the purchase of a piece of equipment, truck
or automobile utilized in their business. We generally limit the term of the
borrowing to a period shorter than the estimated useful life of the equipment
being purchased. We also place a lien on the equipment being financed by the
borrower.
Lines-of-credit are typically provided to meet the short-term working capital
needs of the borrowers for inventory and other seasonal aspects of their
business. We also offer a cash management line of credit that is tied to a
borrower's primary demand deposit operating account. Each day, on an automated
basis, the borrower's line of credit is paid down with the excess operating
funds available in the primary operating account. Upon complete repayment of the
line-of-credit, excess operating funds are invested in investment securities on
a short-term basis, usually overnight, through a securities repurchase agreement
between the Bank and the customer.
Demand loans and time notes are often granted to borrowers to provide short term
or "bridge" financing for special orders, contracts or projects. These loans are
often secured with a lien on business assets, liquid collateral, and/or personal
guarantees.
On a limited basis we also provide inventory financing or "floor plans" for
automobile dealers. Floor plan lines of credit create unique risks that require
close oversight by the Bank's lending personnel. Accordingly, we have developed
special procedures for floor plan lines of credit to assure the borrower
maintains sufficient inventory collateral at all times.
In 1997 we began offering accounts receivable financing to qualified borrowers
through affiliation with a third party vendor specializing in this type of
financing. The program allows business customers to borrow funds from the Bank
by assigning their accounts receivable to the Bank for billing and collection.
The program is supported by limited fraud and credit insurance.
Commercial loans and commercial real estate loans generally involve a higher
degree of risk and are more complex than residential mortgages and consumer
loans. Such loans typically involve large loan balances to single borrowers or
groups of related borrowers. Commercial loan repayment and interest terms are
often established to meet the unique needs of the borrower and the
characteristics of the business. Typically, payments on commercial real estate
are dependent upon leases whose terms are shorter than the borrower's repayment
period. This places significant reliance upon the owner's successful operation
and management of the property. Accordingly, the borrower and we must be aware
of the risks that affect the underlying business including, but not limited to,
economic conditions, competition, product obsolescence, inventory cycles,
seasonality, and the business owner's experience and expertise.
Standby Letters of Credit. We offer stand-by letters of credit for our business
customers. Stand-by letters of credit are not loans. They are guarantees to pay
other creditors of the customer should the customer fail to meet certain payment
obligations required by the third party creditor. Those guarantees are primarily
issued to support public and private borrowing arrangements, including bond
financing and similar transactions. Because the issuance of a stand-by letter of
credit creates a contingent liability for the Bank, they are underwritten in the
same manner as loans. Accordingly, a stand-by letter of credit will only be
issued upon completing our credit review process. We charge our customers a fee
for providing this service, which is based on the principal amount of the
stand-by letter of credit.
Consumer Loans. We offer a variety of consumer loans to our customers. These
loans are usually provided to purchase a new or used automobile, motorcycle or
recreational vehicle, or to make a home improvement. We also make personal loans
to finance the purchase of consumer durables or other needs of our customers.
The consumer loans are generally offered for a shorter term than residential
mortgages because the collateral typically has an estimated useful life of 5 to
10 years and tends to depreciate rapidly. Automobile loans comprise the largest
portion of our consumer loan portfolio. The financial terms of our automobile
loans are determined by the age and condition of the vehicle, and the ability of
the borrower to make scheduled principal and interest payments on the loan. We
obtain a lien on the vehicle and collision insurance policies are required on
these loans. Although we lend directly to borrowers, the majority of our
automobile
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loans are originated through auto dealerships within our primary market area. We
commonly refer to these as indirect automobile or indirect installment loans.
We also provide an overdraft line of credit product called ChequeMate, which
provides our customers with an option to eliminate overdraft fees should they
make an error in balancing their checking account. Our ChequeMate lines of
credit are typically unsecured and are generally limited to less than $4,000 per
account.
b. Loan Approval Procedures and Authority
General. The Bank's Board of Directors delegates the authority to provide loans
to borrowers through the Bank's loan policy. The policy is modified, reviewed
and approved on an annual basis to assure that lending policies and practices
meet the needs of borrowers, mitigate perceived credit risk, and reflect current
economic conditions. Currently, we use a four (4) tier structure to approve
loans. First, the full Board of Directors of the Bank has authority to approve
single loans or loans to any one borrower up to the Bank's legal lending limit,
which was $10.3 million for loans not fully secured by readily marketable
collateral and $17.2 million for loans secured by readily marketable collateral
at December 31, 2005. The full Board of Directors also approves loans made to
members of the Board of Directors, their family members, and their related
businesses when the total loans exceed $500,000. If conditions merit, the Board
of Directors may authorize exceptions to our loan policy.
Second, the Board of Directors, as required by the Bank's by-laws, appoints a
Loan and Investment Committee. The Loan and Investment Committee must be
comprised of at least three (3) outside directors and meets on an as-needed
basis, generally bi-weekly. Its lending authority for loans not secured by
readily marketable collateral is limited to 50% of the Bank's legal lending
limit, which is approximately $5.2 million. The Committee may also approve loans
up to 100% of the Bank's legal lending limit if the loan is secured by readily
marketable collateral such as stocks and bonds. The Loan and Investment
Committee is also responsible for ratifying and affirming all loans made that
exceed $25,000, approving collateral releases, authorizing charge-offs in excess
of $10,000, and annually reviewing all lines of credit that exceed the lending
limit of the Officers' Loan Committee. The actions of the Loan and Investment
Committee are reported to and ratified by the full Board of Directors each
month.
Third, the Board of Directors has authorized the creation of the Officers' Loan
Committee. The Officers' Loan Committee is comprised of four (4) voting members,
the Bank's President and Chief Executive Officer, the Chief Credit Officer, the
Senior Lender, and the Vice President - Credit Risk Management. The Officers'
Loan Committee may approve secured and unsecured loans up to 25% of the Bank's
legal lending limit (approximately $2.6 million) and loans up to 100% of the
Bank's legal lending limit if the loan is secured by readily marketable
collateral. The Committee also has the authority to adjust loan rates from time
to time as market conditions dictate. Loan charge-offs up to $10,000 and
collateral releases within prescribed limits established by the Board of
Directors are also approved by the Officers' Loan Committee. All actions of the
Officers' Loan Committee are reported to the Loan and Investment Committee for
ratification.
Fourth, through the loan policy, individual loan officers are provided specific
loan limits by category of loan. Each officer's lending limits are determined
based on the individual officer's experience, past credit decisions, and
expertise.
Our goal for the loan approval process is to provide adequate review of loan
proposals while at the same time responding quickly to customer requests. We
complete a credit review and maintain a credit file for each borrower. The
purpose of the file is to provide the history and current status of each
borrower's relationship and credit standing, so that a loan officer can quickly
understand the borrower's status and make a fully informed decision on a new
loan request. We require that all business borrowers submit audited, reviewed,
or compiled internal financial statements or tax returns no less than annually.
Loans to Directors and Executive Officers. Loans to members of the Board of
Directors (and their related interests) are granted under the same terms and
conditions as loans made to unaffiliated borrowers. Any fee that is normally
charged to other borrowers is also charged to the members of the Board of
Directors. Loans to Executive Officers are limited by banking regulations. There
is no regulatory loan limit established for Executive Officers to purchase,
construct, maintain or improve a residence, or to finance the education of a
dependent. However, any loans to Executive Officers which are not for the
construction, improvement, or purchase of a residence, not used to finance a
dependent's education, or not secured by readily marketable investment
collateral, are limited to a maximum of $100,000. In addition, we require that
all loans made to Executive Officers be reported to the Board of Directors at
the next Board of Directors meeting.
c. Credit Quality Practices
General. One of our key objectives is to maintain strong credit quality of the
Bank's loan portfolio. We strive to accomplish this objective by maintaining a
diversified mix of loan types, limiting industry concentrations, and monitoring
regional
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economic conditions. In addition, we use a variety of strategies to protect the
quality of individual loans within the loan portfolio during the credit review
and approval process. We evaluate both the primary and secondary sources of
repayment and complete financial statement review and cash flow analysis for
commercial borrowers. We also generally require personal guarantees on small
business loans, cross-collateralize loan obligations, complete on-site
inspections of the business, and require the company to adhere to financial
covenants. Similarly, in the event a modification to an outstanding loan is
requested, we reevaluate the loan under the proposed terms prior to making the
modification. If we approve the modification, we often secure additional
collateral or impose stricter financial covenants. In the event a loan becomes
delinquent, we follow collection procedures to assure repayment. If it becomes
necessary to repossess or foreclose on collateral, we strive to execute the
proceedings in a timely manner and dispose of the repossessed or foreclosed
property quickly to minimize the level of non-performing assets, subsequent
asset deterioration, and costs associated with monitoring the collateral.
Delinquent Loans and Collection Procedures. When a borrower fails to make a
required payment on a loan, we take a number of steps to induce the borrower to
cure the delinquency and restore the loan to current status. Our Chief Credit
Officer continuously monitors the past due status of the loan portfolio.
Individual delinquencies are reported to the Directors' Loan and Investment
Committee at each meeting and the overall delinquency levels to the Board of
Directors at least quarterly. Separate collection procedures have been
established for residential mortgage, consumer, and commercial and commercial
real estate loans.
On residential mortgage loans fifteen (15) days past due, we send the borrower a
notice which requests immediate payment. At twenty (20) days past due, the
borrower is usually contacted by telephone by an employee of the Bank. The
borrower's response and promise to pay is recorded. At sixty (60) days or more
past due, if satisfactory repayment arrangements are not made with the borrower,
generally, an attorney letter will be sent and foreclosure procedures will
begin.
On consumer loans ten (10) days past due, we send the borrower a notice which
requests immediate payment. If the loan remains past due, an employee of the
Bank's Collection Department or the approving Loan Officer will usually contact
the borrower before day thirty (30) of past due status. Loans sixty to ninety
(60 - 90) days past due are generally subject to repossession of collateral.
We send past due notices to borrowers with commercial term loans, demand notes,
and time notes (including commercial real estate) when the loan reaches ten (10)
days past due. Between day fifteen and day thirty (15 - 30), borrowers are
contacted by telephone by an employee of the Bank's Collection Department or by
the approving Loan Officer to attempt to return the account to current status.
After thirty (30) days past due, the loan officer and senior loan officer decide
whether to pursue further action against the borrower.
Loan Portfolio Monitoring Practices. Our loan policy requires that the Chief
Credit Officer continually monitor the status of the loan portfolio, by
regularly reviewing and analyzing reports, which include information on
delinquent loans, criticized loans and foreclosed real estate. We risk rate our
loan portfolios and individual loans based on their perceived risks and
historical losses. For commercial borrowers whose aggregate loans exceed
$50,000, we assign an individual risk rating annually. We arrive at a risk
rating based on current payment performance and payment history, the current
financial strength of the borrower, and the value of the collateral and personal
guarantee. Loans classified as "substandard" typically exhibit some or all of
the following characteristics:
o the borrower lacks current financial information,
o the business of the borrower is poorly managed,
o the borrower's business becomes highly-leveraged or appears to
be insolvent,
o the borrower exhibits inadequate cash flow to support the debt
service,
o the loan is chronically delinquent, or
o the industry in which the business operates has become
unstable or volatile.
Loans we classify as "special mention" are loans that are generally performing,
but the borrower's financial strength appears to be deteriorating. Loans we
categorize as a "pass" are generally performing per contractual terms and
exhibit none of the characteristics of special mention or substandard loans.
Allowance for Loan Loss. The allowance for loan losses is an amount which in the
opinion of management, is necessary to absorb probable losses inherent in the
loan portfolio. We continually monitor the allowance for loan losses to
determine its reasonableness. At each quarter end our Chief Credit Officer
prepares a formal assessment of the allowance for loan losses and submits it to
the full Board of Directors to determine the adequacy of the allowance. The
allowance is determined based upon numerous considerations. For the consumer,
residential mortgage, and small commercial loans, we consider local economic
conditions, the growth and composition of the loan portfolio, the trend in
delinquencies, and
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the trend in loan charge-offs and non-performing loans. Based on these factors,
we estimate the probable or "embedded" losses in the loan portfolio. On large
commercial loans, we take into consideration the specific characteristics of the
loan including the borrower's payment history, business conditions in the
borrower's industry, the collateral and guarantees securing the loan, and our
historical experience with similarly structured loans. We then assign an
estimated loss percentage based on these characteristics. The adequacy of our
allowance for loan losses is also reviewed by the OCC on a periodic basis. Its
comments and recommendations are factored into the determination of the
allowance for loan losses.
The allowance for loan losses is increased by the provision for loan losses,
which is recorded as an expense on our income statement. Loan charge-offs are
recorded as a reduction in the allowance for loan losses. Loan recoveries are
recorded as an increase in the allowance for loan losses.
Non-Performing Loans. There are three categories of non-performing loans, (i)
those 90 or more days delinquent and still accruing interest, (ii) non-accrual
loans, and (iii) troubled debt restructured loans ("TDR"). We place individual
loans on non-accrual status when timely collection of contractual principal and
interest payments is doubtful. This generally occurs when a loan becomes ninety
(90) days delinquent. When deemed prudent, however, we may place loans on
non-accrual status before they become 90 days delinquent. Upon being placed on
non-accrual status, we reverse all interest accrued in the current year against
interest income. Interest accrued and not collected from a prior year is
charged-off through the allowance for loan losses. If ultimate repayment of a
non-accrual loan is expected, any payments received may be applied in accordance
with contractual terms. If ultimate repayment of principal is not expected, any
payment received on the non-accrual loan is applied to principal until ultimate
repayment becomes expected.
A loan is considered to be a TDR when we grant a special concession to the
borrower because the borrower's financial condition has deteriorated to the
point where servicing the original loan under the original terms becomes
difficult or challenges the financial viability of the business. Such
concessions include the reduction of interest rates, forgiveness of principal or
interest, or other similar modifications to the original terms. TDR loans that
are in compliance with their modified terms and that yield a market rate may be
removed from TDR status in the calendar year after the year in which the
restructuring took place.
Our goal is to minimize the number of non-performing loans because of their
negative impact on the Company's earnings.
Foreclosure and Repossession. At times it becomes necessary to foreclose or
repossess property that a delinquent borrower pledged as collateral on a loan.
Upon concluding foreclosure or repossession procedures, we take title to the
collateral and attempt to dispose of it in the most efficient manner possible.
Real estate properties formerly pledged as collateral on loans, which we have
acquired through foreclosure proceedings or acceptance of a deed in lieu of
foreclosure are called Other Real Estate Owned (hereinafter referred to as
"OREO"). OREO is carried at the lower of the recorded investment in the loan or
the fair value of the real estate, less estimated costs to sell. Write-downs
from the unpaid loan balance to fair value are charged to the allowance for loan
losses.
Loan Charge-Offs. We charge off loans or portions of loans that we deem
non-collectible and can no longer justify carrying as an asset on the Bank's
balance sheet. We determine if a loan should be charged-off by analyzing all
possible sources of repayment. Once the responsible Loan Officer or designated
Collections Department personnel determines the loan is not collectible, he/she
completes a "Recommendation for Charge-off" form, which is subsequently reviewed
and approved by the Bank's Loan and Investment Committee (or by the Officers'
Loan Committee for charge-offs less than $10,000).
D. Investment Securities Activities
General. The Bank's Board of Directors has final authority and responsibility
for all aspects of the Bank's investment activities. It exercises this authority
by setting the Bank's Investment Policy each year and appointing the Loan and
Investment Committee to monitor adherence to the policy. The Board of Directors
delegates its powers by appointing designated investment officers to purchase
and sell investment securities for the account of the Bank. The CEO and the
Chief Investment Officer have the authority to make investment purchases within
the limits set by the Board of Directors. All investment securities transactions
are reviewed monthly by the Loan and Investment Committee and the Board of
Directors.
The Bank's investment securities portfolio is primarily comprised of high-grade
fixed income debt instruments. Investment purchases are generally made when we
have funds that exceed the present demand for loans. Our primary investment
objectives are to:
(i) minimize risk through strong credit quality,
(ii) provide liquidity to fund loans and meet deposit run-off,
(iii) diversify the Bank's assets,
(iv) generate a favorable investment return,
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(v) meet the pledging requirements of State, County and Municipal
depositors,
(vi) manage the risk associated with changing interest rates, and
(vii) match the maturities of securities with deposit and borrowing
maturities.
Our current investment policy generally limits securities investments to U.S.
Government, agency and sponsored entity securities, corporate debt, municipal
bonds, pass-through mortgage backed securities issued by Fannie Mae, Freddie Mac
or Ginnie Mae, and collateralized mortgage obligations issued by these same
agencies.
The investment securities we hold are classified as held-to-maturity, trading,
or available-for-sale, depending on the purposes for which the investment
securities were acquired and are being held. Securities held-to-maturity are
debt securities that the Company has both the positive intent and ability to
hold to maturity. These securities are stated at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of sale in the
near term are classified as trading securities and are reported at fair value
with unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held-to-maturity or trading securities are
classified as available-for-sale and are reported at fair value with unrealized
gains and losses excluded from earnings and reported net of taxes in accumulated
other comprehensive income or loss. We hold the majority of our investment
securities in the available-for-sale category.
On a daily basis we buy and sell overnight federal funds to and from our
correspondent banks. Federal funds are unsecured general obligations of the
purchasing bank and therefore subject to credit risk. To mitigate this risk, we
monitor the financial strength of our correspondent banks on a continuous basis.
Financial strength rating reports of each correspondent bank are reviewed by the
Bank's management on a quarterly basis.
From time to time we purchase and hold certificates of deposit with banks
domiciled in the United States. These obligations are all insured by the FDIC.
On a limited basis, we also invest in permissible types of equity securities.
E. Sources of Funds
General. The Bank's lending and investment activities are highly dependent upon
the Bank's ability to obtain funds. Our primary source of funds is customer
deposits. To a lesser extent we have borrowed funds from the FHLBNY and entered
into repurchase agreements to fund our loan and investment activities.
Deposits. We offer a variety of deposit accounts to our customers. The fees,
interest rates, and terms of each deposit product vary to meet the unique needs
and requirements of our depositors. Presently, we offer a variety of accounts
for consumers, businesses, not-for-profit organizations and municipalities
including: demand deposit accounts, interest bearing transaction accounts, money
market accounts, statement savings accounts, passbook savings accounts, and
fixed and variable rate certificates of deposit. The majority of our deposit
accounts are owned by individuals and businesses who reside near our branch
locations. Municipal deposits are generally derived from the local and county
taxing authorities, school districts near our branch locations, and, to a
limited degree, New York State public funds. Accordingly, deposit levels are
dependent upon regional economic conditions, as well as more general national
and statewide economic conditions, local competition, and our pricing decisions.
Borrowed Funds. From time to time we borrow funds to finance our loan and
investment activities. Most of our borrowings are with the FHLBNY. These
advances are secured by a general lien on our eligible 1-4 family residential
mortgage portfolio or specific investment securities collateral. We determine
the maturity and structure of each advance based on market conditions at the
time of borrowing and the interest rate risk profile of the loans or investments
being funded.
We also utilize repurchase and resale agreements to fund our loan and investment
activities. Repurchase / resale agreements are contracts for sale of securities
owned or borrowed by us, with an agreement with the counter party to repurchase
those securities at an agreed upon price and date. In addition, when necessary,
we borrow overnight federal funds from other banks or borrow monies from the
Federal Reserve Bank's discount window.
Deposit account structures, fees and interest rates, as well as funding
strategies, are determined by the Bank's Asset and Liability Committee ("ALCO").
The ALCO is comprised of the Bank's senior managers and meets on a bi-weekly
basis. The ALCO reviews general economic conditions, the Bank's need for funds,
and local competitive conditions prior to establishing funding strategies and
interest rates to be paid. The actions of the ALCO are reported to the
Directors' Loan and Investment Committee at their regularly scheduled meetings.
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F. Electronic and Payment Services
General. We offer a variety of electronic services to our customers. Most of the
services are provided for convenience purposes and are typically offered in
conjunction with a deposit or loan account. Certain electronic and payment
services are provided using marketing arrangements and third party services,
branded with the Bank's name. These services often provide us with additional
sources of fee income or reduce our operating and transaction expenses. Our menu
of electronic and payment services include point of sale transactions, debit
card payments, ATMs, merchant credit and debit card processing, Internet
banking, Internet bill pay services, voice response, wire transfer services,
automated clearing house services, direct deposit of Social Security and other
payments, loan autodraft payments, and cash management services.
G. Trust and Investment Services
General. We offer various personal trust and investment services through our
Trust and Investment Division, including both fiduciary and custodial services.
At December 31, 2005, and December 31, 2004, we had $309.920 million and
$322.248 million, respectively, of assets under management in the Bank's Trust
and Investment Division. The following chart summarizes the Trust and Investment
Division assets under management as of the dates noted:
Trust Assets Summary Table:
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dollars in thousands December 31,
---------------------------------------------------------------------------------------------------------
2005 2004
--------------------------------------------------------------------------------------------------------
Number of Estimated Number of Estimated
Accounts Market Value Accounts Market Value
--------------------------------------------------------------------------------------------------------
Trusts 342 $166,041 337 $176,371
--------------------------------------------------------------------------------------------------------
Estates 8 4,522 8 1,851
--------------------------------------------------------------------------------------------------------
Custodian, Investment Management and Others 227 139,357 221 144,026
--------------------------------------------------------------------------------------------------------
Total 577 $309,920 566 $322,248
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We also provide investment services through a third party provider, INVEST
Financial Corp., for the purchase of mutual funds and annuities.
H. Insurance Services
General. In 1998, the Bank established an insurance agency through a joint
venture with a regional independent insurance agency. The agency, Mang-Wilber,
LLC, is licensed to sell, within New York State, various insurance products
including life, health, property, and casualty insurance products to both
consumers and businesses. The principal office of the agency is in Sidney, New
York, with satellite sales offices in Oneonta, New York (the Bank's main
office), Cobleskill, New York and Walton, New York (doing business as
Mang-Sholes Insurance). Mang - Wilber, LLC, also owns a two-thirds interest in a
specialty-lines agency in Clifton Park (Saratoga County), New York.
We offer credit life and disability insurance through an affiliation with the
New York Bankers Association. The insurance is typically offered to and
purchased by consumers securing a mortgage or consumer loan through the Bank. In
addition, we offer title insurance through New York Bankers Title Agency East,
LLC. Title insurance is sold in conjunction with origination of residential and
commercial mortgages. We own an interest in New York Bankers Title Agency East,
LLC, and receive profit distributions based upon the overall performance of the
agency.
I. Supervision and Regulation
Set forth below is a brief description of certain laws and regulations governing
the Company, the Bank, and its subsidiaries. The description does not purport to
be complete, and is qualified in its entirety by reference to applicable laws
and regulations.
a. The Company
Bank Holding Company Act. The Company is a bank holding company registered with,
and subject to regulation and examination by, the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") pursuant to the
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BHCA, as amended. The Federal Reserve Board regulates and requires the filing of
reports describing the activities of bank holding companies, and conducts
periodic examinations to test compliance with applicable regulatory
requirements. The Federal Reserve Board has enforcement authority over bank
holding companies, including, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders, and to require a
bank holding company to divest subsidiaries.
The BHCA prohibits a bank holding company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank, or
increasing such ownership or control of any bank, without the prior approval of
the Federal Reserve Board. The BHCA further generally precludes a bank holding
company from acquiring direct or indirect ownership or control of any
non-banking entity engaged in any activities other than those which the Federal
Reserve Board has determined to be so closely related to banking or managing and
controlling banks as to be a proper incident thereto. Some of the activities
that have been found to be closely related to banking are: operating a savings
association, mortgage company, finance company, credit card company, factoring
company, or collection agency; performing certain data processing services;
providing investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; real and personal
property leasing; selling money orders, travelers' checks, and United States
Savings Bonds; real estate and personal property appraising; and providing tax
planning and preparation and check guarantee services.
Under provisions of the BHCA enacted as part of the Gramm-Leach-Bliley Act of
1999 ("GLBA"), a bank holding company may elect to become a financial holding
company ("FHC") if all of its depository institution subsidiaries are
well-capitalized and well-managed under applicable guidelines, as certified in a
declaration filed with the Federal Reserve Board. In addition to the activities
listed above, FHC's may engage, directly or through a subsidiary, in any
activity that the Federal Reserve Board, by regulation or order, has determined
to be financial in nature or incidental thereto, or is complementary to a
financial activity and does not pose a risk to the safety and soundness of
depository institutions or the financial system. Pursuant to the BHCA, a number
of activities are expressly considered to be financial in nature, including
insurance and securities underwriting and brokerage. The Company has not elected
to become an FHC but continues to evaluate the opportunities presented by FHC
registration.
The BHCA generally permits a bank holding company to acquire a bank located
outside of the state in which the existing bank subsidiaries of the bank holding
company are located, subject to deposit concentration limits and state laws
prescribing minimum periods of time an acquired bank must have been in existence
prior to the acquisition.
A bank holding company must serve as a source of strength for its subsidiary
bank. The Federal Reserve Board may require a bank holding company to contribute
additional capital to an undercapitalized subsidiary bank. The Company is
subject to capital adequacy guidelines for bank holding companies (on a
consolidated basis), which are substantially similar to the FDIC-mandated
capital adequacy guidelines applicable to the Bank.
Federal Securities Law. The Company is subject to the information, reporting,
proxy solicitation, insider trading, and other rules contained in the Securities
Exchange Act of 1934 (the "Exchange Act") and the regulations of the SEC
thereunder.
Sarbanes-Oxley Act of 2002. The Company is subject to the Sarbanes-Oxley Act of
2002 (the "Sarbanes-Oxley Act"). The Sarbanes-Oxley Act represents a
comprehensive revision of laws affecting corporate governance, accounting
obligations, and corporate reporting. Specifically, the Sarbanes-Oxley Act: (i)
creates a new federal accounting oversight body; (ii) revamps auditor
independence rules; (iii) enacts new corporate responsibility and governance
measures; (iv) enhances disclosures by public companies, their directors, and
their executive officers; (v) strengthens the powers and resources of the SEC;
and (vi) imposes new criminal and civil penalties for securities fraud and
related wrongful conduct. The SEC has adopted in final form substantially all of
the new regulations Congress directed it to adopt in the Sarbanes-Oxley Act,
including: standards of independence for directors who serve on the Company's
Audit Committee; disclosure requirements as to whether at least one member of
the Company's Audit Committee qualifies as a "financial expert" as defined in
the SEC regulations, and whether the Company has adopted a code of ethics
applicable to its chief executive officer, chief financial officer, or those
persons performing similar functions; and disclosure requirements regarding the
operations of board nominating committees and the means, if any, by which
security holders may communicate with directors.
b. The Bank
The following discussion is not, and does not purport to be, a complete
description of the laws and regulations applicable to the Bank. Such statutes
and regulations relate to required reserves, investments, loans, deposits,
issuances of securities, payments of dividends, establishment of branches, and
other aspects of the Bank's operations. Any change in such laws or regulations
by the OCC, the FDIC, or Congress could materially adversely affect the Bank.
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General. The Bank is a national bank subject to extensive regulation,
examination, and supervision by the OCC, as its primary federal regulator, and
by the FDIC, as its deposit insurer. The Bank's deposit accounts are insured up
to applicable limits by the Bank Insurance Fund of the FDIC. The Bank must file
reports with the OCC and the FDIC concerning its activities and financial
condition and must obtain regulatory approval before commencing certain
activities or engaging in transactions such as mergers and other business
combinations or the establishment, closing, purchase or sale of branch offices.
This regulatory structure gives the regulatory authorities extensive discretion
in the enforcement of laws and regulations and the supervision of the Bank.
Business Activities. The Bank's lending, investment, deposit, and other powers
derive from the National Bank Act and OCC regulations. These powers are also
governed to some extent by the FDIC under the Federal Deposit Insurance Act and
FDIC regulations. The Bank may make mortgage loans, commercial loans and
consumer loans, and may invest in certain types of debt securities and other
assets. The Bank may offer a variety of deposit accounts, including savings,
certificate (time), demand, and NOW accounts.
Standards for Safety and Soundness. The OCC has adopted guidelines prescribing
safety and soundness standards. These guidelines establish general standards
relating to internal controls and information systems, internal audit systems,
loan documentation, credit underwriting, interest rate exposure, asset growth,
asset quality, earnings standards, compensation, fees, and benefits. In general,
the guidelines require appropriate systems and practices to identify and manage
the risks and exposures specified in the guidelines. The OCC may order an
institution that has been given notice that it is not satisfying these safety
and soundness standards to submit a compliance plan, and if an institution fails
to do so, the OCC must issue an order directing action to correct the deficiency
and may issue an order directing other action. If an institution fails to comply
with such an order, the OCC may seek to enforce such order in judicial
proceedings and to impose civil money penalties.
Branching. Generally, national banks may establish branch offices within a state
to the same extent as commercial banks chartered under the laws of that state.
Transactions with Related Parties. The Federal Reserve Act governs transactions
between the Bank and its affiliates. In general, an affiliate of the Bank is any
company that controls, is controlled by, or is under common control with the
Bank. Generally, the Federal Reserve Act limits the extent to which the Bank or
its subsidiaries may engage in "covered transactions" with any one affiliate to
10% of the Bank's capital stock and surplus, and contains an aggregate limit of
20% of capital stock and surplus for covered transactions with all affiliates.
Covered transactions include loans, asset purchases, the issuance of guarantees,
and similar transactions. The Bank's loans to insiders must be made on terms
that are substantially the same as, and follow credit underwriting procedures
that are not less stringent than, those prevailing for comparable transactions
with unaffiliated persons and that do not involve more than the normal risk of
repayment or present other unfavorable features. The loans are also subject to
maximum dollar limits and must generally be approved by the Board.
Capital Requirements. Capital adequacy is measured within guidelines defined as
either tier 1 capital (primarily stockholders' equity) or tier 2 capital
(certain debt instruments and a portion of the reserve for loan losses). There
are two measures of capital adequacy for banks: the tier 1 leverage ratio and
the risk-based requirements. Most banks must maintain a minimum tier 1 leverage
ratio of 4%. In addition, tier 1 capital must equal 4% of risk-weighted assets,
and total capital (tier 1 plus tier 2) must equal 8% of risk-weighted assets.
Federal banking agencies are required to take prompt corrective action, such as
imposing restrictions, conditions, and prohibitions, to deal with banks that
fail to meet their minimum capital requirements or are otherwise in troubled
condition. The regulators have also established different capital
classifications for banking institutions, the highest being "well capitalized."
Under regulations adopted by the federal bank regulators, a banking institution
is considered well capitalized if it has a total risk adjusted capital ratio of
10% or greater, a tier 1 risk adjusted capital ratio of 6% or greater and a
leverage ratio of 5% or greater, and is not subject to any regulatory order or
written directive regarding capital maintenance. The Bank qualified as well
capitalized at December 31, 2005. See Part II, Item 7.F. entitled "Capital
Resources and Dividends" and Note 13 of the Consolidated Financial Statements
contained in Part II, Item 8, of this document for additional information
regarding the Bank's capital levels.
Payment of Dividends. The OCC regulates the amount of dividends and other
capital distributions that the Bank may pay to its stockholders. A national bank
may not pay dividends from its capital. All dividends must be paid out of
undivided profits. In general, if the Bank satisfies all OCC capital
requirements both before and after a dividend payment, the Bank may pay a
dividend to stockholders in any year equal to the current year's net income plus
retained net income for the preceding two years. A Bank may not declare or pay
any dividend if it is "undercapitalized" under OCC regulations. The OCC also may
restrict the Bank's ability to pay dividends if the OCC has reasonable cause to
believe that such payment would constitute an unsafe and unsound practice. The
Bank is not undercapitalized nor under any special restrictions regarding the
payment of dividends.
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Insurance of Deposit Accounts. The Bank is an insured depository institution
subject to assessment by, and the payment of deposit insurance premiums to, the
FDIC. Deposit insurance premiums are determined by a number of factors,
including the institution's capital ratio and supervisory condition. Since the
ratio of reserves to insured deposits in the Bank Insurance Fund of the FDIC was
at its statutory maximum, the Bank was not required to pay any deposit insurance
premiums during 2005, 2004, or 2003. Although the Bank did not pay any premiums
during these periods, the FDIC did levy an assessment based on the Bank's
deposit accounts under the Deposit Insurance Funds Act of 1996. Under the
Deposit Insurance Funds Act, deposits insured by the Bank Insurance Fund
("BIF"), such as the deposits of the Bank, are subject to an assessment for
payment on bond obligations financing the FDIC's Savings Association Fund
("SAIF"). The rate is adjusted quarterly, depending on the need of the fund. At
December 31, 2005, the assessment rate was 1.34 cents per $100 of insured
deposits. This compares to 1.46 cents and 1.52 cents per $100 of insured deposit
at December 31, 2004, and December 31, 2003, respectively. There can be no
assurance that the Bank will continue to not be required to pay deposit
insurance premiums. If the Bank is required to pay deposit insurance premiums,
this expense could adversely affect the Bank's earnings in future periods.
Management anticipates that the FDIC may begin assessing a premium for deposits
insured under the BIF during the last two quarters of 2006.
Federal Reserve System. All depository institutions must maintain with a Federal
Reserve Bank reserves against their transaction accounts (primarily checking,
NOW, and Super NOW accounts) and non-personal time accounts. Since these
reserves are maintained as vault cash or non-interest-bearing accounts, they
have the effect of reducing an institution's earnings. As of December 31, 2005,
the Bank was in compliance with applicable reserve requirements.
Loans to One Borrower. The Bank generally may not make a loan or extend credit
to a single or related group of borrowers in excess of 15% of its unimpaired
capital and surplus. Up to an additional 10% of unimpaired capital and surplus
can be lent if the additional amount is fully secured by readily marketable
collateral. At December 31, 2005, the Bank's legal lending limit on loans to one
borrower was $10.3 million for loans not fully secured by readily marketable
collateral and $17.2 million for loans secured by readily marketable collateral.
At that date, the Bank did not have any loans or agreements to extend credit to
a single or related group of borrowers in excess of its legal lending limit.
Real Estate Lending Standards. OCC regulations generally require each national
bank to establish and maintain written internal real estate lending standards
that are consistent with safe and sound banking practices and appropriate to the
size of the bank and the nature and scope of its real estate lending activities.
The standards also must be consistent with accompanying OCC guidelines, which
include loan-to-value ratios for the different types of real estate loans
Community Reinvestment Act. Under the federal Community Reinvestment Act (the
"CRA"), the Bank, consistent with its safe and sound operation, must help meet
the credit needs of its entire community, including low and moderate income
neighborhoods. The OCC periodically assesses the Bank's compliance with CRA
requirements. The Bank received a SATISFACTORY rating for CRA on its last
performance evaluation conducted by the OCC as of August 11, 2003.
Fair Lending and Consumer Protection Laws. The Bank must also comply with the
federal Equal Credit Opportunity Act and the New York Executive Law, which
prohibit creditors from discrimination in their lending practices on bases
specified in these statutes. In addition, the Bank is subject to a number of
federal statutes and regulations implementing them, which are designed to
protect the general public, borrowers, depositors, and other customers of
depository institutions. These include the Bank Secrecy Act, the Truth In
Lending Act, the Truth In Savings Act, the Home Mortgage Disclosure Act, the
Fair Housing Act, the Real Estate Settlement Procedures Act, the Electronic
Funds Transfers Act, the Fair Credit Reporting Act, and the Fair Debt Collection
Practices Act. The OCC and, in some instances, other regulators, including the
Justice Department, may take enforcement action against institutions that fail
to comply with these laws.
Prohibitions Against Tying Arrangements. National banks are prohibited, subject
to some exceptions, from extending credit to or offering any other service, or
fixing or varying the consideration for such extension of credit or service, on
the condition that the customer obtain some additional service from the bank or
its affiliates or not obtain services of a competitor of the bank.
Privacy Regulations. OCC regulations generally require the Bank to disclose its
privacy policy. The policy must identify with whom the Bank shares its
customer's "non-public personal information," at the time of establishing the
customer relationship and annually thereafter. In addition the Bank must provide
its customers with the ability to "opt-out" of having their personal information
shared with unaffiliated third parties and not to disclose account numbers or
access codes to non-affiliated third parties for marketing purposes. We believe
that the Bank's privacy policy complies with the regulations.
The USA PATRIOT Act. The Bank is subject to the USA PATRIOT Act, which gives the
federal government new powers to address terrorist threats through enhanced
domestic security measures, expanded surveillance powers, increased information
sharing, and broadened anti-money laundering requirements. The USA PATRIOT Act
imposes affirmative obligations on financial institutions, including the Bank,
to establish anti-money laundering programs which require: (i) the
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establishment of internal policies, procedures, and controls; (ii) the
designation of an anti-money laundering compliance officer; (iii) ongoing
employee training programs; and (iv) an independent audit function to test the
anti-money laundering program. The OCC must consider the Bank's effectiveness in
combating money laundering when ruling on merger and other applications.
c. Subsidiaries
The Bank's insurance agency subsidiary, Mang-Wilber LLC, is subject to New York
State insurance laws and regulations.
J. Competition
We face competition in all the markets we serve. Traditional competitors are
other local commercial banks, savings banks, savings and loan institutions, and
credit unions, as well as local offices of major regional and money center
banks. Also, non-banking financial organizations, such as consumer finance
companies, mortgage brokers, insurance companies, securities firms, money market
funds, mutual funds and credit card companies offer substantive equivalents of
transaction accounts and various loan and financial products. As a result of the
enactment of the GLBA (discussed further in Item 1. I (b) above), other
non-banking financial organizations now may offer comparable products to those
offered by the Company and to establish, acquire, or affiliate with commercial
banks themselves.
K. Legislative Developments
Preemption and Predatory Lending. On January 13, 2004, the OCC adopted
amendments to its regulations, which assert the exclusive authority of the OCC
to regulate the activities and operations of national banks and prohibit certain
"predatory" lending practices. The new regulations preempt the application to
national banks of any state laws that obstruct, impair, or condition a national
bank's ability to fully exercise its deposit-taking and lending powers and
reaffirm, subject to narrow exceptions, the OCC's exclusive authority to examine
national banks. The new regulations also prohibit a national bank from making
any consumer loan based predominantly on the bank's realization of the
foreclosure or liquidation value of the borrower's collateral, without regard to
the borrower's ability to repay the loan according to its terms and from
engaging in unfair or deceptive practices within the meaning of section 5 of the
Federal Trade Commission Act. We believe that the Bank's underwriting and other
credit-related policies and procedures comply with the lending standards
prescribed in the new regulations.
FACT Act. In December 2003, The Fair and Accurate Credit Transaction Act of 2003
("FACT Act") was signed into law. The FACT Act was crafted to provide consumers
with more disclosure and notification on their credit score, rating, and history
(particularly negative information filings), and how these items impact their
credit-related transactions. The FACT Act also provides consumers with enhanced
identity theft, fraud alert, and fraud repair provisions, as well as
restrictions on information sharing among affiliates.
New Legislative Developments. Various federal bills that would significantly
affect banks are introduced in Congress from time to time. The Company cannot
estimate the likelihood of any currently pending banking bills being enacted
into law, or the ultimate effect that any such potential legislation, if
enacted, would have upon its financial condition or results of operations.
ITEM 1A: RISK FACTORS
The investment performance of our common shares is affected by several material
risk factors. These factors (summarized below) can affect our financial
condition or results of operations. Accordingly, you should be aware of these
risk factors and how each may potentially affect your investment in our common
stock.
General Competitive and Economic Conditions. National, regional, and local
competitive conditions can negatively affect our financial condition or results
of operations. Our existing competition may begin offering new products and
services, change the price for existing products and services, or open a new
office in direct competition with one of our offices. In addition, new
competitors can establish a physical presence in our market or begin offering
products and services through the Internet or other remote channel that compete
directly with our products and services. All of these factors are dynamic and
may affect the demand for our products and services, and, in turn, our financial
condition and results of operations.
18-K
Regional and local economic conditions including employment and unemployment
conditions, population growth, and price and wage scale changes, may impact the
demand for our products and services, the level of customer deposits, or credit
status of our borrowers. National and international economic conditions
including raw materials costs, oil prices, consumer demand, and consumer trends,
may impact the demand for our commercial borrower's products and services,
which, in turn, can affect our financial condition and results of operation.
Changes in Interest Rates and Capital Markets. Our financial condition and
results of operations are highly dependent upon the amount of the interest
income we receive on our earning assets and the interest we pay for our funding
and capital resources. Accordingly, changes in interest rates and capital
markets can affect our financial condition and results of operations. A detailed
analysis regarding our market risk and interest rate sensitivity is contained in
Item 7A of this Annual Report on Form 10-K.
Changes in Government Laws, Regulations, and Policies. Financial institutions
are highly regulated companies and are subject to numerous laws and regulations.
Changes to these laws or regulations, particularly at the federal and state
level, may materially impact the business climate we operate within, which, in
turn, may impact the economic return on our common shares, financial condition,
or results of operations.
Changes in Generally Accepted Accounting Principles. Changes to Generally
Accepted Accounting Principles are periodically issued by the Financial
Accounting Standards Board ("FASB"). The purpose of these new Generally Accepted
Accounting Principles is to quantify, identify, or disclose certain aspects of a
company's financial condition or results of operations. The adoption of new
accounting standards may alter certain aspects of the Consolidated Financial
Statements of the Company and, in turn, the investment performance of our common
shares.
Changes in the Financial Condition of Government Agencies, Government Sponsored
Enterprises, and Local and State Governments. We invest substantially in the
debt instruments issued by U.S. Government Agencies, U.S. Government Sponsored
Enterprises, and local and state governments. A deterioration of the credit
standing of any of these issuers of debt may materially impact our financial
condition or results of operations.
Actions of Regulatory Authorities. The Company and the Bank are subject to the
supervision of several federal and state regulatory bodies. These regulatory
bodies have authority to issue, change, and enforce rules and regulations
including the authority to assess fines. Changes to these regulations may impact
the financial condition or results of operations of the Company or the Bank. See
Item 1 I. of this Annual Report on Form 10-K for additional explanation
regarding the regulations to which the Company and the Bank are subject.
Changes in the Company's Policies or Management. Our financial condition and
results of operations depend upon the policies approved by the Board of
Directors and the practices of management. Changes in our policies or management
practices, particularly credit policies and practices of the Bank, may affect
our financial condition or results of operations.
Allowance for Loan Losses May not be Sufficient to Cover Actual Loan Losses. The
Bank's Chief Credit Officer, under the control and supervision of the Board of
Directors, continually monitors the credit status of the Bank's loan portfolio.
The adequacy of the Allowance for Loan Losses is reviewed quarterly by the Board
of Directors, and periodically by an independent loan review firm under the
direction of the Bank's Audit Committee, the Bank's regulators, and the
Company's external auditors. However, because the Allowance for Loan Losses is
an estimate of probable losses and is based on management's experience and
assumptions, there is no certainty that the Allowance for Loan Losses will be
sufficient to cover actual loan losses. Actual loan losses in excess of the
Allowance for Loan Losses would negatively impact our financial condition and
results of operations.
The Financial Performance of Large Borrowers. Our financial condition and
results of operations are highly dependent upon the credit worthiness and
financial performance of our borrowers. The Bank has several borrowers or groups
of related borrowers whose total indebtedness with the Bank exceeds $1.0
million. The financial performance of these borrowers is a material risk factor
that may affect our financial condition or results of operations.
Incidents Affecting Our Reputation. The demand for our products and services is
influenced by our reputation and the reputation of our management and employees.
Public incidents that negatively affect the reputation of the Company or the
Bank, including, but not limited to, breaches in the security of customer
information or unfair or deceptive practices, may adversely impact our financial
condition, results of operations, or economic performance of the Company's
common stock.
Liquidity of the Company's Common Shares. The Company's common stock is lightly
traded on the Amex(R). This condition may make it difficult for shareholders
with large common stock ownership positions to sell or liquidate shares at a
suitable price.
19-K
Changes to the Markets or Exchanges On Which the Company's Common Shares Are
Traded. The Company's common shares trade on the Amex(R). Changes to the
Amex(R)'s trading practices or systems, reputation or financial condition, or
rules which govern trading on the Amex may impact our shareholders' ability to
buy or sell his / her commons shares at a suitable price.
ITEM 1B: UNRESOLVED STAFF COMMENTS
The Company has not been subject to any comments by the SEC during the period
covered by this Annual Report on Form 10-K that remain unresolved.
ITEM 2: PROPERTIES
The Company and the Bank are headquartered at 245 Main Street, Oneonta, New
York. The three buildings that comprise our headquarters are owned by the Bank
and also serve as our main office. In addition to our main office, we own
nineteen (19) branch offices and lease one (1) branch office and two (2) loan
production offices at market rates. We also own an insurance sales office in
Walton, New York, through our insurance agency subsidiary, Mang-Wilber LLC.
In the opinion of management, the physical properties of the Company are
suitable and adequate. All of our properties are insured at full replacement
cost.
ITEM 3: LEGAL PROCEEDINGS
From time to time, the Company becomes subject to various legal claims which
arise in the normal course of business. At December 31, 2005, the Company was
not the subject of any material pending legal proceedings, other than ordinary
routine litigation occurring in the normal course of its business. The various
pending legal claims against the Company will not, in the opinion of management
based upon consultation with legal counsel, result in any material liability to
the Company and will not materially affect our financial position, results of
operation or cash flow.
Neither the Company, the Bank, nor any of the Bank's subsidiaries have been
subject to review by the Internal Revenue Service of any transactions that have
been identified as abusive or that have a significant tax avoidance purpose.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to a vote of the security holders of the Company
during the fourth quarter of the fiscal year ended December 31, 2005.
20-K
PART II
-------
ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS, AND
ISSUERS PURCHASES OF EQUITY SECURITIES
A. Market Information; Dividends on Common Stock; and Recent Sales of
Unregistered Securities
Through February 11, 2004, the common stock of the Company was inactively traded
on Nasdaq's Over-the-Counter Bulletin Board market under the symbol "WLBC.OB."
Market makers for the stock were Ryan, Beck, and Company; Monroe Securities,
Inc.; Hill Thompson Magid & Co., Inc.; Knight Equity Markets, L.P.; Schwab
Capital Markets, L.P.; and Stifel, Nicolaus & Company, Incorporated. On February
12, 2004, the common stock of the Company ($0.01 par value per share) began
trading on the Amex(R) under the symbol "GIW." The following table shows the
high and low bid quotations (while on the Over-the-Counter Bulletin Board) and
trading price (while on the Amex(R)) for the common stock and quarterly dividend
paid to our security holders for the periods presented:
Common Stock Market Price and Dividend Table:
2005 2004
-------------------------------------------- -------------------------------------------
High Low Dividend High Low Dividend
-------------------------------------------- -------------------------------------------
4th Quarter $12.00 $10.84 $0.0950 $12.64 $11.94 $0.0950
3rd Quarter $12.27 $11.80 $0.0950 $12.80 $12.00 $0.0950
2nd Quarter $12.45 $12.00 $0.0950 $13.65 $12.00 $0.0950
1st Quarter $12.90 $11.94 $0.0950 $15.50 $12.65 $0.0950
(1) The high and low bid quotations and trading prices provided in this table
were obtained from www.finance.yahoo.com. The high and low prices provided for
the period in which the common stock of the Company was traded on the
Over-the-Counter Bulletin Board market reflect inter-dealer bid quotations
without retail mark-up, mark-down, or commissions and may not represent actual
transactions.
At March 7, 2006, there were 532 holders of record of our common stock
(excluding beneficial owners who hold their shares in nominee name through
brokerage accounts). The closing price of the common stock at March 7, 2006, was
$10.42 per share.
We have not sold any unregistered securities in the past five years.
B. Use of Proceeds from Registered Securities
None.
C. Purchases of Equity Securities by Issuer and Affiliated Purchasers
On August 27, 2004, we announced that our Board of Directors approved a stock
repurchase program, which authorizes the purchase, at the discretion of
management, of up to $1.5 million of the Company's common stock. Between August
27, 2004, and July 26, 2005, management purchased 46,300 shares under this
authority. These repurchases reduced the amount available to management to
purchase additional shares under the program to $929 thousand. On July 26, 2005,
management's authority to purchase the Company's common stock under the stock
repurchase program was reauthorized to $1.5 million.
All shares repurchased under our repurchase program were made in the open market
or through private transactions, were limited to one transaction per week, and
were conducted exclusively through Merrill Lynch, a registered broker-dealer.
All such purchases were in compliance with the laws of the State of New York,
Rule 10b(18) of the Securities Exchange Act of 1934 and the rules and
regulations there under, and the rules and regulations of the Amex(R). The
following table summarizes the shares repurchased by us under this repurchase
program during the fourth quarter of 2005:
21-K
Share Repurchases:
Total Average Remaining
Number of Price Share
Shares Paid per Total Cost Repurchase
Period Purchased Share (1) Authority
---------------------------------------------------------------------------------------------------------------
October 1 - October 31, 2005 0 $0.00 $0 $1,500,000
November 1, - November 30, 2005 6,000 $11.30 $67,800 $1,432,200
December 1, - December 31, 2005 11,155 $11.05 $123,263 $1,308,937
-------------------------------------------
Total 17,155 $11.14 $191,063
(1) Excludes brokerage commissions paid by the Company.
All shares purchased by the Company during the three month period ended December
31, 2005, were purchased under the publicly announced program.
ITEM 6: SELECTED FINANCIAL DATA
The comparability of the information provided in the following 5-Year Summary
Table of Selected Financial Data and the Table of Selected Quarterly Financial
Data have not been materially impacted by any significant business combinations,
dispositions of business operations, or accounting changes other than those
provided in the footnotes to our financial statements provided in PART II, Item
8, of this document. However, all per share financial information contained in
this document, as well as all exhibits, was restated to reflect a 4:1 stock
split approved on September 5, 2003.
5-Year Summary Table of Selected Financial Data:
The Wilber Corporation and Subsidiary
(Dollars in Thousands, Except Per Share Data)
As of and for 12-month Period Ended December 31,
---------------------------------------------------
2005 2004 2003 2002 2001
---------------------------------------------------
Consolidated Statements of Income Data:
Interest Income $40,310 $37,165 $38,628 $41,646 $42,307
Interest Expense 14,930 12,761 14,153 17,170 20,449
---------------------------------------------------
Net Interest Income 25,380 24,404 24,475 24,476 21,858
Provision for Loan Losses 1,580 1,200 1,565 1,920 1,540
Net Interest Income After Provision for Loan Losses 23,800 23,204 22,910 22,556 20,318
Non-Interest Income (Excluding Net Gains on Securities) 5,041 4,603 4,599 4,982 4,645
Net Gains on Securities Transactions 469 1,031 1,064 272 175
Non-Interest Expense (1) 18,851 17,218 16,583 15,890 13,945
---------------------------------------------------
Income Before Provision for Income Taxes 10,459 11,620 11,990 11,920 11,193
Provision for Income Taxes 2,715 3,002 3,277 3,358 3,147
---------------------------------------------------
Net Income $7,744 $8,618 $8,713 $8,562 $8,046
===================================================
22-K
5-Year Summary Table of Selected Financial Data, continued
As of and for 12-month Period Ended December 31,
------------------------------------------------------------
2005 2004 2003 2002 2001
------------------------------------------------------------
Per Common Share: (2)
Earnings (Basic) $0.69 $0.77 $0.78 $0.76 $0.71
Cash Dividends 0.380 0.380 0.370 0.375 0.350
Book Value 6.08 6.04 5.74 5.61 4.92
Tangible Book Value (3) 5.61 5.77 5.46 5.32 4.88
5-Year Summary Table of Selected Financial Data, cont.
Consolidated Period-End Balance Sheet Data:
Total Assets $752,728 $750,861 $729,023 $708,984 $626,787
Securities Available-for-Sale 240,350 249,415 275,051 234,542 188,712
Securities Held-to-Maturity 54,939 59,463 44,140 42,837 46,017
Gross Loans 403,665 391,043 360,906 358,295 329,544
Allowance for Loan Losses 6,640 6,250 5,757 5,392 4,476
Deposits 604,958 571,929 580,633 549,081 491,012
Long-Term Borrowings 52,472 65,379 55,849 73,346 62,512
Short-Term Borrowings 19,357 37,559 20,018 13,260 10,530
Stockholder's Equity 67,717 67,605 64,304 63,162 55,827
Selected Key Ratios:
Return on Average Assets 1.02% 1.17% 1.20% 1.25% 1.36%
Return on Average Equity 11.40% 13.08% 13.67% 14.36% 14.91%
Net Interest Margin (tax-equivalent) 3.82% 3.76% 3.77% 3.96% 4.17%
Efficiency Ratio (4) 57.52% 55.37% 53.61% 51.16% 48.46%
Dividend Payout 55.07% 49.35% 47.44% 49.34% 49.30%
Asset Quality:
Non-performing Loans 4,918 2,751 3,658 3,138 3,280
Non-performing Assets 4,938 2,829 3,678 3,160 4,137
Net Loan Charge-Offs to Average Loans 0.30% 0.19% 0.33% 0.29% 0.33%
Allowance for Loan Losses to Period-End Loans 1.64% 1.60% 1.60% 1.50% 1.36%
Allowance for Loan Losses to Non-performing Loans (5) 135% 227% 157% 172% 136%
Non-performing Loans to Period-End Loans 1.22% 0.70% 1.01% 0.88% 1.00%
(1) Amortization of goodwill was discontinued with retroactive effect back to
January 1, 2002 upon adoption of SFAS No. 147 during the third quarter of 2003.
(2) All per share amounts have been adjusted for the 4 for 1 stock split
approved on September 5, 2003.
(3) Tangible book value numbers exclude goodwill and intangible assets
associated with prior business combinations.
(4) The efficiency ratio is calculated by dividing total non-interest expense
less amortization of intangibles and other real estate expense by tax-equivalent
net interest income plus non-interest income other than securities gains and
losses.
(5) Non-performing loans include non-accrual loans, troubled debt restructured
loans and accruing loans 90 days or more delinquent.
23-K
Table of Selected Quarterly Financial Data:
2005 2004
---------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
---------------------------------------------------------------------------------------------------------
(Dollars in Thousands)
Interest income $ 10,400 $ 10,150 $ 9,940 $ 9,820 $ 9,933 $ 9,243 $ 8,893 $ 9,096
Interest expense 4,127 3,735 3,559 3,509 3,383 3,172 3,097 3,109
---------------------------------------------------------------------------------------------------------
Net interest income 6,273 6,415 6,381 6,311 6,550 6,071 5,796 5,987
Provision for loan losses 800 300 240 240 240 300 300 360
---------------------------------------------------------------------------------------------------------
Net interest income after
provision for loan losses 5,473 6,115 6,141 6,071 6,310 5,771 5,496 5,627
---------------------------------------------------------------------------------------------------------
Investment Security Gains
(Losses), Net 5 71 148 244 110 223 (21) 719
---------------------------------------------------------------------------------------------------------
Other non-interest income 1,261 1,308 1,303 1,170 1,161 1,259 1,090 1,093
---------------------------------------------------------------------------------------------------------
Non-interest expense 4,641 4,812 4,845 4,553 4,463 4,329 4,113 4,313
---------------------------------------------------------------------------------------------------------
Income before income tax
expense 2,098 2,682 2,747 2,932 3,118 2,924 2,452 3,126
Income tax expense 505 700 748 762 799 760 601 842
---------------------------------------------------------------------------------------------------------
Net income $ 1,593 $ 1,982 $ 1,999 $ 2,170 $ 2,319 $ 2,164 $ 1,851 $ 2,284
=========================================================================================================
Basic earnings per share $ 0.14 $ 0.18 $ 0.18 $ 0.19 $ 0.21 $ 0.19 $ 0.17 $ 0.20
=========================================================================================================
Basic weighted average
shares outstanding 11,158,813 11,163,092 11,171,114 11,186,275 11,202,087 11,208,037 11,209,392 11,209,392
=========================================================================================================
Net interest margin (tax
equivalent) (1) 3.78% 3.85% 3.85% 3.81% 3.95% 3.75% 3.58% 3.75%
Return on average assets 0.84% 1.04% 1.06% 1.16% 1.23% 1.17% 1.01% 1.27%
Return on average equity 9.37% 11.54% 11.76% 12.94% 13.57% 13.16% 11.53% 14.00%
Efficiency ratio (2) 57.30% 57.97% 58.57% 56.21% 53.99% 55.16% 55.74% 56.72%
(1) Net interest margin (tax-equivalent) is tax-equivalent net interest income
divided by average earning assets.
(2) The Efficiency Ratio is calculated by dividing total non-interest expense
less amortization of intangibles and other real estate expense by tax-equivalent
net interest income plus non-interest income other than securities gains and
losses
24-K
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
A. General
The primary objective of this financial review is to provide an overview of the
financial condition and results of operations of The Wilber Corporation and its
subsidiary for each of the years in the three-year period ended December 31,
2005. This discussion and tabular presentations should be read in conjunction
with the accompanying Consolidated Financial Statements and Notes presented in
PART II, Item 8, of this document.
Our financial performance is heavily dependent upon net interest income, which
is the difference between the interest and dividend income earned on our loans
and investment securities less the interest paid on our deposits and borrowings.
Results of operations are also affected by the provision for loan losses,
investment securities gains (losses), service charges and penalty fees on
deposit accounts, fees collected for trust and investment services, insurance
commission income, the increase on the cash surrender value on bank owned life
insurance, other service fees, other income and taxes. Our non-interest expenses
primarily consist of salaries, employee benefits, occupancy expense, furniture
and equipment expense, computer service fees, advertising and marketing,
professional fees, and other miscellaneous expenses. Results of operations are
also influenced by general economic conditions (particularly changes in interest
rates), competitive conditions, government policies, changes in Federal or State
tax law, and the actions of our regulatory authorities.
Critical Accounting Policies. Management of the Company considers the accounting
policy relating to the allowance for loan losses to be a critical accounting
policy given the uncertainty in evaluating the level of the allowance required
to cover credit losses inherent in the loan portfolio and the material effect
that such judgments can have on the results of operations. While management's
current evaluation of the allowance for loan losses indicates that the allowance
is adequate, under adversely different conditions or assumptions, the allowance
would need to be increased. For example, if historical loan loss experience
significantly worsened or if current economic conditions significantly
deteriorated, additional provisions for loan losses would be required to
increase the allowance for loan losses. In addition, the assumptions and
estimates used in the internal reviews of the Company's non-performing loans and
potential problem loans have a significant impact on the overall analysis of the
adequacy of the allowance for loan losses. While management has concluded that
the evaluation of collateral values was reasonable under the circumstances for
each of the reported periods, if collateral valuations were significantly
lowered the Company's allowance for loan losses would also require an additional
provision for loan losses.
Our policy on the allowance for loan losses is disclosed in Note 1 of the
Consolidated Financial Statements. A more detailed description of the allowance
for loan losses is included in PART II, Item 7 C.a., of this document. All
accounting policies are important, and as such, we encourage the reader to
review each of the policies included in Note 1 of the Consolidated Financial
Statements (provided in PART II, Item 8, of this document) to obtain a better
understanding of how our financial performance is reported.
Accounting for Branch Acquisition. On February 4, 2005, the Bank acquired two
branch offices from HSBC Bank USA, National Association ("HSBC"), one in Sidney,
New York, and one in Walton, New York. Under the terms of our agreement with
HSBC, we assumed deposit liabilities with a fair value of $32.967 million, and
acquired loans with a fair value of $7.635 million, and property, equipment, and
other tangible assets with a fair value of $484 thousand. This acquisition was
accounted for as a business combination in accordance with SFAS No. 141. SFAS
No. 141 states that a business combination occurs when an entity acquires net
assets that constitute a business, as defined by Emerging Issues Task Force
("EITF") Issue No. 98-3, "Determining Whether a Non-monetary Transaction
Involves Receipt of Productive Assets or of a Business." EITF No. 98-3 states
that a business is a self-sustaining integrated set of activities and assets
conducted and managed for the purpose of providing a return to investors. A
business consists of inputs (long-lived assets, intellectual property, the
ability to obtain access to necessary materials or rights, employees, etc.),
processes (the existence of systems necessary for normal, self sustaining
operations) and outputs (the ability to obtain access to customers).
The branch purchase involved the acquisition of (i) long-lived and intangible
assets (building, core deposit intangible, and equipment), (ii) employees
(branch management and staff), (iii) certain processes (administration of
personnel, operational processes, and strategic management processes), and (iv)
the ability to obtain access to customers who purchase outputs (deposit and loan
customers and accounts of the acquired branch were included in the purchase).
For these reasons, we recorded the acquisition as a business combination within
the scope of SFAS No. 141. In connection with this acquisition, we recorded
goodwill of $1.835 million and a core deposit intangible of $492 thousand.
25-K
Recent Accounting Pronouncements.
The EITF reached consensus in March, 2004, regarding guidance provided in EITF
issue No. 03-1, "The Meaning of Other-Than-Temporary Impairment and its
Application to Certain Investments." The purpose of EITF issue No. 03-1 is to
determine the meaning of other-than-temporary impairment and its application to
certain securities, including debt and equity securities that are within the
scope of SFAS No. 115. Guidance in EITF Issue No. 03-1 should be used to
determine when an investment is considered impaired, whether that impairment is
other-than-temporary, and the measurement of an impaired loss. This guidance
also includes accounting considerations for securities subsequent to the
recognition of other-than-temporary impairment, and requires certain disclosures
about unrealized losses that have not been recognized as other-than-temporary.
Portions of this guidance were effective for reporting periods beginning after
June 15, 2004, and other portions will be deliberated further. This delay does
not suspend the current requirement to recognize other-than-temporary
impairments as required by existing authoritative literature. The Company has
not identified any other-than-temporary impairment in its securities portfolio
as of December 31, 2005. Subsequent to the FASB final deliberations, the Company
will evaluate the potential impact on its process of identifying
other-than-temporary declines in value of its debt and equity securities.
Management does not believe that the provision, as currently written, will have
a material impact on the results of operations for several quarters
prospectively.
In 2005, the FASB issued SFAS No. 154, "Accounting Changes and Error
Corrections." This statement replaces Accounting Principles Board Opinion No.
20, "Accounting Changes", and FASB Statement No. 3, "Reporting Accounting
Changes in Interim Financial Statements" and changes the requirements for the
accounting for and reporting of a change in accounting principle. SFAS No. 154
shall be effective for accounting changes and corrections of errors made in
fiscal years beginning after December 15, 2005. Therefore, the Company has
adopted this statement, as applicable, on January 1, 2006.
In December, 2004, the Financial Accounting Standards Board revised Statement of
Financial Accounting Standards (SFAS) No. 123R, "Share-Based Payment (Revised
2004)." SFAS 123R establishes standards for the accounting for transactions in
which an entity (i) exchanges its equity instruments for goods or services, or
(ii) incurs liabilities in exchange for goods or services that are based on the
fair value of the entity's equity instruments or that may be settled by the
issuance of the equity instruments. SFAS 123R eliminates the ability to account
for stock-based compensation using APB 25 and requires that such transactions be
recognized as compensation cost in the income statement based on their fair
values on the date of grant. SFAS 123R is effective for financial statements
issued for fiscal quarters beginning July 1, 2005. Since we do not currently
have an employee stock option plan or any other form of stock-based
compensation, this pronouncement did not have any impact on our Consolidated
Financial Statements.
B. Performance Overview for Period Ended December 31, 2005
During 2005, several of our key performance measures decreased significantly, as
compared to 2004. Net income, earnings per share, return on assets, and return
on equity all decreased between the periods ended December 31, 2004, and
December 31, 2005. Specifically, net income decreased from $8.618 million in
2004 to $7.744 million in 2005, an $874 thousand, or 10.1% decrease. Earnings
per share, return on assets, and return on equity decreased from $0.77, 1.17%,
and 13.08%, respectively, in 2004, to $0.69, 1.02%, and 11.40%, respectively, in
2005. Although our net interest income increased $976 thousand between 2004 and
2005, it was offset by a $1.633 million increase in non-interest expense and a
$380 thousand increase in the provision for loan losses. The increase in
non-interest expense was driven by increases in salaries, employee benefits
expense, computer service fees, professional fees, and other miscellaneous
expenses. During 2005, we converted our core computer system, focused resources
on Bank-related compliance efforts, and incurred increases in professional fees
related to compliance with Section 404 of the Sarbanes - Oxley Act. These
endeavors required us to purchase substantial amounts of new computer hardware
and software, engage computer, accounting and other professional service firms,
pay overtime wages, and create several new full and part-time job positions. The
increase in the provision for loan losses was due to a decline in some of our
key loan quality measures.
Although several of our key performance measures decreased during 2005, we
experienced growth in our primary lines of business, namely deposits and loans.
Total deposits increased from $571.929 million at December 31, 2004, to $604.958
million at December 31, 2005, a $33.029 million, or 5.8% increase. The increase
in our total deposits was principally driven by our HSBC branch acquisition.
During the first quarter of 2005, we assumed $32.967 million of deposit
liabilities as a result of the acquisition. Similarly, total loans increased
from $391.043 million at December 31, 2004, to $403.665 million at December 31,
2005, a $12.622 million, or 3.2% increase. This growth was driven by both the
HSBC branch acquisition and our continuing efforts to increase the size of our
small business loan portfolio.
26-K
During 2005, some of our key loan quality measures worsened. In particular, the
amount of non-performing loans and loans charged-off net of recoveries both
increased. At December 31, 2005, total non-performing loans and total
non-performing loans as a percent of total loans were $4.918 million and 1.22%,
as compared to $2.751 million and 0.70% at December 31, 2004, a $2.167 million,
or 52 basis point increase. During the fourth quarter of 2005, the financial
condition of one of our large commercial borrowers declined rapidly. This
required us to place our loans to the borrower, totaling $973 thousand, on
non-accrual status. During the third quarter we also restructured a troubled
loan for a community-oriented, not-for-profit business. The balance of the loan
at December 31, 2005, was $871 thousand. The loans to these two borrowers
comprised 85.1% of the net increase in non-performing loans between December 31,
2004, and December 31, 2005.
During the fourth quarter of 2005, the amount of loans charged-off net of
recoveries increased precipitously. We experienced a sudden spike in net
charge-offs in the consumer loan and commercial loan portfolio. Through the end
of the third quarter of 2005, loans charged-off net of recoveries totaled $433
thousand. During the fourth quarter, we recorded $758 thousand in net
charge-offs. Of the increase, $335 thousand was due to the charge-off of loans
made to one commercial borrower. The remaining portion of the fourth quarter
increase, totaling $423 thousand, was recorded in the consumer loan portfolio.
Management attributes the sudden increase in consumer loan charge-offs to the
change in the federal bankruptcy law that took effect during the fourth quarter.
The allowance for loan losses and the ratio of the allowance for loan losses to
non-performing loans both increased between December 31, 2004, and December 31,
2005. The allowance for loan losses was $6.250 million at December 31, 2004, as
compared to $6.640 million at December 31, 2005. Similarly, the ratio of the
allowance for loan losses to period-end loans increased from 1.60% at December
31, 2004, to 1.64% at December 31, 2005. The Company's management believes the
allowance for loan losses was adequate at December 31, 2005, to absorb inherent
losses in the loan portfolio.
The information provided in ITEM 7, Parts C through F, that follow provide
additional information as to the financial condition, results of operations,
liquidity, and capital resources of the Company.
C. Financial Condition
a. Comparison of Financial Condition at December 31, 2005, and December 31, 2004
Please refer to the Consolidated Financial Statements presented in PART II, Item
8, of this document.
Asset Composition
-----------------
Our assets are comprised of earning and non-earning assets. Earning assets
include our investment securities, loans, interest-bearing deposits at other
banks, and federal funds sold. Non-earning assets include our real estate and
other assets acquired as the result of foreclosure, facilities, equipment,
goodwill and other intangibles, non-interest bearing deposits at other banks,
and cash. We generally maintain 92% to 95% of our total assets in earning
assets. The ratio of earning assets to total assets we maintained during 2004
and 2005 was slightly greater than the ratio maintained by comparable bank
holding companies.
Total Assets
------------
During 2005, our total assets increased slightly, from $750.861 million at
December 31, 2004, to $752.728 million at December 31, 2005, a $1.867 million,
or less than 1% increase. This compares to a 3.0% increase in total assets
between December 31, 2003, and December 31, 2004. During 2005, we acquired
$32.967 million of deposit liabilities from HSBC, but repaid $31.109 million of
short and long-term borrowings. During 2005 our management repaid maturing
borrowings as they came due, which curbed growth in total assets. Throughout
most of 2005 the yield curve was flat. This interest rate environment reduced
the Bank's ability to earn spread on borrowed funds, which prompted management
to repay rather than renew most borrowings during 2005.
Investment Securities
---------------------
Our investment securities portfolio consists of trading, available-for-sale, and
held-to-maturity securities. The following table summarizes our trading,
available-for-sale, and held-to-maturity investment securities portfolio for the
periods indicated.
27-K
Summary of Investment Securities:
At December 31
----------------------------------------------------------------------------
2005 2004 2003
----------------------------------------------------------------------------
Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value Cost Fair Value
----------------------------------------------------------------------------
(In thousands)
----------- ----------- ----------- ----------- ----------- -----------
Trading (1): $1,334 $1,542 $1,347 $1,504 $1,028 $1,025
----------- ----------- ----------- ----------- ----------- -----------
Available-for-sale:
U.S. Treasuries $10,952 $10,866 $4,960 $5,016 $3,978 $4,023
Obligations of U.S. Government
Corporations and Agencies 25,444 25,091 11,989 11,954 2,000 2,005
Obligations of States and Political
Subdivisions (Municipal Bonds) 55,080 54,638 66,656 67,745 56,684 58,016
Mortgage - Backed Securities 146,463 143,248 159,289 158,645 192,745 192,365
Corporate Bonds 0 0 0 0 13,038 13,949
Equity securities 6,356 6,507 5,870 6,055 4,520 4,693
----------- ----------- ----------- ----------- ----------- -----------
Total available-for-sale $244,295 $240,350 $248,764 $249,415 $272,965 $275,051
----------- ----------- ----------- ----------- ----------- -----------
Held-to-maturity:
Obligations of States and Political
Subdivisions (Municipal Bonds) $10,655 $10,633 $7,811 $7,999 $6,292 $6,515
Mortgage-Backed Securities 44,284 43,204 51,652 51,325 37,848 37,901
----------- ----------- ----------- ----------- ----------- -----------
Total held-to-maturity $54,939 $53,837 $59,463 $59,324 $44,140 $44,416
----------- ----------- ----------- ----------- ----------- -----------
(1) These securities are held by the Company for its non-qualified Executive
Deferred Compensation plan.
Between December 31, 2004, and December 31, 2005, our investment securities
portfolio (including trading, available-for-sale, and held-to-maturity)
decreased $13.551 million, or 4.4%. During 2005, we sold or had mature $80.232
million of available-for-sale and held-to-maturity investment securities versus
new purchases of $71.895 million. Proceeds from the sale or maturity of the
investment securities portfolio in excess of new purchases were generally used
to fund growth in our loan portfolio.
During 2005, we continued to reduce our concentration in mortgage-backed
securities. These include both mortgage pass-through securities and
collateralized mortgage obligations. At the end of 2005, our mortgage-backed
securities portfolio comprised 63.2% of the carrying value of our investment
securities portfolio. This compares to 67.6% and 71.9% at the end of 2004 and
2003, respectively. During 2003 and 2004, residential mortgage interest rates
were very low. This boosted housing starts and provided considerable incentive
for consumers to refinance their existing home. This, in turn, significantly
accelerated the level of principal pre-payments on our mortgage-backed
securities, requiring us to record unprecedented levels of amortization of
premiums on investments in those years. Since the prepayment options embedded in
mortgage-backed securities provides for more volatile investment securities cash
flows and yields, the Bank's management reduced its concentration in
mortgage-backed securities during 2004 and 2005 and increased its holdings of
U.S. Treasury and U.S. government corporation and agency bonds.
The estimated fair value of the investment portfolio is largely dependent upon
the interest rate environment at the time the market price is determined. As
interest rates decline, the estimated fair value of bonds generally increases,
and conversely, as interest rates increase, the estimated fair value of bonds
generally decreases. At December 31, 2005, the net unrealized loss on the
available-for-sale investment securities portfolio was $3.945 million. By
comparison, at December 31, 2004, the net unrealized gain on the
available-for-sale investment securities portfolio was $651 thousand. The change
in net unrealized investment securities gains / losses between the periods was
due to several factors, including the general rise in interest rates between the
periods, the change in the composition of our investment securities portfolio,
as well as the sale of available-for-sale securities. During 2003 and 2004,
respectively, we purchased $203.619 million and $181.119 million of
available-for-sale and held-to-maturity investment securities due principally to
the high
28-K
levels of prepayments on our mortgage-backed securities portfolio. During those
periods the coupon rates and yields on investment securities were very low. For
this reason, management anticipates that the Company's available-for-sale
investment securities portfolio will remain in a net unrealized loss position
during 2006.
The following table sets forth information regarding the carrying value,
weighted average yields, and anticipated principal repayments of the Bank's
investment securities portfolio as of December 31, 2005. All amortizing security
principal payments, including collateralized mortgage obligations and mortgage
pass-through securities, are included based on their expected average lives.
Callable securities, primarily callable agency securities, and municipal bonds
are assumed to mature on their maturity date. Available-for-sale securities are
shown at fair value. Held-to-maturity securities are shown at their amortized
cost. The yields on debt securities shown in the table below are calculated by
dividing annual interest, including accretion of discounts and amortization of
premiums, by the amortized cost of the securities at December 31, 2005. Yields
on obligations of states and municipalities exempt from federal taxation were
not tax-effected.
Investment Securities Maturity Table:
At December 31, 2005
------------------------------------------------------------------------------------------------------------
After One Year After Five Years
In One Year or Less through Five Years through Ten Years After Ten Years Total
------------------------------------------------------------------------------------------------------------
Weighted Weighted Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average Carrying Average Carrying Average
Dollars in Thousands Value Yield Value Yield Value Yield Value Yield Value Yield
------------------------------------------------------------------------------------------------------------
U.S. Treasuries
-- 0.00% $7,918 4.03% $2,948 4.10% -- 0.00% $10,866 3.65%
Obligations of U.S.
Government
Corporations 9,854 3.03% 15,237 3.75% -- 0.00% -- 0.00% 25,091 3.47%
and Agencies
Obligations of States
and Political
Subdivisions 5,084 3.98% 13,154 3.59% 36,932 3.83% 10,123 4.34% 65,293 3.87%
(Municipal Bonds)
Mortgage-backed
securities 9,131 5.13% 145,236 4.21% 31,097 5.00% 2,068 5.42% 187,532 4.40%
------------------------------------------------------------------------------------------------------------
Total securities (1) $24,069 4.03% $181,545 4.12% $70,977 4.35% $12,191 4.52% $288,782 4.19%
============================================================================================================
(1) This table excludes trading securities totaling $1.542 million and other
equity securities totaling $6.507 million at December 31, 2005.
At December 31, 2005, the approximate weighted average maturity for all of the
Bank's available-for-sale and held-to-maturity debt securities was 4.4 years.
This estimate was established based upon projected cash flows provided by a
third party investment securities analyst and is used to provide comparisons
with other companies in the banking industry. Our estimate fluctuates
considerably from period to period due to our concentration in mortgage-backed
securities.
The credit quality of our debt securities is strong. At December 31, 2005, 99.8%
of the securities held in our available-for-sale and held-to-maturity investment
securities portfolio were rated "A" or better by Moody's credit rating services;
95.1% were rated AAA. This compares to 99.8% and 94.1%, respectively, for the
period ended December 31, 2004.
At December 31, 2005, we also held $6.507 million of equity securities
including: $3.254 million in FHLBNY stock; a $1.829 million equity interest in a
Small Business Investment Company, Meridian Venture Partners II, L.P; $1.229
million of common stock holdings of other banking institutions; $135 thousand of
Federal Reserve Bank of New York stock; $35 thousand in New York Business
Development Corporation stock; and $25 thousand in a money market mutual fund.
By comparison, at December 31, 2004; equity securities totaled $6.055 million at
estimated fair value. The increase in the estimated fair value of equity
securities between the periods totaling $452 thousand was due to a $592 thousand
increase in the common stock of other banking institutions (primarily due to
additional security purchases during 2005) and a $200 thousand increase in the
Bank's investment in Meridian Venture Partners II, L.P., offset by a $115
thousand decrease in FHLBNY stock and a $225 thousand decrease in the money
market mutual fund balance.
Interest Bearing Bank Balances and Federal Funds Sold
-----------------------------------------------------
During 2005, we substantially reduced our time deposits with other banks. At
December 31, 2004, time deposits at other banks were $10.099 million, as
compared to $2.700 million at December 31, 2005, a $7.399 million decrease.
These balances are comprised of FDIC-insured certificates of deposit (in amounts
of $100,000 or less) in various FDIC-insured banks throughout the United States.
All of the certificates of deposit were acquired by the Bank during the
execution of
29-K
wholesale leverage transactions in 2000, 2001 and 2004. The certificates of
deposit purchased in December 2000 and January 2001 (original total - $20.0
million) were funded by equal amounts of FHLBNY advances with identical maturity
terms. The cost of the advances were 0.70% - 0.75% below the yield on the like
maturity certificates of deposit at the time of purchase. All of the
certificates of deposit currently in our portfolio will mature prior to December
31, 2007.
In the normal course of business, we sell and purchase federal funds to and from
other banks to meet our daily liquidity needs. Because the funds are generally
an unsecured obligation of the counter party, we only sell federal funds to
well-capitalized banks that carry strong credit ratings. Given the daily
fluctuation in our federal funds sold position throughout the year, it is
appropriate to compare the annual average federal funds sold positions rather
than the positions at the end of the periods. During 2005, our average federal
funds sold position was $8.110 million. By comparison, during 2004, our average
federal funds sold position was $6.346 million.
Loan Portfolio
--------------
General. The total loan portfolio increased by $12.622 million, or 3.2%, during
2005. Total loans outstanding at December 31, 2005, were $403.665 million, as
compared to $391.043 million at December 31, 2004. During 2005, we acquired
$7.635 million of loans during the HSBC branch acquisition and continued to
increase the loans outstanding in the commercial and commercial real estate
categories. This was due to our efforts to expand our market area and focus our
resources on this type of lending. During 2005, we established a new
representative loan production office in the Syracuse, New York (Onondaga
County) market, continued to seek loan opportunities with select loan brokers,
expanded our network of banks to grow participation loans, and maintained a
geographic footprint for small business loans that extended beyond our primary
market area. The following table summarizes the composition of our loan
portfolio over the prior five-year period.
Distribution of Loans Table:
At December 31,
-------------------------------------------------------------------------------------------------------
2005 2004 2003 2002 2001
-------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential real estate (1) $123,748 30.7% $119,103 30.5% $118,571 32.9% $125,464 35.0% $125,510 38.1%
Commercial real estate 144,171 35.7% 129,516 33.1% 115,733 32.1% 104,967 29.3% 87,268 26.5%
Commercial (2) 69,651 17.3% 78,003 19.9% 65,031 18.0% 65,595 18.3% 53,157 16.1%
Consumer 66,095 16.4% 64,421 16.5% 61,571 17.1% 62,269 17.4% 63,609 19.3%
-------------------------------------------------------------------------------------------------------
Total loans 403,665 100.0% 391,043 100.0% 360,906 100.0% 358,295 100.0% 329,544 100.0%
----------=========------------=========------------=========------------=========------------=========
Less:
Allowance for loan losses (6,640) (6,250) (5,757) (5,392) (4,476)
-------- -------- -------- -------- --------
Net loans $397,025 $384,793 $355,149 $352,903 $325,068
======== ======== ======== ======== ========
(1) Includes loans secured by 1-4 family residential dwellings, 5+ family
residential dwellings, home equity loans and residential construction loans.
(2) Includes commercial and industrial loans, agricultural loans and obligations
(other than securities and leases) of states and political subdivisions in the
United States
During the prior five-year period the composition of our loan portfolio has
generally shifted from one with a concentration in residential real estate to
one with a concentration in commercial real estate and commercial (primarily
small business) loans. However, during 2005 our residential loan portfolio
increased modestly, primarily due to an increase in home equity loans. During
the first quarter of 2005 we acquired the loans of two branch offices of HSBC.
The majority of the loans acquired were loans secured by residential properties.
In addition, we continued to actively promote and competitively price our
variable rate home equity line of credit product known as the "Prestige Line of
Credit." The loan balances outstanding in the residential real estate category
increased $4.721 million or 4.0% during 2005, from $119.103 million at December
31, 2004 to $123.824 million at December 31, 2005.
Our commercial real estate portfolio increased during 2005 due to our continued
emphasis on small business lending and the low interest rate environment.
Specifically, our commercial real estate portfolio increased from $129.516
million at December 31, 2004 to $144.171 million at December 31, 2005, a $14.655
million or 11.3% increase.
30-K
Our commercial loan portfolio decreased $8.352 million or 10.7% during 2005,
from $78.003 million at December 31, 2004 to $69.651 million at December 31,
2005. During 2005 two large commercial borrowers repaid their loans with us. One
paid-off approximately $4.5 million on a line of credit, which the Bank
continues to maintain. The other borrower paid-off all loans with the Bank,
totaling $5.220 million. In spite of the decrease in this category of loans
during 2005, we will continue to focus our efforts on increasing the balances of
our small business loan portfolio prospectively.
During 2005, we increased our total consumer loans outstanding by $1.674 million
or 2.6%. During 2005, we continued to broaden our automobile dealer network to
increase the volume of our indirect automobile loans (secured primarily by used
vehicles). These efforts resulted in a $1.791 million increase in loans
outstanding in this category. In management's opinion, higher levels of growth
in indirect loans were curbed by a reduced level of used automobile sales in our
primary market area. At December 31, 2004, our indirect automobile loan
portfolio was comprised of 4,123 accounts, totaling $41.268 million. This
compares to 4,217 accounts and $43.059 million at December 31, 2005, a 2.3% net
increase in accounts and 4.3% net increase in indirect automobile loan volume
outstanding.
The following table sets forth the amount of loans maturing and repricing in our
portfolio. The full principal amount outstanding of adjustable rate loans are
included in the period in which the interest rate is next scheduled to adjust.
Similarly, the full principal amount outstanding of fixed-rate loans are shown
based on their final maturity date. The full principal amount outstanding of
demand loans without a repayment schedule and no stated maturity, financed
accounts receivable, and overdrafts are reported as due within one year. The
table has not been adjusted for scheduled principal payments or anticipated
principal pre-payments.
Maturity and Repricing of Loans Table:
One More
Within One Through Than
Year (1) Five Years Five Years Total
----------------------------------------------
Residential real estate (1) $51,624 $10,249 $61,875 $123,748
Commercial real estate 52,861 9,826 81,484 144,171
Commercial (2) 39,203 11,202 19,246 69,651
Consumer 9,265 47,332 9,498 66,095
----------------------------------------------
Total loans receivable $152,953 $78,609 $172,103 $403,665
==============================================
(1) Includes loans secured by 1-4 family residential dwellings, 5+ family
residential dwellings, home equity loans and residential construction loans.
(2) Includes commercial and industrial loans, agricultural loans and obligations
(other than securities and leases) of states and political subdivisions in the
United States
The following table sets forth fixed and adjustable rate loans with maturity
dates after December 31, 2006:
Table of Fixed and Adjustable Rate Loans:
Due After December 31, 2006
----------------------------------
Fixed Adjustable Total
---------- ---------- ----------
Residential real estate (1) $26,395 $90,647 $117,042
Commercial real estate 93,034 50,084 143,118
Commercial (2) 28,735 16,130 44,865
Consumer 58,800 1,454 60,254
-------- --------- --------
Total loans $206,964 $158,315 $365,279
======== ======== ========
(1) Includes loans secured by 1-4 family residential dwellings, 5+ family
residential dwellings, home equity loans and residential construction loans.
(2) Includes commercial and industrial loans, agricultural loans and obligations
(other than securities and leases) of states and political subdivisions in the
United States
31-K
Commitments and Lines of Credit. Standby letters of credit are conditional
commitments issued by us to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including bond financing and similar transactions. The
credit risk involved in issuing standby letters of credit is essentially the
same as that involved in extending loans to customers. Since most of the standby
letters of credit are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. At
December 31, 2005 and December 31, 2004 standby letters of credit totaled $8.880
million and $9.948 million, respectively. At December 31, 2005 and December 31,
2004 the fair value of the Bank's standby letters of credit was not material.
In addition to standby letters of credit, we have issued lines of credit and
other commitments to lend to our customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the loan agreement. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
These include home equity lines of credit, commitments for residential and
commercial construction loans, commercial letters of credit, and other personal
and commercial lines of credit. At December 31, 2005 and December 31, 2004 we
had outstanding unfunded loan commitments of $76.783 million and $57.055
million, respectively, representing a $19.728 million or 34.6% increase period
over period. The increase in the unfunded loan commitments was primarily due to
growth in the unused portion of commercial and home equity lines of credit.
Asset Quality and Risk Elements
-------------------------------
General. One of our key objectives is to maintain strong credit quality of the
Bank's loan portfolio. The following narrative provides summary information and
our experience regarding the quality and risk elements of our loan portfolio.
Delinquent Loans. At December 31, 2005, we had $2.062 million of loans that were
30 or more days past due (excluding non-performing loans). This equaled 0.51% of
total loans outstanding. By comparison, at December 31, 2004 we had $2.077
million of this same category of loans that were 30 or more days past due
(excluding non-performing loans). This equaled 0.53% of total loans outstanding.
Management considers the level of delinquent loans as low (relative to prior
years' levels) and attributes the low levels of delinquency to improved
delinquent loan collection procedures implemented in 2001.
Non-accrual, Past Due and Restructured Loans. The following chart sets forth
information regarding non-performing assets for the periods stated.
Table of Non-performing Assets:
At December 31,
------------------------------------------
Dollars in Thousands 2005 2004 2003 2002 2001
------------------------------------------
Loans in Non-Accrual Status:
Residential real estate (1) $327 $141 $257 $222 $465
Commercial real estate 2,287 2,168 1,199 1,049 1,587
Commercial (2) 1,191 243 1,700 760 33
Consumer 61 9 8 3 5
------------------------------------------
Total non-accruing loans 3,866 2,561 3,164 2,034 2,090
Loans Contractually Past Due 90 Days or
More and Still Accruing Interest 181 190 123 717 329
Troubled Debt Restructured Loans 871 0 371 387 861
------------------------------------------
Total non-performing loans 4,918 2,751 3,658 3,138 3,280
Other real estate owned 20 78 20 22 857
------------------------------------------
Total non-performing assets $4,938 $2,829 $3,678 $3,160 $4,137
==========================================
Total non-performing assets as a
percentage of total assets 0.66% 0.38% 0.50% 0.45% 0.66%
==========================================
Total non-performing loans as a percentage
of total loans 1.22% 0.70% 1.01% 0.88% 1.00%
==========================================
(1) Includes loans secured by 1-4 family residential dwellings, 5+ family
residential dwellings, home equity loans and residential construction loans.
(2) Includes commercial and industrial loans, agricultural loans and obligations
(other than securities and leases) of states and political subdivisions in the
United States
32-K
Total non-performing assets increased from $2.829 million at December 31, 2004,
to $4.938 million at December 31, 2005, a $2.109 million or 74.5% increase. The
substantial majority of the increase in non-performing assets was due to the
decline in the financial condition of two of our large borrowers. During the
third quarter of 2005 we restructured a credit facility for a struggling
not-for-profit company. The loan balance at December 31, 2005 was $871 thousand
and was current under the restructured terms. During the fourth quarter of 2005
the financial condition of one of our large commercial borrowers deteriorated
rapidly. Due to the borrowers financial condition and past due status, we
determined it was necessary to place the borrower's loans with us on non-accrual
status. The total loans outstanding with the borrower were $973 thousand at
December 31, 2005.
Other Real Estate Owned and Repossessed Assets. Other Real Estate Owned ("OREO")
consists of properties formerly pledged as collateral on loans, which have been
acquired by the Bank through foreclosure proceedings or acceptance of a deed in
lieu of foreclosure. OREO is carried at the lower of the recorded investment in
the loan or the fair value of the real estate, less estimated costs to sell. At
both December 31, 2004 and December 31, 2005 we held insignificant amounts of
OREO property totaling less than $100 thousand.
Potential Problem Loans. In addition to non-performing loans, we have identified
through normal credit review procedures potential problem loans totaling $7.897
million or 2.0% of total loans outstanding at December 31, 2005. By comparison,
at December 31, 2004, potential problem loans totaled $8.662 million or 2.2% of
total loans outstanding. Potential problem loans are loans that are currently
performing, but where known information about possible credit problems of the
related borrowers causes management to have doubts as to the ability of such
borrowers to comply with the present loan repayment terms and which may result
in disclosure of such loans as non-performing at some time in the future.
Potential problem loans are typically loans that are performing, but are
classified by our loan rating system as "substandard." Potential problem loans
may fluctuate significantly from period to period due to a rating upgrade of
loans previously classified as substandard or a rating downgrade of loans
previously carried in a higher credit classification. Management does not
believe the decrease in potential problem loans, totaling $765 thousand between
December 31, 2004, and December 31, 2005 to be significant or indicative of an
improvement in the overall quality of the loan portfolio. Management cannot
predict the extent to which economic conditions may worsen or other factors
which may impact borrowers and the potential problem loans. Accordingly, there
can be no assurance that other loans will not become 90 days or more past due,
be placed on non-accrual status, become restructured, or require increased
allowance coverage and provision for loan losses.
Loan Concentrations. At December 31, 2005 we had $33.210 million of total loans
outstanding and $1.795 million of unfunded loan commitments secured by
commercial rental properties. Total loans outstanding in this category comprised
8.2% of our total loans outstanding at December 31, 2005. We have nine (9)
borrowers within this area of concentration that each has outstanding loan
balances in excess of $1.0 million. The aggregate amount of loans outstanding to
these nine (9) borrowers at December 31, 2005, was $23.393 million. All of these
loans were in compliance with contractual payment terms at December 31, 2005.
The remaining portfolio was comprised of approximately seventy-five (75) loans
and spread amongst a diverse group of properties and borrowers. By comparison,
at December 31, 2004, we had $22.707 million of commercial rental property loans
outstanding with seven (7) of these loans in excess of $1.0 million totaling
$12.873 million.
At December 31, 2005 we had outstanding $28.538 million or 7.1% of our total
loans outstanding to borrowers who operate in the hotel / motel industry. By
comparison, at December 31, 2004 we had outstanding $30.048 million, or 7.7% of
our total loans outstanding in this same category. The hotel / motel properties
that we finance are geographically dispersed throughout our market area and the
broader statewide region. The Bank's Board of Directors has established a
specific exposure guideline for this hotel / motel industry at 50% of the Bank's
total equity capital, which at December 31, 2005 was $32.449 million.
At December 31, 2005 we had $25.350 million of total loan outstanding and $2.054
million of unfunded loan commitments to manufacturing companies. Total loans
outstanding in this category comprised 6.2% of our total loans outstanding at
December 31, 2005. This compares to $23.076 million in loans outstanding and
$8.795 million of unfunded loan commitments to this sector at December 31, 2004.
Although our borrowers operate in various industries within the manufacturing
sector, we have experienced a general decline in the financial condition of
several borrowers within this sector. We have eight (8) borrowers in the
manufacturing sector with aggregate credit facilities in excess of $1.0 million.
Five (5) of these have either been placed on non-accrual status, identified as a
potential problem loan, or identified as a "special mention" loan requiring
special monitoring.
At December 31, 2005 we had $22.766 of total loans outstanding and $1.418
million of unfunded loan commitments secured by residential rental properties.
Total loans outstanding in this category comprised 5.6% of our total loans
outstanding at December 31, 2005. Within this group we had six (6) loans to four
(4) borrowers totaling approximately $9.6 million that operate independent
living, assisted living, or residential care facilities for senior citizens.
None of these
33-K
loans was classified as substandard at December 31, 2005 and all were performing
pursuant to contractual terms. By comparison, at December 31, 2004 we had
$22.257 million of total loan commitments in this same category.
At December 31, 2005 we had $16.663 million of total loans outstanding and
$4.065 million of unfunded loan commitments to automotive dealerships. Total
loans outstanding in this category comprised 4.1% of our total loans outstanding
at December 31, 2005. The largest eight (8) borrowers comprise $19.380 million
or 93.5% of the loan commitments to this industry. Management monitors the
dealer floor plan loans provided to six of these seven borrowers by conducting
inventory reviews on a monthly basis.
At December 31, 2005 we had $13.943 million of total loans outstanding and
$6.135 million of unfunded loan commitments to borrowers in the convenience
store / fuel business. Total loans outstanding in this category comprised 3.5%
of our total loans outstanding at December 31, 2005. By comparison, at December
31, 2004, we had $22.036 million of total loan commitments to this industry. At
December 31, 2005 none of the loans to these borrowers were rated substandard by
our management. These loans were primarily distributed among five (5) borrowers.
We have loan commitments totaling $8.000 million to one borrower in this
industry.
Other areas of concentration at December 31, 2005, include $12.724 million of
loan commitments to medical facilities and medical practices, $9.527 million of
loan commitments to general residential and commercial contractors, $8.632
million of loan commitments to various restaurants, and $8.049 million of loan
commitments to religious and human services organizations. Although we
classified these industries as areas of credit concentration, we believe the
aggregate exposure to these industries do not pose unwarranted amounts of risk
to the Company.
Summary of Loss Experience (Charge-Offs) and Allowance for Loan Losses. The
following table sets forth the analysis of the activity in the allowance for
loan losses, including charge-offs and recoveries, for the periods indicated.
Analysis of the Allowance for Loan Losses Table:
Years Ended December 31,
------------------------------------------
2005 2004 2003 2002 2001
------------------------------------------
(Dollars in thousands)
Balance at beginning of year $6,250 $5,757 $5,392 $4,476 $4,003
Charge offs:
Residential real estate (1) 20 133 174 93 225
Commercial real estate 0 51 0 0 148
Commercial (2) 364 121 193 402 123
Consumer 1,091 639 1,109 926 905
------------------------------------------
Total charge offs 1,475 944 1,476 1,421 1,401
------------------------------------------
Recoveries:
Residential real estate (1) 39 20 10 0 24
Commercial real estate 0 0 0 0 40
Commercial (2) 29 51 78 250 88
Consumer 217 166 188 167 181
------------------------------------------
Total recoveries 285 237 276 417 334
------------------------------------------
Net charge-offs 1,190 707 1,200 1,004 1,068
Provision for loan losses 1,580 1,200 1,565 1,920 1,540
------------------------------------------
Balance at end of year $6,640 $6,250 $5,757 $5,392 $4,476
==========================================
Ratio of net charge-offs during the year to 0.30% 0.19% 0.33% 0.29% 0.33%
average loans outstanding during the year
==========================================
Allowance for loan losses to total loans 1.64% 1.60% 1.60% 1.50% 1.36%
==========================================
Allowance for loan losses to non-
performing loans 135% 227% 157% 172% 136%
==========================================
(1) Includes loans secured by 1-4 family residential dwellings, 5+ family
residential dwellings, home equity loans and residential construction loans.
(2) Includes commercial and industrial loans, agricultural loans and obligations
(other than securities and leases) of states and political subdivisions in the
United States
34-K
The allowance for loan losses and the allowance for loan losses as a percent of
total loans increased from $6.250 million and 1.60%, respectively, at December
31, 2004 to $6.640 million and 1.64%, respectively, at December 31, 2005. This
represents a $390 thousand and 4 basis point increase between the periods. In
2005 the provision for loan losses increased to $1.580 million, versus $1.200
million in 2004. During 2005, two of our key credit quality measures, namely net
charge-offs and non-performing loans, worsened, as compared to 2004. These
trends in our loan portfolio, as well as the decline in the financial condition
of one of our large commercial borrowers during the fourth quarter of 2005,
prompted us to increase the provision for loan losses during the fourth quarter
to absorb the estimated losses embedded in our loan portfolio. Management and
the Board of Directors deemed the allowance for loan losses as adequate at
December 31, 2005 and December 31, 2004.
Allocation of the Allowance for Loan Losses. We allocate our allowance for loan
losses among the loan categories indicated below. This allocation should not be
interpreted as a projection of: (i) likely sources of future charge-offs, (ii)
likely proportional distribution of future charge-offs among loan categories, or
(iii) likely amounts of future charge-offs. Additionally, since management
regards the allowance for loan losses as a general balance, the amounts
presented do not represent the total balance available to absorb future
charge-offs that might occur within the designated categories.
Subject to the qualifications noted above, an allocation of the allowance for
loan losses by principal classification and the proportion of the related loan
balance represented by the allocation is presented below for the periods
indicated.
Loan Loss Summary Allocation Table:
At December 31,
-----------------------------------------------------------------------------------
2005 2004 2003
-----------------------------------------------------------------------------------
Percent of Percent of Percent of
Allowance Allowance Allowance
Amount of for Loan Amount of for Loan Amount of for Loan
Allowance Losses in Allowance Losses in Allowance Losses in
for Loan Each for Loan Each for Loan Each
Dollars in Thousands Losses Category Losses Category Losses Category
-----------------------------------------------------------------------------------
Residential real
estate (1) $595 9.0% $670 10.7% $545 9.5%
Commercial real
estate 3,171 47.8% 2,454 39.3% 2,248 39.0%
Commercial (2) 1,512 22.8% 1,435 23.0% 1,297 22.5%
Consumer 1,114 16.8% 1,080 17.3% 966 16.8%
Unallocated 248 3.7% 611 9.8% 701 12.2%
-----------------------------------------------------------------------------------
Total $6,640 100.0% $6,250 100.0% $5,757 100.0%
===================================================================================
At December 31,
------------------------------------------------------
2002 2001
------------------------------------------------------
Percent of Percent of
Allowance Allowance
Amount of for Loan Amount of for Loan
Allowance Losses in Allowance Losses in
for Loan Each for Loan Each
Dollars in Thousands Losses Category Losses Category
------------------------------------------------------
Residential real
estate (1) $718 13.3% $598 13.4%
Commercial real
estate 2,051 38.0% 1,461 32.6%
Commercial (2) 1,282 23.8% 891 19.9%
Consumer 1,017 18.9% 982 21.9%
Unallocated 324 6.0% 544 12.2%
------------------------------------------------------
Total $5,392 100.0% $4,476 100.0%
======================================================
(1) Includes loans secured by 1-4 family residential dwellings, 5+ family
residential dwellings, home equity loans and residential construction loans.
(2) Includes commercial and industrial loans, agricultural loans and obligations
(other than securities and leases) of states and political subdivisions in the
United States
Other Non-earning Assets and Bank Owned Life Insurance
------------------------------------------------------
Cash and Due from Banks. In order to operate the Bank on a daily basis, it is
necessary for us to maintain a limited amount of cash at our teller stations and
within our vaults and ATMs to meet customers' demands. In addition, we always
maintain an amount of check and other presentment items in the process of
collection (or float). We are also required to maintain a clearing / reserve
balance at the Federal Reserve Bank of New York and minimum target balances at
our correspondent banks. At December 31, 2005, we maintained $12.817 million, or
1.7% of total assets in these categories of non-earning assets. This compares to
$10.440 million, or 1.4% of total assets at December 31, 2004.
Premises and Equipment. The net book value of premises and equipment increased
$570 thousand or 9.7%, from $5.860 million at December 31, 2004, to $6.430
million at December 31, 2005. During 2005, we acquired $440 thousand of real
property and equipment in the HSBC branch acquisition and purchased significant
amounts of computer equipment for our core computer system conversion and
expansion activities.
Bank-Owned Life Insurance. The cash surrender value of the life insurance at
December 31, 2005 was $15.530 million, as compared to $14.975 million at
December 31, 2004. The increase was attributable to an increase in the cash
surrender value of the policies between the periods totaling $555 thousand. The
policies are issued by four life insurance
35-K
companies who all carry strong financial strength ratings. The policies are
issued on the lives of the Bank's senior management.
Goodwill and Other Intangible Assets. As a result of the HSBC branch transaction
in February, 2005, we recorded $1.836 million in goodwill and $492 thousand in
core deposit intangible. No impairment of the goodwill from the HSBC transaction
or previous transactions was deemed necessary during 2005. The $492 thousand
increase in core deposit intangible was offset by $171 thousand of amortization
expense on the HSBC core deposit intangible, as well as previously recorded
intangible assets, resulting in a $321 thousand net increase. The core deposit
intangible on the HSBC acquisition is being amortized over 5 years on a
straight-line basis.
Other Assets. Other assets increased by $2.026 million, or 18.0%, from $11.253
million at December 31, 2004, to $13.279 million at December 31, 2005. Other
assets are comprised of other real estate owned, interest receivable, prepaid
dealer reserve, prepaid pension plan asset, computer software, net deferred tax
assets, deferred taxes on investment securities, other assets, other prepaid
items, and other accounts receivable. Several factors contributed to the net
increase in other assets between the periods.
The largest contributing factor to the increase in other assets was the
significant swing in our deferred taxes on investment securities between the
periods. Our deferred taxes on investment securities increased $1.789 million
between the periods due to the significant decline in net unrealized gains /
losses in our available-for-sale investment securities portfolio between
December 31, 2004 and December 31, 2005. At December 31, 2004 the net unrealized
gain on our available-for-sale investment securities portfolio was $651
thousand. This compares to a net unrealized loss of $3.945 million at December
31, 2005.
Composition of Liabilities
--------------------------
Deposits. Deposits are our primary funding source. At December 31, 2005 deposits
represented 88.3% of our total liabilities, compared to 83.7% at December 31,
2004. At December 31, 2004 our total deposits were $571.929 million. This
compares to $604.958 million at December 31, 2005, a $33.029 million or 5.8%
increase. The increase in total deposits was primarily attributable to our HSBC
branch acquisition in the first quarter of 2005, in which we assumed $32.967
million of deposit liabilities.
At December 31, 2005, $343.095 million or 56.7% of our total deposits were in
accounts without a stated maturity date versus $261.863 million or 43.3% of
total deposits in certificates of deposit. This compares to $330.389 million or
57.8% of total deposits and $241.540 million or 42.2% of total deposits,
respectively, at December 31, 2004.
The following table indicates the amount of our time accounts by time remaining
until maturity as of December 31, 2005.
Time Accounts Maturity Table:
Maturity as of December 31, 2005
-------------------------------------------------------------
Over 6 to
Dollars in Thousands 3 Months Over 3 to 12 Over 12
or Less 6 Months Months Months Total
-------------------------------------------------------------
Certificates of Deposit of $100,000 or more $21,557 $12,369 $9,746 $34,475 $78,147
Certificates of Deposit less than $100,000 29,340 21,005 29,493 103,878 183,716
-------------------------------------------------------------
Total of time accounts $50,897 $33,374 $39,239 $138,353 $261,863
=============================================================
Foreign Deposits in Domestic Offices. At December 31, 2005, we held $3.793
million of deposits from foreign depositors. This compares to $13.824 million at
December 31, 2004. The substantial majority of these deposit relationships were
acquired during 1994 when we purchased certain assets and all of the deposit
liabilities from the First National Bank of Downsville in Delaware County, New
York. Due to the difficulty associated with servicing our foreign depositors,
during 2005 we asked each of these customers to close their accounts upon
maturity. At December 31, 2005, a few certificates of deposit and other
interest-bearing accounts remained active.
Borrowings. Total borrowed funds consist of short-term and long-term borrowings.
Short-term borrowings include federal funds purchased, treasury, tax, and loan
notes held for the benefit of the U.S. Treasury Department, and securities sold
under agreements to repurchase with our customers and other third parties.
Long-term borrowings consist of monies we
36-K
borrowed from the FHLBNY for various funding requirements and wholesale funding
strategies. At December 31, 2005, our ratio of borrowed funds (including
short-term and long-term borrowings) to total liabilities decreased as compared
to December 31, 2004. Total borrowed funds were $71.829 million or 10.5% of
total liabilities at December 31, 2005, as compared to $102.938 million or 15.1%
of total liabilities at December 31, 2004, a $31.109 million decrease. During
2005, upon acquisition of the HSBC branches, we repaid a $15.0 million borrowing
from a large money center bank. The monies were initially borrowed in the fourth
quarter of 2004 to purchase $15.0 million of available-for-sale investment
securities with the intention of replacing the borrowing with the core deposit
liabilities assumed in the HSBC branch acquisition. In addition, throughout 2005
we repaid other short-term and long-term borrowings as they came due. In prior
years, management has borrowed funds at the FHLBNY for the purpose of acquiring
investment securities or time deposits at other banks to increase net interest
income. Management did not execute any new such wholesale leverage transactions
during 2005 due to a poor interest rate climate, most notably the flat Treasury
yield curve. See Note 8 of the Consolidated Financial Statements contained in
PART II, Item 8, of this document for additional detail on our borrowed funds.
D. Results of Operations
a. Comparison of Operating Results for the Years Ended December 31, 2005 and
December 31, 2004
Please refer to the Consolidated Financial Statements presented in PART II, Item
8, of this document.
Summary. Net income for 2005 was $7.744 million. This was $874 thousand or 10.1%
less than 2004 net income of $8.618 million. This resulted in a $0.08 decrease
in earnings per share. Earnings per share were $0.69 in 2005, as compared to
$0.77 in 2004. Although net interest income and several components of
non-interest income improved year over year, they were negated by an increase in
non-interest expense, an increase in the provision for loan losses, and a
decrease in net investment securities gains. In 2005 net interest income
increased $976 thousand. This was principally due to an increase in both the
volume and the yield on the loan portfolio. This improvement was offset by a
$1.633 million increase in non-interest expense. In 2005 we incurred significant
increases in most components of non-interest expense due to expansion
activities, the core computer system conversion, and significant regulatory
compliance efforts, including Sarbanes-Oxley Act compliance and Bank Secrecy Act
/ Anti-Money Laundering compliance.
During the fourth quarter of 2005, we recorded $800 thousand in the provision
for loan losses to increase the allowance for loan losses to a level that
reflected the estimated embedded losses in the portfolio. The substantial
increase in the provision for loan losses during the fourth quarter was
principally due to the substantial decline in the financial condition of one of
our large commercial borrowers and increase in net charge-offs.
In 2004 we recorded $1.031 million of investment securities gains due
principally to the sale of $12.986 million of available-for-sale investment
securities. Low interest rates through the period allowed us to sell investment
securities at substantial gains to our book value. During 2005 interest rates
increased, which reduced the level of investment securities gains on
available-for-sale securities. As a result, during 2005 we sold $9.350 million
of available-for-sale investment securities and recorded $469 thousand of net
investment securities gains.
Our return on average assets declined from 1.17% in 2004 to 1.02% in 2005.
Similarly, our return on average stockholders' equity also declined from 13.08%
in 2004 to 11.40% in 2005. In 2005 average assets and average stockholders'
equity increased, while net income declined, resulting in a lower return on
average assets and lower return on average equity.
Net Interest Income. Net interest income is our most significant source of
earnings. During 2005, net interest income comprised 82% of our total revenues
(the other 18% was due to non-interest income). This compares to 81% and 19%,
respectively, for 2004. For this reason, the following tables, including the
Asset and Yield Summary Table, the Interest Rate Table and the Rate and Volume
Table and the associated analytical narrative are important components of our
results of operations.
The following table summarizes the total dollar amount of interest income from
average earnings assets and the resultant yields, as well as the interest
expense and rate paid on average interest bearing liabilities. No tax equivalent
adjustments were made for tax-exempt assets. The average balances presented are
calculated using daily totals and averaging them for the period indicated.
37-K
Asset and Yield Summary Table:
For the Years Ended December 31,
-------------------------------------------------------------------------------
2005 2004
-------------------------------------------------------------------------------
Average Interest Yield Average Interest Yield
Outstanding Earned / Outstanding Earned /
Balance /Paid Rate Balance /Paid Rate
-------------------------------------------------------------------------------
(Dollars in thousands)
Earning Assets:
Federal funds sold $8,110 $270 3.33% $6,346 $81 1.28%
Interest- bearing
deposits 9,006 449 4.99% 8,581 534 6.22%
Securities (1) 297,965 11,908 4.00% 308,101 11,685 3.79%
Loans, Net (2) 392,240 27,683 7.06% 367,328 24,865 6.77%
---------------------- ----------------------
Total earning assets 707,321 40,310 5.70% 690,356 37,165 5.38%
Non-earning assets 46,394 46,394
-------- --------
Total assets $753,715 $736,750
======== ========
Liabilities:
Savings accounts $98,356 $677 0.69% $95,657 $601 0.63%
Money market
accounts 42,667 1,145 2.68% 28,773 328 1.14%
NOW accounts 112,042 1,134 1.01% 122,640 1,023 0.83%
Time & other deposit
accounts 277,649 8,984 3.24% 271,317 7,526 2.77%
Borrowings 83,225 2,990 3.59% 82,929 3,283 3.96%
---------------------- ----------------------
Total interest-bearing
liabilities 613,939 14,930 2.43% 601,316 12,761 2.12%
Non-interest bearing
deposits 67,790 61,626
Other non-interest
bearing liabilities 5,986 7,913
-------- --------
Total liabilities 687,715 670,855
Stockholders' equity 67,950 65,895
-------- --------
Total liabilities and
stockholders' equity $755,665 $736,750
======== ========
Net interest income $25,380 $24,404
======= =======
Net interest rate
spread (3) 3.27% 3.26%
====== ======
Net earning assets $93,382 $89,040
======== ========
Net interest margin (4) 3.59% 3.53%
====== ======
Ratio of earning assets
to interest-bearing ======== ========
liabilities 115.21% 114.81%
======== ========
For the Years Ended December 31,
-----------------------------------
2003
-----------------------------------
Average Interest Yield
Outstanding Earned /
Balance /Paid Rate
-----------------------------------
(Dollars in thousands)
Earning Assets:
Federal funds sold 15,175 173 1.14%
Interest- bearing
deposits 14,149 928 6.56%
Securities (1) 302,387 13,050 4.32%
Loans, Net (2) 352,935 24,477 6.94%
-----------------------
Total earning assets 684,646 38,628 5.64%
Non-earning assets 43,580
---------
Total assets $728,226
=========
Liabilities:
Savings accounts $89,087 $791 0.89%
Money market
accounts 30,938 298 0.96%
NOW accounts 121,288 1,353 1.12%
Time & other deposit
accounts 280,290 8,258 2.95%
Borrowings 77,068 3,453 4.48%
-----------------------
Total interest-bearing
liabilities 598,671 14,153 2.36%
Non-interest bearing
deposits 57,355
Other non-interest
bearing liabilities 8,454
--------
Total liabilities 664,480
Stockholders' equity 63,746
--------
Total liabilities and
stockholders' equity $728,226
========
Net interest income $24,475
=======
Net interest rate
spread (3) 3.28%
======
Net earning assets $85,975
========
Net interest margin (4) 3.57%
======
Ratio of earning assets
to interest-bearing ========
liabilities 114.36%
========
(1) Securities are shown at average amortized cost with net unrealized gains or
losses on securities available-for-sale included as a component of non-earning
assets.
(2) Average net loans equal average total loans less the average allowance for
loan losses. However, for purposes of these computations, non-accrual loans are
included in average loan balances outstanding.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
38-K
Net interest income increased $976 thousand or 4.0% in 2005. During 2005
national interest rates increased (see comparative interest rate table below for
an 8 quarter history of interest rates). These changes, particularly the changes
to the national prime rate of interest (eight 25 basis point increases totaling
200 basis points), helped increase the average yield on net loans from 6.77% in
2004 to 7.06% in 2005. During 2005 we maintained approximately $155 million in
variable rate loans. The substantial majority of these variable rate loans were
indexed to the national prime rate, which contributed to the improved yield on
these assets. The interest income on our loan portfolio increased from $24.865
million in 2004 to $27.683 million in 2005, a $2.818 million or 11.3% increase.
Also during the year, we increased the average dollar volume of loans
outstanding through our loan production efforts and the HSBC branch acquisition.
During 2004 the average volume of our net loans was $367.328 million, as
compared to $392.240 million during 2005, a 6.8% increase.
In addition to increases in interest income on loans, during 2005 we recorded an
increase in the interest income on our investment securities. Although our
average volume of securities decreased during 2005, as loans grew and we repaid
borrowings, we recorded a $223 thousand increase in interest income on
securities over 2004. During 2004, due to the very low interest rate
environment, we recorded $2.180 million in net amortization of premiums and
accretion of discounts on investments. This decreased to $1.027 million in 2005.
Within our investment securities portfolio, we maintained a concentration of
mortgage-backed securities. Many of these securities were purchased at premiums
to their par value. As homeowners refinanced and prepaid their mortgages during
2004 due to the low interest rate environment, we received prepayments on these
securities, which required us to record substantial amounts of amortization on
the premiums. During 2005 the level of homeowner refinancing decreased due to
higher residential mortgage interest rates, resulting in a decrease in the
amount of amortization recorded on this portfolio. Our yield on investment
securities was 3.79% in 2004, versus 4.00% in 2005.
Due to the rising interest rate environment during 2005 and the acquisition of
the HSBC branches, we substantially increased the interest expense on our most
interest rate sensitive deposits, namely money market and time accounts. During
2005, the interest expense on these two categories of deposits increased $2.275
million. Throughout 2005 our competitors raised their deposit interest rates due
to the higher national interest rate environment. To remain competitive and
retain our customer's deposit accounts, we also raised our deposit rates. This
rate increase, coupled with the HSBC branch acquisition and slight increases in
less interest sensitive savings and NOW account interest rates, our total cost
of interest-bearing liabilities increased from 2.12% in 2004 to 2.43% in 2005, a
31 basis point increase.
At December 31, 2005 the Treasury yield curve was very flat. The two year and
the ten year Treasury notes were both yielding 4.34%. This flat interest rate
environment inhibits our ability to earn net interest income, since banks
typically earn net interest income by procuring short-term deposits and
borrowings and investing those proceeds in longer term loans and investments.
This practice, which is sometimes referred to as mismatching assets and
liabilities, typically allows banks to enhance their "interest spread," which
generates net interest income. If this flat interest rate environment persists,
it may negatively impact our ability to increase net interest income for several
quarters prospectively.
Comparative Interest Rate Table:
----------------------------------------------------------------------------------------------------------------------------------
2005 2004
------------------------------------------------- ------------------------------------------------
Interest Rates (1) December September June March December September June March
-------------------------------------------------------------------------------- ------------------------------------------------
Target Federal Funds Rate 4.25% 3.75% 3.25% 2.75% 2.25% 1.75% 1.00% 1.00%
-------------------------------------------------------------------------------- ------------------------------------------------
NYC Prime 7.25% 6.75% 6.25% 5.75% 5.25% 4.75% 4.00% 4.00%
-------------------------------------------------------------------------------- ------------------------------------------------
90 Day Treasury Bill 3.97% 3.48% 2.98% 2.78% 2.23% 1.71% 1.32% 0.95%
-------------------------------------------------------------------------------- ------------------------------------------------
6 Month Treasury Bill 4.32% 3.87% 3.12% 3.09% 2.56% 1.95% 1.68% 0.99%
-------------------------------------------------------------------------------- ------------------------------------------------
1 Year Treasury Note 4.37% 3.88% 3.40% 3.38% 2.77% 2.14% 2.20% 1.17%
-------------------------------------------------------------------------------- ------------------------------------------------
2 Year Treasury Note 4.34% 4.08% 3.65% 3.83% 3.09% 2.53% 2.84% 1.53%
-------------------------------------------------------------------------------- ------------------------------------------------
3 Year Treasury Note 4.30% 4.08% 3.69% 4.03% 3.27% 2.81% 3.32% 1.93%
-------------------------------------------------------------------------------- ------------------------------------------------
5 Year Treasury Note 4.31% 4.14% 3.77% 4.27% 3.65% 3.29% 3.97% 2.71%
-------------------------------------------------------------------------------- ------------------------------------------------
10 Year Treasury Note 4.34% 4.29% 4.00% 4.59% 4.29% 4.04% 4.75% 3.76%
-------------------------------------------------------------------------------- ------------------------------------------------
Federal Housing Finance Board
National Avg. Mortgage 6.22% 5.83% 5.80% 5.68% 5.65% 5.77% 5.73% 5.69%
Contract Rate (2)
-------------------------------------------------------------------------------- ------------------------------------------------
(1) The yields and interest rates presented in this table are provided to us by
a third party vendor on a bi-weekly basis. The interest rates provided in the
table were obtained from the report nearest to the month-end.
(2) The Federal Housing Finance Board national average mortgage contract rate is
presented with a one-month lag.
39-K
Rate and Volume Analysis
The following table presents changes in interest income and interest expense
attributable to changes in volume (change in average balance multiplied by prior
year rate), changes in rate (change in rate multiplied by prior year volume),
and the net change in net interest income. The net change attributable to the
combined impact of volume and rate has been allocated to each in proportion to
the absolute dollar amount of change. The table has not been adjusted for
tax-exempt interest.
Rate and Volume Table:
Year Ended December 31,
--------------------------------------------------------------
2005 vs. 2004 2004 vs. 2003
--------------------------------------------------------------
Rate Volume Total Rate Volume Total
--------------------------------------------------------------
(In thousands)
Earning assets:
Federal funds sold $161 $28 $189 $19 ($111) ($92)
Interest-bearing deposits (110) 25 (85) (46) (348) (394)
Securities 621 (398) 223 (1,608) 243 (1,365)
Loans 1,088 1,730 2,818 (595) 983 388
----------------------------- -------------------------------
Total earning assets 1,760 1,385 3,145 (2,230) 767 (1,463)
----------------------------- -------------------------------
Interest bearing liabilities:
Savings accounts 58 17 75 (245) 55 (190)
Money market accounts 603 214 817 52 (22) 30
NOW accounts 205 (93) 112 (345) 15 (330)
Time accounts 1,234 224 1,458 (486) (246) (732)
Borrowings (306) 13 (293) (421) 251 (170)
----------------------------- -------------------------------
Total interest bearing liabilities 1,794 375 2,169 (1,445) 53 (1,392)
----------------------------- -------------------------------
Change in net interest income ($34) $1,010 $976 ($785) $714 ($71)
----------------------------- -------------------------------
During 2005 we recorded a $3.145 million increase in interest income and a
$2.169 million increase in interest expense, netting a $976 thousand improvement
in net interest income over 2004. Between the periods we recorded a $2.818
million increase in interest income on loans. This comprised 89.6% of the net
increase in interest income between the periods. As mentioned above, we
maintained an average variable rate loan portfolio of approximately $155 million
throughout 2005. As interest rates climbed during 2005 the interest rates and
resultant yields on these loans increased. In addition, during 2005 as loans
matured or were repaid, they were replaced by new loans at higher rates of
interest. Due to these factors, the amount of interest income recorded on loans
due to changes in rate contributed an additional $1.088 million to interest
income between 2004 and 2005. The increase in the average volume of loans
outstanding between 2004 and 2005 (due to our HSBC branch acquisition and our
loan production efforts) contributed an additional $1.730 million toward
interest income between the periods.
During 2005 we recorded $11.908 million of interest income on investment
securities, as compared to $11.685 million during 2004, a $223 thousand
increase. During 2005, the yield on the investment securities portfolio improved
primarily because we recorded a decrease in the net amortization of premiums and
accretion of discounts on investments between the periods. The increase in
interest income on investment securities between the periods due to rate was
$621 thousand. This was offset by a $398 thousand decrease in interest income on
investments securities due to a decrease in the average volume of investment
securities outstanding between the periods.
During 2005 we recorded $449 thousand of interest income from interest-bearing
deposits held at other banks. This compares with $534 thousand in 2004, an $85
thousand decrease. During the course of 2004 and 2005 we had mature $7.598
million of FDIC-insured certificates of deposit that were originally acquired
during 2000 and 2001 in connection with an interest rate arbitrage wholesale
leverage strategy. Interest rates were significantly higher in 2000 and 2001
than in 2004 and 2005. In addition, during the fourth quarter of 2004 we
acquired $4.800 million of FDIC-insured certificates of deposit as part of a
wholesale leverage strategy consummated in connection with the HSBC branch
acquisition. The certificates of deposit acquired in the fourth quarter of 2004
were acquired at a much lower rate of interest than the certificates that had
matured in connection with the 2000 / 2001 interest arbitrage wholesale leverage
strategy. These activities resulted in a $110 thousand decrease in interest
income due to rate and a $25 thousand increase in interest income due to an
increase in the average volume between the periods.
40-K
During 2005 we maintained an average balance in our federal funds sold account
of $8.110 million. This compares to $6.346 million during 2004. In addition,
throughout 2004 and 2005 the Federal Open Market Committee raised the target
federal funds rate by 325 basis points (thirteen 25 basis point increases). Due
to these changes, interest income on federal funds sold increased $189 thousand
between 2004 and 2005, $161 thousand due to an increase in rate and $28 thousand
due to the increase in volume of federal funds sold.
During 2005 the interest expense on all categories of our interest-bearing
deposits increased relative to 2004. The most significant increases between the
periods were recorded on our most interest-sensitive deposits, namely time and
money market accounts. This was due to both the rapidly rising short-term
interest rates throughout both periods and the HSBC branch acquisition
consummated during the first quarter of 2005. The total increase in interest
expense on interest-bearing deposits due to rate was $2.100 million. This
compares to a net increase in interest expense on interest-bearing deposits due
to volume of $362 thousand. Between the periods, the average volume of savings,
money market, and time accounts increased, while the average volume of NOW
accounts decreased. The decrease in NOW account volumes was principally due to a
decrease in deposit balances in our Electronic Money Management Account, a
consumer-oriented deposit account. The increase in the average volume of
savings, money market and time accounts was principally due to the HSBC branch
acquisition.
The total interest expense on our borrowings decreased from $3.283 million in
2004 to $2.990 million in 2005, a $293 thousand decrease. During 2005 we repaid
$37.807 million of long-term borrowings. Most of these borrowings were borrowed
in periods when borrowing costs were greater than the rates that prevailed
during 2005. Although we re-borrowed $24.900 million of long-term borrowings
during 2005, the rates of interest on these borrowings were lower than the rates
of borrowings that were repaid.
Provision for Loan Losses. During 2005 we recorded a provision for loan losses
of $1.580 million, or 0.40% of average total loans outstanding. This compares to
$1.200 million, or 0.31% of average total loans outstanding in 2004. The
provision for loan losses increased in 2005, as compared to 2004, due to a
decline in the credit quality of our loan portfolio. During 2005, net loan
charge-offs increased $483 thousand or 68.3%, from $707 thousand or 0.19% of
average total loans outstanding in 2004 to $1.190 million or 0.30% of average
total loans outstanding in 2005. Similarly, during 2005 we experienced an
increase in the level of our non-performing loans. At December 31, 2005 we had
$4.918 million of non-performing loans outstanding versus $2.751 million at
December 31, 2004. This was a $2.167 million or 78.8% increase between the
periods.
Non-Interest Income. Non-interest income is comprised of trust fees, service
charges on deposit accounts, commission income, investment security gains /
(losses), income on bank-owned life insurance, other service fees, and other
income. Non-interest income decreased modestly from $5.634 million in 2004 to
$5.510 million in 2005. This represents a $124 thousand or 2.2% decrease.
Increases in trust fees, service charges on deposit accounts, other service
fees, and other income, were negatively offset by a significant decrease in net
investment security gains, a modest decrease in commission income and a slight
decrease in bank-owned life insurance income.
Total trust fees increased during 2005. Specifically, during 2004 we recorded
total trust fees of $1.325 million, as compared to $1.472 million in 2005, a
$147 thousand or 11.1% increase. The increase in trust fees between the periods
was due to an increase in non-recurring estate administration commissions and
trust account termination fees, as well as an increase in general service fees
on trust, custodial, and investment management accounts. During 2004 we revised
our trust account fee schedule. Accordingly, the increased fees imposed by the
revised fee schedule impacted all of 2005, as opposed to only a portion of
fiscal 2004. In 2005 we recorded $118 thousand in trust / estate closing fees,
as compared to $81 thousand in 2004.
Service charges on deposit accounts increased from $1.556 million in 2004 to
$1.615 million in 2005, a $59 thousand or 3.8% increase. During the second half
of 2004, we increased certain penalty charges on checking accounts, the impact
of which was recognized for the full-year of 2005 versus only for a portion of
2004. In addition, due to the HSBC branch acquisition in the first quarter of
2005, the number of demand deposit accounts upon which we were able to assess
service charges increased year over year.
Our commission income is generated from the Bank's insurance agency subsidiary,
Mang - Wilber LLC. During 2005 we recorded $489 thousand of commission income,
as compared to $524 thousand in 2004, a $35 thousand or 6.7% decrease. During
2005 our agency did not renew coverage on several large commercial property and
casualty insurance accounts due to competitive factors. In addition the agency's
personal lines property and casualty "book of business" did not grow
substantially between periods. These two factors resulted in a net decrease in
commission income.
During 2005, we recognized net pre-tax investment securities gains of $469
thousand. This was a $562 thousand or 54.5% decrease, as compared to 2004. In
2004 we recorded $1.031 million in net pre-tax investment securities gains.
During 2005 we sold $9.350 million of available-for-sale investment securities
and an additional $70.882 million in
41-K
available-for-sale and held-to-maturity securities matured or were called. By
comparison, during 2004 we sold $12.986 million of available-for-sale investment
securities and had an additional $175.702 in available-for-sale and
held-to-maturity securities mature or be called. The principal cash flows from
matured, called, and sold investment securities and the realized gains generated
from those principal cash flows were greater in 2004 than in 2005 due to
historically low interest rates experienced during 2004.
The income related to the increase in the cash surrender value of bank-owned
life insurance decreased from $570 thousand in 2004 to $555 thousand in 2005, a
$15 thousand or 2.6% decrease. During 2005 the insurance companies that
underwrote our bank-owned life insurance decreased the crediting rates to their
policyholders because the yields on their investment securities portfolios
generally declined during 2004 and 2005 as a result of the low interest rate
environment.
Other service fees are comprised of numerous types of fee income, including
merchant credit card processing fees, residential mortgage commissions, official
check and check cashing fees, travelers' check sales, wire transfer fees, letter
of credit fees, and other miscellaneous service charges, commissions, and fees.
Other service fees increased substantially year over year. During 2004 we
recorded $286 thousand in other service fees, versus $471 thousand in 2005, a
$185 thousand or 64.7% increase. The substantial majority of the increase in
other services fees in 2005 was due to a substantial increase in mortgage
commissions year over year. During 2005 we increased our marketing efforts and
streamlined our mortgage origination process to increase the volume of mortgages
we originate as agent for a large regional bank based in the Southeast. These
efforts, coupled with the low mortgage rates prevalent during most of 2005,
increased our mortgage origination fees by $159 thousand, from $69 thousand in
2004 to $228 thousand in 2005.
Other income is comprised of numerous types of fee income, including investment
services, lease income, safe deposit box income, title insurance agency income,
rental of foreclosed real estate, and distributions from two insurance trusts,
in which the Bank participates. Other income increased from $342 thousand in
2004 to $439 thousand in 2005, a $97 thousand, or 28.4% increase. During 2004,
we recorded $113 thousand of investment services income, as compared to $211
thousand in 2005, a $98 thousand, or 86.7% increase. During 2003, we hired a
financial planning and investment management specialist and licensed eight
additional employees to sell investment services. The fee income improvements
experienced in 2005 were the result of additional mutual fund, annuity, and
investment securities sales generated by these employees. In addition, during
2005 we recorded a $25 thousand increase in other income due to the improved
performance in a title insurance agency in which we hold an ownership interest.
During 2004 we recorded $18 thousand of other income due to the title agency, as
compared to $43 thousand in 2005. This improvement was offset by a $25 thousand
decrease in the amount distributed from a credit life insurance trust in which
we participate through our membership in the New York Bankers Association.
During 2004 we received a $52 thousand distribution from this credit life
insurance trust, versus $27 thousand in 2005.
Non-Interest Expense. Non-interest expense is comprised of salaries, employee
benefits, occupancy expense, furniture and equipment expense, computer service
fees, advertising and marketing expense, professional fees, and other expense.
Total non-interest expense increased from $17.218 million in 2004 to $18.851
million in 2005, a $1.633 million or 9.5% increase. During 2005, we acquired two
branch offices from HSBC, opened a loan production office in Syracuse, New York,
converted our core computer operating system, and completed a few significant
compliance related projects, including documenting and testing our internal
controls over financial reporting in compliance with the Sarbanes-Oxley Act
(Section 404). These efforts resulted in significant increases in several
categories of non-interest expense.
Salaries expense increased significantly in 2005. Total salaries expense in 2005
was $9.040 million versus $8.425 million in 2004, a $615 thousand or 7.3%
increase. The $615 thousand increase between periods was due to several factors.
To service the accounts acquired from HSBC we increased our teller and customer
service staff by ten (10) full-time employees. During the second quarter of 2005
we opened a loan production office in Syracuse, New York, and hired two (2)
additional staff members. In addition, throughout 2004 and 2005 we provided
salary increases to various members of the Company's staff for merit and cost of
living purposes. And finally, due to our core computer system conversion and our
Sarbanes-Oxley Act (Section 404) compliance efforts, we recorded $78 thousand in
increased overtime wages. These increases were partially offset by a $227
thousand reduction in salaries expense related to the Company's profit sharing
incentive and commission plans.
In 2005 employee benefits expense increased $296 thousand or 12.8%, from $2.316
million in 2004 to $2.612 million in 2005. Although various components of
benefits expense changed year over year, the increase was primarily attributable
to three factors, namely group health insurance costs, F.I.C.A expense, and
retirement plan costs. During 2005, we experienced higher claims on our
partially self-insured group health insurance plan. This resulted in a $155
thousand increase in plan costs year over year. In addition, during 2005 the
expense associated with our pension plan increased from $477 thousand in 2004 to
$574 thousand in 2005, a $97 thousand increase. And finally, due to an increase
in
42-K
salaries expense, our F.I.C.A. tax increased from $580 thousand in 2004 to $639
thousand in 2005, a $59 thousand increase.
On February 28, 2006, we "froze" our defined benefit pension plan and replaced
it with a defined contribution 401k retirement plan. Under the frozen plan, no
future benefits will accrue for the plan's participants. We expect that the
switch from the defined benefit retirement plan to the defined contribution 401k
plan will reduce retirement benefit related expense by $163 thousand in 2006.
Occupancy expense and furniture and fixture expense both increased during 2005
due to our expansion activities, increased utilities cost, and increased
property taxes. In 2005 we recorded total occupancy and furniture and fixture
expenses of $2.197 million. This compares to $2.327 million in 2004, a $130
thousand or 5.9% increase. During 2005 our utilities cost increased $64 thousand
due primarily to higher fuel prices. Our school and land taxes increased $33
thousand or 11.4% year over year due to increased property taxes assessed by the
municipalities in which our main office and branch offices operate. In addition,
we acquired an office building in the HSBC branch acquisition. And finally,
building repair and maintenance costs due to increased snow removal costs and
depreciation expense increased $27 thousand and $17 thousand, respectively, year
over year.
Computer service fees increased from $598 thousand in 2004 to $745 thousand in
2005, a $147 thousand or 24.6% increase. During the third quarter of 2005, we
converted our proprietary core computer operating system to a system more widely
used throughout the banking industry. To complete the conversion we incurred
significant computer consulting fees to: (i) convert existing data to the new
system, (ii) build software interfaces between the core system and related
ancillary computer systems, and (iii) set and test new system parameters. In
addition, to operate the new system(s) on an ongoing basis we entered into
various software licensing agreements and maintenance contracts with several
hardware and software computer system vendors.
Advertising and marketing expense decreased $30 thousand or 5.6% in 2005, from
$538 thousand in 2004 to $508 thousand in 2005. During 2004 we recorded a
significant increase in advertising and marketing expense to support our market
expansion activities. In addition, due to the low interest rate environment in
2004, we increased the promotion expense related to variable rate home equity
line of credit. We reduced our expenditures on these marketing and advertising
endeavors in 2005 due to our concentration on our computer conversion and
compliance efforts.
Professional fees increased $197 thousand or 38.5% in 2005, from $512 thousand
in 2004 to $709 thousand in 2005. The increase was principally due to a
substantial increase in independent auditor fees and an accounting consultant
related to our Sarbanes - Oxley Act compliance efforts.
Other miscellaneous expenses include directors' fees, fidelity insurance, the
Bank's OCC assessment, FDIC premiums and assessments, bad debt collection
expenses, correspondent bank services, service expense related to the Bank's
accounts receivable financing service, charitable donations and customer
relations, other losses, dues and memberships, office supplies, postage and
shipping, subscriptions, telephone expense, employee travel and entertainment,
software amortization, intangible asset amortization expense, goodwill
impairment, OREO expenses, gain / loss on the disposal of assets, minority
interest expense, Amex(R) listing fees, and several other miscellaneous
expenses. During 2005, other miscellaneous expenses increased $278 thousand, or
10.6%, from $2.632 million in 2004 to $2.910 million in 2005. The following
table itemizes the individual components of other miscellaneous expenses that
increased or (decreased) by more than $10 thousand between the periods.
43-K
Table of Other Miscellaneous Expenses:
----------------------------------------------------------------------------------------------
Year
-----------------
Description of Other Miscellaneous Increase /
Expense 2005 2004 (Decrease)
----------------------------------------------------------------------------------------------
dollars in thousands
Directors fees $200 $150 $50
Accounts receivable financing servicing
expense 165 152 13
Customer relations expense 79 67 12
Charitable donations 84 107 (23)
Office Supplies 318 261 57
Postage and Shipping 270 224 46
Travel and entertainment 229 198 31
Software amortization 183 165 18
Amortization of Intangible Assets 171 84 87
Minority interest for Mang - Wilber
insurance agency subsidiary 90 110 (20)
Other losses 36 25 11
American stock exchange listing fees 20 73 (53)
(Gain) / loss on disposal of assets (5) 30 (35)
All other expense items, net 1,070 986 84
----------------------------------
Total Other Miscellaneous Expense $2,910 $2,632 $278
----------------------------------------------------------------------------------------------
Income Taxes. Income tax expense decreased from $3.002 million in 2004 to $2.715
million in 2005, a $287 thousand, or 9.6% decrease. The primary reason income
tax expense decreased between the periods was due to a decrease in pre-tax
income. Our effective tax rates for 2005 and 2004 were 26.0% and 25.8%,
respectively.
During 2004 and 2005 we recorded New York State income tax expense utilizing a
statutory alternative minimum tax rate of 3%. This rate was used because New
York State tax law has allowed us to claim a 60% dividends paid deduction for
dividends paid to the Bank by its subsidiary, Wilber REIT, Inc. This section of
New York State tax law, namely, Article 32, may not be renewed in its current
form, which would disallow the dividends paid deduction for taxable income
earned in tax years beginning January 1, 2006. If this were to occur, our New
York State income tax expense would increase in 2006 and beyond, negatively
affecting the results of operations. If passed, we expect the legislative change
would increase our New York State income tax rate to 6.75%.
b. Comparison of Operating Results for the Years Ended December 31, 2004, and
December 31, 2003
Please refer to the Consolidated Financial Statements presented in PART II, Item
8, of this document.
Summary. Net income for 2004 was $8.618 million. This was $95 thousand or 1.1%
less than 2003 net income of $8.713 million. Earnings per share also decreased
slightly, from $0.78 in 2003 to $0.77 in 2004. Minor decreases in net interest
income and other income and an increase in other expenses were partially offset
by reductions in the provision for loan losses and income taxes. During 2004 net
interest income decreased by $71 thousand or 0.3%, from $24.475 million in 2003
to $24.404 million in 2004. A reduction in net interest income due to rate
totaling $785 thousand was offset by an increase in net interest income due to
volume of $714 thousand. Similarly, other income decreased modestly from $5.663
million in 2003 to $5.634 million in 2004. Decreases in trust fees, investment
securities gains, bank-owned life insurance income, other service fees, and
other income were offset by increases in service charges on deposit accounts and
commission income. Other expenses increased $635 thousand or 3.8% in 2004 due to
increases in employee benefits expense, occupancy expense, computer service
fees, advertising and marketing, professional fees, and other fees totaling $810
thousand, offset by reductions in salaries expense and furniture and equipment
expense totaling $175 thousand. The provision for loan losses in 2004 was $1.200
million, as compared to $1.565 million in 2003, a $365 thousand decrease due
primarily to a decrease in net charge-offs and improved asset quality. Income
taxes decreased from $3.277 million in 2003 to $3.002 million in 2004, a $275
thousand or 9.2% decrease due to increased tax-exempt municipal security income
and a reduction in income before taxes.
Our return on average assets declined from 1.20% in 2003 to 1.17% in 2004.
Similarly, our return on average stockholders' equity also declined from 13.67%
in 2003 to 13.08% in 2004. In 2004 average earning assets and average
44-K
stockholders' equity increased modestly, while net income declined, resulting in
a lower return on average assets and lower return on average equity.
Net Interest Income. Net interest income is our most significant source of
earnings. During both 2004 and 2003 net interest income contributed 81% of our
total revenues, as compared to 19% for non-interest income. Net interest income
decreased $71 thousand or 0.3% in 2004. Specifically, our net interest income
was $24.404 million in 2004, as compared to $24.475 million in 2003. Throughout
2004, national interest rates remained low relative to historical interest rates
(see comparative interest rate table below for an 8 quarter history of interest
rates). This interest rate environment allowed us to reduce the interest rates
paid on our deposits (particularly time deposits) and borrowings, netting a
reduction in interest expense and the total cost of interest-bearing
liabilities. In 2004 our interest-bearing liabilities expense and cost were
$12.761 million and 2.12% respectively. This compares to $14.153 million and
2.36%, respectively, in 2003. A reduction in interest expense totaling $1.392
million was offset by a reduction in interest income totaling $1.463 million. In
2004 the interest income and net yield on our earning assets were $37.165
million and 5.38%, respectively. In 2003, the interest income and net yield on
our earning assets were $38.628 million and 5.64%, respectively. The primary
cause for the decrease in interest income and our total earning asset yield was
the reduction in interest income on our investment securities portfolio
(including trading, available-for-sale and held-to-maturity).
Comparative Interest Rate Table:
--------------------------------------------------------------------------------------------------------------------------------
2004 2003
--------------------------------------------- --------------------------------------------------
Interest Rates (1) December September June March December September June March
----------------------------------------------------------------------------- --------------------------------------------------
Target Federal Funds Rate 2.25% 1.75% 1.00% 1.00% 1.00% 1.00% 1.00% 1.25%
----------------------------------------------------------------------------- --------------------------------------------------
NYC Prime 5.25% 4.75% 4.00% 4.00% 4.00% 4.00% 4.00% 4.25%
----------------------------------------------------------------------------- --------------------------------------------------
90 Day Treasury Bill 2.23% 1.71% 1.32% 0.95% 0.88% 0.91% 0.81% 1.10%
----------------------------------------------------------------------------- --------------------------------------------------
6 Month Treasury Bill 2.56% 1.95% 1.68% 0.99% 0.99% 1.00% 0.82% 1.10%
----------------------------------------------------------------------------- --------------------------------------------------
1 Year Treasury Note 2.77% 2.14% 2.20% 1.17% 1.21% 1.06% 0.84% 1.16%
----------------------------------------------------------------------------- --------------------------------------------------
2 Year Treasury Note 3.09% 2.53% 2.84% 1.53% 1.84% 1.47% 1.10% 1.49%
----------------------------------------------------------------------------- --------------------------------------------------
3 Year Treasury Note 3.27% 2.81% 3.32% 1.93% 2.31% 1.97% 1.40% 1.86%
----------------------------------------------------------------------------- --------------------------------------------------
5 Year Treasury Note 3.65% 3.29% 3.97% 2.71% 3.24% 2.82% 2.16% 2.73%
----------------------------------------------------------------------------- --------------------------------------------------
10 Year Treasury Note 4.29% 4.04% 4.75% 3.76% 4.27% 3.94% 3.27% 3.82%
----------------------------------------------------------------------------- --------------------------------------------------
Federal Housing Finance Board
National Avg. Mortgage 5.65% 5.77% 5.73% 5.69% 5.79% 5.61% 5.68% 5.88%
Contract Rate (2)
--------------------------------------------------------------------------------------------------------------------------------
(1) The yields and interest rates presented in this table are provided to us by
a third party vendor on a bi-weekly basis. The interest rates provided in the
table were obtained from the report nearest to the month-end.
(2) The Federal Housing Finance Board national average mortgage contract rate is
presented with a one-month lag.
In 2003 our investment securities portfolio generated $13.050 million in
interest income resulting in a 4.32% yield. By comparison, in 2004 our
investment securities portfolio generated $11.685 million in interest income and
yielded 3.79%, a $1.365 million reduction in interest income and 53 basis point
reduction in yield. During 2004, we experienced very rapid prepayments on the
mortgage-backed securities sector of our investment securities portfolio,
requiring us to record a significant amount of amortization of premiums on our
investment securities. During 2003 we recorded a net amortization of premiums
and accretion of discounts on investments of $1.682 million. This compares to
$2.180 million in 2004, a $498 thousand increase. Additionally, due to the high
levels of prepayments and the low interest rate environment, we reinvested much
of the investment securities proceeds in investment securities at investment
yields below the investment yield on the maturing security, driving down our
yields. Specifically, during 2003 and 2004 we received investment securities
proceeds (primarily due to prepayments) totaling $344.788 million, $156.031
million in 2003 and $188.757 million in 2004.
The yield on the loan portfolio declined from 6.94% in 2003 to 6.77% in 2004, a
17 basis point decrease. As existing loans matured and amortized throughout
2004, they were replaced by new loans at lower rates of interest. In spite of
the decreased yields, the interest income on loans increased by $388 thousand
period over period due to a substantial increase in our average total loans
outstanding. Average total loans outstanding were $352.935 million in 2003, as
compared to $367.328 million in 2004, a $14.393 million or 4.1% increase period
over period.
During 2004 both the yield and average volume outstanding of interest-bearing
bank balances decreased. This resulted in a $394 thousand decrease in interest
income year over year. In 2003 the average balances outstanding and average
yield on interest-bearing bank balances were $14.149 million and 6.56%
respectively. This compares to $8.581 million and 6.22% in 2004. During 2003 and
2004, several FDIC-insured bank certificates of deposit acquired in a wholesale
45-K
leverage transaction during the fourth quarter of 2000 and first quarter of 2001
matured. The average yield on these maturing certificates ranged from 6.50 -
6.75%. During the fourth quarter of 2004, we acquired $4.800 million of
FDIC-insured certificates of deposit as part of a wholesale leverage
transaction. The interest rate paid on these certificates of deposit was lower
(2.40 - 3.40%) than the interest rates paid on the matured certificates,
resulting in a decrease in our average yield on interest-bearing bank balances
in 2004.
During 2004 the interest income earned on federal funds sold decreased,
primarily due to a reduction in our average outstanding balances. During 2003,
we maintained an average balance in federal funds sold of $15.175 million, as
compared to $6.346 million in 2004. Although the average yield on federal funds
sold increased during the last two quarters of 2004, our interest income
decreased from $173 thousand in 2003 to $81 thousand in 2004.
During 2004 we offset our decrease in earning asset yields by decreasing the
cost of interest-bearing liabilities. Specifically, the interest expenses and
total cost of interest-bearing liabilities was $14.153 million and 2.36% in
2003, as compared to $12.761 million and 2.12% in 2004, respectively. During
2004, we reduced our interest expense on our savings accounts, NOW accounts,
time accounts, and borrowings, and only modestly increased the interest expense
on our money market accounts.
The most significant decrease in our interest expense occurred in time accounts.
During 2003, we recorded $8.258 million of interest expense on time accounts.
This compares to $7.526 million of interest expense on time accounts in 2004, a
$732 thousand decrease. During 2004 the weighted average interest rate on
maturing certificates of deposit exceeded the rates of interest being paid on
new and renewed certificates of deposit, primarily because the maturing
certificates of deposit were initially issued at a time when market interest
rates were higher. This caused a reduction in the average cost of time deposits
from 2.95% in 2003 to 2.77% in 2004, an 18 basis point decrease.
During 2004 the interest expense and cost associated with savings accounts and
NOW accounts also decreased even though the average balance maintained in both
categories increased. In 2003, savings accounts balances averaged $89.087
million. This compares to $95.657 million in 2004, a $6.570 million, or 7.4%
increase. In spite of this increase, the interest expense related to savings
accounts decreased by $190 thousand, from $791 thousand in 2003 to $601 thousand
in 2004. During 2003 and 2004 we decreased the interest rate paid on our savings
accounts as a result of the decrease in short-term interest rates during the
second quarter of 2003. This decreased our average cost on savings deposits from
0.89% in 2003 to 0.63% in 2004, a 26 basis point decrease. Similarly, the
average cost of our NOW accounts decreased from 1.12% in 2003 to 0.83% in 2004
for this same reason. This reduced interest expense on NOW accounts from $1.353
million in 2003 to $1.023 million in 2004, a $330 thousand, or 24.4% decrease.
Our interest expense and average cost of borrowings decreased during 2004.
Specifically, in 2003 our interest expense on borrowings was $3.453 million, as
compared to $3.283 million in 2004. During 2003 and 2004 respectively, we repaid
$17.497 million and $5.470 million of high cost borrowings. These matured
borrowings were replaced by $6.758 million and $32.541 million of new lower-cost
borrowings in 2003 and 2004, respectively, which reduced the average cost of
borrowed funds from 4.48% in 2003 to 3.96% in 2004.
The cost of our money market accounts increased from 0.96% in 2003 to 1.14% in
2004 due to an increase in the 90-day Treasury bill rate during 2004. The
majority of our money market account balances were deposited in our highest
interest rate tier in 2004, which was indexed weekly to the 90-day Treasury bill
rate. For this reason, as the 90-day Treasury bill rate increased during 2004,
as did our cost of money market deposit accounts.
Rate and Volume Analysis. During 2004 we were able to maintain our net interest
income near the 2003 levels because we increased the volume of our earning
assets and reduced the cost of interest-bearing liabilities. Specifically, in
2004 net interest income decreased by $71 thousand, from $24.475 million in 2003
to $24.404 million in 2004. The growth in the volume of our earning assets
contributed an additional $767 thousand in interest income in 2004 (over 2003),
while the reduction in our interest-bearing liability costs reduced interest
expense by $1.445 million. These two factors combined nearly offset the decrease
in interest income on earning assets of $2.230 million due to a change in
interest rates.
Interest income on investment securities decreased $1.365 million during 2004,
due to reduction in volume. An increase in the average volume of securities
contributed an additional $243 thousand of interest income in 2004, while a
reduction in the yield on the securities portfolio decreased interest income by
$1.608 million. During 2004 we experienced very rapid prepayments on our
mortgage-backed securities portfolio due to the low interest rates available on
home mortgages. During 2004 many homeowners refinanced or repaid their existing
mortgage to lower their interest rate or move into a new home. These rapid
prepayments required us to amortize a significant portion of premiums paid by us
to obtain these securities. Additionally, due to a high turnover rate on our
investment securities portfolio in 2003 and 2004, many of the securities
purchased were purchased at yields below the yield on the maturing security. The
reduction in
46-K
interest income on the securities portfolio due to a change in interest rates
was the largest contributing factor toward our decrease in net interest income.
Interest income on loans increased $388 thousand during 2004. Changes in
interest rates caused a $595 thousand reduction in interest income, while an
increase in the average volume of loans outstanding increased interest income by
$983 thousand. Although interest rates declined on loans during 2004, we
increased the interest income earned on loans by increasing loans outstanding.
Interest income earned on interest-bearing deposits (at other banks) decreased
by $394 thousand during 2004. A decrease in the average volume of
interest-bearing deposits reduced interest income by $348 thousand, while a
decrease in the average yield reduced interest income by $46 thousand.
Interest income on federal funds sold in 2004 decreased by $92 thousand, from
$173 thousand in 2003 to $81 thousand in 2004. The interest income earned on
federal funds sold decreased by $111 thousand due to a reduction in the average
volume of federal funds sold during the year. This reduction was partially
offset by a $19 thousand increase in interest income on federal funds sold due
to the increase in the federal funds rate during the second half of 2004.
During 2004 we experienced a significant reduction in interest expense due to a
reduction in the rate and volume of time accounts. During 2004 higher-rate
certificates of deposit were replaced by new certificates of deposit at lower
rates. Interest expense on time accounts decreased $732 thousand in 2004, as
compared to 2003. Interest expense decreased $486 thousand as a result of a
reduction in rates and $246 thousand as a result of a reduction in volume. The
average cost of time deposits was 2.95% in 2003, as compared to 2.77% in 2004,
while the average volume of time deposits decreased from $280.290 million in
2003 to $271.317 million in 2004.
Savings accounts, NOW accounts, and borrowings experienced similar rate and
volume patterns in 2004. In 2004 the average balances of all three of these
categories of interest bearing liabilities increased, while the average interest
rate paid decreased. The increase in the average balances resulted in additional
interest expense due to a change in volume, while the change in the rates
decreased interest expense. On the savings accounts, interest expense decreased
$190 thousand due to a $245 thousand reduction in interest expense due to a
change in rates, offset by a $55 thousand increase in interest expense due to an
increase in the average volume. On the NOW accounts, interest expense decreased
$330 thousand due to a $345 thousand reduction in interest expense due to a
change in rates, offset by a $15 thousand increase in interest expense due to an
increase in the average volume. And finally, on borrowings, interest expense
decreased $170 thousand due to a $421 thousand reduction in interest expense due
to a change in rates, offset by a $251 thousand increase in interest expense due
to an increase in the average volume.
Interest expense on our money market accounts increased $30 thousand in 2004
over 2003. Interest expense increased $52 thousand due to an increase in
interest rates paid on money market accounts, while interest expense decreased
$22 thousand due to a reduction in the volume of money market accounts. The
majority of our money market accounts are indexed to the 90-day Treasury bill
rate, which increased during 2004.
Provision for Loan Losses. The provision for loan losses was $1.200 million or
0.33% of average total loans outstanding in 2004, as compared to $1.565 million
or 0.44% of average total loans outstanding in 2003. This was a $365 thousand or
23.3% decrease. The provision for loan losses decreased in 2004 as compared to
2003 due to a general improvement in the credit quality of our loan portfolio.
During 2004 net loan charge-offs decreased by $493 thousand or 41.1%, from
$1.200 million or 0.33% of average loans outstanding in 2003 to $707 thousand or
0.19% of average loans outstanding in 2004. Similarly, during 2004 we
experienced a reduction in the level of our non-performing loans. At December
31, 2003, we had $3.658 million of non-performing loans outstanding versus
$2.751 million at December 31, 2004. This was a $907 thousand or 24.8% decrease
between the periods. Delinquent loans also decreased between the periods. At
December 31, 2004, we had $2.267 million of loans or 0.58% of total loans
outstanding that were 30 or more days past due (excluding loans placed on
non-accrual status). By comparison, at December 31, 2003, we had $2.752 million
or 0.76% of total loans outstanding that were 30 or more days past due
(excluding loans placed on non-accrual status). The potential problem loans did
not change significantly between the periods. Potential problem loans increased
slightly between the periods, from $7.846 million or 2.2% of total loans
outstanding at December 31, 2003, to $8.662 million or 2.2% of total loans
outstanding at December 31, 2004.
Non-Interest Income. Non-interest income is comprised of trust fees, service
charges on deposit accounts, commission income, investment security gains /
(losses), income on bank-owned life insurance, other service fees, and other
income. Non-interest income decreased slightly from $5.663 million in 2003 to
$5.634 million in 2004. This represents a $29 thousand or 0.5% decrease.
Increases in service charges on deposit accounts and commissions income were
negatively offset by decreases in trust fees, investment security gains,
bank-owned life insurance income, other service fees, and other income.
47-K
Total trust fees decreased slightly in 2004. Specifically, trust fees totaled
$1.383 million in 2003, as compared to $1.325 million in 2004, a $58 thousand or
4.2% decrease. The decrease in trust fees between the periods was primarily due
to a reduction in non-recurring closing fees, including estate administration
commissions and trust account termination fees. In 2003 we recorded $289
thousand in trust / estate closing fees, as compared to $81 thousand in 2004. We
partially offset this decline in 2004 by recording a $151 thousand increase in
fees on other trusts, custodial and investment management accounts. Although
there was a decrease in the period end market value of trust accounts between
December 31, 2003 and December 31, 2004, the average value of trust assets
administered by the Bank increased, driving the increase in our trust fees. The
decrease in the period end market value of trust accounts between the periods
was primarily due to the reduction in value of a single trust account totaling
approximately $26.600 million.
Service charges on deposit accounts increased from $1.457 million in 2003 to
$1.556 million in 2004, a $99 thousand or 6.8% increase. During the second half
of 2004, we increased certain penalty charges on checking accounts. This, in
addition to a higher average balance of demand deposit accounts in 2004 versus
2003, increased our service charge income year over year.
Our commission income is generated from the Bank's insurance agency subsidiary,
Mang - Wilber LLC. During 2004 we increased the number of policies through
additional sales to customers and purchased a two-thirds interest in a small
specialty-lines insurance agency located in Clifton Park, New York. These
factors increased our commission income from $434 thousand in 2003 to $524
thousand in 2004, a $90 thousand or 20.7% increase.
During 2004 we recorded net pre-tax investment securities gains of $1.031
million on the call and sale of investment securities. This was a $33 thousand
or 3.1% decrease as compared to 2003. In 2003 we recorded $1.064 million in net
pre-tax investment securities gains. During 2004 we sold $12.986 million of
available-for-sale investment securities and had an additional $175.771 million
in available-for-sale and held-to-maturity securities mature or be called as
interest rates declined. Our corporate securities were sold during 2004 to
reduce the credit risk in our investment securities portfolio.
The income related to the increase in the cash surrender value of bank-owned
life insurance decreased from $639 thousand in 2003 to $569 thousand in 2004, a
$70 thousand or 11.0% decrease. During 2004 the insurance companies decreased
the crediting rates for their policyholders because yields decreased on their
investment securities portfolios as a result of the low interest rate
environment.
Other service fees are comprised of numerous types of fee income, including
merchant credit card processing fees, residential mortgage origination fees,
official check and check cashing fees, travelers' check sales, wire transfer
fees, letter of credit fees, and other miscellaneous service charges,
commissions, and fees. Other service fees decreased from $325 thousand in 2003
to $286 thousand in 2004, a $39 thousand or 12.0% decrease. During the second
quarter of 2003, we lost our largest merchant credit card customer, which
decreased fees related to this service from $58 thousand in 2003 to $9 thousand
in 2004, a $49 thousand decrease. This decrease was partially offset by an
increase in our mortgage loan fees. During 2004, we increased our marketing
efforts and origination process to increase the volume of mortgages we originate
as agent for another bank. These efforts, coupled with the low mortgage rates,
increased our mortgage loan fees by $30 thousand, from $39 thousand in 2003 to
$69 thousand in 2004.
Other income is comprised of numerous types of fee income, including investment
services, lease income, safe deposit box income, title insurance agency income,
rental of foreclosed real estate, and distributions from two insurance trusts,
in which the Bank participates. Other income decreased from $361 thousand in
2003 to $342 thousand in 2004, a $19 thousand or 5.3% decrease. During 2004 we
recorded $113 thousand of investment services income, as compared to $54
thousand in 2003, a $59 thousand increase. During 2003 we hired a financial
planning and investment management specialist and licensed eight additional
employees to sell investment services. The fee income improvements experienced
in 2004 were the result of additional mutual fund, annuity, and investment
securities sales generated by these employees. These improvements were
negatively offset by a $50 thousand decrease in income related to the Bank's
investment in New York Bankers Title Agency East and a $28 thousand net decrease
in other miscellaneous income items.
Non-Interest Expense. Non-interest expenses are comprised of salaries and
employee benefits, occupancy expense, furniture and equipment expense, computer
service fees, advertising and marketing expense, professional fees, and other
expense. Total non-interest expense increased from $16.583 million in 2003 to
$17.218 million in 2004, a $635 thousand or 3.8% increase.
Salaries expense decreased slightly in 2004. Specifically, total salaries
expense was $8.425 million in 2004, as compared to $8.548 million in 2003, a
$123 thousand or 1.41% decrease. Although the net decrease in salaries was
modest in 2004, there were several positive and negative factors, which
contributed to the net change. Base salaries, overtime, and
48-K
employee incentive pay increased by $276 thousand, or 3.5% in 2004, from $7.889
million in 2003 to $8.165 million in 2004 due to annual wage and salary
adjustments for existing employees and expansion activities, including the
addition of new employees. This increase was offset by a $399 thousand decrease
in salaries expense recorded between the periods due to our deferred
compensation plan for executives. Under the plan, participants may defer a
portion of their salary into the plan. The deferred amounts are then invested in
either "phantom stock units" of the Company or other permissible investments
allowed under the plan. The deferred amounts allocated to "phantom stock units"
are indexed to the economic performance of the Company's common stock with
changes recorded to salaries expense. During 2004, we recorded $83 thousand of
expense due to the "phantom stock units" component of the plan, as compared to
$395 thousand during 2003, a $312 thousand decrease. Similarly, during 2004 we
recorded $177 thousand of expense due to the other investments held by the plan,
as compared to $264 thousand in 2003, an $87 thousand decrease.
During 2004, we recorded $2.316 million of employee benefits expense, as
compared to $2.230 million in 2003, an $86 thousand or 3.9% increase between the
periods. The net increase in benefits expense, although modest, was due to
several positive and negative factors. Our group health insurance expenses
increased from $650 thousand in 2003 to $717 thousand in 2004, a $67 thousand or
9.3% increase due to increased claims and plan administration costs. In
addition, during 2004 we recorded increases in F.I.C.A. expense (due to
increased salaries expense), group life insurance, group disability, employee
education, supplemental executive retirement plan benefits, and other benefits
totaling $95 thousand. These increases were partially offset by a $67 thousand
decrease in retirement plan expenses and a $9 thousand decrease in workers
compensation expense between the periods.
Our net occupancy expense on bank premises increased $86 thousand or 6.3%, from
$1.360 million in 2003 to $1.446 million in 2004. During 2004, building repairs,
utilities, insurance, building rental expense, school and land taxes, and
depreciation expense all increased due to general inflationary-type increases
and the establishment of a new full-service branch office in Johnson City
(Broome County), New York, and a representative loan production office in
Kingston (Ulster County), New York.
Furniture and equipment expense decreased $52 thousand or 6.5% in 2004, from
$803 thousand in 2003 to $751 thousand in 2004. During 2004, equipment
maintenance and repair costs and depreciation expense declined by $30 thousand
and $26 thousand respectively.
During 2004, we recorded a significant increase in computer service fees. Total
computer service fees were $598 thousand in 2004, as compared to $305 thousand
in 2003, a $293 thousand or 96.1% increase. During the third quarter of 2004, we
terminated a contract to convert our core computer processing system. At that
time we were carrying $135 thousand of prepaid conversion costs in other assets,
which we expensed to computer service fees. The remaining $158 thousand in
computer service fee increases were incurred as the result of implementing new
computer systems and data conversion costs related to increased information
technology system demands and the pending core computer system conversion
scheduled for the second quarter of 2005.
Marketing and advertising expense increased $102 thousand or 23.4% in 2004, from
$436 thousand in 2003 to $538 thousand in 2003. Our market expansion activities,
increased product promotions and an increased level of participation in
community events drove the increase in our marketing and advertising expense in
2004.
Professional fees increased by $103 thousand or 25.2% in 2004, from $409
thousand in 2003 to $512 thousand in 2004. In 2004 we expanded the scope of our
loan review process. We recorded $39 thousand of additional professional fees
expense for this purpose. Other various professional fees increases account for
the remaining of professional fees increases.
Other miscellaneous expenses include directors' fees, fidelity insurance, the
Bank's OCC assessment, FDIC premiums and assessments, bad debt collection
expenses, correspondent bank services, service expense related to the Bank's
accounts receivable financing service, charitable donations and customer
relations, other miscellaneous losses, dues and memberships, office supplies,
postage and shipping, subscriptions, telephone expense, employee travel and
entertainment, software amortization, intangible asset amortization expense,
goodwill impairment, OREO expenses, gain / loss on the disposal of assets,
minority interest expense, Amex(R) listing fees, and several other miscellaneous
expenses. During 2004, other expenses increased $140 thousand or 5.6%, from
$2.492 million in 2003 to $2.632 million in 2004. The following table itemizes
the individual components of other miscellaneous expenses that increased or
(decreased) by more than $10 thousand between the periods.
49-K
Table of Other Miscellaneous Expenses:
----------------------------------------------------------------------------
Year
----------------
Increase /
Description of Other Expense 2004 2003 (Decrease)
----------------------------------------------------------------------------
dollars in thousands
Directors fees $ 150 $ 168 $ (18)
Bad debt collection expense 137 178 (41)
Accounts receivable financing servicing expense 152 100 52
Customer relations expense 67 31 36
Charitable donations 107 89 18
Telephone 178 227 (49)
Travel and entertainment 198 177 21
Software amortization 165 130 35
Intangible asset amortization 84 115 (31)
Deferred reserves for unused loan commitments 4 38 (34)
Minority interest for Mang - Wilber insurance
agency subsidiary 110 89 21
Other losses 25 38 (13)
American stock exchange listing fees 73 -- 73
All other expense items, net 1,182 1,112 70
-------------------------
Total Other $ 2,632 $ 2,492 $ 140
----------------------------------------------------------------------------
Income Taxes. Income tax expense decreased from $3.277 million in 2003 to $3.002
million in 2004, a $275 thousand, or 8.4% decrease. The decrease in the income
tax expense was primarily due to a net increase in tax-exempt income of $397
thousand in 2004 and decreased pre-tax earnings. Our effective tax rates for
2004 and 2003 were 25.8% and 27.3%, respectively.
Our income tax expense and effective tax rate were reduced in 2004 (as well as
in prior years) because current New York State tax law allows us to claim a 60%
dividends paid deduction for dividends paid to the Bank by its subsidiary,
Wilber REIT, Inc. Legislation has been proposed at the New York State level,
which would change the tax treatment of dividends paid by real estate investment
trusts, such as Wilber REIT, Inc. If the law is passed in its current form with
an effective date of January 1, 2005, our annual income tax expense would
increase by approximately $320 thousand, increasing our effective tax rate to
28.6%.
E. Liquidity
Liquidity describes our ability to meet financial obligations in the normal
course of business. Liquidity is primarily needed to meet the borrowing and
deposit withdrawal requirements of our customers, to fund loans to customers,
and to fund our current and planned expenditures. We are committed to
maintaining a strong liquidity position. Accordingly, we monitor our liquidity
position on a daily basis through our daily funds management process. This
includes:
o maintaining the appropriate levels of currency throughout our
branch system to meet the daily cash needs of our customers,
o balancing our mandated deposit or "reserve" requirements at
the Federal Reserve Bank of New York,
o maintaining adequate cash balances at our correspondent banks,
and
o assuring that adequate levels of federal funds sold, liquid
assets, and borrowing resources are available to meet
obligations, including reasonably anticipated daily
fluctuations.
In addition to the daily funds management process, we also monitor certain
liquidity ratios and complete a liquidity assessment every 90 days to estimate
current and future sources and uses of liquidity. The 90 day sources and uses
assessment is reviewed by our ALCO. The ALCO, based on this assessment and other
data, determines our future funding or investment needs and strategies. The
results of the 90 day sources and uses assessment is reported to the Board of
Directors of the Bank quarterly. We were in compliance with all of its internal
liquidity policy limits at December
50-K
31, 2005 and December 31, 2004. The following list represents the sources of
funds available to meet our liquidity requirements. Our primary sources of funds
are denoted by an asterisk (*).
Source of Funding
o Currency*
o Federal Reserve and Correspondent Bank Balances*
o Federal Funds Sold*
o Loan and Investment Principal and Interest Payments*
o Investment Security Maturities and Calls*
o Demand Deposits & NOW Accounts*
o Savings & Money Market Deposits*
o Certificates of Deposit and Other Time Deposits*
o Repurchase Agreements*
o FHLBNY Advances / Lines of Credit*
o Sale of Available-for-Sale Investment Securities
o Brokered Deposits
o Correspondent Lines of Credit
o Fed. Reserve Discount Window Borrowings
o Sale of Loans
o Proceeds from Issuance of Equity Securities
o Branch Acquisition
o Cash Surrender Value of Bank-Owned Life Insurance
Our liquidity position did not materially change between December 31, 2004 and
December 31, 2005. We maintained adequate amounts of cash and cash equivalents
at both period ends to meet anticipated short-term funding needs. In addition,
our ability to meet unanticipated funding needs was strong. At December 31, 2004
we maintained $64.622 million of available-for-sale investment securities that
could be pledged for borrowings or sold to meet unanticipated funding needs.
This compares to $63.472 million at December 31, 2004. In addition, we
maintained a $10.000 million credit facility at a correspondent bank, in the
event we needed to borrow federal funds on an overnight basis. This compares to
$7.600 million at December 31, 2004. In addition, at December 31, 2005 and
December 31, 2004, our total loan to total asset ratio of 53.6% and 52.1%,
respectively, were low relative to our comparative peer group of financial
institutions.
The following table summarizes several of our key liquidity measures for the
periods stated:
Table of Liquidity Measures:
-----------------------------------------------------------------------------------------
Liquidity Measure December 31,
-------------------
Dollars in Thousands 2005 2004
-----------------------------------------------------------------------------------------
Cash and Cash Equivalents $18,417 $20,539
-----------------------------------------------------------------------------------------
Available for Sale Investment Securities at
Estimated Fair Value less Securities pledged for $64,622 $63,472
State and Municipal Deposits and Borrowings
-----------------------------------------------------------------------------------------
Total Loan to Total Asset Ratio 53.63% 52.08%
-----------------------------------------------------------------------------------------
FHLBNY Remaining Borrowing Capacity $19,413 $19,180
-----------------------------------------------------------------------------------------
Available Correspondent Bank Lines of Credit $10,000 $ 7,600
-----------------------------------------------------------------------------------------
Our commitments to extend credit and stand-by letters of credit increased by
$18.660 million or 27.8% between December 31, 2004 and December 31, 2005. At
December 31, 2005 commitments to extend credit and stand-by letters of credit
were $85.663 million, as compared to $67.003 million at December 31, 2004. This
increase was due to both an increase in home equity line of credit commitments
assumed during the HSBC branch acquisition and additional commercial loan
commitments. Our experience indicates that draws on the commitments to extend
credit and stand-by letters of credit do not fluctuate significantly from
quarter to quarter, and therefore, are not expected to materially impact our
liquidity prospectively.
We recognize that deposit flows and loan and investment prepayment activity are
affected by the level of interest rates, the interest rates and products offered
by competitors, and other factors. Based on our deposit retention experience,
anticipated levels of regional economic activity, particularly moderate levels
of loan demand within our primary market
51-K
area, and current pricing strategies, we anticipate that we will have sufficient
levels of liquidity to meet our current funding commitments for several quarters
prospectively.
F. Capital Resources and Dividends
The maintenance of appropriate capital levels is a management priority. Overall
capital adequacy is monitored on an ongoing basis by our management and reviewed
regularly by the Board of Directors. Our principal capital planning goal is to
provide an adequate return to stockholders while retaining a sufficient capital
base to provide for future expansion and comply with all regulatory standards.
At December 31, 2005 our stockholders' equity was $67.717 million, a $112
thousand or 0.2% increase over December 31, 2004 stockholders' equity of $67.605
million. The slight increase in stockholders' equity was due to an increase in
retained earnings of $3.498 million offset by a $2.805 million reduction in
other comprehensive income and a $581 thousand increase in Treasury stock.
The Company and the Bank are both subject to regulatory capital guidelines.
Under these guidelines, as established by federal bank regulators, to be
adequately capitalized the Company and the Bank must both maintain the minimum
ratio of tier 1 capital to risk-weighted assets at 4.0% and the minimum ratio of
total capital to risk-weighted assets ratio of 8.0%. tier 1 capital is comprised
of stockholders' equity, less intangible assets and accumulated other
comprehensive income. Total capital, for this risk-based capital standard,
includes tier 1 capital plus the Company's allowance for loan losses. Similarly,
for the Bank to be considered "well capitalized," it must maintain a tier 1
capital to risk-weighted assets ratio of 6.0% and a total capital to
risk-weighted assets ratio of 10.0%. The Company exceeded all capital adequacy
guidelines and the Bank exceeded all well capitalized guidelines at December 31,
2005, and December 31, 2004. The Company's tier 1 capital to risk-weighted
assets ratio and total capital to risk-weighted assets ratio at December 31,
2005, were 13.12% and 14.37%, respectively. This compares to 13.09% and 14.34%,
respectively, at December 31, 2004. Additional details regarding the Company's
and the Bank's capital ratios are set forth in Note 13 of the Company's
Consolidated Financial Statements located in PART II, Item 8, of this document.
The principal source of funds for the payment of shareholder dividends by the
Company has been dividends declared and paid to the Company by its subsidiary
bank. There are various legal and regulatory limitations applicable to the
payment of dividends to the Company by its subsidiaries as well as the payment
of dividends by the Company to its stockholders. As of December 31, 2005, under
this statutory limitation, the maximum amount that could have been paid by the
Bank subsidiary to the Company, without special regulatory approval, was
approximately $9.787 million. The ability of the Company and the Bank to pay
dividends in the future is and will continue to be influenced by regulatory
policies, capital guidelines, and applicable laws.
See PART II, Item 5 of this document, "Market for Registrant's Common Equity,
Related Stockholder Matters, and Issuers Purchases of Equity Securities," for a
recent history of the Company's cash dividend payments and stock sale and
repurchase activities.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business activities generate market risk. Market risk is the possibility
that changes in future market conditions, including rates and prices, will
reduce earnings and make the Company less valuable. We are primarily exposed to
market risk through changes in interest rates. This risk is called interest rate
risk and is an inherent component of risk for all banks. The risk occurs because
we pay interest on deposits and borrowed funds at varying rates and terms, while
receiving interest income on loans and investments with different rates and
terms. As a result, our earnings and the imputed economic value of assets and
liabilities are subject to potentially significant fluctuations as interest
rates rise and fall. Our objective is to minimize the fluctuation in net
interest margin and net interest income caused by anticipated and unanticipated
changes in interest rates.
Ultimately, the Company's Board of Directors is responsible for monitoring and
managing market and interest rate risk. The Board accomplishes this objective by
annually reviewing and approving an Asset and Liability Management Policy, which
establishes broad risk limits and delegates responsibility to carry out asset
and liability oversight and control to the Directors' Loan and Investment
Committee and management's Asset and Liability Committee ("ALCO").
We manage a few different forms of interest rate risk. The first is mismatch
risk, which involves the mismatch of maturities of fixed rate assets and
liabilities. The second is basis risk. Basis risk is the risk associated with
non-correlated changes in different interest rates. For example, we price many
of our adjustable rate commercial loans (an asset) using the prime rate as a
basis, while some of our deposit accounts (a liability) are tied to Treasury
security yields. In a given
52-K
timeframe, the prime rate might decrease 2% while a particular Treasury security
might only decrease 1%. If this were to occur, our yield on prime based
commercial loans would decrease by 2%, while the cost of deposits might only
decrease by 1%, negatively affecting net interest income and net interest
margin. The third risk is option risk. Option risk generally appears in the form
of prepayment volatility on residential mortgages, commercial and commercial
real estate loans, consumer loans, mortgage-backed securities, and callable
agency or municipal investment securities. The Bank's customers generally have
alternative financing sources (or options) to refinance their existing debt
obligations with other financial institutions. When interest rates decrease,
many of these customers exercise this option and refinance at other institutions
and prepay their loans with us, forcing us to reinvest the prepaid funds in
lower yielding investments and loans. The same type of refinancing activity also
accelerates principal payments on mortgage-backed securities held by the Bank.
Municipal investment securities and agency securities are issued with specified
call dates and call prices and are typically exercised by the issuer when
interest rates on comparable maturity securities are lower than the current
coupon rate on the security.
Measuring and managing interest rate risk is a dynamic process that the Bank's
management must continually perform to meet the objective of maintaining stable
net interest income and net interest margin. This means that prior to setting
the term or interest rate on loans or deposits, or before purchasing investment
securities or borrowing funds, management must understand the impact that
alternative interest rates will have on the Bank's interest rate risk profile.
This is accomplished through simulation modeling. Simulation modeling is the
process of "shocking" the current balance sheet under a variety of interest rate
scenarios and then measuring the impact of interest rate changes on both
projected earnings and the economic value of the Bank's equity. The estimates
underlying the sensitivity analysis are based on numerous assumptions including,
but not limited to: the nature and timing of interest rate changes, prepayments
on loans and securities, deposit retention rates, pricing decisions on loans and
deposits, and reinvestment/replacement rates on asset and liability cash flows.
While assumptions are developed based on available information and current
economic and local market conditions, management cannot make any assurances as
to the ultimate accuracy of these assumptions, including competitive influences
and customer behavior. Accordingly, actual results will differ from those
predicted by simulation modeling.
The following table shows the projected changes in net interest income from a
parallel shift in all market interest rates. The shift in interest rates is
assumed to occur in monthly increments of 0.50% per month until the full shift
is complete. In other words, we assume it will take 6 months for a 3.00% shift
to take place. This is also known as a "ramped" interest rate shock. The
projected changes in net interest income are totals for the 12-month period
beginning January 1, 2006 and ending December 31, 2006, under ramped shock
scenarios.
Interest Rate Sensitivity Table:
--------------------------------------------------------------------------------
Interest Rates Dollars in Thousands
--------------------------------------------------------------------------------
Projected
Change in
Projected Projected Net Interest
Projected Dollar Percentage Income as a
Annualized Change Change in Percent of
Interest Net in Net Net Total
Rate Shock Prime Interest Interest Interest Stockholders'
(1) Rate Income Income Income Equity
--------------------------------------------------------------------------------
3.00% 10.25% $25,863 220 0.86% 0.32%
-------------------------------------------------------------------------------
2.00% 9.25% $25,482 (161) -0.63% -0.24%
--------------------------------------------------------------------------------
1.00% 8.25% $25,478 (165) -0.64% -0.24%
-------------------------------------------------------------------------------
No change 7.25% $25,643 -- -- --
--------------------------------------------------------------------------------
-1.00% 6.25% $25,245 (398) -1.55% -0.59%
--------------------------------------------------------------------------------
-2.00% 5.25% $24,092 (1,551) -6.05% -2.29%
--------------------------------------------------------------------------------
-3.00% 4.25% $23,295 (2,348) -9.16% -3.47%
--------------------------------------------------------------------------------
(1) Under a ramped interest rate shock, interest rates are modeled to change at
a rate of 0.50% per month.
Many assumptions are embedded within our interest rate risk model. These
assumptions are approved by the Bank's ALCO and are based upon both management's
experience and projections provided by investment securities companies. Assuming
our prepayment and other assumptions are accurate and assuming we take
reasonable actions to preserve net interest income, we project that net interest
income would decline by $161 thousand or 0.24% of total stockholders' equity
53-K
in a +2.00% ramped interest rate shock and $1.551 million or 2.29% of total
stockholders' equity in a -2.00% ramped interest rate shock. This is within our
Asset and Liability Policy guideline, which limits the maximum projected
decrease in net interest income in a +2.00% or -2.00% ramped interest rate shock
to -5.0% of the Company's total equity capital.
Our strategy for managing interest rate risk is impacted by general market
conditions and customer demand. But generally, we try to limit the volume and
term of fixed-rate assets and fixed-rate liabilities so that we can adjust the
mix and pricing of assets and liabilities to mitigate net interest income
volatility. We also purchase investments for the securities portfolio and
structure borrowings from the FHLBNY to offset interest rate risk taken in the
loan portfolio. We also offer adjustable rate loan and deposit products that
change as interest rates change. Approximately 21% of our total assets at
December 31, 2005 were invested in adjustable rate loans and investments.
At December 31, 2005 the Treasury yield curve was very "flat." The two year and
the ten year Treasury note were both yielding 4.34%. This flat interest rate
environment inhibits our ability to earn net interest income, since Banks
typically earn net interest income by procuring short-term deposits and
borrowings and investing those proceeds in longer term loans and investments.
This practice, which is sometimes referred to as mismatching assets and
liabilities, typically allows Bank's to enhance their "interest spread," which
generates net interest income. If this flat interest rate environment persists,
it may negatively impact our ability to increase net interest income for several
quarters prospectively.
54-K
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors of The Wilber Corporation:
We have audited the accompanying consolidated statements of condition of The
Wilber Corporation and subsidiary (the "Company") as of December 31, 2005 and
2004, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2005. These consolidated
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Wilber
Corporation and subsidiary as of December 31, 2005 and 2004, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2005, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the effectiveness of the Company's
internal control over financial reporting as of December 31, 2005, based on
criteria established in Internal Control-Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our
report dated March 10, 2006 expressed an unqualified opinion on management's
assessment of, and the effective operation of, internal control over financial
reporting.
/s/ KPMG LLP
Albany, New York
March 10, 2006
55-K
The Wilber Corporation
Consolidated Statements of Condition
December 31, December 31,
dollars in thousands except share and per share data 2005 2004
------------------------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 12,817 $ 10,440
Time Deposits with Other Banks 2,700 10,099
Federal Funds Sold 2,900 --
------------- -------------
Total Cash and Cash Equivalents 18,417 20,539
Securities
Trading, at Fair Value 1,542 1,504
Available-for-Sale, at Fair Value 240,350 249,415
Held-to-Maturity, Fair Value of $53,837 at December 31, 2005
and $59,324 at December 31, 2004 54,939 59,463
Loans 403,665 391,043
Allowance for Loan Losses (6,640) (6,250)
------------- -------------
Loans, Net 397,025 384,793
------------- -------------
Premises and Equipment, Net 6,430 5,860
Bank Owned Life Insurance 15,530 14,975
Goodwill 4,518 2,682
Intangible Assets, Net 698 377
Other Assets 13,279 11,253
------------- -------------
Total Assets $ 752,728 $ 750,861
============= =============
Liabilities and Stockholders' Equity
Deposits:
Demand $ 72,986 $ 63,746
Savings, NOW and Money Market Deposit Accounts 244,484 241,151
Certificates of Deposit (Over $100M) 78,147 76,346
Certificates of Deposit (Under $100M) 183,716 165,194
Other Deposits 25,625 25,492
------------- -------------
Total Deposits 604,958 571,929
------------- -------------
Short-Term Borrowings 19,357 37,559
Long-Term Borrowings 52,472 65,379
Other Liabilities 8,224 8,389
------------- -------------
Total Liabilities 685,011 683,256
------------- -------------
Stockholders' Equity:
Common Stock, $.01 Par Value, 16,000,000 Shares Authorized,
and 13,961,664 Shares Issued at December 31, 2005,
and December 31, 2004 140 140
Additional Paid in Capital 4,224 4,224
Retained Earnings 86,900 83,402
Accumulated Other Comprehensive (Loss) Income (2,409) 396
Treasury Stock at Cost, 2,815,727 Shares at December 31, 2005
and 2,767,072 Shares at December 31, 2004 (21,138) (20,557)
Total Stockholders' Equity 67,717 67,605
------------- -------------
Total Liabilities and Stockholders' Equity $ 752,728 $ 750,861
============= =============
See accompanying notes to Consolidated Financial Statements
56-K
The Wilber Corporation
Consolidated Statements of Income
Year Ended December 31,
dollars in thousands except share and per share data 2005 2004 2003
---------------------------------------------------------------------------------------------------------
Interest and Dividend Income
Interest and Fees on Loans $ 27,683 $ 24,865 $ 24,477
Interest and Dividends on Securities:
U.S. Government and Agency Obligations 9,124 8,605 9,751
State and Municipal Obligations 2,569 2,665 2,198
Other 215 415 1,101
Interest on Federal Funds Sold and Time Deposits 719 615 1,101
------------ ------------ ------------
Total Interest and Dividend Income 40,310 37,165 38,628
------------ ------------ ------------
Interest Expense
Interest on Deposits:
Savings, NOW and Money Market Deposit Accounts 2,956 1,952 2,442
Certificates of Deposit (Over $100M) 2,445 2,197 2,414
Certificates of Deposit (Under $100M) 5,944 4,782 5,310
Other Deposits 595 547 534
Interest on Short-Term Borrowings 633 212 116
Interest on Long-Term Borrowings 2,357 3,071 3,337
------------ ------------ ------------
Total Interest Expense 14,930 12,761 14,153
------------ ------------ ------------
Net Interest Income 25,380 24,404 24,475
Provisions for Loan Losses 1,580 1,200 1,565
------------ ------------ ------------
Net Interest Income After Provision for Loan Losses 23,800 23,204 22,910
------------ ------------ ------------
Non Interest Income
Trust Fees 1,472 1,325 1,383
Service Charges on Deposit Accounts 1,615 1,556 1,457
Commissions Income 489 524 434
Investment Security Gains, Net 469 1,031 1,064
Increase in Cash Surrender Value of Bank Owned Life Insurance 555 570 639
Other Service Fees 471 286 325
Other Income 439 342 361
------------ ------------ ------------
Total Non Interest Income 5,510 5,634 5,663
------------ ------------ ------------
Non Interest Expense
Salaries 9,040 8,425 8,548
Employee Benefits 2,612 2,316 2,230
Net Occupancy Expense of Bank Premises 1,563 1,446 1,360
Furniture and Equipment Expense 764 751 803
Computer Service Fees 745 598 305
Advertising and Marketing 508 538 436
Professional Fees 709 512 409
Other Miscellaneous Expenses 2,910 2,632 2,492
------------ ------------ ------------
Total Non Interest Expense 18,851 17,218 16,583
------------ ------------ ------------
Income Before Taxes 10,459 11,620 11,990
Income Taxes (2,715) (3,002) (3,277)
------------ ------------ ------------
Net Income $ 7,744 $ 8,618 $ 8,713
============ ============ ============
Weighted Average Shares Outstanding 11,169,730 11,207,215 11,214,288
Basic Earnings Per Share
$ 0.69 $ 0.77 $ 0.78
See accompanying notes to Consolidated Financial Statements
57-K
The Wilber Corporation
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income
Accumulated
Additional Other
Common Paid in Retained Comprehensive Treasury
dollars in thousands except share and per share data Stock Capital Earnings Income (Loss) Stock Total
---------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2002 $ 2,182 $ 2,182 $ 74,439 $ 4,242 $(19,883) $ 63,162
------- -------- -------- -------- -------- --------
Comprehensive Income:
Net Income -- -- 8,713 -- -- 8,713
Change in Net Unrealized (Loss)
on Securities, Net of Taxes -- -- -- (2,970) -- (2,970)
--------
Total Comprehensive Income 5,743
--------
Cash Dividends ($.37 per share) -- -- (4,109) -- -- (4,109)
Purchase of Treasury Stock (11,917 shares) -- -- -- -- (492) (492)
Change in Par Value and Stock Split (2,042) 2,042 -- -- -- --
------- -------- -------- -------- -------- --------
Balance December 31, 2003 $ 140 $ 4,224 $ 79,043 $ 1,272 $(20,375) $ 64,304
------- -------- -------- -------- -------- --------
Comprehensive Income:
Net Income -- -- 8,618 -- -- 8,618
Change in Net Unrealized (Loss)
on Securities, Net of Taxes -- -- -- (876) -- (876)
--------
Total Comprehensive Income 7,742
--------
Cash Dividends ($.38 per share) -- -- (4,259) -- -- (4,259)
Purchase of Treasury Stock (14,800 shares) (182) (182)
------- -------- -------- -------- -------- --------
Balance December 31, 2004 $ 140 $ 4,224 $ 83,402 $ 396 $(20,557) $ 67,605
------- -------- -------- -------- -------- --------
Comprehensive Income:
Net Income -- -- 7,744 -- -- 7,744
Change in Net Unrealized (Loss)
on Securities, Net of Taxes -- -- -- (2,805) -- (2,805)
--------
Total Comprehensive Income 4,939
--------
Cash Dividends ($.38 per share) -- -- (4,246) -- -- (4,246)
Purchase of Treasury Stock (48,655 shares) (581) (581)
------- -------- -------- -------- -------- --------
Balance December 31, 2005 $ 140 $ 4,224 $ 86,900 $ (2,409) $(21,138) $ 67,717
------- -------- -------- -------- -------- --------
See accompanying notes to Consolidated Financial Statements.
(1) Per share information has been restated to give retroactive effect to the
4-for-1 stock split that was approved September 5, 2003.
58-K
The Wilber Corporation
Consolidated Statements of Cash Flows
Year Ended December 31,
dollars in thousands 2005 2004 2003
---------------------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 7,744 $ 8,618 $ 8,713
Adjustments to Reconcile Net Income to Net Cash
Used by Operating Activities:
Provision for Loan Losses 1,580 1,200 1,565
Depreciation and Amortization 1,151 1,022 1,026
Net Amortization of Premiums and Accretion of Discounts on Investments 1,027 2,180 1,682
Available-for-Sale Investment Security Gains, net (370) (871) (808)
Deferred Income Tax (Benefit) Expense (138) (56) 336
Other Real Estate Losses -- 41 66
Increase in Cash Surrender Value of Bank Owned Life Insurance (555) (570) (639)
Net Decrease (Increase) in Trading Securities 61 (319) 138
Net Gains on Trading Securities (99) (160) (256)
Increase in Other Assets (180) (302) (2,849)
(Decrease) Increase in Other Liabilities (223) 226 (141)
-------- --------- ---------
Net Cash Provided by Operating Activities 9,998 11,009 8,833
-------- --------- ---------
Cash Flows from Investing Activities:
Net Cash Acquired from Acquisition of a Branch 22,521 -- --
Proceeds from Maturities of Held-to-Maturity Investment Securities 9,932 24,150 32,230
Purchases of Held-to-Maturity Investment Securities (5,528) (39,767) (33,745)
Proceeds from Maturities of Available-for-Sale Investment Securities 60,950 151,552 112,562
Proceeds from Sales of Available-for-Sale Investment Securities 9,350 12,986 11,239
Purchases of Available-for-Sale Investment Securities (66,367) (141,352) (169,874)
Net Increase in Loans (6,177) (31,295) (3,921)
Proceeds from Sale of Loans -- 294 --
Purchase of Premises and Equipment, Net of Disposals (927) (912) (548)
Proceeds from Sale of Other Real Estate -- 58 47
-------- --------- ---------
Net Cash Provided by (Used by) Investing Activities 23,754 (24,286) (52,010)
-------- --------- ---------
Cash Flows from Financing Activities:
Net Decrease in Demand Deposits, Savings, NOW,
Money Market and Other Time Deposits (8,100) (8,614) 28,452
Net Increase (Decrease) in Certificates of Deposit 8,162 (90) 3,100
Net (Decrease) Increase in Short-Term Borrowings (18,202) 17,541 6,758
Increase in Long-Term Borrowings 24,900 15,000 --
Repayment of Long-Term Borrowings (37,807) (5,470) (17,497)
Decrease in Dividends Payable -- -- (209)
Purchase of Treasury Stock (581) (182) (492)
Cash Dividends Paid (4,246) (4,259) (4,109)
-------- --------- ---------
Net Cash (Used by) Provided by Financing Activities (35,874) 13,926 16,003
-------- --------- ---------
Net (Decrease) Increase in Cash and Cash Equivalents (2,122) 649 (27,174)
Cash and Cash Equivalents at Beginning of Period 20,539 19,890 47,064
-------- --------- ---------
Cash and Cash Equivalents at End of Period $ 18,417 $ 20,539 $ 19,890
======== ========= =========
Supplemental Disclosures of Cash Flow Information:
Cash Paid during Period for:
Interest $ 14,918 $ 12,852 $ 14,334
Income Taxes $ 3,085 $ 2,874 $ 3,683
Non Cash Investing Activities:
Change in Unrealized Loss on Securities $ (4,596) $ (1,435) $ (4,902)
Transfer of Loans to Other Real Estate $ -- $ 157 $ 110
Fair Value of Tangible Assets Acquired $ 8,119 $ -- $ --
Fair Value of Liabilities Assumed $ 32,967 $ -- $ --
See accompanying notes to Consolidated Financial Statements.
59-K
Note 1. Summary of Significant Accounting Policies
The Wilber Corporation (the Parent Company) operates 20 branches serving Otsego,
Delaware, Schoharie, Ulster, Chenango, and Broome Counties through its wholly
owned subsidiary Wilber National Bank (the Bank). The Company's primary source
of revenue is interest earned on commercial, mortgage, and consumer loans to
customers who are predominately individuals and small and middle-market
businesses. Collectively, the Parent Company and the Bank are referred to herein
as "the Company."
The Bank owns a majority interest in Mang-Wilber, LLC, an insurance agency
offering a full line of life, health and property, and casualty insurance.
Accordingly, the assets and liabilities and revenues and expenses of
Mang-Wilber, LLC are included in the Company's Consolidated Financial
Statements.
The Consolidated Financial Statements of the Company conform to accounting
principles generally accepted in the United States of America (GAAP). The
following is a summary of the more significant policies:
Principles of Consolidation -- The Consolidated Financial Statements include the
accounts of the Parent Company and its wholly owned subsidiary after elimination
of inter-company accounts and transactions. In the "Parent Company Only
Financial Statements," the investment in subsidiary is carried under the equity
method of accounting.
Management's Use of Estimates -- The preparation of the Consolidated Financial
Statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
Reclassifications -- Whenever necessary, reclassifications are made to prior
period amounts to conform to current year presentation.
Cash Equivalents -- The Company considers amounts due from correspondent banks,
cash items in process of collection, federal funds sold and time deposit
balances with other banks to be cash equivalents for purposes of the
consolidated statements of cash flows.
Securities -- The Company classifies its investment securities at date of
purchase as either held-to-maturity, available-for-sale or trading.
Held-to-maturity securities are those for which the Company has the intent and
ability to hold to maturity, and are reported at amortized cost.
Available-for-sale securities are reported at fair value, with net unrealized
gains and losses reflected in stockholders' equity as accumulated other
comprehensive income (loss), net of the applicable income tax effect. Trading
securities are reported at fair value, with unrealized gains and losses
reflected in the income statement. Transfers of securities between categories
are recorded at full value at the date of transfer.
Non-marketable equity securities, including Federal Reserve and FHLBNY stock
required for membership in those organizations, are carried at cost.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using a method that approximates the interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses on the sale of securities are included in securities gains (losses).
The cost of securities sold is based on the specific identification method.
A decline in the fair value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary is charged to
earnings, resulting in the establishment of a new cost basis for the security.
Loans -- Loans are reported at their outstanding principal balance. Interest
income on loans is accrued based upon the principal amount outstanding.
Loans are placed on non-accrual status when timely collection of principal and
interest in accordance with contractual terms is doubtful. Loans are transferred
to a non-accrual basis generally when principal or interest payments become
ninety days delinquent, unless the loan is well secured and in the process of
collection, or sooner when management concludes circumstances indicate that
borrowers may be unable to meet contractual principal or interest payments. When
a loan is transferred to a non-accrual status, all interest previously accrued
in the current period but not collected is reversed against interest income in
that period. Interest accrued in a prior period and not collected is charged-off
against the allowance for loan losses.
60-K
Note 1. Summary of Significant Accounting Policies, Continued
If ultimate repayment of a non-accrual loan is expected, any payments received
are applied in accordance with contractual terms. If ultimate repayment of
principal is not expected, any payment received on a non-accrual loan is applied
to principal until ultimate repayment becomes expected. Non-accrual loans are
returned to accrual status when they become current as to principal and interest
or demonstrate a period of performance under the contractual terms and, in the
opinion of management, are fully collectible as to principal and interest. When
in the opinion of management the collection of principal appears unlikely, the
loan balance is charged-off in total or in part.
Commercial type loans are considered impaired when it is probable that the
borrower will not repay the loan according to the original contractual terms of
the loan agreement, and all loan types are considered impaired if the loan is
restructured in a troubled debt restructuring.
A loan is considered to be a troubled debt restructured loan (TDR) when the
Company grants a concession to the borrower because of the borrower's financial
condition that it would not otherwise consider. Such concessions include the
reduction of interest rates, forgiveness of principal or interest or other
modifications of interest rates that are less than the current market rate for
new obligations with similar risk. TDR loans that are in compliance with their
modified terms and that yield a market rate may be removed from the TDR status
after a period of performance.
Allowance for Loan Losses -- The allowance for loan losses is the amount, which
in the opinion of management, is necessary to absorb probable losses inherent in
the loan portfolio. The allowance is determined based upon numerous
considerations, including local economic conditions, the growth and composition
of the loan portfolio with respect to the mix between the various types of loans
and their related risk characteristics, a review of the value of collateral
supporting the loans, comprehensive reviews of the loan portfolio by the
external Loan Review and management, as well as consideration of volume and
trends of delinquencies, non-performing loans, and loan charge-offs. As a result
of the test of adequacy, required additions to the allowance for loan losses are
made periodically by charges to the provision for loan losses.
The allowance for loan losses related to impaired loans is based on discounted
cash flows using the loan's initial effective interest rate or the fair value of
the collateral for certain loans where repayment of the loan is expected to be
provided solely by the underlying collateral (collateral dependent loans). The
Company's impaired loans are generally collateral dependent. The Company
considers the estimated cost to sell, on a discounted basis, when determining
the fair value of collateral in the measurement of impairment if those costs are
expected to reduce the cash flows available to repay or otherwise satisfy the
loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, future additions
to the allowance for loan losses may be necessary based on changes in economic
conditions or changes in the values of properties securing loans in the process
of foreclosure. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination, which may not be currently available
to management.
Other Real Estate Owned ("OREO") -- Other real estate owned consists of
properties formerly pledged as collateral on loans, which have been acquired by
the Company through foreclosure proceedings or acceptance of a deed in lieu of
foreclosure. Other real estate owned is carried at the lower of the recorded
investment in the loan or the fair value of the real estate, less estimated
costs to sell. Upon transfer of a loan to foreclosure status, an appraisal is
obtained and any excess of the loan balance over the fair value, less estimated
costs to sell, is charged against the allowance for loan losses. Expenses and
subsequent adjustments to the fair value are treated as other operating expense.
Gains on the sale of other real estate owned are included in income when title
has passed and the sale has met the minimum down payment requirements prescribed
by GAAP.
Bank Premises and Equipment -- Land is carried at cost. Premises and equipment
are stated at cost less accumulated depreciation computed principally using
accelerated methods over the estimated useful lives of the assets, which range
from 15 to 40 years for buildings and from 3 to 10 years for furniture and
equipment. Maintenance and repairs are charged to expense as incurred.
Bank-Owned Life Insurance ("BOLI") -- The BOLI was purchased as a financing tool
for employee benefits. The value of life insurance financing is the tax
preferred status of increases in life insurance cash values and death benefits
and the cash flow generated at the death of the insured. The purchase of the
life insurance policy results in an interest sensitive asset on the Company's
consolidated statements of condition that provides monthly tax-free income to
the Company. In
61-K
Note 1. Summary of Significant Accounting Policies, Continued
addition to interest risk related to BOLI investments, there is also credit risk
related to insurance carriers. To mitigate this risk, annual financial condition
reviews are completed on all carriers. BOLI is stated on the Company's
consolidated statements of condition at its current cash surrender value.
Increases in BOLI's cash surrender value are reported as other operating income
in the Company's consolidated statements of income.
Income Taxes -- Income taxes are accounted for under the asset and liability
method. The Company files a consolidated tax return on the accrual method.
Deferred tax assets and liabilities are recognized for future tax consequences
attributable to temporary differences between the financial statement carrying
amounts of existing assets and liabilities and their respective tax bases and
operating loss and tax credit carry forwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Pension Costs -- The Company maintains a noncontributory, defined benefit
pension plan covering substantially all employees, as well as supplemental
employee retirement plans covering certain executives. Costs associated with
these plans, based on actuarial computations of current and future benefits for
employees, are charged to current operating expenses.
Treasury Stock -- Treasury stock acquisitions are recorded at cost. Subsequent
sales of treasury stock are recorded on an average cost basis. Gains on the sale
of treasury stock are credited to additional paid-in-capital. Losses on the sale
of treasury stock are charged to additional paid-in-capital to the extent of
previous gains, otherwise charged to retained earnings.
Earnings Per Share -- Basic earnings per share (EPS) is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Entities with complex capital structures must
also present diluted EPS, which reflect the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common shares. The Company does not have a complex capital
structure and, accordingly, has presented only basic EPS.
Trust Department -- Assets held in fiduciary or agency capacities for customers
are not included in the accompanying consolidated statements of condition, since
such items are not assets of the Company.
Financial Instruments with Off-Balance Sheet Risk -- The Bank is a party to
other financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit
which involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the statement of condition. The contract
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
Comprehensive Income -- For the Company, comprehensive income represents net
income plus other comprehensive income (loss), which consists of the net change
in unrealized gains or losses on securities available for sale, net of income
taxes, for the period and is presented in the consolidated statements of changes
in stockholders' equity and comprehensive income. Accumulated other
comprehensive income (loss) represents the net unrealized gains or losses on
securities available-for-sale as of the balance sheet dates, net of income
taxes.
Segment Reporting -- The Company's operations are solely in the community
banking industry and include the provision of traditional commercial banking
services. The Company operates solely in the geographical region of Central New
York State. The Company has identified separate operating segments; however,
these segments did not meet the quantitative thresholds for separate disclosure.
Goodwill and Other Intangible Assets --Acquired intangible assets (other than
goodwill) are amortized over their useful economic life, while goodwill and any
acquired intangible assets with an indefinite useful economic life are not
amortized, but are reviewed for impairment on an annual basis.
62-K
Note 2. Investment Securities
The amortized cost and fair value of investment securities are as follows:
December 31, 2005
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
dollars in thousands Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------------
Available-for-Sale Portfolio
U.S. Treasuries $ 10,952 $ -- $ 86 $ 10,866
Obligations of U.S. Government Corporations and Agencies 25,444 -- 353 25,091
Obligations of States and Political Subdivisions 55,080 519 961 54,638
Mortgage-Backed Securities 146,463 156 3,371 143,248
Equity Securities 6,356 154 3 6,507
-------- -------- -------- --------
$244,295 $ 829 $ 4,774 $240,350
======== ======== ======== ========
-------- -------- -------- --------
Trading Portfolio 1,334 208 -- 1,542
======== ======== ======== ========
Held-to-Maturity Portfolio
Obligations of States and Political Subdivisions $ 10,655 $ 27 $ 49 10,633$
Mortgage-Backed Securities 44,284 1 1,081 $ 43,204
-------- -------- -------- --------
$ 54,939 $ 28 $ 1,130 $ 53,837
======== ======== ======== ========
December 31, 2004
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
dollars in thousands Cost Gains Losses Value
-----------------------------------------------------------------------------------------------------------------
Available-for-Sale Portfolio
U.S. Treasuries $ 4,960 $ 56 $ -- $ 5,016
Obligations of U.S. Government Corporations and Agencies 11,989 5 40 11,954
Obligations of States and Political Subdivisions 66,656 1,556 467 67,745
Mortgage-Backed Securities 159,289 612 1,256 158,645
Equity Securities 5,870 185 -- 6,055
-------- -------- -------- --------
$248,764 $ 2,414 $ 1,763 $249,415
======== ======== ======== ========
-------- -------- -------- --------
Trading Portfolio 1,347 157 -- 1,504
======== ======== ======== ========
Held-to-Maturity Portfolio
Obligations of States and Political Subdivisions $ 7,811 $ 205 $ 17 $ 7,999
Mortgage-Backed Securities 51,652 127 454 $ 51,325
-------- -------- -------- --------
$ 59,463 $ 332 $ 471 $ 59,324
======== ======== ======== ========
The following tables provide information on temporarily impaired securities:
December 31, 2005
-----------------------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
------------------------ ---------------------- ----------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
dollars in thousands Fair Value Losses Fair Value Losses Fair Value Losses
-------------------------------------------------------------------------------------------------------------------------
U.S. Treasuries 10,866 86 -- -- 10,866 87
Obligations of U.S. Government
Corporations and Agencies 15,255 193 9,837 160 25,092 354
Obligations of States and Political Subdivisions 17,608 235 18,296 775 35,904 1,010
Mortgage-Backed Securities 69,924 1,193 104,396 3,259 174,320 4,450
Equity Securities 210 3 -- -- 210 3
-------- -------- -------- -------- -------- ------
$113,863 $ 1,710 $132,529 $ 4,194 $246,392 $5,904
======== ======== ======== ======== ======== ======
63-K
Note 2. Investment Securities, Continued
December 31, 2004
-----------------------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
------------------------ ---------------------- ----------------------
Estimated Unrealized Estimated Unrealized Estimated Unrealized
dollars in thousands Fair Value Losses Fair Value Losses Fair Value Losses
-------------------------------------------------------------------------------------------------------------------------
Obligations of U.S.
Government Corporations and Agencies 9,955 40 -- -- 9,955 40
Obligations of States and Political Subdivisions 16,193 127 8,744 357 24,937 484
Mortgage-Backed Securities 119,403 1,386 26,545 324 145,948 1,710
-------- -------- -------- -------- -------- ------
$145,551 $ 1,553 $ 35,289 $ 681 $180,840 $2,234
======== ======== ======== ======== ======== ======
The above unrealized losses are considered temporary, based on the following:
U.S. Treasuries and agencies, State and political subdivisions: The unrealized
losses on these investments were caused by market interest rate increases. The
contractual terms of these investments require the issuer to settle the
securities at par upon maturity of the investment. Because the Company has the
ability and intent to hold these investments until a market price recovery or
possibly to maturity, these investments are not considered
other-than-temporarily impaired.
Mortgage-backed securities: The unrealized losses on investments in
mortgage-backed securities has been caused by market rate increases.
Substantially all of the contractual cash flows of these securities are issued
or backed by various government agencies or government sponsored enterprises
such as GNMA, FNMA, and FHLMC. Because the decline in fair value is attributed
to market interest rates and not credit quality, and because the Company has the
ability and intent to hold these investments until a market price recovery or to
maturity, these investments are not considered other-than-temporarily impaired.
Based on our analysis for other than temporary impairment, there were no
securities in the investment portfolio at or during the twelve months ended
December 31, 2005 and 2004 that exceeded the Company's guidelines for
recognizing an other-than-temporary impairment loss.
The amortized cost and fair value of debt securities by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties. Equity securities have no stated maturity and are
excluded from the following tables.
December 31, 2005
--------------------------
Amortized Fair
dollars in thousands Cost Value
--------------------------------------------------------------------------------
Available-for-Sale Securities
Due in One Year or Less 11,788 11,669
Due After One Year Through Five Years 73,005 71,630
Due After Five Years Through Ten Years 72,257 70,860
Due After Ten Years 80,889 79,684
-------- --------
$237,939 $233,843
======== ========
December 31, 2005
--------------------------
Amortized Fair
dollars in thousands Cost Value
--------------------------------------------------------------------------------
Held-to-Maturity Securities
Due in One Year or Less 3,391 3,476
Due After One Year Through Five Years 2,048 2,051
Due After Five Years Through Ten Years 22,502 21,979
Due After Ten Years 26,998 26,331
-------- --------
$ 54,939 $ 53,837
======== ========
64-K
Note 2. Investment Securities, Continued
The following table sets forth information with regard to securities gains and
losses realized on sales or calls:
Year Ended Year Ended Year Ended
December 31, 2005 December 31, 2004 December 31, 2003
---------------------- ---------------------- ----------------------
Available - Available - Available -
dollars in thousands -for-Sale Trading -for-Sale Trading -for-Sale Trading
---------------------------------------------------------------------------------------------------
Gross Gains $ 383 $ 99 $ 932 $ 161 $ 842 $ 280
Gross Losses (13) -- (61) (1) (34) (24)
--------- --------- --------- --------- --------- ---------
Net Securities Gains $ 370 $ 99 $ 871 $ 160 $ 808 $ 256
========= ========= ========= ========= ========= =========
Federal Home Loan Bank and Federal Reserve Bank stock of $3,424,000 at December
31, 2005, and $3,504,000 in 2004 is carried at cost as fair values are not
readily determinable. Both investments are required for membership. At December
31, 2005, investment securities with an amortized cost of $181,038,000 and an
estimated fair value of $177,864,000 were pledged as collateral for certain
public deposits and other purposes as required or permitted by law.
Note 3. Loans
December 31,
dollars in thousands 2005 2004
--------------------------------------------------------------------------------
Residential Real Estate 123,748 119,103
Commercial Real Estate 144,171 129,516
Commercial 69,651 78,003
Consumer 66,095 64,421
--------- ---------
403,665 391,043
Less: Allowance for Loan Losses (6,640) (6,250)
--------- ---------
Net Loans $ 397,025 $ 384,793
========= =========
At December 31, 2005, $57,012,000 residential real estate loans were pledged as
collateral for FHLBNY advances.
At the periods presented below, the subsidiary bank had loans to directors and
executive officers of the Company and its subsidiary, or company in which they
have ownership. Such loans are made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and did
not involve more than normal risk of collectibility or present other unfavorable
features. Loan transactions with related parties are as follows:
December 31,
dollars in thousands 2005 2004
--------------------------------------------------------------------------------
Balance at Beginning of Year $ 14,249 $ 13,254
Loan Payments (8,133) (2,320)
New Loans and Advances 480 3,315
-------- --------
Ending Balance $ 6,596 $ 14,249
-------- --------
65-K
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are presented in the following summary:
Year Ended December 31,
dollars in thousands 2005 2004 2003
--------------------------------------------------------------------------------
Balance at Beginning of Year $ 6,250 $ 5,757 $ 5,392
Provision for Loan Losses 1,580 1,200 1,565
Recoveries Credited 285 237 276
Loans Charged-Off (1,475) (944) (1,476)
------- ------- -------
Ending Balance $ 6,640 $ 6,250 $ 5,757
======= ======= =======
The following provides information on impaired loans for the periods presented:
As of and For the Year
Year Ended December 31,
dollars in thousands 2005 2004 2003
--------------------------------------------------------------------------------
Impaired Loans $3,478 $2,411 $3,270
Allowance for Impaired Loans 1,179 651 510
Average Recorded Investment in Impaired Loans 3,170 2,089 3,485
The following table sets forth information with regards to non-performing loans:
As of December 31,
dollars in thousands 2005 2004 2003
--------------------------------------------------------------------------------
Loans in Non-Accrual Status $3,866 $2,561 $3,164
Loans Contractually Past Due 90 Days or More
and Still Accruing Interest 181 190 123
Troubled Debt Restructured Loans 871 -- 371
------ ------ ------
Total Non-Performing Loans $4,918 $2,751 $3,658
====== ====== ======
Had the loans in non-accrual status performed in accordance with their original
terms, additional interest income of $49,000 would have been recorded for the
year ended December 31, 2005. In addition, in 2004 and 2003 interest income of
$22,000, and $83,000, respectively, would have been recorded.
Had the troubled debt restructured loans performed in accordance with their
original terms, the Company would have recorded interest income of $3,000 for
the year ended December 31, 2005 and $31,000 for the year ended December 31,
2003. Under the restructured terms, the Company recorded interest income of
$4,000 for the year ended December 31, 2005 and $32,000 for the year ended
December 31, 2003.
Note 5. Premises and Equipment
December 31,
dollars in thousands 2005 2004
--------------------------------------------------------------------------------
Land $ 599 $ 539
Buildings 8,614 7,892
Furniture, Fixtures and Equipment 6,046 5,518
-------- --------
15,259 13,949
Less: Accumulated Depreciation (8,829) (8,089)
-------- --------
$ 6,430 $ 5,860
======== ========
Depreciation expense was $797,000, $773,000, and $781,000 for the years ended
December 31, 2005, 2004 and 2003, respectively.
66-K
Note 6. Goodwill and Intangible Assets
Goodwill and intangible assets are presented in the following table:
December 31,
dollars in thousands 2005 2004
--------------------------------------------------------------------------------
Goodwill $ 4,518 $ 2,682
======= =======
Core Deposit Intangible $ 777 $ 285
Other Intangible Assets 350 350
------- -------
Total Intangible Assets $ 1,127 $ 635
Accumulated Amortization (429) (258)
------- -------
Intangible Assets, Net $ 698 $ 377
======= =======
Amortization expense on intangible assets was $171,000 for 2005, $84,000 for
2004, and $115,000 for 2003. The core deposit intangible and other intangible
assets are amortized over a weighted average period of approximately 5 and 15
years, respectively.
In February 2005, the Company acquired two branches and recorded related
goodwill of $1,836,000 and a core deposit intangible asset of $492,000.
Estimated annual amortization expense of intangible assets, absent any
impairment or change in estimated useful lives is summarized as follows for each
of the next five years:
dollars in thousands
--------------------------------------------------------------------------------
2006 $179
2007 129
2008 121
2009 121
2010 31
Note 7. Time Deposits
Contractual maturities of time deposits were as follows:
December 31, 2005
dollars in thousands Amount %
--------------------------------------------------------------------------------
2006 $123,509 47.16
2007 75,412 28.80
2008 40,007 15.28
2009 21,157 8.08
2010 1,678 0.64
Thereafter 100 0.04
-------- ------
$261,863 100.00%
-------- ------
67-K
Note 8. Borrowings
The following is a summary of borrowings:
December 31,
dollars in thousands 2005 2004
------------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased $ -- $ 2,400
Securities Sold Under Agreements to Repurchase 17,564 33,106
Treasury Tax and Loan Notes 1,793 2,053
Long-Term Borrowings:
Advances from Federal Home Loan Bank of New York
Bearing Interest at 3.64% to 5.68%, Due January 2005 -- 617
Bearing Interest at 6.52%, Due January 2005 -- 10,000
Bearing Interest at 1.30% to 6.55%, Due March 2005 -- 13,000
Bearing Interest at 2.62%, Due November 2012, Callable November 2005 -- 8,000
Bearing Interest at 5.90% to 6.11%, Due December 2005 -- 4,000
Bearing Interest at 5.77%, Due January 2006 1,000 1,000
Bearing Interest at 1.81%, Due March 2006 3,000 3,000
Bearing Interest at 5.22%, Due July 2006 223 544
Bearing Interest at 4.30%, Due November 2010, Callable November 2006 4,000 --
Bearing Interest at 3.62%, Due February 2008, Callable February 2007 5,000 --
Bearing Interest at 2.35% to 2.43%, Due March 2007 5,500 5,500
Bearing Interest at 3.85%, Due March 2010, Callable March 2007 5,000 --
Bearing Interest at 3.05%, Due December 2012, Callable December 2007 8,000 8,000
Bearing Interest at 5.56%, Due July 2008 427 572
Bearing Interest at 4.31% Due November 2015, Callable November 2008 4,000 --
Bearing Interest at 5.03%, Due January 2009 992 1,274
Bearing Interest at 3.85%, Due January 2010 846 --
Bearing Interest at 3.12%, Due March 2011 2,735 3,199
Bearing Interest at 5.89% to 5.95%, Due July 2011 1,084 1,241
Bearing Interest at 5.30%, Due December 2011 1,340 1,521
Bearing Interest at 4.11%, Due January 2012 896 --
Bearing Interest at 4.42%, Due January 2015 932 --
Bearing Interest at 6.26%, Due July 2016 800 851
Bearing Interest at 5.77%, Due December 2016 1,631 1,733
Bearing Interest at 6.04%, Due January 2017 823 873
Bearing Interest at 6.46%, Due July 2021 439 454
Bearing Interest at 5.07%, Due January 2025 3,804 --
------- --------
Total Borrowings $71,829 $102,938
======= ========
Borrowings from the Federal Home Loan Bank of New York (FHLBNY) are
collateralized by mortgage loans, mortgage-backed securities or other government
agency securities. At December 31, 2005, $26,500,000 of the long term borrowings
were collateralized by securities with an amortized cost and estimated fair
value of $30,492,000 and $29,773,000, respectively. The remaining long term
borrowings totaling $25,972,000 are collateralized by the Company's mortgage
loans. At December 31, 2005, the Bank had a line of credit of $75,432,000 with
the FHLB. However, based on outstanding borrowings at FHLB the total potential
borrowing capacity on these lines is reduced to $19,413,000 at December 31,
2005.
Information related to short-term borrowings is as follows:
As of and For the
Year Ended December 31,
dollars in thousands 2005 2004 2003
--------------------------------------------------------------------------------
Outstanding Balance at End of Period $19,357 $37,559 $20,018
Average Interest Rate at End of Period 3.30% 1.77% 0.92%
Maximum Outstanding at any Month-End 39,447 37,559 20,018
Average Amount Outstanding during Period 22,747 17,288 13,529
Average Interest Rate during Period 2.78% 1.23% 0.86%
68-K
Note 8. Borrowings, Continued
Average amounts outstanding and average interest rates are computed using
weighted daily averages.
Securities sold under agreements to repurchase included in short-term borrowings
represent the purchase of interests in government securities by the Bank's
customers or other third parties, which are repurchased by the Bank on the
following business day or at stated maturity. The underlying securities are held
in a third party custodian account and are under the Company's control. The
amortized cost and estimated fair value of securities pledged as collateral for
repurchase agreements was $43,660,000 and $42,802,000 at December 31, 2005,
respectively. These amounts are included in the total of investment securities
pledged disclosed in Note 2.
Note 9. Income Taxes
Income tax expense attributable to income before taxes is comprised of the
following:
Year Ended December 31,
dollars in thousands 2005 2004 2003
--------------------------------------------------------------------------------
Current:
Federal $ 2,541 $ 2,738 $2,620
State 312 320 321
------- ------- ------
Total Current 2,853 3,058 2,941
Deferred:
Federal (75) (109) 275
State (63) 53 61
------- ------- ------
Total Deferred (138) (56) 336
------- ------- ------
Total Income Tax Expense $ 2,715 $ 3,002 $3,277
======= ======= ======
The components of deferred income taxes, which are included in the consolidated
statements of condition are:
Year Ended December 31,
dollars in thousands 2005 2004
--------------------------------------------------------------------------------
Assets:
Allowance for Loan Losses $2,586 $2,434
Deferred Compensation 1,341 1,255
Net Unrealized Loss on Securities
Available-for-Sale 1,537 --
Other 203 168
------ ------
5,667 3,857
------ ------
Liabilities:
Securities Discount Accretion 280 221
Defined Benefit Pension Plan 1,544 1,768
Net Unrealized Gain on Securities
Available-for-Sale -- 252
Equity Investment 286 132
Goodwill Amortization 233 140
Other 406 353
------ ------
2,749 2,866
------ ------
Net Deferred Tax Assets $2,918 $ 991
====== ======
69-K
Note 9. Income Taxes, Continued
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable income
and projected future taxable income over the periods in which the temporary
differences comprising the deferred tax assets will be deductible. Based on its
assessment, management determined that no valuation allowance is necessary.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
Year Ended December 31,
dollars in thousands 2005 2004 2003
--------------------------------------------------------------------------------
Statutory Federal Income Tax Rate 34.0% 34.0% 34.0%
Variances from Statutory Rate:
State Income Tax, Net of Federal Tax Benefit 1.6 2.1 2.1
Tax Exempt Income (12.1) (10.2) (8.8)
Other 2.5 (0.1) --
---- ---- ----
Effective Tax Rate 26.0% 25.8% 27.3%
==== ==== ====
Note. 10. Employee Benefit Plans
The Company, through its bank subsidiary, has a non-contributory defined benefit
pension plan covering employees who have attained the age of 21 and have
completed one year of service. The Company's funding practice is to contribute
at least the minimum amount annually to meet minimum funding requirements.
Contributions are intended to provide not only for benefits attributed to
service to date, but for those expected to be earned in the future. Plan assets
consist primarily of marketable fixed income securities and common stocks. Plan
benefits are based on years of service and the employee's average compensation
during the five highest consecutive years of the last ten years of employment.
The following table sets forth the components of pension expense (benefit) as
well as changes in the plan's projected benefit obligation and plan assets and
the plan's funded status and amounts recognized in the consolidated statements
of condition based on a September 30 measurement date.
dollars in thousands 2005 2004
--------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit Obligation at Beginning of Year $ 16,050 $ 14,259
Service Cost 682 646
Interest Cost 924 839
Actuarial Loss 1,305 903
Benefits Paid (693) (597)
-------- --------
Projected Benefit Obligation at End of Year $ 18,268 $ 16,050
======== ========
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year $ 15,404 $ 14,538
Actual Gain on Plan Assets 1,765 1,462
Employer Contribution 552 --
Benefits Paid (693) (597)
-------- --------
Fair Value of Plan Assets at End of Year $ 17,028 $ 15,403
======== ========
dollars in thousands 2005 2004
--------------------------------------------------------------------------------
Unfunded Status $ (1,240) $ (647)
Unrecognized Net Actuarial Loss 4,849 4,244
Unrecognized Net Transition Asset -- --
Unrecognized Prior Service Cost 355 389
-------- --------
Prepaid Benefit Cost before Fourth Quarter Contribution $ 3,964 $ 3,986
Amount Contributed during the Fourth Quarter $ -- $ 552
-------- --------
Prepaid Benefit Cost at December 31 $ 3,964 $ 4,538
======== ========
70-K
Note. 10. Employee Benefit Plans, Continued
The following table presents a comparison of the accumulated benefit obligation
and plan assets:
dollars in thousands 2005 2004
--------------------------------------------------------------------------------
Projected benefit obligation $18,268 $16,050
Accumulated benefit obligation 15,354 13,491
Fair Value of Plan Assets 17,028 15,403
Components of Net Periodic Benefit Cost are:
dollars in thousands 2005 2004 2003
--------------------------------------------------------------------------------
Service Cost $ 682 $ 646 $ 541
Interest Cost 924 839 785
Expected Return on Plan Assets (1,247) (1,142) (949)
Net Amortization 215 200 166
------- ------- -----
$ 574 $ 543 $ 543
======= ======= =====
The following weighted-average assumptions were used to determine the benefit
obligation of the plan as of September 30:
2005 2004 2003
--------------------------------------------------------------------------------
Discount Rate 5.50% 5.88% 6.00%
Expected Return on Plan Assets 8.00% 8.00% 8.00%
Rate of Compensation Increase 3.00% 3.00% 3.00%
The following weighted-average assumptions were used to determine the net
periodic benefit cost of the plan for the years ended December 31:
2005 2004 2003
--------------------------------------------------------------------------------
Discount Rate 5.88% 6.00% 6.75%
Expected Return on Plan Assets 8.00% 8.00% 8.50%
Rate of Compensation Increase 3.00% 3.00% 4.00%
The plan's weighted average asset allocations at September 30, 2005 and 2004, by
asset category are as follows:
Plan Assets at
September 30,
2005 2004
--------------------------------------------------------------------------------
Equity Securities 58.8% 64.7%
Debt Securities 41.2% 34.9%
Other 0.0% 0.4%
----- -----
100.0% 100.0%
===== =====
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid over the next five years
dollars in thousands
-------------------------------------------------------------------------------
2006 $ 685
2007 774
2008 820
2009 819
2010 849
2011-2016 5,143
71-K
Note. 10. Employee Benefit Plans, Continued
Investment Strategy
The plan assets are invested in the New York State Bankers Retirement System
(the "System"), which was established in 1938 to provide for the payment of
benefits to employees of participating banks. The System is overseen by a Board
of Trustees who meet quarterly and set the investment policy guidelines. The
System utilizes two investment management firms, (which will be referred to as
Firm I and Firm II). Firm I is investing approximately 68% of the total
portfolio and Firm II is investing approximately 32% of the portfolio. The
System's investment objective is to exceed the investment benchmarks in each
asset category. Each firm operates under a separate written investment policy
approved by the Board of Trustees and designed to achieve an allocation
approximating 60% invested in Equity Securities and 40% invested in Debt
Securities. Each firm reports at least quarterly to the Investment Committee and
semi-annually to the Board.
The equity portfolio consists of international securities and a diversified
range of securities in the US equity markets. The fixed income porfolio focuses
the purchase and sale of futures and options on futures on foreign currencies
and foreign and domestic bonds, bond indicies and short-term securities.
Discount Rate
Annually, the Company establishes a discount rate to determine the value of the
plan's benefit obligation. The Company uses the 20-year AA Corporate bond yield
as a basis for determining the discount rate for the plan.
Expected Long-Term Rate-of-Return
The expected long-term rate-of-return on the plan assets reflects long-term
earnings expectations on existing plan assets and those contributions expected
to be received during the current plan year. In estimating that rate,
appropriate consideration was given to historical returns earned by plan assets
in the fund and the rates of return expected to be available for reinvestment.
Average rates of return over the past 1,3,5 and 10 year periods were determined
and subsequently adjusted to reflect current capital market assumptions and
changes in investment allocations.
Supplemental Retirement Income Agreement
In addition to the Company's noncontributory defined benefit pension plan, in
2002 the Company adopted two supplemental employee retirement plans for one
current executive and one former executive. The amount of the liabilities
recognized in the Company's consolidated statements of condition associated with
these plans was $934,000 at December 31, 2005 and $787,000 at December 31, 2004.
For the years ended December 31, 2005, 2004, and 2003, the Company recognized
$194,000, $178,000 and $163,000, respectively, of expense related to those
plans. The discount rate used in determining the actuarial present values of the
projected benefit obligations was 5.88% at December 31, 2005.
Note 11. Commitments and Contingencies
Financial instruments whose contract amounts represent credit risk consist of
the following:
December 31,
dollars in thousands 2005 2004
--------------------------------------------------------------------------------
Commitments to Extend Credit $76,783 $57,055
Standby Letters of Credit 8,880 9,948
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including bond financing and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Since some of the letters of credit are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
72-K
Note 11. Commitments and Contingencies, Continued
The estimated fair value of the Company's stand-by letters of credit was $12
thousand and $22 thousand at December 31, 2005 and December 31, 2004
respectively. The estimated fair value of stand-by letters of credit at their
inception is equal to the fee that is charged to the customer by the Company.
Generally, the Company's stand-by letters of credit have a term of one year. In
determining the fair values disclosed above, the fees were reduced on a
straight-line basis from the inception of each stand-by letter of credit to the
respective dates above. Due to immateriality of the fair value of the Company's
standby letters of credit, as well as their short-term nature, the Company
recognized the fees for the stand-by letters of credit in income at inception
during 2003.
The amount of collateral obtained, if deemed necessary, by the Bank upon
extension of credit for commitments to extend credit and letters of credit, is
based upon management's credit evaluation of the counter party. Collateral held
varies but includes residential and commercial real estate.
In the ordinary course of business there are various legal proceedings pending
against the Company. After consultation with outside counsel, management
considers that the aggregate exposure, if any, arising from such litigation
would not have a material adverse effect on the Company's consolidated financial
position.
Note 12. Disclosures about Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the consolidated statement of condition, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and in many cases, could not be realized in
immediate settlement of the instruments. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Short-Term Financial Instruments
The fair value of certain financial instruments is estimated to approximate
their carrying value because the remaining term to maturity of the financial
instrument is less than 90 days or the financial instrument reprices in 90 days
or less. Such financial instruments include cash and due from banks, Federal
Funds sold, accrued interest receivable and accrued interest payable.
The fair value of Time Deposits with Other Banks is estimated using discounted
cash flow analysis based on the Company's current reinvestment rate for similar
deposits.
Securities
Fair values of securities are based on quoted market prices or dealer quotes. If
a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans
For certain homogenous categories of loans, such as some residential mortgages,
credit card receivables, and other consumer loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
73-K
Note 12. Disclosures about Fair Value of Financial Instruments, Continued
Deposits
The fair value of demand deposits, savings accounts, and certain NOW and money
market deposits is the amount payable on demand at the reporting date. The fair
value of fixed-maturity time deposits is estimated using the rates currently
offered for deposits of similar remaining maturities.
Borrowings
The fair value of repurchase agreements, short-term borrowings, and long-term
borrowings is estimated using discounted cash flow analysis based on the
Company's current incremental borrowing rate for similar borrowing arrangements.
Off-Balance Sheet Instruments
The fair value of outstanding loan commitments and standby letters of credit are
based on fees currently charged to enter into similar agreements, taking into
account the remaining terms of the agreements, the counter parties' credit
standing and discounted cash flow analysis. The fair value of these instruments
approximates the value of the related fees and is not material.
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
December 31 December 31
2005 2004
--------------------------------------------------
Carrying Fair Carrying Fair
dollars in thousands Value Value Value Value
---------------------------------------------------------------------------------------
Financial Assets:
Cash and Cash Equivalents $ 18,417 $ 18,427 $ 20,539 $ 21,112
Securities 296,831 295,729 310,382 310,243
Loans 403,665 398,429 391,043 393,640
Allowance for Loan Losses (6,640) (6,640) (6,250) (6,250)
--------- --------- --------- ---------
Net Loans 397,025 391,789 384,793 387,390
Accrued Interest Receivable 3,297 3,297 2,857 2,857
Financial Liabilities:
Demand, Savings, NOW and Money
Market Deposit Accounts $ 342,815 $ 342,815 $ 304,897 $ 304,897
Time Deposits 262,143 262,133 267,032 266,577
Borrowings 71,829 70,638 102,938 103,675
Accrued Interest Payable 690 690 678 678
74-K
Note 13. Regulatory Matters
The Company and the subsidiary bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company' s consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the subsidiary bank must meet specific capital guidelines
that involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and subsidiary bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes the Company and subsidiary bank meet
all capital adequacy requirements to which they are subject.
The most recent notification from the Office of the Comptroller of the Currency
categorized the subsidiary bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Company and subsidiary bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the following table.
There have been no conditions or events since that notification that management
believes have changed the subsidiary institution's category.
For Capital
Actual: Adequacy Purposes: Well Capitalized:
dollars in thousands Amount Ratio Amount Ratio Amount Ratio
-------------------------------------------------------------------------------------------------------------
As of December 31, 2005
Total Capital to Risk-Weighted Assets:
The Company $ 71,198 14.37% $ 39,626 8.00% N/A N/A
Subsidiary Bank $ 68,365 13.83% $ 39,546 8.00% $ 49,432 10.00%
Tier 1 Capital to Risk-Weighted Assets:
The Company $ 65,000 13.12% $ 19,813 4.00% N/A N/A
Subsidiary Bank $ 62,180 12.58% $ 19,773 4.00% $ 29,659 6.00%
Tier 1 Capital to Average Assets:
The Company $ 65,000 8.71% $ 29,846 4.00% N/A N/A
Subsidiary Bank $ 62,180 8.35% $ 29,798 4.00% $ 37,247 5.00%
As of December 31, 2004
Total Capital to Risk-Weighted Assets:
The Company $ 70,276 14.34% $ 39,197 8.00% N/A N/A
Subsidiary Bank $ 67,689 13.84% $ 39,132 8.00% $ 48,915 10.00%
Tier 1 Capital to Risk-Weighted Assets:
The Company $ 64,150 13.09% $ 19,599 4.00% N/A N/A
Subsidiary Bank $ 61,571 12.59% 19,566 4.00% $ 29,349 6.00%
Tier 1 Capital to Average Assets:
The Company $ 64,150 8.59% $ 29,880 4.00% N/A N/A
Subsidiary Bank $ 61,571 8.25% $ 29,854 4.00% $ 37,318 5.00%
Banking regulations limit the amount of dividends that may be paid to
stockholders. Generally, dividends are limited to retained net profits for the
current year and two preceding years. At December 31, 2005, dividends totaling
$9,787,000 could have been paid without prior regulatory approval.
75-K
Note 14. Other Comprehensive Income
The following is a summary of changes in other comprehensive income for the
periods presented:
Year Ended December 31,
dollars in thousands 2005 2004 2003
--------------------------------------------------------------------------------------------------
Unrealized Holding Losses Arising During the Period Net of Tax
(Pre-tax Amount of ($4,226,000), ($564,000), and ($4,094,000)) $(2,579) $ (344) $(2,485)
Reclassification Adjustment for Gains Realized in Net Income
During the Period, Net of Tax (Pre-tax Amount of ($370,000),
($871,0000), and ($808,000)) (226) (532) (485)
------- ------- -------
Other Comprehensive Loss, Net of Tax of ($1,791,000), ($559,000)
and ($1,932,000) $(2,805) $ (876) $(2,970)
======= ======= =======
Note 15. Parent Company Only Financial Statements
Presented below are the condensed statements of condition December 31, 2005, and
2004 and statements of income and cash flows for each of the years in the
three-year period ended December 31, 2005, for the Parent Company. These
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto.
Condensed Statements of Condition
December 31,
dollars in thousands 2005 2004
--------------------------------------------------------------------------------
Assets
Cash and Cash Equivalents $ 1,593 $ 2,083
Securities Available for Sale, at Estimated Fair Value 1,229 638
Investment in Subsidiary, Equity Basis 64,897 64,913
Other Assets 1,547 1,525
------- -------
Total Assets $69,266 $69,159
======= =======
Liabilities and Stockholders' Equity
Total Liabilities $ 1,549 $ 1,554
Stockholders' Equity 67,717 67,605
------- -------
Total Liabilities and Stockholders' Equity $69,266 $69,159
======= =======
Condensed Statements of Income
December 31,
dollars in thousands 2005 2004 2003
--------------------------------------------------------------------------------------
Dividends from Subsidiary $ 5,305 $ 5,306 $ 5,375
Interest and Other Dividend Income 89 47 31
Net (Loss) Gain on Sale of Securities -- 95 --
------- ------- -------
5,394 5,448 5,406
Operating Expense 606 301 172
------- ------- -------
Income Before Income Tax (Benefit) Expense and Equity
in Undistributed Income of Subsidiary 4,788 5,147 5,234
Income Tax (Benefit) Expense (190) (81) (56)
Equity in Undistributed Income of Subsidiaries 2,766 3,390 3,423
------- ------- -------
Net Income $ 7,744 $ 8,618 $ 8,713
======= ======= =======
76-K
Note 15. Parent Company Only Financial Statements, Continued
Condensed Statements of Cash Flows
Year Ended December 31,
dollars in thousands 2005 2004 2003
----------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 7,744 $ 8,618 $ 8,713
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Investment Security Gains -- (95) --
Decrease (Increase) in Other Assets 16 (16) (4)
(Decrease) Increase in Other Liabilities (32) 91 (44)
Equity in Undistributed Income of Subsidiaries (2,766) (3,390) (3,423)
------- ------- -------
Net Cash Provided by Operating Activities 4,962 5,208 5,242
------- ------- -------
Cash Flows from Investing Activities:
Proceeds from Sales of Available-for-Sale Securities -- 195 --
Purchase of Available-for-Sale Securities (625) -- --
------- ------- -------
Net Cash (Used by) Provided by Investing Activities (625) 195 --
------- ------- -------
Cash Flows from Financing Activities:
Purchase of Treasury Stock (581) (182) (492)
Sale of Treasury Stock -- -- --
Cash Dividends (4,246) (4,259) (4,319)
------- ------- -------
Net Cash Used in Financing Activities (4,827) (4,441) (4,811)
------- ------- -------
Net (Decrease) Increase in Cash Equivalents (490) 962 431
Cash and Cash Equivalents at Beginning of Year 2,083 1,121 690
------- ------- -------
Cash and Cash Equivalents at End of Year $ 1,593 $ 2,083 $ 1,121
======= ======= =======
Note 16. Stockholders' Equity
On July 21, 2003 the Board of Directors approved a 4-for-1 stock split payable
on September 18, 2003. On September 5, 2003, the stockholders approved: (i) an
increase in authorized shares of common stock to 16,000,000 and (ii) a change in
the par value of the common stock from no par value to $0.01 par value. All per
share amounts were restated to reflect the 4-for-1 stock split. The stock split
resulted in an increase in the shares issued and treasury shares of 10,471,248
and 2,064,204 shares, respectively, on September 5, 2003.
Note 17. Federal Reserve Bank Requirement
The Company is required to maintain a clearing balance with the Federal Reserve
Bank. The required clearing balance for the 14-day maintenance period ending
January 4, 2006 was $1,300,000.
Note 18. Subsequent Events
Effective February 2006, the Company' s defined benefit pension plan was frozen.
The curtailment gain due to the freezing of the plan will reduce the projected
benefit obligation by approximately $2,561,000 in the first quarter of 2006.
77-K
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
We have established disclosure control procedures to ensure that material
information related to the Company, its financial condition or results of
operation, is made known to the officers that certify the Company's financial
reports and to other members of senior management and the Board of Directors.
These procedures have been formalized through the formation of a Management
Disclosure Committee and the adoption of a Management Disclosure Committee
Charter and related disclosure certification process. The management disclosure
committee is comprised of our senior management and meets at least quarterly to
review periodic filings for full and proper disclosure of material information.
Our management, including the Chief Executive Officer and Chief Financial
Officer, evaluated the design and operational effectiveness of the Company's
disclosure controls and procedures (as defined in Rules 13(a)-15(e) and
15(d)-15(e) under the Securities Exchange Act of 1934, as amended) as of
December 31, 2005. Based upon that evaluation, the Chief Executive Officer and
Chief Financial Officer concluded that the Company's disclosure controls and
procedures were effective in ensuring that information required to be disclosed
by the Company in reports that it files or submits under the Securities Exchange
Act of 1934 are recorded, processed, summarized and reported within the time
periods specified in the SEC's rules and forms.
It should be noted that any system of internal controls, regardless of design
can provide only reasonable, and not absolute, assurance that the objectives of
the control system are met. In addition, the design of any control system is
based in part upon certain assumption about the likelihood of future events.
Because of these and other inherent limitations of control systems, there can be
no assurance that any design will succeed in achieving its stated goals under
all potential future conditions, regardless of how remote.
Management's Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rules
13a-15f. Under the supervision and with the participation of our management,
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in Internal Control - Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on our evaluation under the framework in Internal Control - Integrated
Framework, our management concluded that our internal control over financial
reporting was effective as of December 31, 2005. Our management's assessment of
the effectiveness of our internal control over financial reporting as of
December 31, 2005, has been audited by KPMG, LLP, an independent registered
public accounting firm, as stated in their report on the following page.
78-K
Report of Independent Registered Public Accounting Firm
The Board of Directors of The Wilber Corporation:
We have audited management's assessment, included in the accompanying
Management's Report on Internal Control Over Financial Reporting that The Wilber
Corporation (the "Company") maintained effective internal control over financial
reporting as of December 31, 2005, based on criteria established in Internal
Control-Integrated framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission (COSO). The Company's management is responsible for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting.
Our responsibility is to express an opinion on management's assessment and an
opinion on the effectiveness of the Company's internal control over financial
reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, evaluating management's assessment, testing and evaluating
the design and operating effectiveness of internal control, and performing such
other procedures as we considered necessary in the circumstances. We believe
that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company's internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company's
assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting
may not prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our opinion, management's assessment that The Wilber Corporation maintained
effective internal control over financial reporting as of December 31, 2005, is
fairly stated, in all material respects, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Also, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2005, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company
Accounting Oversight Board (United States), the consolidated statements of
condition of The Wilber Corporation and subsidiary as of December 31, 2005 and
2004, and the related consolidated statements of income, changes in
stockholders' equity and comprehensive income, and cash flows for each of the
years in the three-year period ended December 31, 2005, and our report dated
March 10, 2006 expressed an unqualified opinion on those consolidated financial
statements.
Albany, New York
March 10, 2006
79-K
ITEM 9B: OTHER INFORMATION
None.
PART III
--------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors of the Registrant
Information contained under the caption Proposal II, "Election of Directors
(introduction);" "The Nominees and Continuing Directors" and in "Meetings of the
Board of Directors and Certain Committees" in the definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on April 29, 2006, to be filed
with the Commission within 120 days after the end of the fiscal year covered by
this Form 10-K, is incorporated herein by this reference.
B. Executive Officers of the Registrant Who Are Not Directors
Information contained in Proposal II under the caption, "Executive Officers Who
Are Not Directors," in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 29, 2006, to be filed with the Commission
within 120 days after the end of the fiscal year covered by this Form 10-K, is
incorporated herein by this reference.
C. Compliance With Section 16(a)
Information contained under the caption, "Section 16(a) Beneficial Ownership
Reporting Compliance," in the definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on April 29, 2006, to be filed with the Commission
within 120 days after the end of the fiscal year covered by this Form 10-K, is
incorporated herein by this reference.
The Company has adopted a Code of Ethics for adherence by its Chief Executive
Officer, Chief Financial Officer, and Chief Accounting Officer to ensure honest
and ethical conduct; full, fair and proper disclosure of financial information
in the Company's periodic reports; and compliance with applicable laws, rules,
and regulations. The text of the Company's Code of Ethics is posted and
available on the Bank's website (http://www.wilberbank.com) under 'About Us.'
ITEM 11: EXECUTIVE COMPENSATION
Information contained under the caption, "Compensation," in the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on April 29, 2006,
to be filed with the Commission within 120 days after the end of the fiscal year
covered by this Form 10-K, is incorporated herein by this reference.
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Information contained under the caption, "Principal Owners of Our Common Stock,"
in the definitive Proxy Statement for the Annual Meeting of Shareholders to be
held on April 29, 2006, to be filed with the Commission within 120 days after
the end of the fiscal year covered by this Form 10-K, is incorporated herein by
this reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption, "Compensation - Transactions with
Directors and Executive Officers," in the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April 29, 2006, to be filed with
the Commission within 120 days after the end of the fiscal year covered by this
Form 10-K, is incorporated herein by this reference.
ITEM 14: PRINCIPAL ACCOUNTING FEES AND SERVICES
Information contained under the caption, "Independent Auditors' Fees - Audit and
Non-Audit Fees," and "Independent Auditors' Fees - Pre-Approval Policies and
Procedures" in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 29, 2006, to be filed with the Commission
within 120 days after the end of the fiscal year covered by this Form 10-K, is
incorporated herein by this reference.
80-K
PART IV
-------
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The financial statement schedules and exhibits filed as part of this Form 10-K
are as follows:
(a) (1) The following Consolidated Financial Statements are included in PART
II, Item 8, hereof:
-Independent Auditors' Report
-Consolidated Balance Sheets at December 31, 2005 and 2004
-Consolidated Statements of Income for the Years Ended December
31, 2005, 2004 and 2003
-Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 2005, 2004 and 2003
-Consolidated Statements of Cash Flows for the Years Ended
December 31, 2005, 2004 and 2003 -Consolidated Statements
of Comprehensive Income for the Years Ended December 31,
2005, 2004 and 2003
-Notes to Consolidated Financial Statements
(2) None.
(3) Exhibits: See Exhibit Index to this Form 10-K
(b) See Exhibit Index to this Form 10-K
(c) None.
81-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE WILBER CORPORATION
Date: March 10, 2006 By: /s/ Douglas C. Gulotty
--------------- --------------------------------
Douglas C. Gulotty
President and Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated.
Signatures Title Date
---------- ----- ----
/s/ Douglas C. Gulotty President and Chief Executive Officer March 10, 2006
--------------------------------- --------------
Douglas C. Gulotty
/s/ Joseph E. Sutaris Secretary, Treasurer and Chief Financial March 10, 2006
--------------------------------- Officer --------------
Joseph E. Sutaris
/s/ Brian R. Wright Director, Chairman March 10, 2006
--------------------------------- --------------
Brian R. Wright
/s/ Alfred S. Whittet Director, Vice Chairman March 10, 2006
--------------------------------- --------------
Alfred S. Whittet
/s/ Mary C. Albrecht Director March 10, 2006
--------------------------------- --------------
Mary C. Albrecht
/s/ Olon T. Archer Director March 10, 2006
--------------------------------- --------------
Olon T. Archer
/s/ Philip J. Devine Director March 10, 2006
--------------------------------- --------------
Philip J. Devine
/s/ Richard E. Keene Director March 10, 2006
--------------------------------- --------------
Richard E. Keene
/s/ Joseph P. Mirabito Director March 10, 2006
--------------------------------- --------------
Joseph P. Mirabito
/s/ James L. Seward Director March 10, 2006
--------------------------------- --------------
James L. Seward
/s/ Geoffrey A. Smith Director March 10, 2006
--------------------------------- --------------
Geoffrey A. Smith
/s/ James F. VanDeusen Director March 10, 2006
--------------------------------- --------------
James F. VanDeusen
/s/ David F. Wilber, III Director March 10, 2006
--------------------------------- --------------
David F. Wilber, III
82-K
EXHIBIT INDEX
No. Document
3.1 Restated Certificate of Incorporation of The Wilber Corporation
(incorporated by reference as Exhibit A of the Company's Definitive
Proxy Statement - Schedule 14A (File No. 001-31896) filed with the
Securities and Exchange Commission on March 24, 2005)
3.2 Bylaws of The Wilber Corporation as Amended and Restated
(incorporated by reference to Exhibit 3.2 of the Company's Form 8-K
Current Report (File No. 001-31896) filed with the Securities and
Exchange Commission on January 27, 2005)
10.1 Deferred Compensation Agreement as Amended between Wilber National
Bank and Alfred S. Whittet (incorporated by reference to Exhibit 10.1
of the Company's Form 8-K Current Report (File No. 001-31896) filed
with the Securities and Exchange Commission on January 6, 2006)
10.2 Summary Plan Description for the Amended and Restated Wilber National
Bank Split-Dollar Life Insurance Plan (incorporated by reference to
Exhibit 10.2 of the Company's Form 10/A Registration Statement (No.
001-31896) filed with the Securities and Exchange Commission on
January 30, 2004)
10.3 Amendment to the Wilber National Bank Split-Dollar Life Insurance
Plan Agreement and Split-Dollar Policy Endorsement between Wilber
National Bank and Alfred S. Whittet (incorporated by reference to
Exhibit 10.3 of the Company's Form 10/A Registration Statement (No.
001-31896) filed with the Securities and Exchange Commission on
January 30, 2004)
10.4 Executive Salary Continuation Agreement between Wilber National Bank
and Robert W. Moyer (incorporated by reference to Exhibit 10.4 of the
Company's Form 10/A Registration Statement (No. 001-31896) filed with
the Securities and Exchange Commission on January 30, 2004)
10.5 Executive Salary Continuation Agreement between Wilber National Bank
and Alfred S. Whittet (incorporated by reference to Exhibit 10.5 of
the Company's Form 10/A Registration Statement (No. 001-31896) filed
with the Securities and Exchange Commission on January 30, 2004)
10.6 Employment Agreement between Wilber National Bank and Alfred S.
Whittet (incorporated by reference to Exhibit 10.6 of the Company's
Form 10/A Registration Statement (No. 001-31896) filed with the
Securities and Exchange Commission on January 30, 2004)
10.7 Severance Compensation Agreement between The Wilber Corporation and
Alfred S. Whittet (incorporated by reference to Exhibit 10.7 of the
Company's Form 10/A Registration Statement (No. 001-31896) filed with
the Securities and Exchange Commission on January 30, 2004)
10.8 Retention Bonus Agreement as Amended between Wilber National Bank and
Douglas C. Gulotty (incorporated by reference to Exhibit 10.8 of the
Company's Form 8-K Current Report (File No. 001-31896) filed with the
Securities and Exchange Commission on January 6, 2006)
10.9 Retention Bonus Agreement as Amended between Wilber National Bank and
Joseph E. Sutaris (incorporated by reference to Exhibit 10.8 of the
Company's Form 8-K Current Report (File No. 001-31896) filed with the
Securities and Exchange Commission on January 6, 2006)
10.11 Employment Agreement between Wilber National Bank and Douglas C.
Gulotty (incorporated by reference to Exhibit 10.11 of the Company's
Form 8-K Current Report (File No. 001-31896) filed with the
Securities and Exchange Commission on January 6, 2006)
10.12 Employment Agreement between Wilber National Bank and Joseph E.
Sutaris (incorporated by reference to Exhibit 10.12 of the Company's
Form 8-K Current Report (File No. 001-31896) filed with the
Securities and Exchange Commission on January 6, 2006)
13 Annual Report to Shareholders (included in this annual report on Form
10-K)
83-K
14 Code of Ethics as Amended incorporated by reference to Exhibit 14 of
the Company's Annual Report on Form 10-K, and available on the
Company's website (http://www.wilberbank.com) under the link 'About
Us.'
21 Subsidiaries of the Registrant
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of
the Sarbanes-Oxley Act
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350
84-K
Exhibit 21
Subsidiaries of the Registrant
The Wilber Corporation has the following subsidiary, which is wholly owned:
Wilber National Bank, a national bank.
85-K