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THE
WILBER CORPORATION
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ANNUAL
REPORT ON SECURITIES AND EXCHANGE
COMMISSION FORM 10-K |
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for
the Year-Ended December 31, 2007
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The
Annual Report on Form 10-K that follows is not part of the proxy solicitation
material.
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UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-K
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ý
ANNUAL REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
For
the fiscal year ended December 31, 2007
Commission
file number: 001-31896
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The
Wilber Corporation
(Exact
name of registrant as specified in its charter)
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New
York
(State
or other jurisdiction of incorporation or organization)
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15-6018501
(I.R.S.
Employer Identification No.)
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245
Main Street, P.O. Box 430, Oneonta, NY
(Address
of principal executive offices)
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13820
(Zip
Code)
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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 Section 12(b) of the Act:
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Title
of each class
Common
Stock, $0.01 par value per share
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Name
of each exchange on which registered
American
Stock Exchange
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Securities
registered pursuant to Section 12(g) of the
Act: None
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Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined
in
Rule 405 of the Securities Act.
Yes
o
No ý
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
o
No ý
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
ý
No o
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (§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. o
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “Large accelerated filer,” “accelerated
filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange
Act. (Check one).
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Large
accelerated filer o
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Accelerated
filer ý
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Non-accelerated
filer o
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Smaller
Reporting Company o
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1-K
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
o No
ý
As
of
June 30, 2007, the aggregate market value of the registrant’s common stock held
by non-affiliates of the registrant was $58.8 million, based upon the closing
price as reported on the American Stock Exchange (“Amex®”). 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, 2007.
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
(Common
Stock, $0.01 par value per share)
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Outstanding
at March 10, 2008
10,503,704
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 25, 2008 are incorporated by
reference.
2-K
This
page intentionally left blank
3-K
THE
WILBER CORPORATION
FORM
10-K
INDEX
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BUSINESS
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A.
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General
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B.
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Market
Area
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C.
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Lending
Activities
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i.
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Loan
Products and Services
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ii.
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Loan
Approval Procedures and Authority
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iii.
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Credit
Quality Practices
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D.
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Investment
Securities Activities
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E.
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Sources
of Funds
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F.
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Electronic
and Payment Services
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G.
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Trust
and Investment Services
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H.
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Insurance
Services
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I.
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Supervision
and Regulation
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i.
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The
Company
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ii.
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The
Bank
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iii.
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Other
Subsidiaries
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J.
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Competition
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K.
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Legislative
and Regulatory Developments
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RISK
FACTORS
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UNRESOLVED
STAFF COMMENTS
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PROPERTIES
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LEGAL
PROCEEDINGS
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SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
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MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
PURCHASES OF EQUITY SECURITIES
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A.
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Market
Information; Dividends on Common Stock; and Recent Sales of Unregistered
Securities
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B.
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Use
of Proceeds from Registered Securities
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C.
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Purchases
of Equity Securities by Issuer and Affiliated
Purchasers
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SELECTED
FINANCIAL DATA
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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A.
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General
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B.
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Performance
Overview
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C.
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Financial
Condition
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i.
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Comparison
of Financial Condition at December 31, 2007 and December 31,
2006
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D.
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Results
of Operations
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i.
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Comparison
of Operating Results for the Years Ended December 31, 2007 and
December
31, 2006
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ii.
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Comparison
of Operating Results for the Years Ended December 31, 2006 and
December
31, 2005
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E.
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Liquidity
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F.
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Capital
Resources and Dividends
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QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
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CONTROLS
AND PROCEDURES
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OTHER
INFORMATION
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DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
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A.
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Directors
of the Registrant
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B.
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Executive
Officers of the Registrant Who Are Not Directors
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C.
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Compliance
With Section 16(a)
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D.
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Code
of Ethics
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E.
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Corporate
Governance
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EXECUTIVE
COMPENSATION
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SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
STOCKHOLDER MATTERS
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CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
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A.
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Related
Transactions
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B.
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Director
Independence
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PRINCIPAL
ACCOUNTING FEES AND SERVICES
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EXHIBITS
AND FINANCIAL STATEMENT SCHEDULES
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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 that occur after the statements are made,
and we specifically disclaim such obligation.
PART
I
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
applicable limits by the Federal Deposit Insurance Corporation (“the
FDIC”). The Company, through the Bank and the Bank’s subsidiaries,
offers a full range of commercial and consumer financial products, including
business, municipal, and consumer loans, deposits, trust and investment
services, and insurance. The Bank serves its customers through
twenty- one (21) 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, the
Bank operates representative loan production offices in Syracuse, New York
(Onondaga County) and Clifton Park, New York (Saratoga County). The
Bank’s main office is located at 245 Main Street, Oneonta, New York, 13820
(Otsego County). The Bank employed 267 full-time equivalent employees
at December 31, 2007. The Bank’s website address, which also serves
as the Company’s main website address, is www.wilberbank.com.
In
2007,
the Company acquired Provantage Funding Corporation (“Provantage”) a New York
State licensed mortgage banking company based in Clifton Park, New York
(Saratoga County). Provantage has five (5) licensed mortgage banking
offices, four (4) of which are located in New York State’s Capital District
region, namely Saratoga, Schenectady, and Albany
Counties. Provantage’s other licensed office is located in Oneonta,
New York (Otsego County), adjacent to the Bank’s Main
Office. Provantage is regulated by the New York State Banking
Department. Its principal business is to originate and sell
high-quality residential mortgage loans to the Bank and other third party
investors.
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. Mang – Wilber, LLC sells a full range of
personal and commercial property and casualty, life, and health insurance
products from two of the Bank’s branch offices, namely the Bank’s main office in
Oneonta, New York (Otsego County) and its Walton, New York office (Delaware
County). At December 31, 2007, the Bank owned a 62.4% membership
interest in Mang–Wilber, LLC.
The
Company and its subsidiaries’ (collectively “we” or “our”) principal business is
to act as a financial intermediary and lending institution in the communities
its serves 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
we
serve and to small and mid-sized businesses in the immediate geographic areas
we
serve as well as a broader statewide region. Our investment
activities primarily consist of purchases of U.S. Treasury, U.S. Government
Agency (“GinnieMae”), and U.S. Government Sponsored Entities (“FannieMae” and
“FreddieMac”) obligations, as well as 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.
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. Eighteen (18) of
the Bank’s twenty-one (21) full-service branch offices and one of our Provantage
mortgage banking offices are located in our primary market
area. Based on 2005 U.S. Census Bureau data, the estimated population
of our four-county primary market area is 194,000. Between 2000 and
2005, the area population increased by less than 1%. This compares to
a national average of 1.5% 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
2003 (the latest available statistics) the median household income for the
four-county region was approximately $34 thousand. This was
approximately 79% of the United States national average 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
2007.
In
addition to the eighteen (18) full-service branches located in our primary
market area, we also operate two (2) full-service branch offices in Ulster
County, New York, a full-service branch in Johnson City, New York (Broome
County), two (2) representative loan production offices in Syracuse, New York
(Onondaga County) and Clifton Park, New York (Saratoga County), and four (4)
mortgage banking offices in New York’s capital district (Saratoga, Schenectady,
and Albany Counties). The Johnson City branch office, the Syracuse
and Clifton Park representative offices, the four (4) Capital District mortgage
banking offices, and our branch office located in Kingston, New York (Ulster
County) operate in markets that are more densely populated than our primary
market. Our second office located in Ulster County, New York, namely
our Boiceville Branch, is located in a rural market that is demographically
similar to our primary market.
We
anticipate that our expansion into the more densely populated markets throughout
New York State will continue during 2008. The Bank recently filed
applications with the OCC to establish three additional full-service branch
offices in Clifton Park, New York (Saratoga County); Dewitt, New York (Onondaga
County); and Cicero, New York (Onondaga County).
C.
Lending Activities
General. The
Company, through the Bank and Provantage, engage 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 fifteen (15) 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.
i.
Loan
Products and Services
Residential
Real
Estate. We originate 1-4 family residential mortgage loans,
principally through Provantage. Some of these loans are sold into the
secondary market to third party investors, while others that meet our
underwriting and
interest
rate guidelines are retained 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. We also offer
residential construction financing to borrowers that meet our credit
underwriting guidelines. In the regular course of our business, we do
not originate sub-prime, Alt-A, negative amortizing, or other higher risk
residential mortgages.
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 second 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 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, trucks,
or
automobiles 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.
We
offer
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.
Stand-by
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 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.
ii.
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 five (5) 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 $10.5
million for loans not fully secured by readily marketable collateral and $17.5
million for loans secured by readily marketable collateral at December 31,
2007. 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 60% of the Bank’s legal
lending limit, which is approximately $6.3 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 $25,000, 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 three (3) permanent members of the Officers’ Loan
Committee include the Bank’s Chief Executive Officer, the Regional President –
Southern Tier and Hudson Valley, and the Vice President - Credit Risk Management
and Planning. The fourth voting member of the Committee alternates
among and between other specifically-designated senior loan
officers. The Officers’ Loan Committee may approve secured and
unsecured loans up to $3.75 million and 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 $25,000 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,
the Board of Directors authorized the formation of Regional Officers’ Loan
Committee(s), who may approve secured and unsecured loans up to $2.5
million. The Regional Officer’s Loan Committee must be comprised of
at least two (2) of the permanent members of the Officer’s Loan Committee,
including the Bank’s Chief Executive Officer, the
Regional
President – Southern Tier and Hudson Valley, and the Vice President - Credit
Risk Management and Planning, and two (2) other specifically-designated senior
loan officers.
Fifth,
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. These individual limits can also be combined under certain
conditions.
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.
iii. 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 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. Criticized and non-performing loans are reported to the
Directors’ Loan and Investment Committee monthly, and the overall delinquency
levels are reported 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 Vice President -
Credit Risk Management and Planning 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:
•
the
borrower lacks current financial
information,
•
the
business of the borrower is
poorly managed,
•
the
borrower’s business becomes
highly-leveraged or appears to be insolvent,
•
the
borrower exhibits inadequate cash
flow to support the debt service,
•
the
loan is chronically delinquent,
or
•
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. On a quarterly basis, our Vice
President - Credit Risk Management and Planning 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 these loan portfolios, the trend in delinquencies,
changes in underwriting standards, the trend in loan charge-offs and other
relevant economic and market factors to estimate the probable losses in the
loan
portfolio. For large commercial loans, we evaluate specific
characteristics of each loan, including, the borrower’s current cash flow, debt
service coverage and payment history, business conditions in the borrower’s
industry, the collateral and guarantees securing the loan, and our historical
experience with similarly structured loans to arrive at a risk
rating. We then determine probable losses for these loans based on
these characteristics, risk ratings and other economic factors. And
finally, we specifically estimate probable losses on non-performing loans
through impairment testing. 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 consolidated statement of
income. 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.
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 TDR when we grant a special concession to the borrower
because the borrower’s financial condition has deteriorated to the point where
servicing the 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, extension
of
time for repayment, 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
(
“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
$25,000).
D.
Investment Securities Activities
General. Our
Board
of Directors has final authority and responsibility for all aspects of the
Company’s investment activities. It exercises this authority by
setting the 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
Company. The Chief Executive Officer and the Senior Vice President of
Bank Investments 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;
|
|
(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, U.S. agency and U.S. 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 formally reviewed by our 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. Our
lending and investment activities are highly dependent upon our 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 and the full Board of
Directors at their regularly scheduled meetings.
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, 2007 and December
31, 2006, we had $316.692 million and $310.893 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:
|
December
31,
|
||||
|
2007
|
2006
|
|||
|
dollars
in thousands
|
Number
of
Accounts
|
Estimated
Market
Value
|
Number
of
Accounts
|
Estimated
Market
Value
|
|
Trusts
|
338
|
$160,268
|
348
|
$151,558
|
|
Estates
|
9
|
4,108
|
12
|
4,540
|
|
Custodian,
Investment Management and Others
|
230
|
152,316
|
232
|
154,795
|
|
Total
|
577
|
$316,692
|
592
|
$310,893
|
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. Since
1998, the Bank has been operating 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 (Delaware County), with satellite sales offices located
in
the Bank’s main office in Oneonta, New York (Otsego County) and its Walton, New
York (Delaware County) branch office. Mang – Wilber, LLC, also owns a
two-thirds interest in a specialty-lines agency in Clifton Park, New York
(Saratoga County).
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.
i.
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 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.
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. In
addition, the Company must comply with the corporate governance and listing
standards of the Amex® to maintain the listing of its common stock on the
exchange.
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 all of the new regulations Congress directed it to
adopt in the Sarbanes-Oxley Act, including: new executive compensation
disclosure rules, 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.
ii.
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.
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 Deposit Insurance Fund of the FDIC. The Bank must file
reports with the Federal Financial Institution Examination Council (“FFIEC”),
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, FFIEC Interagency 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
capital adequacy, asset quality, management, earnings
performance,
liquidity and sensitivity to market risk. In evaluating these safety
and soundness standards, the OCC also evaluates internal controls and
information systems, internal audit systems, loan documentation, credit
underwriting, exposure to changes in interest rates, asset growth, 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 shareholders’ 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, 2007. 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 shareholders. 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 shareholders 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.
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
insured depository’s supervisory condition and several of its financial
ratios. During 2006 and 2005, the Bank was not required to pay any
deposit insurance premiums. During 2007, the FDIC implemented certain
provisions of the Federal Deposit Insurance Reform Act of 2005 (“FDIRA”), which
provided a one time credit to qualified insured depositories, including the
Bank, to offset future FDIC deposit insurance assessments. The Bank’s
one time credit totaling approximately $580 thousand was initially granted
in
the second quarter of 2007. The remaining credit balance at December
31, 2007 was $321 thousand. We anticipate exhausting the remaining
FDIRA credit during the fourth quarter of 2008, at which time we expect to
begin
recording FDIC premium expense at an annual rate of 5 to 7 basis points on
eligible insured deposits.
Although
we did not pay any FDIC insurance premiums during 2007, 2006 or 2005, 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, were 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, 2007, the assessment rate was 1.14 cents
per $100 of insured deposits. This compares to 1.24 cents and 1.34
cents per $100 of insured deposits at December 31, 2006 and December 31, 2005,
respectively.
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, 2007, 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, 2007, the Bank’s legal
lending limit on loans to one borrower was $10.5 million for loans not fully
secured by readily marketable collateral and $17.5 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 March 20,
2006.
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 Home Ownership
and
Equity Protection 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, the Right to
Financial Privacy Act, the Expedited Funds Availability Act, the Flood Disaster
Protection Act, the Fair Debt Collection Practices Act and the Consumer
Protection for Depository Institutions Sales of Insurance
regulation. 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 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.
iii.
Other Subsidiaries
Provantage,
the Company’s mortgage banking subsidiary, is licensed and regulated by the New
York State Department of Banking. Annually the New York State
Department of Banking examines Provantage to assure it maintains certain minimum
capitalization standards, and complies with stringent ownership and consumer
protection rules and laws.
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 (i) 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 and Regulatory Developments
Identity
Theft. On
November 9, 2007, the federal banking agencies issued final rules and guidelines
on identity theft. The regulation and guidelines, which implement Sections
114
and 315 of the Fair and Accurate Credit Transactions Act of 2003 (“FACT Act”),
require financial institutions to implement a written identity theft prevention
program, that card issuers assess the validity of change of address requests,
and that users of consumer reports reasonably verify the identity of the subject
of a consumer report in the event of a notice of address discrepancy. Compliance
with the final rules is required by November 1, 2008. The Company’s
management has created a task force to assure compliance with these final rules
by the mandatory compliance date.
Money
Laundering. On July 19, 2007, the federal banking agencies
issued the “Interagency Statement on Enforcement of Bank Secrecy Act/Anti-Money
Laundering Requirements.” This guidance clarifies the circumstances under which
the bank regulators will take enforcement action, including the imposition
of a
cease and desist order, for failure to comply with the Bank Secrecy Act (‘BSA”)
and its implementing regulations. We believe our policies and procedures comply
the BSA requirements.
Subprime
Mortgage
Lending. On June 29 2007, the federal banking agencies issued
the “Interagency Statement on Subprime
Mortgage Lending.” This guidance prescribes risk management,
underwriting, workout and other prudent safety and soundness and consumer
protection standards for lenders in connection with certain adjustable rate
residential mortgage loans. We typically have not and do not intend to originate
such loans.
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 impact 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 channels
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.
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.
Real
Estate Market
Conditions. If real estate values in the market decline or
become stagnant, business could be adversely affected. Real estate
values in our market area have risen over the last several
years. There continues to be a significant amount of speculation that
the United States, or at least certain parts of the country, is in the midst
of
a real estate “bubble,” meaning that current real estate prices exceed the true
values of the properties. If this is the case, or if the market
generally perceives that this is the case, then real estate prices could become
stagnant or decline, and there could be a significant reduction in real estate
construction and housing starts.
In
addition, the value and liquidity of the real estate or other collateral
securing Wilber’s loans could be impaired. A significant portion of the loan
portfolio is dependent on real estate. At December 31, 2007, real estate
served as the principal source of collateral with respect to approximately
64.9%
of the loan portfolio. While Wilber is not a subprime lender, a decline in
the
value of residential and commercial real estate securing the loans could
adversely impact Wilber’s consolidated financial condition and results of
operations. Given Wilber’s heavy reliance on real estate lending, this could
have a significant adverse affect on business.
Credit
Risk. One
of our main functions as a financial intermediary is to extend credit, in the
form of loans, commitments and investments, to individuals, businesses, state,
local and federal government and government sponsored entities within and
outside of our primary market area. The risk associated with these
extensions of credit pose significant risks to earnings and capital that need
to
be controlled and monitored by management. Losses incurred by us due
to borrower’s failing to repay loans or other extensions of credit will
negatively affect 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.
Allowance
for Loan Losses May Not Be
Sufficient to Cover Actual Loan Losses. The Bank’s Vice
President of Credit Risk Management and Planning, 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.
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.
Fraud
Risk. Financial institutions are inherently exposed to fraud
risk. A fraud can be perpetrated by a customer of the Bank, an
employee, a vendor, or members of the general public. A loss due to
fraud that is determined not to be insured under our fidelity insurance coverage
could negatively affect our financial condition or results of
operations.
Changes
in 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.
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.
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.
Technology
Risk. We deploy various forms of technology to facilitate and
process customer and internal transactions. In addition, we gather,
store and summarize various forms of computer generated data to analyze the
Company’s services, business processes and financial
performance. Although we maintain various policies and procedures,
including data back-up and recovery procedures, to mitigate technology risk,
in
the event one of our systems were to fail it could have and adverse impact
on
our financial condition or results of operations.
Liquidity
of the Company’s Common
Shares. The Company’s common stock is lightly traded on the
Amex®. This condition may make it difficult for shareholders with
large common stock ownership positions to sell or liquidate shares at a suitable
price.
Changes
to the Markets or Exchanges
On Which the Company’s Common Shares Are Traded. The
Company’s common shares trade on the Amex®. Changes to the Amex®’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 common 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 two (2) branch offices
and
two (2) loan production offices at market rates.
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, 2007, 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 operations or cash flow.
Neither
the Company, the Bank, Provantage, 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,
2007.
PART
II
ITEM
5: MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER
MATTERS, AND ISSUER PURCHASES OF EQUITY SECURITIES
A. Market
Information; Dividends on Common Stock; and Recent Sales of Unregistered
Securities
The
common stock of the Company ($0.01 par value per share) trades on the Amex®
under the symbol “GIW.” The following table shows the high and low
trading prices for the common stock and quarterly dividend paid to our security
holders for the periods presented:
Common
Stock Market Price and Dividend Table:
|
2007
|
2006
|
|||||||||||||||||||||||
|
High
|
Low
|
Dividend
|
High
|
Low
|
Dividend
|
|||||||||||||||||||
|
4th
Quarter
|
$ | 9.50 | $ | 8.65 | $ | 0.0950 | $ | 10.25 | $ | 9.51 | $ | 0.0950 | ||||||||||||
|
3rd
Quarter
|
$ | 12.00 | $ | 8.20 | $ | 0.0950 | $ | 10.50 | $ | 9.85 | $ | 0.0950 | ||||||||||||
|
2nd
Quarter
|
$ | 9.89 | $ | 8.85 | $ | 0.0950 | $ | 11.35 | $ | 10.20 | $ | 0.0950 | ||||||||||||
|
1st
Quarter
|
$ | 10.29 | $ | 9.17 | $ | 0.0950 | $ | 10.85 | $ | 9.90 | $ | 0.0950 | ||||||||||||
|
(1)
Source: The American Stock Exchange Monthly Market Statistics
Report.
|
||||||||||||||||||||||||
At
March
10, 2008, there were 489 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 10, 2008
was $9.00 per share.
Shareholder
Return Performance
Graph. The following line graph presentation compares the
five-year cumulative total shareholder return on the Company’s common stock
against the cumulative total return on the Standard & Poor's 500 Index and
the Standard and Poor’s Financial Index. The graph assumes that $100
was invested on January 1, 2003 and includes both price change and reinvestment
of cash dividends. Graph points are as of December 31 of each
year. From January 1, 2003 until February 11, 2004, the common stock
of The Wilber Corporation was inactively traded on Nasdaq’s Over-the-Counter
Bulletin Board market. On February 12, 2004, the Company’s common
stock began trading on the Amex® under the symbol “GIW”. The
cumulative return provided for The Wilber Corporation common stock was
calculated using the December 31, 2007 closing prices for the common stock
as
reported on the Amex®.
Shareholder
Return Performance Graph:
|
2002
|
2003
|
2004
|
2005
|
2006
|
2007
|
|||||||||||||||||||
|
S&P
500
|
$ | 100 | $ | 129 | $ | 140 | $ | 144 | $ | 160 | $ | 166 | ||||||||||||
|
S&P
Financial
|
$ | 100 | $ | 131 | $ | 142 | $ | 148 | $ | 168 | $ | 149 | ||||||||||||
|
Wilber
Corporation
|
$ | 100 | $ | 132 | $ | 125 | $ | 117 | $ | 113 | $ | 109 | ||||||||||||
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
July
26, 2005, we announced that the Company’s Board of Directors authorized
management to purchase up to $1.5 million of the Company’s common stock under a
stock repurchase program. At September 30, 2007 management’s
remaining share repurchase authority was $283 thousand due to the purchase
of
treasury shares totaling $1.217 million under this program since its
inception. During the three month period ended December 31, 2007, the
Company’s management did not purchase any additional shares of common stock
under this program. Management’s remaining share repurchase authority
was $283 thousand at December 31, 2007.
Shares
repurchased under the repurchase program are made in the open market or through
private transactions and are limited to one transaction per week. All
open market transactions are conducted exclusively through Merrill Lynch, a
registered broker-dealer. Private purchases may be transacted
directly with the seller and need not be transacted through Merrill
Lynch. Each private transaction is individually subject to the
approval of the Board of Directors of the Company. All stock
purchases are effected 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 thereunder, and the rules of the Amex®.
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.
5-Year
Summary Table of Selected Financial Data:
|
The
Wilber Corporation and Subsidiaries
|
As
of and for the Year Ended December 31, (1)
|
|||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(dollars
in thousands, except per share data)
|
||||||||||||||||||||
|
Consolidated
Statements of Income Data:
|
||||||||||||||||||||
|
Interest
and Dividend Income
|
$ | 46,030 | $ | 43,341 | $ | 40,310 | $ | 37,165 | $ | 38,628 | ||||||||||
|
Interest
Expense
|
21,474 | 18,360 | 14,930 | 12,761 | 14,153 | |||||||||||||||
|
Net
Interest Income
|
24,556 | 24,981 | 25,380 | 24,404 | 24,475 | |||||||||||||||
|
Provision
for Loan Losses
|
900 | 1,560 | 1,580 | 1,200 | 1,565 | |||||||||||||||
|
Net
Interest Income After Provision for Loan Losses
|
23,656 | 23,421 | 23,800 | 23,204 | 22,910 | |||||||||||||||
|
Non-Interest
Income (Excl. Investment Securities Gains, Net)
|
6,956 | 5,455 | 5,156 | 4,692 | 4,684 | |||||||||||||||
|
Investment
Securities Gains, Net
|
80 | 514 | 469 | 1,031 | 1,064 | |||||||||||||||
|
Non-Interest
Expense
|
20,857 | 20,032 | 18,966 | 17,307 | 16,668 | |||||||||||||||
|
Income
Before Provision for Income Taxes
|
9,835 | 9,358 | 10,459 | 11,620 | 11,990 | |||||||||||||||
|
Provision
for Income Taxes
|
2,128 | 2,206 | 2,715 | 3,002 | 3,277 | |||||||||||||||
|
Net
Income
|
$ | 7,707 | $ | 7,152 | $ | 7,744 | $ | 8,618 | $ | 8,713 | ||||||||||
|
Per
Common Share:
|
||||||||||||||||||||
|
Earnings
(Basic)
|
$ | 0.73 | $ | 0.66 | $ | 0.69 | $ | 0.77 | $ | 0.78 | ||||||||||
|
Cash
Dividends
|
0.38 | 0.38 | 0.38 | 0.38 | 0.37 | |||||||||||||||
|
Book
Value
|
6.61 | 5.99 | 6.08 | 6.04 | 5.74 | |||||||||||||||
|
Tangible
Book Value (2)
|
6.13 | 5.52 | 5.61 | 5.77 | 5.46 | |||||||||||||||
|
Consolidated
Period-End Balance Sheet Data:
|
||||||||||||||||||||
|
Total
Assets
|
$ | 793,680 | $ | 761,981 | $ | 752,728 | $ | 750,861 | $ | 729,023 | ||||||||||
|
Securities
Available-for-Sale
|
237,274 | 228,959 | 235,097 | 243,998 | 271,095 | |||||||||||||||
|
Securities
Held-to-Maturity
|
52,202 | 62,358 | 54,939 | 59,463 | 44,140 | |||||||||||||||
|
Gross
Loans
|
443,870 | 405,832 | 403,665 | 391,043 | 360,906 | |||||||||||||||
|
Allowance
for Loan Losses
|
6,977 | 6,680 | 6,640 | 6,250 | 5,757 | |||||||||||||||
|
Deposits
|
657,494 | 629,044 | 604,958 | 571,929 | 580,633 | |||||||||||||||
|
Long-Term
Borrowings
|
41,538 | 42,204 | 52,472 | 65,379 | 55,849 | |||||||||||||||
|
Short-Term
Borrowings
|
15,786 | 18,459 | 19,357 | 37,559 | 20,018 | |||||||||||||||
|
Shareholder's
Equity
|
69,399 | 63,332 | 67,717 | 67,605 | 64,304 | |||||||||||||||
|
Selected
Key Ratios:
|
||||||||||||||||||||
|
Return
on Average Assets
|
0.99 | % | 0.95 | % | 1.02 | % | 1.17 | % | 1.20 | % | ||||||||||
|
Return
on Average Equity
|
11.84 | % | 11.20 | % | 11.40 | % | 13.08 | % | 13.67 | % | ||||||||||
|
Net
Interest Margin (tax-equivalent)
|
3.62 | % | 3.81 | % | 3.82 | % | 3.76 | % | 3.77 | % | ||||||||||
|
Efficiency
Ratio (3)
|
61.76 | % | 61.14 | % | 57.67 | % | 55.50 | % | 53.76 | % | ||||||||||
|
Dividend
Payout
|
52.05 | % | 57.58 | % | 55.07 | % | 49.35 | % | 47.44 | % | ||||||||||
|
Asset
Quality:
|
||||||||||||||||||||
|
Non-performing
Loans
|
6,136 | 2,529 | 4,918 | 2,751 | 3,658 | |||||||||||||||
|
Non-performing
Assets
|
6,383 | 2,632 | 4,938 | 2,829 | 3,678 | |||||||||||||||
|
Net
Loan Charge-Offs to Average Loans
|
0.14 | % | 0.38 | % | 0.30 | % | 0.19 | % | 0.33 | % | ||||||||||
|
Allowance
for Loan Losses to Period-End Loans
|
1.57 | % | 1.65 | % | 1.64 | % | 1.60 | % | 1.60 | % | ||||||||||
|
Allowance
for Loan Losses to Non-performing Loans (4)
|
114 | % | 264 | % | 135 | % | 227 | % | 157 | % | ||||||||||
|
Non-performing
Loans to Period-End Loans
|
1.38 | % | 0.62 | % | 1.22 | % | 0.70 | % | 1.01 | % | ||||||||||
|
(1)
Certain figures have been reclassified to conform with the current
period
presentation.
|
||||||||||||||||||||
|
(2)
Tangible book value numbers exclude goodwill and intangible assets
associated with prior business combinations.
|
||||||||||||||||||||
|
(3)
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. (4) Non-performing loans include
non-accrual loans, troubled debt restructured loans and accruing
loans 90
days or more delinquent. |
||||||||||||||||||||
Table
of
Selected Quarterly Financial Data:
|
2007
|
2006
|
|||||||||||||||||||||||||||||||
|
Selected
Unaudited Quarterly Financial Data
|
Fourth
|
Third
|
Second
|
First
|
Fourth
|
Third
|
Second
|
First
|
||||||||||||||||||||||||
|
(Dollars
in Thousands)
|
||||||||||||||||||||||||||||||||
|
Interest
income
|
$ | 11,768 | $ | 11,736 | $ | 11,412 | $ | 11,114 | $ | 11,291 | $ | 10,934 | $ | 10,646 | $ | 10,470 | ||||||||||||||||
|
Interest
expense
|
5,604 | 5,485 | 5,335 | 5,050 | 5,061 | 4,691 | 4,388 | 4,220 | ||||||||||||||||||||||||
|
Net
interest income
|
6,164 | 6,251 | 6,077 | 6,064 | 6,230 | 6,243 | 6,258 | 6,250 | ||||||||||||||||||||||||
|
Provision
for loan losses
|
250 | 150 | 240 | 260 | 300 | 420 | 420 | 420 | ||||||||||||||||||||||||
|
Net
interest income after provision for loan losses
|
5,914 | 6,101 | 5,837 | 5,804 | 5,930 | 5,823 | 5,838 | 5,830 | ||||||||||||||||||||||||
|
Investment
Security Gains (Losses), Net
|
(68 | ) | 22 | 79 | 47 | 129 | 75 | 17 | 293 | |||||||||||||||||||||||
|
Other
non-interest income
|
1,433 | 1,546 | 2,267 | 1,710 | 1,464 | 1,300 | 1,334 | 1,357 | ||||||||||||||||||||||||
|
Non-interest
expense
|
5,570 | 5,102 | 5,221 | 4,964 | 4,618 | 5,069 | 5,494 | 4,851 | ||||||||||||||||||||||||
|
Income
before income tax expense
|
1,709 | 2,567 | 2,962 | 2,597 | 2,905 | 2,129 | 1,695 | 2,629 | ||||||||||||||||||||||||
|
Income
tax expense
|
349 | 576 | 555 | 648 | 704 | 485 | 341 | 676 | ||||||||||||||||||||||||
|
Net
income
|
$ | 1,360 | $ | 1,991 | $ | 2,407 | $ | 1,949 | $ | 2,201 | $ | 1,644 | $ | 1,354 | $ | 1,953 | ||||||||||||||||
|
Basic
earnings per share
|
$ | 0.13 | $ | 0.19 | $ | 0.23 | $ | 0.18 | $ | 0.21 | $ | 0.15 | $ | 0.12 | $ | 0.18 | ||||||||||||||||
|
Basic
weighted average shares outstanding
|
10,503,704 | 10,537,801 | 10,569,182 | 10,569,182 | 10,569,182 | 10,579,400 | 10,966,693 | 11,145,937 | ||||||||||||||||||||||||
|
Net
interest margin (tax equivalent) (1)
|
3.52 | % | 3.67 | % | 3.63 | % | 3.68 | % | 3.74 | % | 3.83 | % | 3.84 | % | 3.81 | % | ||||||||||||||||
|
Return
on average assets
|
0.68 | % | 1.01 | % | 1.26 | % | 1.04 | % | 1.14 | % | 0.87 | % | 0.73 | % | 1.05 | % | ||||||||||||||||
|
Return
on average equity
|
7.96 | % | 12.15 | % | 14.92 | % | 12.57 | % | 13.92 | % | 10.78 | % | 8.37 | % | 11.71 | % | ||||||||||||||||
|
Efficiency
ratio (2)
|
68.52 | % | 61.02 | % | 58.52 | % | 59.36 | % | 55.52 | % | 62.34 | % | 67.44 | % | 59.36 | % | ||||||||||||||||
|
(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
|
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
subsidiaries for each of the years in the three-year period ended December
31,
2007. 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 on
deposit accounts, trust and investment service fees, insurance commission
income, the net gain on sale of loans, the increase on the cash surrender value
on bank owned life insurance, other service fees and other
income. Our non-interest expenses consist of salaries, employee
benefits, occupancy expense, furniture and equipment expense, computer service
fees, advertising and marketing, professional fees, other miscellaneous expenses
and taxes. 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.i., 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.
Recent
Accounting
Pronouncements. In December 2007, the Financial Accounting
Standards Board (“FASB”) issued revised Statement of Financial Accounting
Standards No. 141, “Business Combinations” (“SFAS 141(R)”). SFAS
141(R) retains the fundamental requirements of SFAS No. 141 that the acquisition
method of accounting (formerly the purchase method) be used for all business
combinations; that an acquirer be identified for each business combination;
and
that intangible assets be identified and recognized separately from
goodwill. SFAS 141(R) requires the acquiring entity in a business
combination to recognize the assets acquired, the liabilities assumed, and
any
non-controlling interest in the acquiree at the acquisition date, measured
at
their fair values as of that date, with limited
exceptions. Additionally, SFAS No 141(R) changes the requirements for
recognizing assets acquired and liabilities assumed arising from contingencies
and recognizing and measuring contingent consideration. SFAS No
141(R) also enhances the disclosure requirements for business
combinations. SFAS No 141(R) applies prospectively to business
combinations for which the acquisition date is on or after the beginning of
the
first annual reporting period beginning on or after December 15, 2008 and may
not be applied before that date.
In
December 2007, the FASB issued SFAS No. 160,
“Noncontrolling Interests in Consolidated Financial
Statements, an amendment of ARB No. 51,”
(“SFAS 160”). SFAS 160 amends Accounting
Research Bulletin No. 51, “Consolidated Financial
Statements,” to establish accounting and
reporting standards for the non-controlling interest in a
subsidiary and for the deconsolidation of a subsidiary. Among other
things, SFAS 160 clarifies that a non-controlling
interest in a subsidiary is an ownership
interest in the consolidated entity that
should be reported as equity in the
consolidated financial statements and requires
consolidated net income to be reported at amounts that
include the amounts attributable to both the parent and the non-controlling
interest. SFAS 160 also amends SFAS 128, “Earnings per Share,” so
that earnings per share calculations in consolidated financial statements will
continue to be based on amounts attributable to the parent. SFAS 160 is
effective for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008 and is applied prospectively as of
the beginning of the fiscal year in which it
is initially applied, except for the presentation and
disclosure requirements which are to be
applied retrospectively for all periods
presented. SFAS 160 is not expected to have a material impact on
our financial condition or results of operations.
In
November 2007, the SEC issued Staff Accounting Bulletin No. 109,
“Written Loan Commitments Recorded at Fair Value Through Earnings” (“SAB
109”). SAB 109 provides views on the accounting for
written loan commitments recorded at fair value under
GAAP. SAB No. 109 supersedes SAB 105, “Application of Accounting
Principles to Loan Commitments.” Specifically, SAB 109 states that
the expected net future cash flows related to the associated servicing of a
loan
should be included in the measurement of all written loan commitments that
are
accounted for at fair value through earnings. The provisions of SAB 109
are applicable on a prospective basis to written loan commitments recorded
at
fair value under GAAP that are issued or modified in fiscal quarters beginning
after December 15, 2007. SAB 109 is not expected to have a material impact
on our financial condition or results of operations.
In
February 2007, FASB issued Statement of Financial Accounting Standards No.
159,
“The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS
159”). SFAS 159 permits entities to choose to measure many financial
instruments and certain other items at fair value. The objective is
to improve financial reporting by providing entities with the opportunity to
mitigate volatility in reported earnings caused by measuring related assets
and
liabilities differently without having to apply complex hedge accounting
provisions. SFAS 159 is effective for fiscal years beginning after
November 15, 2007. Early adoption was permitted; however, we did not
elect early adoption and therefore adopted the
standard
on January 1, 2008. Upon adoption, we did not elect the fair value
option for any eligible items that existed at January 1, 2008..
In
September 2006, FASB’s Emerging Issues Task Force (“EITF”) reached a consensus
on EITF Issue No. 06-4, “Accounting for Deferred Compensation and Postretirement
Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements” (“EITF
06-4”). EITF 06-4 will require that the postretirement aspects of an
endorsement-type split dollar life insurance arrangement be recognized as a
liability by the employer and that the obligation is not effectively settled
by
the purchase of life insurance. Companies adopting EITF 06-4 will be
able to choose between retrospective application to all prior periods or
treating the application of EITF 06-4 as a cumulative-effect adjustment to
beginning retained earnings or to other components of equity or net assets
in
the statement of condition. EITF 06-4 will be effective for fiscal
years beginning after December 15, 2007. We have 15 split-dollar life
insurance arrangements with current and former executives of the Bank that
are
subject to EITF 06-4. We adopted EITF 06-4 effective for the fiscal
year that began on January 1, 2008, at which time we recorded a $676 thousand
liability and an equal and offsetting reduction to our beginning retained
earnings.
In
September 2006, the FASB issued Statement of Financial Accounting Standards
No.
157, “Fair Value Measurements,” (“SFAS 157”), which is effective for fiscal
years beginning after November 15, 2007 and for interim periods within those
years. This statement defines fair value, establishes a framework for
measuring fair value, and expands the related disclosure
requirements. The expanded disclosures include a requirement to
disclose fair value measurements according to a hierarchy, segregating
measurements using (1) quoted prices in active markets for identical assets
and
liabilities, (2) significant other observable inputs, and (3) significant
unobservable inputs. SFAS No. 157 will affect certain of our fair
value disclosures, but is not expected to have a material impact on our
financial condition or results of operations. The portion of our
assets and liabilities with fair values based on unobservable inputs is not
significant.
B. Performance
Overview for the Year Ended December 31, 2007
During
2007 several of our key performance measures improved, as compared to
2006. Net income, earnings per share, return on assets, and return on
equity all increased in 2007. Specifically, net income increased from
$7.152 million in 2006 to $7.707 million in 2007, a $555 thousand or 7.8%
increase. Earnings per share, return on assets, and return on equity
increased from $0.66, 0.95%, and 11.20%, respectively, in 2006, to $0.73, 0.99%,
and 11.84%, respectively, in 2007. During 2007, there was an increase
in total non-interest income, a reduction in the provision for loan losses
and a
reduction in income taxes. These improvements were offset by a
decrease in net interest income and an increase in total non-interest
expense.
Although
most of our performance measures improved during 2007, the improvement was
largely due to a $660 thousand decrease in the provision for loan losses and
three unusual events that largely impacted non-interest
income. First, during the first quarter of 2007 we recorded a $352
thousand gain on the disposal of fixed assets due to the recognition of a
deferred gain on the sale of our Norwich Town, New York (Chenango County) branch
building and contents. Second, in May 2007 a senior executive of the
Bank unexpectedly passed away. As a result, in the second quarter of
2007 we recorded a $615 thousand (non-taxable) gain on life insurance coverage
maintained by the Bank on the senior executive. And finally, due to a
regional flood in the second quarter of 2006, we recorded approximately $600
thousand in losses and expenses due to the disposal / impairment of fixed assets
for two of our branch office buildings and their contents and subsequent
business resumption costs. We applied for various flood relief grants
from various New York State agencies due to the flood and were awarded $245
thousand of grant funding, $232 thousand of which was recorded in
2007. The combined
positive impact on net income from these events for the year ended December
31,
2007, compared to the year ended December 31, 2006 was approximately $1.350
million. The improvement in net income due to these three unusual
events was offset, in part, by a decrease in net interest income and an increase
in non-interest expense. During 2007, we generally operated in a flat
or inverted interest rate climate, which resulted in a $425 thousand decrease
in
net interest income between the periods. Non-interest expense
increased by $825 thousand or 4.1% between 2006 and 2007 largely due
to increases in salaries and employee benefits expense.
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
i.
Comparison of Financial Condition at December 31, 2007, and December 31,
2006
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 approximately 92% to 95%
of our total assets in earning assets. During 2007 the
composition of our assets changed modestly. The total loans to total
assets ratio was 55.9% at December 31, 2007, as compared to 53.3% at December
31, 2006.
Total
Assets
During
2007, total assets increased from $761.981 million at December 31, 2006 to
$793.680 million at December 31, 2007, a $31.699 million or 4.2%
increase. The growth in total assets was principally funded by an
increase in deposit liabilities. During 2007, deposit liabilities
increased $28.450 million or 4.5%, from $629.044 million at December 31, 2006
to
$657.494 million at December 31, 2007. Throughout most of 2007,
opportunities to increase borrowings were limited due to an unfavorable flat
or
inverted yield curve, thereby curbing potential growth in funding, and, in
turn,
total asset growth.
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.
Summary
of Investment Securities:
|
At
December 31
|
||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||
|
Amortized
Cost
|
Estimated
Fair
Value
|
Amortized
Cost
|
Estimated
Fair
Value
|
Amortized
Cost
|
Estimated
Fair
Value
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Trading
(1):
|
$ | 1,167 | $ | 1,430 | $ | 1,296 | $ | 1,625 | $ | 1,334 | $ | 1,542 | ||||||||||||
|
Available-for-sale:
|
||||||||||||||||||||||||
|
U.S.
Treasuries
|
$ | 5,997 | $ | 6,070 | $ | 10,963 | $ | 10,807 | $ | 10,952 | $ | 10,866 | ||||||||||||
|
Obligations
of U.S. Government
|
||||||||||||||||||||||||
|
Corporations
and Agencies
|
7,997 | 8,015 | 21,486 | 21,336 | 25,444 | 25,091 | ||||||||||||||||||
|
Obligations
of States and Political
|
||||||||||||||||||||||||
|
Subdivisions
(Municipal Bonds)
|
48,861 | 48,718 | 47,985 | 47,544 | 55,080 | 54,638 | ||||||||||||||||||
|
Mortgage
- Backed Securities
|
172,719 | 171,395 | 149,400 | 146,086 | 146,463 | 143,248 | ||||||||||||||||||
|
Corporate
Securities
|
2,294 | 2,293 | 2,274 | 2,267 | 0 | 0 | ||||||||||||||||||
|
Equity
securities (2)
|
866 | 783 | 825 | 919 | 1,103 | 1,254 | ||||||||||||||||||
|
Total
available-for-sale
|
$ | 238,734 | $ | 237,274 | $ | 232,933 | $ | 228,959 | $ | 239,042 | $ | 235,097 | ||||||||||||
|
Held-to-maturity:
|
||||||||||||||||||||||||
|
Obligations
of States and Political Subdivisions (Municipal Bonds)
|
$ | 17,874 | $ | 18,018 | $ | 22,903 | $ | 22,916 | $ | 10,655 | $ | 10,633 | ||||||||||||
|
Mortgage-Backed
Securities
|
34,328 | 33,725 | 39,455 | 38,394 | 44,284 | 43,204 | ||||||||||||||||||
|
Total
held-to-maturity
|
$ | 52,202 | $ | 51,743 | $ | 62,358 | $ | 61,310 | $ | 54,939 | $ | 53,837 | ||||||||||||
|
(1)
These securities are held by the Company for its non-qualified Executive
Deferred Compensation plan.
|
||||||||||||||||||||||||
|
(2)
Certain figures have been reclassified to conform with the current
period
presentation.
|
||||||||||||||||||||||||
Between
December 31, 2006 and December 31, 2007, our total investment securities
portfolio (including trading, available-for-sale, and held-to-maturity)
decreased $2.036 million or 0.7%. During 2007 we received proceeds
from sales and maturities of securities totaling $59.829 million, versus new
purchases of $55.943 million. Proceeds from the sale or maturity of
the investment securities portfolio were generally used to purchase new
investment securities, since most of our loan growth was funded by new deposit
liabilities.
During
2007 we continued to maintain a concentration in mortgage-backed
securities. These included both mortgage pass-through securities and
collateralized mortgage obligations. At the end of 2007, our
mortgage-backed securities portfolio comprised 70.7% of the carrying value of
our investment securities portfolio. This compares to 63.3% and 64.3%
at the end of 2006 and 2005, respectively. Approximately 78.0% of our
mortgage-backed securities are backed by the full faith and credit of the United
States government through a Ginnie Mae guarantee. The remaining 22.0%
are guaranteed by Fannie Mae and Freddie Mac, which are government sponsored
enterprises. Although our mortgage-backed securities are guaranteed
by U.S. government agencies, they are susceptible to prepayment
risk. For example, if residential mortgage interest rates were to
drop significantly, the yield on our mortgage-backed securities would also
decline. When mortgage rates are low, homeowners often refinance
their existing mortgage loans or purchase new homes. This increases
the amount of principal payments we receive on our mortgage-backed securities,
which, in turn, increases the amount of net amortization expense we record
as an
offset to interest income, thereby decreasing the yield on the
securities.
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,
2007, the net unrealized loss on the available-for-sale investment securities
portfolio was $1.460 million. By comparison, at December 31, 2006,
the net unrealized loss on the available-for-sale investment securities
portfolio was $3.974 million. The general level of interest rates was
lower at December 31, 2007, as compared to the general level of interest rates
at December 31, 2006, which caused a general decrease in the net unrealized
loss
on the available-for-sale investment securities portfolio between the
periods. The net unrealized loss on the available-for-sale investment
securities portfolio as a percent of the amortized cost was 0.6% at December
31,
2007, versus 1.7% at December 31, 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, 2007. 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, 2007. Yields on obligations of states and municipalities exempt
from federal taxation were not tax-effected.
Investment
Securities Maturity Table:
|
At
December 31, 2007
|
||||||||||||||||||||||||||||||||||||||||
|
In
One Year or Less
|
After
One Year
through
Five Years
|
After
Five Years
through
Ten Years
|
After
Ten Years
|
Total
|
||||||||||||||||||||||||||||||||||||
|
Dollars
in Thousands
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
Carrying
Value
|
Weighted
Average
Yield
|
||||||||||||||||||||||||||||||
|
U.S.
Treasuries
|
- | - | $ | 6,070 | 4.03 | % | - | - | - | - | $ | 6,070 | 4.03 | % | ||||||||||||||||||||||||||
|
Obligations
of U.S. Government Corporations and Agencies
|
4,002 | 5.00 | % | 4,013 | 4.11 | % | - | - | - | - | 8,015 | 4.55 | % | |||||||||||||||||||||||||||
|
Obligations
of States and Political Subdivisions (Municipal Bonds)
|
10,365 | 3.68 | % | 22,702 | 3.49 | % | 31,752 | 4.52 | % | 1,773 | 4.52 | % | 66,592 | 4.04 | % | |||||||||||||||||||||||||
|
Mortgage-backed
Securities
|
8,564 | 2.86 | % | 191,023 | 4.75 | % | 4,146 | 5.22 | % | 1,990 | 5.21 | % | 205,723 | 4.69 | % | |||||||||||||||||||||||||
|
Corporate
Securities
|
2,293 | 5.02 | % | - | - | - | - | - | - | 2,293 | 5.02 | % | ||||||||||||||||||||||||||||
|
Total
securities (1)
|
$ | 25,224 | 3.73 | % | $ | 223,808 | 4.59 | % | $ | 35,898 | 4.60 | % | $ | 3,763 | 4.88 | % | $ | 288,693 | 4.52 | % | ||||||||||||||||||||
|
(1)
This table excludes trading securities totaling $1.430 million and
equity
securities totaling $783 thousand at December 31, 2007.
|
||||||||||||||||||||||||||||||||||||||||
At
both
December 31, 2007 and December 31, 2006, the approximate weighted average life
for all of the Bank’s available-for-sale and held-to-maturity debt securities
was 3.5 years. These estimates were provided by a third party
investment securities analyst and are used to provide comparisons with other
companies in the banking industry. The
estimates
were based upon the projected cash flows (to the most likely call date) of
our
investment securities portfolio taking into consideration the unique
characteristics of the individual securities held by us. Our estimate
may fluctuate significantly from period to period due to our concentration
in
mortgage-backed securities.
The
credit quality of our debt securities is strong. At December 31,
2007, 99.5% 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; 95.5% were rated AAA. This compares
to 99.4% and 95.9%, respectively, for the period ended December 31,
2006. The following table summarizes the insured and uninsured status
of the Bank’s municipal securities portfolio (excluding notes issued directly by
the Bank to local municipalities) at December 31, 2007. The values
and percentages presented are based on the par value of municipal securities
portfolio at December 31, 2007.
Obligations
of States and Political Subdivisions (Municipal Bonds) Credit Quality
Table:
|
dollars
in thousands
|
||||||
|
AAA
(1)
|
AA
|
A
|
Not
Rated
|
|||
|
Uninsured
/
Un-enhanced
|
Insured
/
Enhanced
|
Uninsured
/
Un-
enhanced
|
Insured
/
Enhanced
|
Un-Enhanced
|
Un-Enhanced
|
Total
|
|
$9,760
|
$32,820
|
$8,745
|
$1,765
|
$300
|
$510
|
$53,900
|
|
18.1%
|
60.9%
|
16.2%
|
3.3%
|
0.6%
|
0.9%
|
|
|
Total
AAA
|
$42,580
|
Total
AA
|
$10,510
|
|||
|
79.0%
|
19.5%
|
|||||
|
(1) Moody's
ratings
|
||||||
We
purchase our municipal securities based on the underlying creditworthiness
of
the issuing municipality and have not relied on the insurance enhancement
attached to the security.
At
December 31, 2007, the equity securities in our available-for-sale portfolio
had
a fair value of $783 thousand. These securities are held by the
Company and were comprised of common stocks of other banking
institutions. By comparison, the market value of this portfolio was
$919 thousand at December 31, 2006.
Other
Investments
At
December 31, 2007 we held $4.782 million of non-marketable equity securities
including: $2.759 million in FHLBNY stock; a $1.833 million equity interest
in a
Small Business Investment Company, Meridian Venture Partners II, L.P; $135
thousand of Federal Reserve Bank of New York stock; $34 thousand in New York
Business Development Corporation stock; and $21 thousand in small title
insurance agency. By comparison, at December 31, 2006; the estimated
fair value of our non-marketable equity securities totaled $4.600 million,
a
$182 thousand or 4.0% net increase between the periods. During 2007,
we contributed $200 thousand of additional capital toward our Small Business
Investment Company to fund additional equity investments.
Federal
Funds Sold and Time
Deposits with Other Banks
In
the
normal course of business, we sell and purchase federal funds to and from other
banks to meet our daily liquidity needs. We generally target our
federal funds sold position to be between $10 million and $30
million. We believe these levels provide us ample levels of
short-term liquidity to meet loan funding needs and other working capital
requirements. Because these funds are generally an unsecured
obligation of the counter party, we only sell federal funds to well-capitalized
banks that carry strong credit ratings. We also limit our total
federal funds sold position to 50% of the Bank’s equity capital or $33.411
million at December 31, 2007. Given the significant 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 2007 our average federal
funds sold position was $19.026 million. By comparison, during 2006
our average federal funds sold position was $11.548 million.
On
occasion we invest short-term liquid funds in time deposits with other banks
to
improve the yield on our liquid investments. At December 31, 2007, we
did not hold any deposits with other banks, as compared to $800 thousand at
December 31, 2006.
Loan
Portfolio
General. The
total loan portfolio
increased $38.038 million or 9.4% during 2007. Total loans
outstanding at December 31, 2007, were $443.870 million, as compared to $405.832
million at December 31, 2006. During 2007, we continued to expand our
geographic market for loans. In particular, we established a
representative loan production office in Clifton
Park,
New
York (Saratoga County) and acquired Provantage. We also continued to
aggressively market our small business, consumer, and residential mortgage
loans
in both our core rural markets and more densely populated markets including
Johnson City, New York (Broome County); Syracuse, New York (Onondaga County);
and Kingston, New York (Ulster County). Due to these efforts, all
categories of loans increased during 2007. The following table
summarizes the composition of our loan portfolio over the prior five-year
period.
Distribution
of Loans Table:
|
At
December 31,
|
||||||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||||||||||||
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
Amount
|
Percent
|
|||||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||||||
|
Residential
real estate (1)
|
$ | 127,113 | 28.6 | % | $ | 117,815 | 29.0 | % | $ | 124,367 | 30.8 | % | $ | 119,103 | 30.5 | % | $ | 118,571 | 32.9 | % | ||||||||||||||||||||
|
Commercial
real estate
|
161,071 | 36.3 | % | 152,128 | 37.5 | % | 143,552 | 35.6 | % | 129,516 | 33.1 | % | 115,733 | 32.1 | % | |||||||||||||||||||||||||
|
Commercial
(2)
|
83,622 | 18.8 | % | 74,033 | 18.2 | % | 69,651 | 17.3 | % | 78,003 | 19.9 | % | 65,031 | 18.0 | % | |||||||||||||||||||||||||
|
Consumer
|
72,064 | 16.2 | % | 61,856 | 15.2 | % | 66,095 | 16.4 | % | 64,421 | 16.5 | % | 61,571 | 17.1 | % | |||||||||||||||||||||||||
|
Total
loans
|
443,870 | 100.0 | % | 405,832 | 100.0 | % | 403,665 | 100.0 | % | 391,043 | 100.0 | % | 360,906 | 100.0 | % | |||||||||||||||||||||||||
|
Less:
|
||||||||||||||||||||||||||||||||||||||||
|
Allowance
for loan losses
|
(6,977 | ) | (6,680 | ) | (6,640 | ) | (6,250 | ) | (5,757 | ) | ||||||||||||||||||||||||||||||
|
Net
loans
|
$ | 436,893 | $ | 399,152 | $ | 397,025 | $ | 384,793 | $ | 355,149 | ||||||||||||||||||||||||||||||
|
(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 our commercial real estate portfolio increased
$45.338 million or 39.2%. At December 31, 2007, commercial real
estate loans comprised 36.3% or $161.071 million of our total loan
portfolio. This compares to 32.1% or $115.733 million at December 31,
2003. Throughout the five-year period covered in the table above, we
concentrated our efforts on opening new offices and hiring commercial lenders
in
large, more densely populated markets. These efforts contributed to
the increase in the outstanding balances in our commercial loan portfolio,
as
well. At December 31, 2007, commercial loan balances outstanding
totaled $83.622 million. This compares to $65.031 million at December
31, 2003.
In
the
first quarter of 2007, we acquired Provantage, a New York State licensed
mortgage banker with four (4) offices located throughout the Capital District
of
New York, namely Saratoga, Schenectady and Albany Counties. We
acquired Provantage to improve our residential mortgage lending capabilities
and
increase the outstanding balances of our residential mortgage
portfolio. At December 31, 2007, the outstanding balance of our
residential mortgage portfolio was $127.113 million. This
compares to $117.815 million at December 31, 2006, a $9.298 million or 7.9%
increase between the periods.
During
2007, we competitively priced and marketed our consumer loan products,
principally installment-type automobile loans, which increased the consumer
loan
portfolio to $72.064 million at December 31, 2007. This represents a
$10.208 million or 16.5% increase over the December 31, 2006 consumer loan
portfolio balance totaling $61.856 million. At December 31, 2006, our
indirect automobile loan portfolio was comprised of 4,077 accounts, totaling
$40.744 million. This compares to 4,710 accounts and $51.299 million
at December 31, 2007, a 15.5% net increase in accounts and a 25.9% net increase
in indirect automobile loans 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 prepayments.
Maturity
and Repricing of Loans Table:
|
Within
One
Year
(1)
|
One
Through
Five
Years
|
More
Than
Five
Years
|
Total
|
|||||||||||||
|
Residential
real estate (1)
|
$ | 42,377 | $ | 9,057 | $ | 75,679 | $ | 127,113 | ||||||||
|
Commercial
real estate
|
36,348 | 38,119 | 86,604 | 161,071 | ||||||||||||
|
Commercial
(2)
|
47,731 | 14,845 | 21,046 | 83,622 | ||||||||||||
|
Consumer
|
6,730 | 46,916 | 18,418 | 72,064 | ||||||||||||
|
Total
loans receivable
|
$ | 133,186 | $ | 108,937 | $ | 201,747 | $ | 443,870 | ||||||||
|
(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, 2008:
Table
of
Fixed and Adjustable Rate Loans:
|
Due
After December 31, 2008
|
||||||||||||
|
Fixed
|
Adjustable
|
Total
|
||||||||||
|
Residential
real estate (1)
|
$ | 77,998 | $ | 45,710 | $ | 123,708 | ||||||
|
Commercial
real estate
|
72,588 | 85,187 | 157,775 | |||||||||
|
Commercial (2)
|
36,264 | 26,191 | 62,455 | |||||||||
|
Consumer
|
68,202 | 1,084 | 69,286 | |||||||||
|
Total
loans
|
$ | 255,052 | $ | 158,172 | $ | 413,224 | ||||||
|
(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
|
||||||||||||
Commitments
and Lines of
Credit. Standby and commercial 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 and
commercial letters of credit are 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, 2007 and December 31, 2006 standby and commercial letters of credit
totaled $6.988 million and $6.974 million, respectively. At December
31, 2007 and December 31, 2006 the fair value of the Bank’s standby letters of
credit was not significant. The following table summarizes the
expirations of our standby and commercial letters of credit as of December
31,
2007.
Standby
and Commercial Letters of Credit Expiration Table:
|
Commitment
Expiration
of Standby and Commercial Letters of Credit
|
||||
|
(dollars
in thousands)
|
||||
|
Within
one year
|
$ | 3,552 | ||
|
After
one but within three years
|
84 | |||
|
After
three but within five years
|
127 | |||
|
Five
years or greater
|
3,225 | |||
|
Total
|
$ | 6,988 | ||
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, 2007
and December 31, 2006, we had outstanding unfunded loan commitments of $90.555
million and $81.536 million, respectively, representing a $9.019 million or
11.1% increase period over period. The increase in the unfunded loan
commitments was primarily due to growth in the unused portion of commercial
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, 2007, we had $3.917 million of loans
that were 30 to 89 days past due (excluding non-performing
loans). This equaled 0.88% of total loans outstanding. By
comparison, at December 31, 2006 we had $6.070 million of loans that were 30
to
89 days past due (excluding non-performing loans). This equaled 1.50%
of total loans outstanding. The decrease in delinquent loans between
the periods was principally due to a decrease in delinquency on a few large
commercial real estate loans. We considered the level of delinquent
loans at December 31, 2007 to be manageable and well within management’s
targeted guideline of less than 2.0% of loans outstanding.
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
|
2007
|
2006
|
2005
|
2004
|
2003
|
|||||||||||||||
|
Loans
in Non-Accrual Status:
|
||||||||||||||||||||
|
Residential
real estate (1)
|
$ | 895 | $ | 450 | $ | 327 | $ | 141 | $ | 257 | ||||||||||
|
Commercial
real estate
|
4,341 | 1,626 | 2,287 | 2,168 | 1,199 | |||||||||||||||
|
Commercial
(2)
|
843 | 271 | 1,191 | 243 | 1,700 | |||||||||||||||
|
Consumer
|
7 | 0 | 61 | 9 | 8 | |||||||||||||||
|
Total
non-accruing loans
|
6,086 | 2,347 | 3,866 | 2,561 | 3,164 | |||||||||||||||
|
Loans
Contractually Past Due 90 Days or More and Still Accruing
Interest
|
50 | 182 | 181 | 190 | 123 | |||||||||||||||
|
Troubled
Debt Restructured Loans
|
0 | 0 | 871 | 0 | 371 | |||||||||||||||
|
Total
non-performing loans
|
6,136 | 2,529 | 4,918 | 2,751 | 3,658 | |||||||||||||||
|
Other
real estate owned
|
247 | 103 | 20 | 78 | 20 | |||||||||||||||
|
Total
non-performing assets
|
$ | 6,383 | $ | 2,632 | $ | 4,938 | $ | 2,829 | $ | 3,678 | ||||||||||
|
Total
non-performing assets as a percentage of total assets
|
0.80 | % | 0.35 | % | 0.66 | % | 0.38 | % | 0.50 | % | ||||||||||
|
Total
non-performing loans as a percentage of total loans
|
1.38 | % | 0.62 | % | 1.22 | % | 0.70 | % | 1.01 | % | ||||||||||
|
(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
|
||||||||||||||||||||
Total
non-performing loans, including non-accruing loans, loans 90 days or more past
due and still accruing interest, and troubled debt restructured loans increased
$3.607 million between December 31, 2006 and December 31, 2007, from $2.529
million to $6.136 million. Non-performing loans as a percentage of
total loans outstanding were 1.38% at December 31, 2007, as compared to 0.62%
at
December 31, 2006, a 76 basis point increase. During 2007, we
transferred twenty-two (22) loans from performing to non-performing
status. These loans were distributed among seventeen (17) borrowers
with one borrower’s indebtedness representing 52% or $1.867 million of the net
increase. The non-performing loans were not concentrated to any
single industry or closely-related group of industries.
Impaired
Loans. The following table provides information on impaired
loans for the periods presented:
|
As
of and for the Year
|
||||||||
|
Ended
December 31,
|
||||||||
|
dollars
in thousands
|
2007
|
2006
|
||||||
|
Impaired
Loans
|
$ | 5,701 | $ | 1,896 | ||||
|
Allowance
for Impaired Loans
|
1,382 | 334 | ||||||
|
Average
Recorded Investment in Impaired Loans
|
4,858 | 1,597 | ||||||
At
December 31, 2007, $4.365 million of the impaired loans had a specific reserve
allocation of $1.382 million, compared to $1.669 million of impaired loans
at
December 31, 2006 with a related reserve allocation of $334
thousand.
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
us 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, 2007 and December 31, 2006 we held modest
amounts of OREO property totaling $247 thousand and $103 thousand,
respectively.
Potential
Problem
Loans. 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 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. In addition, we hold an
amount of commercial and commercial real estate loans with balances in excess
of
$1.0 million. We
have identified through normal credit review procedures potential problem loans
totaling $7.870 million or 1.8% of total loans outstanding at December 31,
2007. By comparison, at December 31, 2006, potential problem loans
totaled $14.538 million or 3.6% of total loans outstanding. This
represents a $6.668 million decrease in potential problem loans between December
31, 2006 and December 31, 2007.
The
decrease in potential problem loans from the period ended December 31, 2006
to
the period ended December 31, 2007, was due to several factors including,
repayment by some borrowers, a rating upgrade of loans previously classified
as
substandard, and the transfer of a significant number of loans to non-performing
status. Management cannot predict economic conditions or other
factors that may impact each potential problem loan. 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. We classify our loan portfolio by call report
code and industry to determine and monitor the level of our loan
concentrations. We generally consider industry concentrations when
the total loan obligations (outstanding loans and unfunded commitments) to
the
industry exceed 25% of the Bank’s Tier II capital. The Bank’s Tier II
capital at December 31, 2007 was $68.837 million, which established our industry
concentration threshold at $17.209 million. We also review the
geographic concentration and economic trends within each industry concentration
to further segment and analyze the risk. The following narrative
summarizes our concentrations of credit.
At
December 31, 2007 we had $161.071 million in total loan obligations or 234.0%
of
the Bank’s Tier II capital secured by commercial real estate (“CRE”) properties
or to commercial real estate developers/property managers. The Office
of the Comptroller of the Currency has set concentrations of CRE loans
(non-owner occupied) at 300.0% of the Bank’s Tier II capital. Based
upon our analysis, as of December 31, 2007, the Bank had approximately $49.943
million or 72.6% of the Bank’s Tier II capital in non-owner occupied CRE loans
secured by the real estate and another $5.722 million or 8.3% to non-owner
occupied CRE developers/property managers that is either secured by collateral
other than commercial real estate or is unsecured. At December 31,
2007, there were 32 CRE loans with an aggregate balance of $13.478 million
that
have been identified as either non-performing or potential problem
loans.
At
December 31, 2007, we had 57 loans with $34.282 million in total loan
obligations or 49.8% of the Bank’s Tier II capital to borrowers who operate in
the hotel/motel industry, including lodges, bed and breakfast inns, and a
limited number of campgrounds. At December 31, 2007, 3 of the Bank’s
largest hotel / motel borrowers had loan obligations totaling $15.021
million. In addition, there were another 7 hotel / motel borrowers
who had aggregate loan obligations of between $1.000 million and $3.000
million. The hotel/motel properties that we finance are
geographically dispersed throughout our market area and the broader statewide
region. However, 10 of the hotels/motels/bed & breakfast inns we
finance are located in the core market areas of Cooperstown (Otsego County),
Oneonta (Otsego County), Sidney (Delaware County),
Cobleskill
(Schoharie County), and Norwich (Chenango County), New York, with total loan
obligations of approximately $14.2 million. Many of these hotels/inns
are highly dependent upon tourism and have a seasonality that peaks in July
and
August. At December 31, 2007, these loans were deemed to be of
acceptable risk (“pass rated”) by our management, with no delinquency
noted. Two (2) loans in the hotel/motel sector with an outstanding
balance of $1.736 million were risk rated as substandard at December 31, 2007
due to insufficient cash flow generated by the operations of the
motels.
At
December 31, 2007, loan obligations to the healthcare industry, including hospitals,
medical practices, and residential and independent care facilities, totaled
$34.139 million or 49.6% of the Bank’s Tier II capital. This
portfolio was comprised of approximately 122 loans with an average size of
$280
thousand. This portfolio presently contains 4 of the largest
borrowers in the Bank with loan obligations totaling $20.994
million. All of these loans were pass rated at December 31, 2007 and
were performing in compliance with contractual terms. Only 1 (loan
obligation in this portfolio was identified as substandard at December 31,
2007. The borrower is a small hospital with an unused line of credit
totaling $200 thousand.
At
December 31, 2007 we had 62 loans with $31.456 million of total loan obligations
to borrowers who operate in the automotive and other vehicle dealership
industry. The total loan obligations to this industry-sector
represents 45.7% of the Bank’s Tier II capital and consists of 22 borrowers
whose primary revenue is derived from the retail sale and service of new and
used motor vehicles, motor cycles, and/or recreational
vehicles. Loans to this industry consist of commercial real estate
mortgages, equipment financing, working capital lines of credit, and inventory
lines (dealer floor plans). We maintain 16 dealer floor plan lines
within this portfolio totaling $15.800 million, $9.654 million of which was
outstanding at December 31, 2007. Due to the significant risk posed
by dealer floor plan lending, management monitors the dealer floor plan loans
by
conducting inventory reviews on a monthly basis. At December 31,
2007, there were three borrowers within this area of industry concentration
with
$3.195 million in aggregate loan obligations outstanding that were classified
as
substandard. The substantial majority of our loan obligations for
this area of concentration were made to dealerships that primarily sell American
automobiles. In 2007, American automobile manufacturers lost
substantial market share to foreign automobile retailers.
At
December 31, 2007, we had $25.719 million in total loan obligations or 37.4%
of
the Bank’s Tier II capital secured by residential rental properties, including
1-4 family units, 5+ family units, and mobile home parks. At December
31, 2007, the portfolio consisted of approximately 117 loans with an average
loan size of $222 thousand. The geographic location and types of
properties securing this portfolio were fairly diverse. Five of the
loans in this portfolio totaling $777 thousand were classified as substandard
at
December 31, 2007.
At
December 31, 2007, we had 14 borrowers whose total loan obligations were equal
to or exceeded $4.000 million. In aggregate, these borrowers’ total
loan obligations were $87.020 million. Although these large
relationships were dispersed among borrowers who operate in various industries,
the decline in the financial condition of one of our large borrowers could
significantly impact the credit quality of our loan portfolio. At
December 31, 2007, one of our large borrowers, with total loan obligations
of
$4.500 million, was classified as substandard.
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,
|
||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||
|
Balance
at beginning of year
|
$ | 6,680 | $ | 6,640 | $ | 6,250 | $ | 5,757 | $ | 5,392 | ||||||||||
|
Charge
offs:
|
||||||||||||||||||||
|
Residential
real estate (1)
|
109 | 56 | 20 | 133 | 174 | |||||||||||||||
|
Commercial
real estate
|
120 | 2 | 0 | 51 | 0 | |||||||||||||||
|
Commercial
(2)
|
216 | 1,161 | 364 | 121 | 193 | |||||||||||||||
|
Consumer
|
721 | 887 | 1,091 | 639 | 1,109 | |||||||||||||||
|
Total
charge offs
|
1,166 | 2,106 | 1,475 | 944 | 1,476 | |||||||||||||||
|
Recoveries:
|
||||||||||||||||||||
|
Residential
real estate (1)
|
22 | 31 | 39 | 20 | 10 | |||||||||||||||
|
Commercial
real estate
|
105 | 73 | 0 | 0 | 0 | |||||||||||||||
|
Commercial
(2)
|
137 | 143 | 29 | 51 | 78 | |||||||||||||||
|
Consumer
|
299 | 339 | 217 | 166 | 188 | |||||||||||||||
|
Total
recoveries
|
563 | 586 | 285 | 237 | 276 | |||||||||||||||
|
Net
charge-offs
|
603 | 1,520 | 1,190 | 707 | 1,200 | |||||||||||||||
|
Provision
for loan losses
|
900 | 1,560 | 1,580 | 1,200 | 1,565 | |||||||||||||||
|
Balance
at end of year
|
$ | 6,977 | $ | 6,680 | $ | 6,640 | $ | 6,250 | $ | 5,757 | ||||||||||
|
Ratio
of net charge-offs during the year to average loans outstanding during
the
year
|
0.14 | % | 0.38 | % | 0.30 | % | 0.19 | % | 0.33 | % | ||||||||||
|
Allowance
for loan losses to total loans
|
1.57 | % | 1.65 | % | 1.64 | % | 1.60 | % | 1.60 | % | ||||||||||
|
Allowance
for loan losses to non-performing loans
|
114 | % | 264 | % | 135 | % | 227 | % | 157 | % | ||||||||||
|
(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
allowance for loan losses at December 31, 2007 was $6.977 million or 1.57%
of
gross loans outstanding. This compares to $6.680 million or 1.65% of
loans outstanding at December 31, 2006. During 2007, net charge-offs
on loans totaled $603 thousand or 0.14% of average loans
outstanding. This compares to $1.520 million of net charge-offs or
0.38% of average loans outstanding in 2006, a $917 thousand and 24 basis point
net decrease, respectively, between the periods. During the first quarter
of
2006, we recorded a $981 thousand charge-off on two loans to one of our large
commercial borrowers. No similarly large charge-offs were recorded
during 2007.
We
recorded $900 thousand in the provision for loan losses during
2007. This compares to $1.560 million recorded in the provision for
loan losses in 2006, a $660 thousand or 42.3% decrease. During 2007,
we experienced a decrease in delinquent loans, net charge-offs and potential
problem loans. The improvement in these credit quality measures were
offset, in part, by an increase in non-performing loans. Management
and the Board of Directors deemed the allowance for loan losses as adequate
at
December 31, 2007 and December 31, 2006.
Allocation
of the Allowance for Loan
Losses. We allocate our allowance for loan losses among the
loan categories indicated in the following table. Although we
estimate and allocate probable losses by category of loan, this allocation
should not be interpreted as the precise amount of future charge-offs or a
proportional distribution of future charge-offs among loan
categories. 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,
|
||||||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
2004
|
2003
|
||||||||||||||||||||||||||||||||||||
|
Dollars
in Thousands
|
Amount
of
Allowance
for
Loan
Losses
|
Percent
of
Allowance
for
Loan
Losses
in
Each
Category
|
Amount
of
Allowance
for
Loan
Losses
|
Percent
of
Allowance
for
Loan
Losses
in
Each
Category
|
Amount
of
Allowance
for
Loan
Losses
|
Percent
of
Allowance
for
Loan
Losses
in
Each
Category
|
Amount
of
Allowance
for
Loan
Losses
|
Percent
of
Allowance
for
Loan
Losses
in
Each
Category
|
Amount
of
Allowance
for
Loan
Losses
|
Percent
of
Allowance
for
Loan
Losses
in
Each
Category
|
||||||||||||||||||||||||||||||
|
Residential
real estate (1)
|
$ | 607 | 8.7 | % | $ | 501 | 7.5 | % | $ | 595 | 9.0 | % | $ | 670 | 10.7 | % | $ | 545 | 9.5 | % | ||||||||||||||||||||
|
Commercial
real estate
|
2,969 | 42.6 | % | 3,083 | 46.2 | % | 3,171 | 47.8 | % | 2,454 | 39.3 | % | 2,248 | 39.0 | % | |||||||||||||||||||||||||
|
Commercial
(2)
|
1,799 | 25.8 | % | 1,462 | 21.9 | % | 1,512 | 22.8 | % | 1,435 | 23.0 | % | 1,297 | 22.5 | % | |||||||||||||||||||||||||
|
Consumer
|
1,383 | 19.8 | % | 1,114 | 16.7 | % | 1,114 | 16.8 | % | 1,080 | 17.3 | % | 966 | 16.8 | % | |||||||||||||||||||||||||
|
Unallocated
|
219 | 3.1 | % | 520 | 7.8 | % | 248 | 3.7 | % | 611 | 9.8 | % | 701 | 12.2 | % | |||||||||||||||||||||||||
|
Total
|
$ | 6,977 | 100.0 | % | $ | 6,680 | 100.0 | % | $ | 6,640 | 100.0 | % | $ | 6,250 | 100.0 | % | $ | 5,757 | 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, 2007, we
maintained $11.897 million or 1.5% of total assets in these categories of
non-earning assets. This compares to $12.742 million or 1.7% of total
assets at December 31, 2006.
Premises
and
Equipment. The net book value of premises and equipment
increased $626 thousand or 11.0%, from $5.686 million at December 31, 2006
to
$6.312 million at December 31, 2007. During 2007 we acquired land in
the Dewitt, New York (Onondaga County) at a cost of $412 thousand with the
intention of building a full-service branch facility on the site during
2008. The remaining net increase in premises and equipment totaling
$214 thousand was due to various building improvements and equipment purchases
made during 2007, net of depreciation.
Bank-Owned
Life
Insurance. The cash surrender value of bank-owned life
insurance at December 31, 2007 was $15.785 million, as compared to $16.108
million at December 31, 2006, a $323 thousand or 2.0% decrease. In
May of 2007, a senior executive of the Bank unexpectedly passed
away. The Bank held life insurance policies on the senior executive
and received the full cash surrender value of these policies totaling $929
thousand following his death. This reduction in the cash surrender
value of the bank-owned life insurance was offset, in part, by an increase
in
the cash surrender value on the remaining policies (and the senior executive’s
policies preceding his death) totaling $606 thousand. The policies
are issued by five life insurance companies who all carry strong financial
strength ratings. At December 31, 2007, the Bank held policies on 15
former and current members of the Bank’s senior management, all of whom
participate in the Bank’s Amended and Restated Split-Dollar Life Insurance Plan
as furnished in Exhibit 10.2 of this document.
Goodwill
and Other Intangible
Assets. During 2007 we recorded $101 thousand of goodwill due
to the acquisition of Provantage. This increased goodwill from $4.518
million at December 31, 2006 to $4.619 million at December 31,
2007. We determined that no impairment of goodwill related to
previous branch acquisitions or the Provantage acquisition was required in
2007.
Other
intangible assets, net, which consist of identifiable core deposit intangibles
from prior period branch purchases and customer list intangibles from prior
period insurance agency purchases, totaled $394 thousand at December 31, 2007,
versus $520 thousand at December 31, 2006. The $126 thousand
reduction in other intangible assets between the periods was due to the
amortization of both the core deposit intangible asset recorded in prior period
bank branch acquisitions and the customer list intangible asset from a prior
period insurance agency acquisition.
Pension
Asset. On
December 31, 2006, we adopted SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – an amendment of FASB Statements
No. 87, 88, 106, and 132(R),” an accounting standard which requires employers to
(i) recognize the over funded or under funded status of defined benefit
postretirement plans, which is measured as the difference between the plan
assets at fair value and the benefit obligation, as an asset or liability on
its
balance sheet, (ii) recognize changes in that funded status in the year in
which
the changes occur through comprehensive income, and (iii) measure the defined
benefit plan assets and obligations as of the date of its year-end balance
sheet. Although we froze our defined pension plan on February 28,
2006, as the plan sponsor we maintain a requirement to fund the plan and comply
with SFAS No. 158. At December 31, 2007, our pension plan remained in
an over funded status due to improved plan performance. The pension
asset at December 31, 2007 was $4.872 million. This compares to
$2.357 million at December 31, 2006, a $2.515 million increase between
periods.
Other
Assets. Other assets decreased $520 thousand or 5.1%, from
$10.239 million at December 31, 2006 to $9.719 million at December 31,
2007. Other assets are principally comprised of other real estate
owned, interest receivable, prepaid dealer reserve, prepaid taxes, prepaid
insurance, computer software, net deferred tax assets, deferred taxes on
investment securities, deferred tax asset on the pension plan, other assets,
return/rejected check items, other prepaid items, and other accounts
receivable. Several factors contributed to the net decrease in other
assets between the periods including decreases in deferred taxes on investment
securities, deferred tax asset on the pension plan and other assets, offset,
in
part, by increases in rejected check items, deferred federal income tax,
software, prepaid dealer reserve and other real estate owned.
Composition
of
Liabilities
Deposits. Deposits
are our primary funding source. At December 31, 2007 and December 31,
2006 deposits represented approximately 90% of our total
liabilities. Total deposits at December 31, 2007 were $657.494
million. This compares to $629.044 million at December 31, 2006, a
$28.450 million or 4.5% increase. The increase in total deposits
between December 31, 2006 and December 31, 2007 was attributable to significant
increases in money market deposit accounts and certificates of deposit (over
and
under $100 thousand) totaling $31.952 million, offset, by decreases in savings
accounts, NOW accounts, demand deposits and other deposits totaling $3.502
million. During 2007, our depositors continued to transfer their
funds to higher yield deposit accounts as interest rates on savings and NOW
accounts remained low relative to money market and certificate of deposit
interest rates.
The
following table indicates the amount of our time accounts by time remaining
until maturity as of December 31, 2007.
Time
Accounts Maturity Table:
|
Maturity
as of December 31, 2007
|
||||||||||||||||||||
|
Dollars
in Thousands
|
3
Months
or
Less
|
Over
3 to
6
Months
|
Over
6 to
12
Months
|
Over
12
Months
|
Total
|
|||||||||||||||
|
Certificates
of Deposit of $100,000 or more
|
$ | 53,962 | $ | 17,052 | $ | 17,803 | $ | 23,132 | $ | 111,949 | ||||||||||
|
Certificates
of Deposit less than $100,000
|
36,415 | 31,498 | 48,307 | 82,247 | 198,467 | |||||||||||||||
|
Total
of time accounts
|
$ | 90,377 | $ | 48,550 | $ | 66,110 | $ | 105,379 | $ | 310,416 | ||||||||||
Borrowings
and Other Contractual
Obligations. Total borrowed funds consist of short-term and
long-term borrowings. Short-term borrowings include 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 borrowed
from the FHLBNY for various asset funding requirements and wholesale funding
strategies. Total borrowed funds were $57.324 million or 7.9% of
total liabilities at December 31, 2007, as compared to $60.663 million or 8.7%
of total liabilities at December 31, 2006, a $3.339 million or 5.5% decrease
between the periods.
Short-term
borrowings decreased from $18.459 million at December 31, 2006 to $15.786
million at December 31, 2007, a $2.673 million or 14.5% decrease. The
decrease was principally due to a reduction in customer repurchase agreement
balances.
During
2007 we repaid $25.666 million of our long-term borrowings at FHLBNY as they
amortized, matured or were called throughout the year. These
borrowings were replaced by new long-term borrowings totaling $25.000 million,
which were used to fund newly originated and existing earning
assets. Management did not increase long-term borrowings during 2006
as loan growth was principally funded by a growth in
deposits. Throughout most of 2007, deposits were a less
expensive
funding source than long-term borrowings. In addition, due to a poor
interest rate environment, in particular a flat or inverted yield curve,
management did not execute any new wholesale leverage transactions during
2007. See Note 8 of the Consolidated Financial Statements contained
in PART II, Item 8, of this document for additional detail on our borrowed
funds.
In
connection with our financing and operating activities, we have entered into
certain contractual obligations. Our future minimum cash payments,
excluding interest, associated with these contractual obligations, including
borrowed funds and operating leases, at December 31, 2007 were as
follows:
|
Contractual
Obligations as of December 31, 2007
|
||||||||||||||||||||||||||||
|
Payments
Due by Period
|
||||||||||||||||||||||||||||
|
(In
thousands)
|
2008
|
2009
|
2010
|
2011
|
2012
|
Thereafter
|
Total
|
|||||||||||||||||||||
|
Long-term
debt
|
$ | 6,493 | $ | 2,205 | $ | 9,563 | $ | 1,673 | $ | 16,030 | $ | 5,574 | $ | 41,538 | ||||||||||||||
|
Operating
lease obligations
|
235 | 226 | 223 | 214 | 183 | 1,116 | 2,197 | |||||||||||||||||||||
|
Total
contractual obligations
|
$ | 6,728 | $ | 2,431 | $ | 9,786 | $ | 1,887 | $ | 16,213 | $ | 6,691 | $ | 43,736 | ||||||||||||||
D. Results
of Operations
i.
Comparison of Operating Results for the Years Ended December 31, 2007 and
December 31, 2006
Please
refer to the Consolidated Financial Statements presented in PART II, Item 8,
of
this document.
Summary. Net
income for 2007 was $7.707 million. This compares to $7.152 million
in 2006, a $555 thousand or 7.8% increase year over year. During
2007, we recorded a $1.067 million increase in total non-interest income, a
$660
thousand reduction in the provision for loan losses and a $78 thousand reduction
in income taxes. These improvements were offset by a $425 thousand
decrease in net interest income and an $825 thousand increase in total
non-interest expense. Earnings per share improved from $0.66 in 2006
to $0.73 in 2007, a $0.07 or 10.6% improvement.
Throughout
2007 we operated in a difficult interest rate environment. The
treasury yield curve was flat or inverted throughout most of 2007, conditions
which reduced our ability to improve net interest income. Although we
increased our average earning asset base by $25.315 million or 3.6% between
2006
and 2007, and believe we managed our asset and liability portfolios effectively
throughout 2007, net interest income decreased $425 thousand or 1.7% between
2006 and 2007. We recorded net interest income of $24.556 million in
2007, as compared to $24.981 million in 2006. Net interest margin
(tax-equivalent) was 3.62% in 2007, versus 3.81% in 2006.
The
provision for loan losses decreased between comparable years due to positive
trends in most of our credit quality measures. In particular, the
level of delinquent loans, potential problem loans and net loan charge-offs
decreased between comparable periods, while non-performing loans
increased. We recorded $900 thousand in the provision for loan losses
during 2007, as compared to $1.560 million in 2006, a $660 thousand
decrease.
Non-interest
income increased from $5.969 million in 2006 to $7.036 million in 2007, a $1.067
million or 17.9% increase. The gain on life insurance coverage
recorded due to the death of a senior executive contributed $615 thousand of
the
improvement, in addition to increases in trust fees, service charges on deposit
accounts, net gain on sale of loans, bank-owned life cash surrender value income
and other income. Other income increased from $776 thousand in 2006
to $1.310 million in 2007, a $534 thousand increase. These
improvements were offset, in part, by decreases in commission income, net
investment securities gains and other service fees. During 2007, we
recorded a $352 thousand deferred gain on the sale of the Bank’s Norwich Town
branch building and contents and $232 thousand in flood-recovery
grants.
During
2007, non-interest expense increased $825 thousand or 4.1%, from $20.032 million
in 2006 to $20.857 million in 2007. Most of the increase was due to
an increase in our salaries and employee benefits totaling $554
thousand. During 2007, we increased our full-time equivalent
employees by 26, from 255 at December 31, 2006 to 281 at December 31, 2007
due
to our expansion efforts and the acquisition of Provantage. In
addition, we provided merit based wage increases to most of our employees and
increased commission and bonus payments to our sales force for increases in
loan
and deposit balances outstanding.
Net
Interest
Income. Net interest income is our most significant source of
revenue (net interest income plus non-interest income). During 2007,
net interest income comprised 78% of our total revenues. The other
22% was due to non-interest income. This compares to 81% and 19%,
respectively, for 2006. The following Asset and Yield Summary
Table, Interest Rate
Table and Rate and
Volume Table and the associated narrative provide detailed net interest
income information and analysis that are important to understanding our results
of operations.
The
following table summarizes the total dollar amount of interest income from
average earning assets and the resultant yields, as well as the interest expense
and rate paid on average interest bearing liabilities. The average
balances presented are calculated using daily totals and averaging them for
the
period indicated.
Asset
and
Yield Summary Table:
|
For
the Years Ended December 31,
|
||||||||||||||||||||||||||||||||||||
|
2007
|
2006
|
2005
|
||||||||||||||||||||||||||||||||||
|
Average
Outstanding
Balance
|
Interest
Earned
/Paid
|
Yield
/
Rate
|
Average
Outstanding
Balance
|
Interest
Earned
/Paid
|
Yield
/
Rate
|
Average
Outstanding
Balance
|
Interest
Earned
/Paid
|
Yield
/
Rate
|
||||||||||||||||||||||||||||
|
(Dollars
in thousands)
|
||||||||||||||||||||||||||||||||||||
|
Earning
Assets:
|
||||||||||||||||||||||||||||||||||||
|
Federal
funds sold
|
$ | 19,026 | $ | 952 | 5.00 | % | $ | 11,548 | $ | 596 | 5.16 | % | $ | 8,110 | $ | 270 | 3.33 | % | ||||||||||||||||||
|
Interest-
bearing deposits
|
6,676 | 314 | 4.70 | % | 2,446 | 90 | 3.68 | % | 9,006 | 449 | 4.99 | % | ||||||||||||||||||||||||
|
Securities
(1)
|
286,160 | 12,592 | 4.40 | % | 294,151 | 12,312 | 4.19 | % | 297,965 | 11,908 | 4.00 | % | ||||||||||||||||||||||||
|
Loans
(2)
|
423,798 | 32,172 | 7.59 | % | 402,200 | 30,343 | 7.54 | % | 398,616 | 27,683 | 6.94 | % | ||||||||||||||||||||||||
|
Total
earning assets
|
735,660 | 46,030 | 6.26 | % | 710,345 | 43,341 | 6.10 | % | 713,697 | 40,310 | 5.65 | % | ||||||||||||||||||||||||
|
Non-earning
assets
|
40,744 | 41,650 | 41,968 | |||||||||||||||||||||||||||||||||
|
Total
assets
|
$ | 776,404 | $ | 751,995 | $ | 755,665 | ||||||||||||||||||||||||||||||
|
Liabilities:
|
||||||||||||||||||||||||||||||||||||
|
Savings
accounts
|
$ | 76,815 | $ | 467 | 0.61 | % | $ | 87,453 | $ | 549 | 0.63 | % | $ | 98,356 | $ | 677 | 0.69 | % | ||||||||||||||||||
|
Money
market accounts
|
98,213 | 3,741 | 3.81 | % | 65,103 | 2,408 | 3.70 | % | 42,667 | 1,145 | 2.68 | % | ||||||||||||||||||||||||
|
NOW
accounts
|
77,316 | 996 | 1.29 | % | 89,845 | 1,026 | 1.14 | % | 112,042 | 1,134 | 1.01 | % | ||||||||||||||||||||||||
|
Time
& other deposit accounts
|
318,692 | 13,756 | 4.32 | % | 302,127 | 11,805 | 3.91 | % | 277,649 | 8,984 | 3.24 | % | ||||||||||||||||||||||||
|
Borrowings
|
63,146 | 2,514 | 3.98 | % | 67,908 | 2,572 | 3.79 | % | 83,255 | 2,990 | 3.59 | % | ||||||||||||||||||||||||
|
Total
interest-bearing liabilities
|
634,182 | 21,474 | 3.39 | % | 612,436 | 18,360 | 3.00 | % | 613,969 | 14,930 | 2.43 | % | ||||||||||||||||||||||||
|
Non-interest
bearing deposits
|
72,350 | 71,792 | 67,788 | |||||||||||||||||||||||||||||||||
|
Other
non-interest bearing liabilities
|
4,758 | 3,918 | 5,958 | |||||||||||||||||||||||||||||||||
|
Total
liabilities
|
711,290 | 688,146 | 687,715 | |||||||||||||||||||||||||||||||||
|
Shareholders'
equity
|
65,114 | 63,849 | 67,950 | |||||||||||||||||||||||||||||||||
|
Total
liabilities and shareholders' equity
|
$ | 776,404 | $ | 751,995 | $ | 755,665 | ||||||||||||||||||||||||||||||
|
Net
interest income
|
$ | 24,556 | $ | 24,981 | $ | 25,380 | ||||||||||||||||||||||||||||||
|
Net
interest rate spread (3)
|
2.87 | % | 3.10 | % | 3.22 | % | ||||||||||||||||||||||||||||||
|
Net
earning assets
|
$ | 101,478 | $ | 97,909 | $ | 99,728 | ||||||||||||||||||||||||||||||
|
Net
interest margin (4)
|
3.34 | % | 3.52 | % | 3.56 | % | ||||||||||||||||||||||||||||||
|
Net
interest margin (tax-equivalent)
|
3.62 | % | 3.81 | % | 3.82 | % | ||||||||||||||||||||||||||||||
|
Ratio
of earning assets to interest-bearing liabilities
|
116.00 | % | 115.99 | % | 116.24 | % | ||||||||||||||||||||||||||||||
|
(1)
Securities include trading, available-for-sale, held-to-maturity
and other
investments. They 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 loans include loans held for sale, net deferred loan fees
and
costs, non-accrual loans and excludes the allowance for loan
losses.
|
|
|
(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.
|
|
We
recorded $24.556 million of net interest income during 2007. This
compares to $24.981 million of net interest income during 2006. The
$425 thousand or 1.7% decrease in net interest income between comparable periods
was principally due to a significant increase in the cost of our interest
bearing liabilities (principally deposit funding), offset, in part, by increases
in interest income on earning assets (principally loans).
The
level
of our net interest income is dependent on several factors including, but not
limited to: our ability to attract and retain deposits, our ability to generate
and retain loans, regional and local economic conditions, regional competition,
capital market conditions, the national interest rate environment, as well
as
our tolerance for risk. Throughout 2006 and 2007, our net interest
income was affected by all of these factors, the most significant of which
has
been the general persistence of a flat or inverted yield curve. A
flat to inverted interest rate environment generally diminishes our ability
to
maintain or improve net interest margin because a portion of our net interest
margin has historically been derived from mismatching long-term earning assets
with short-term interest bearing liabilities.
Between
2006 and 2007, total interest and dividend income increased $2.689 million
or
6.2%, from $43.341 million during 2006 to $46.030 million during
2007. The weighted average yield on loans, investment securities and
interest-bearing deposits at other banks increased between 2006 and
2007. During the first three quarters of 2007, maturing earning
assets were generally replaced with new assets originated at higher rates of
interest. In addition, during the first three quarters of 2007 most
variable rate earning assets reset at higher rates of interest due to an
increase in the index interest rate between periodic re-pricing
dates. The average yield on federal funds sold decreased between 2006
and 2007, due principally to a 100 basis point drop in the federal funds target
rate during the last four months of 2007.
The
average yield on loans, our largest earning asset portfolio, increased five
basis points between 2006 and 2007, from 7.54% in 2006 to 7.59% in
2007. Although the prime rate remained unchanged at 8.25% throughout
most of 2007, the average yield on our loans increased. A significant
portion of our variable rate loans are indexed to the prime rate or other market
interest rate, but only reset on a pre-determined periodic basis such as the
anniversary date of the loan. This condition delays the impact
interest rate changes have on our loan portfolio yield. For this
reason, the prime rate increases experienced in the first two quarters of 2006
did not fully impact loan yields until subsequent quarters. The
increase in loan yields, coupled with an increase in the average volume of
loans
outstanding between comparable periods, resulted in a $1.829 million increase
in
interest income on loans. Interest income on loans totaled $32.172
million in 2007, as compared to $30.343 million in 2006. The average
loans outstanding increased from $402.200 million in 2006 to $423.798 million
in
2007. The average yield on loans began to decline during the fourth
quarter of 2007, as the prime interest rate decreased 100 basis points between
September 18, 2007 and December 11, 2007. The prime rate at December
11, 2007 decreased to 7.25%. This compares to 8.25% on September 18,
2007.
The
average yield on the securities portfolio increased 21 basis points between
2006
and 2007, from 4.19% in 2006 to 4.40% in 2007. During 2007, the
proceeds of maturing, sold, or called investment securities were reinvested
in
higher yield instruments. Although this activity helped improve
interest income between comparable years, it was offset, in part, by a reduction
in the average volume of securities we maintained in our investment
portfolio. Between 2006 and 2007, we maintained an increased level of
federal funds sold and interest-bearing deposits (at other banks) to help manage
interest rate and liquidity risk and were successful in increasing average
loans
outstanding. The 21 basis point increase in the average yield on the
investment securities portfolio, offset by a reduction in the average
outstanding balance of the portfolio, resulted in a net increase in interest
income on securities of $280 thousand between 2006 and 2007. Interest
income on securities increased from $12.312 million in 2006 to $12.592 million
in 2007.
To
manage
interest rate risk and liquidity risk, we increased our average outstanding
balance in federal funds sold and interest-bearing deposits (at other banks)
between 2006 and 2007. In particular, the average volume of federal
funds sold increased $7.478 million, from $11.548 million in 2006 to $19.026
million in 2007. The average yield on the federal funds sold
portfolio decreased 16 basis points between comparable periods due principally
to a 100 basis point decrease in the target federal funds rate during the fourth
quarter of 2007. The increase in the volume of federal funds sold,
offset, in part by a decrease in the yield on federal funds sold resulted in
a
$356 thousand improvement in interest income on federal funds sold between
2006
and 2007. Interest income recorded on federal funds sold during 2007
was $952 thousand, as compared to $596 thousand during 2006.
We
recorded $314 thousand of interest income on interest-bearing deposits during
2007, as compared to $90 thousand during 2006, a $224 thousand
increase. We increased the volume of interest-bearing deposits
between comparable periods to mitigate interest rate risk and liquidity
risk. In addition, the yield on this portfolio increased from 3.68%
during 2006 to 4.70% during 2007 due to higher market interest
rates.
Interest
expense increased $3.114 million, or 17.0%, between 2006 and 2007. We
recorded total interest expense of $21.474 million in 2007, as compared to
$18.360 million during 2006. The increase in interest expense between
the periods was due to two primary factors. First, between comparable
periods, a significant portion of the certificate of deposit portfolio
matured. These funds, along with funds from new depositors, were
often reinvested in new certificates of deposit, generally at higher rates
of
interest. This increased interest expense on time and other deposit
accounts from $11.805 million 2006 to $13.756 million in 2007, a $1.951 million
or 16.5% increase. Second, we recorded $3.741 million of interest
expense on our money market deposit accounts during 2007. This
compares to $2.408 million during 2006, a
$1.333
million or 55.4% increase between the periods. Throughout 2006 and
2007 we offered and promoted to customers our Wealth Management money market
deposit account. The account provided depositors with a 4.0% interest
rate throughout 2006 and most of 2007. It was offered to remain
competitive with other financial institutions in our market. As
expected, our existing deposit customers and new deposit customers transferred
their funds into this account, raising the average balance in our money market
deposit accounts from $65.103 million in 2006 to $98.213 million in 2007, a
$33.110 million or 50.9% increase.
At
December 31, 2007, the Treasury yield curve was modestly sloped with a slight
inversion in the 2-year and 3-year maturity timeframe. The 90-day
Treasury bill, the 3-year Treasury note and the 10-year Treasury note were
yielding 3.25%, 2.81% and 3.90%, respectively. This interest rate
environment inhibits our ability to earn net interest income, since we typically
earn a portion of our net interest income by procuring short-term to mid-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.
Since
December 31, 2007, the Federal Open Market Committee decreased the target
federal funds rate an additional 125 basis points to 3.00%. This
prompted banks, including us, to correspondingly lower their prime rate of
interest to 6.00%. In addition, the Treasury yield curve generally
decreased 50 to 120 basis points due to concerns about general weakness in
the
national economy. This interest environment will continue to make it
difficult for us to improve net interest spread for several quarters
prospectively since much of our loan portfolio is indexed to the prime rate
and
our federal funds sold position generally exceeds $20.000 million.
Comparative
Interest Rate Table:
| 2007 | 2006 | |||||||||||||||||||||||||||||||
|
Interest
Rates (1)
|
December
|
September
|
June
|
March
|
December
|
September
|
June
|
March
|
||||||||||||||||||||||||
|
Target
Federal Funds Rate
|
4.25 | % | 4.75 | % | 5.25 | % | 5.25 | % | 5.25 | % | 5.25 | % | 5.25 | % | 4.75 | % | ||||||||||||||||
|
NYC
Prime
|
7.25 | % | 7.75 | % | 8.25 | % | 8.25 | % | 8.25 | % | 8.25 | % | 8.25 | % | 7.75 | % | ||||||||||||||||
|
90
Day Treasury Bill
|
3.25 | % | 3.79 | % | 4.94 | % | 5.04 | % | 5.05 | % | 4.89 | % | 5.06 | % | 4.64 | % | ||||||||||||||||
|
6
Month Treasury Bill
|
3.31 | % | 4.06 | % | 4.95 | % | 5.05 | % | 5.06 | % | 5.01 | % | 5.26 | % | 4.82 | % | ||||||||||||||||
|
1
Year Treasury Note
|
3.42 | % | 4.11 | % | 4.94 | % | 4.93 | % | 4.96 | % | 4.97 | % | 5.27 | % | 4.77 | % | ||||||||||||||||
|
2
Year Treasury Note
|
2.86 | % | 3.99 | % | 4.88 | % | 4.58 | % | 4.79 | % | 4.69 | % | 5.17 | % | 4.79 | % | ||||||||||||||||
|
3
Year Treasury Note
|
2.81 | % | 4.04 | % | 4.89 | % | 4.50 | % | 4.71 | % | 4.58 | % | 5.14 | % | 4.78 | % | ||||||||||||||||
|
5
Year Treasury Note
|
3.27 | % | 4.26 | % | 4.93 | % | 4.50 | % | 4.68 | % | 4.55 | % | 5.11 | % | 4.77 | % | ||||||||||||||||
|
10
Year Treasury Note
|
3.90 | % | 4.61 | % | 5.04 | % | 4.61 | % | 4.68 | % | 4.58 | % | 5.15 | % | 4.78 | % | ||||||||||||||||
|
Federal
Housing Finance Board National Avg. Mortgage Contract Rate
(2)
|
6.35 | % | 6.73 | % | 6.37 | % | 6.40 | % | 6.45 | % | 6.75 | % | 6.61 | % | 6.31 | % | ||||||||||||||||
|
(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.
|
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,
|
||||||||||||||||||||||||
|
2007
vs. 2006
|
2006
vs. 2005
|
|||||||||||||||||||||||
|
Rate
|
Volume
|
Total
|
Rate
|
Volume
|
Total
|
|||||||||||||||||||
|
(In
thousands)
|
||||||||||||||||||||||||
|
Earning
assets:
|
||||||||||||||||||||||||
|
Federal
funds sold
|
$ | (19 | ) | $ | 375 | $ | 356 | $ | 184 | $ | 142 | $ | 326 | |||||||||||
|
Interest-bearing
deposits
|
31 | 193 | 224 | (94 | ) | (265 | ) | (359 | ) | |||||||||||||||
|
Securities
|
620 | (340 | ) | 280 | 557 | (153 | ) | 404 | ||||||||||||||||
|
Loans
|
191 | 1,638 | 1,829 | 2,409 | 251 | 2,660 | ||||||||||||||||||
|
Total
earning assets
|
823 | 1,866 | 2,689 | 3,056 | (25 | ) | 3,031 | |||||||||||||||||
|
Interest
bearing liabilities:
|
||||||||||||||||||||||||
|
Savings
accounts
|
(17 | ) | (65 | ) | (82 | ) | (56 | ) | (71 | ) | (127 | ) | ||||||||||||
|
Money
market accounts
|
74 | 1,259 | 1,333 | 526 | 736 | 1,262 | ||||||||||||||||||
|
NOW
accounts
|
124 | (154 | ) | (30 | ) | 134 | (242 | ) | (108 | ) | ||||||||||||||
|
Time
& other deposit accounts
|
1,192 | 759 | 1,951 | 1,911 | 910 | 2,821 | ||||||||||||||||||
|
Borrowings
|
127 | (185 | ) | (58 | ) | 156 | (574 | ) | (418 | ) | ||||||||||||||
|
Total
interest bearing liabilities
|
1,500 | 1,614 | 3,114 | 2,671 | 759 | 3,430 | ||||||||||||||||||
|
Change
in net interest income
|
$ | (677 | ) | $ | 252 | $ | (425 | ) | $ | 385 | $ | (784 | ) | $ | (399 | ) | ||||||||
Rate
and Volume
Analysis: The purpose of a rate volume analysis is to identify
the dollar amount of change in net interest income due to changes in interest
rates versus changes in the volume of earning assets and interest bearing
liabilities.
Interest
income increased $2.689 million between the 2006 and 2007, due to both a net
increase in the rate and volume of earning assets. The yield on
interest-bearing deposits, securities and loans all increased between 2006
and
2007, while the yield on federal funds sold decreased. Similarly, the
volume of federal funds sold, interest-bearing deposits and loans increased
between comparable periods, while the average volume of investment securities
decreased. On a combined basis, the rate improvement on earning
assets contributed an additional $823 thousand of interest income between
comparable years, while the net increase in the volume of earning assets
contributed $1.866 million of additional interest income.
Of
the
$2.689 million increase in interest income between 2006 and 2007, $1.829 million
or 68.0% of the total increase was due to an increase in interest income on
loans. Between comparable periods, the average volume of loans
outstanding increased $21.598 million, due principally to loan growth in our
newer markets. The growth in the volume of loans between comparable
years contributed $1.638 million of the $1.829 million improvement in interest
income on loans. In addition, between the comparable periods,
existing variable rate loans generally re-priced at higher rates of interest,
helping to increase the yield on loans by 5 basis points from 7.54% in 2006
to
7.59% in 2007. The increase in the rate on loans between comparable
periods contributed $191 thousand of the $1.829 million increase in interest
income on loans between comparable periods.
Due
to
the increasing interest rate risk associated with building the loan portfolio,
particularly longer term fixed-rate loans, an increase in the volatility of
deposit funding, and the persistence of a flat or inverted yield curve
throughout most of 2007, we increased our average outstanding balance in federal
funds sold between comparable years. During 2007, we maintained an
average federal funds sold position of $19.026 million. This compares
to $11.548 million in 2006. The increase in the volume of federal
funds sold between 2006 and 2007 contributed additional interest income totaling
$375 thousand. During the fourth quarter of 2007, the average yield
on federal funds dropped significantly as the Federal Open Market Committee
dropped the target federal funds rate to provide stimulus to the national
economy. The action of the Federal Open Market Committee helped drive
down our average yield on federal funds sold to 5.00% for 2007. This
compares to 5.16% in 2006, a 16 basis point decrease. The decrease in
the average yield on federal funds reduced interest income $19 thousand between
comparable periods.
Interest
income on the securities portfolio increased $280 thousand between 2006 and
2007. To help fund loan growth, an increased federal funds sold
position, and a higher interest-bearing deposits position, we reduced the size
of our investment securities portfolio between comparable
periods. During 2006, the average outstanding balance of the
investment securities portfolio was $294.151 million. This compares
to $286.160 million during 2007, a $7.991 million or
2.7%
decrease. The decrease in the average outstanding balance of
investment securities between periods negatively impacted interest income by
$340 thousand. This was offset, however, by an increase in interest
income on securities due to rate totaling $620 thousand.
The
$2.689 million increase in interest income between 2006 and 2007 was negated
by
a $3.114 million increase in the cost of interest-bearing liabilities, $1.500
million of which was due to the increase in rate and $1.614 million of which
was
due to the increase in the volume of interest-bearing
liabilities. The interest expense recorded on our most
interest-sensitive liabilities, including time and other deposit accounts and
money market accounts, increased due to both an increase in volume and an
increase in rate.
Interest
expense on time and other deposit accounts increased $1.951 million between
2006
and 2007. Between comparable years, we raised the interest rates paid
on certificates of deposit. This was done to remain competitive with
local bank competition and to match market increases in short-term interest
rates, particularly for jumbo certificates of deposit (over
$100,000). This action increased the cost of time and other deposit
accounts, resulting in a $1.192 million increase in interest expense due to
rate. The remaining increase in interest expense on time and other
deposit accounts between the periods, totaling $759 thousand, was due to an
increase in volume as depositors transferred their monies from low-rate
interest-bearing deposit or demand deposit accounts to higher-yield certificates
of deposit.
As
short-term interest rates increased during the first half of 2006, we raised
the
interest rate to 4.0% on all tiers of our Wealth Management money market deposit
account. Although we believe this helped us retain existing
depositors’ funds and attract new depositors, it caused a significant increase
in interest expense on money market accounts. Interest expense on
money market deposit accounts increased $1.333 million between 2006 and
2007. The average rate paid on our money market deposit accounts
increased from 3.70% for 2006 to 3.81% for 2007, while the average outstanding
volume of money market deposit accounts increased from $65.103 million to
$98.213 million over the same periods. Of the $1.333 million increase
in interest expense on money market deposit accounts, $1.259 million was due
to
an increase in volume and $74 thousand was due to an increase in
rate.
During
the first nine months of 2006, there was a general rise in short-term interest
rates. This caused some of our customers with NOW account deposits to
either move their monies to another institution or transfer their NOW account
funds to a less liquid, higher-rate deposit account. This decreased
the average volume of NOW accounts between the periods from $89.845 million
in
2006 to $77.316 million in 2007. The decrease in the average volume
of NOW account deposits reduced interest expense $154 thousand between
comparable periods. This improvement was offset, in part, by a $124
thousand increase in interest expense on NOW account deposits due to a 15 basis
point increase in the average rate paid between the periods.
The
weighted average rate paid on savings accounts was 0.61% for 2007, as compared
to 0.63% for 2006. The low interest rate being offered on savings
accounts caused depositors to reduce their savings deposits and decreased the
average volume of savings deposits between the periods. The interest
expense recorded on savings accounts due to changes in volume decreased $65
thousand between 2006 and 2007. The 2 basis point drop in the average
rate paid on savings accounts between the periods further reduced interest
expense $17 thousand between 2006 and 2007.
The
interest expense on borrowings decreased $58 thousand between 2006 and
2007. Between comparable periods, lower-cost borrowings were replaced
by higher-cost borrowings as they matured. This increased borrowing
costs from 3.79% in 2006 to 3.98% in 2007, causing a $127 thousand increase
in
interest expense on borrowings due to rate. Due to the increased
borrowing rates and the flat to inverted yield curve throughout the comparable
periods, we reduced average borrowings. Specifically, average
outstanding borrowings decreased from $67.908 million in 2006 to $63.146 million
in 2007. The decrease in the average outstanding balance of borrowed
funds reduced interest expense on borrowings due to volume by $185 thousand
between comparable years.
Provision
for Loan
Losses. We recorded $900 thousand in the provision for loan
losses during 2007. This compares to $1.560 million for
2006. The $660 thousand or 42.3% decrease in the provision for loan
losses between comparable periods was principally caused by a reduction in
potential problem loans, delinquent loans, and net charge-offs, offset, in
part,
by an increase in non-performing loans. At December 31, 2006 we had
identified $14.538 million in potential problem loans. By comparison,
at December 31, 2007, potential problem loans totaled $7.870 million, a $6.668
million or 45.9% decrease. Net charge-offs for 2007 were $603
thousand, as compared to $1.520 million for 2006. Loans 30 to 89 days
delinquent decreased from $6.070 million at December 31, 2006 to $3.941 million
at December 31, 2007. Non-performing loans totaled $2.529 million at
December 31, 2006 as compared to $6.136 million at December 31, 2007, a $3.607
million increase between the periods.
Non-Interest
Income. Non-interest income is comprised of trust fees,
service charges on deposit accounts, commission income, net investment security
gains, net gain on sale of loans, income and gains on bank-owned life insurance,
other
service
fees, and other income. Non-interest income improved significantly
between 2006 and 2007. In particular, total non-interest income
increased from $5.969 million in 2006 to $7.036 million in 2007, a $1.067
million or 17.9% increase. The significant increase in non-interest
income between 2006 and 2007 principally due to three unusual events: (i) a
$615
thousand gain on life insurance coverage due to the death of a senior executive
of the Company; (ii) the recording of New York State flood-grant proceeds during
2007 totaling $232 thousand; and (iii) the recognition of a $352 thousand
deferred gain on the sale of our Norwich Town branch building and related
equipment to the site’s landowner. In addition, between comparable
periods we recorded increases in trust fees, service charges on deposit
accounts, net gain on sale of loans, and bank-owned life insurance income
totaling $512 thousand. These improvements were offset, in part, by
decreases in commission income, investment security gains (net), and other
service fees totaling $594 thousand.
Trust
fees increased $56 thousand or 3.5% between 2006 and 2007. During
2007, we recorded $1.641 million in trust fees as compared to $1.585 million
in
2006. During 2007, we recorded account termination and executor fees
totaling $296 thousand. By comparison, during 2006 we recorded
account termination and executor fees totaling $228 thousand, a $68 thousand
increase between the years. Trust fees recorded for routine account
administration, custodial services and investment management (excluding account
termination and executor fees) decreased $12 thousand between the periods,
from
$1.357 million in 2006 to $1.345 million in 2007.
During
2007 we recorded $1.891 million of service charges on deposit
accounts. This compares to $1.659 million in service charges on
deposit accounts during 2006, a $232 thousand or 14.0% increase. The
net increase in service charges on deposit accounts was primarily due to an
increase in penalty charges on checking accounts. During the first
quarter of 2007 we began offering our courtesy overdraft service to more of
our
checking account customers, causing an increase in the product’s usage and
improving deposit service fees. Penalty charges on checking accounts
increased $215 thousand between 2006 and 2007, from $824 thousand during 2006
to
$1.039 million during 2007.
Our
commission income is generated from the Bank’s insurance agency subsidiary,
Mang–Wilber LLC. During 2007, we recorded commission income totaling
$476 thousand. This compares to $487 thousand in commission income
during 2006, an $11 thousand or 2.3% decrease. Mang–Wilber, LLC owns
two-thirds of a specialty-lines property and casualty agency located in Clifton
Park, New York (Saratoga County). This agency did not perform well in
2007, as compared to 2006, and was largely responsible for the decrease in
commission income period over period.
During
2007, we recorded net investment security gains totaling $80 thousand, $64
thousand of which was due to an increase in the value of our trading securities
portfolio and $16 thousand of which was attributable to gains on the sale of
available-for-sale investment securities. Our trading securities
portfolio consists of equity and debt securities held by the Company’s executive
deferred compensation plan. By comparison, during 2006 we recorded
$514 thousand in net investment security gains, a $434 thousand decrease period
over period. During 2006, we received proceeds from the sale and
maturity of available-for-sale investment securities totaling $48.479 million,
which generated $326 thousand in net gains during the period. During
that same period, our trading securities generated net gains of $188
thousand.
During
the first quarter of 2007 we acquired Provantage, a New York State licensed
mortgage banker, to gain a foothold in the New York State Capital District
market and provide additional residential mortgage options to our
borrowers. Provantage sells a significant portion of its originated
loans to third party financial institutions in the normal course of its
business. During 2007, we recorded a $196 thousand net gain on the
sale of these loans. This compares to no loans sold during
2006.
During
2007, we recorded a $606 thousand increase in the cash surrender value of
bank-owned life insurance. This compares to $578 thousand during
2006, a $28 thousand or 4.8% increase. Between comparable periods,
our insurance carriers raised their net crediting rates on bank-owned life
insurance contracts.
Other
service fees are comprised of numerous types of fee income including merchant
credit card processing fees, commissions on residential mortgages, official
check and check cashing fees, travelers’ check sales, wire transfer fees, letter
of credit fees, U.S. government bond sales, certificate of deposit account
registry service fees, and other miscellaneous service charges and
fees. Other service fees decreased $149 thousand or 40.3% between
2006 and 2007. The decrease in other service fees between the periods
was principally due to the decrease in residential mortgage
commissions. During 2006, we originated residential mortgages as an
agent for a large regional bank based in the Southeast. In the first
quarter of 2007, we acquired Provantage and terminated our agency relationship
with the large regional bank. This reduced residential mortgage
commissions from $153 thousand in 2006 to $19 thousand in 2007, a $134 thousand
decrease.
Other
income is comprised of numerous types of fee income including investment
services income, lease income, safe deposit box income, gain on sale of fixed
assets, title insurance agency income, and income from the rental of foreclosed
real estate. Other income increased from $776 thousand in 2006 to
$1.310 million in 2007, a $534 thousand or 68.8%
increase. In
the first quarter of 2007, we recorded a $352 thousand deferred gain on the
sale
of our Norwich Town branch building and related equipment to the site’s
landowner. There were no similar transactions recorded in
2006. In addition, during 2007, we received $232 thousand in flood
grant proceeds from New York State. These grants were provided to
assist us with our flood recovery efforts due to a regional flood in
2006.
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 miscellaneous
expenses. Non-interest expense increased $825 thousand or 4.1%
between 2006 an 2007, from $20.032 million in 2006 to $20.857 million in
2007. Increases in salaries, employee benefits, furniture and
equipment expense, advertising and marketing, professional fees and other
miscellaneous expenses totaling $928 thousand, were offset, in part, by a modest
decrease in occupancy expense and computer service fees totaling $103
thousand.
Salaries
expense increased $454 thousand or 4.9% between 2006 and 2007, from $9.369
million in 2006 to $9.823 million in 2007. The increase between
comparable periods was due to a $429 thousand increase in base salaries and
overtime (less deferred amounts), a $186 thousand increase in commission and
incentive payments and a $161 thousand decrease in deferred compensation
expenses. During the first quarter of 2007, we acquired Provantage
and provided general merit-related pay raises to our employees. Our
full-time equivalent employee base also increased from 255 at December 31,
2006
to 281 at December 31, 2007. Due to these factors, we recorded a $429
thousand increase in base salaries and overtime in 2007. During 2006 and 2007,
we had in place various commission and incentive plans for our sales and support
staff to grow our loan and deposit portfolios and improve the Company’s net
income. During 2007, we recorded $588 thousand in salaries
expense due to these commission and incentive plans, as compared to $402
thousand in 2006, a $186 thousand or 46.3% increase. And finally, the
salaries expense related to the Company’s executive deferred compensation plan
decreased $161 thousand between 2006 and 2007, from $188 thousand in 2006 to
$27
thousand in 2007 due principally to weaker performance of the investments held
for the benefit of the Company’s deferred compensation accounts.
Employee
benefits expense increased modestly between 2006 and 2007. We
recorded employee benefits expense of $2.672 million in 2007, as compared to
$2.572 million in 2006, a $100 thousand or 3.9% increase. During
2006, we recorded $263 thousand of expense associated with the Bank’s defined
benefit retirement plan. In February 2006, we froze the plan’s
benefits. In addition, the plan’s assets have performed well in
recent years. Due to these factors, we recorded a $159 thousand
credit on the defined benefit retirement plan during 2007, reducing employee
benefits expense by $421 thousand. This reduction in benefits expense
was offset by a significant increase in employee health insurance costs totaling
$290 thousand, a $94 thousand increase in F.I.C.A. expense and a $145 thousand
increase in other benefits. During 2007 we experienced a significant
increase in claims on the Bank’s partially self-insured health plan and assumed
the costs associated with the Provantage health insurance plan resulting in
a
$290 thousand increase in total health insurance expense between comparable
periods. F.I.C.A. expense increased $94 thousand between 2006 and
2007 due to increases in salaries expense. And finally, other
benefits expense increased $145 thousand between 2006 and 2007, due principally
to an increase in the liability associated with the Bank’s supplemental
executive retirement plan for two retired executives.
During
2007, we recorded $1.769 million in occupancy expense for the Company’s
premises. This compares to $1.840 million during 2006, a $71 thousand
or 3.9% decrease. In the third quarter of 2006, we incurred
significant occupancy expenses due to business resumption costs associated
with
restoring banking services after our market area was severely impacted by
regional flooding. In particular, during the third quarter of 2006 we
leased “bank in the box” trailers to restore banking services at our Sidney, NY
and Walton, NY locations. In addition to incurring the costs
associated with establishing and leasing these temporary banking facilities,
we
also incurred significant costs related to cleaning and dehumidifying our
offices directly affected by flooding. Similar expenses were not
incurred in 2007.
During
2007 we recorded furniture and equipment expense totaling $927 thousand, as
compared to $793 thousand during 2006, a $134 thousand or 16.9%
increase. Between comparable periods we recorded a $110 thousand
increase in depreciation expense on furniture and equipment, due principally
to
increased technology demands and related computer equipment
purchases.
Computer
service fees decreased $32 thousand or 4.0% between 2006 and 2007, from $807
thousand in 2006 to $775 thousand in 2007. Between the comparable
periods, we engaged a new ATM network provider and successfully reduced ATM
vendor fees by $48 thousand. This decrease was offset, in part, by a
$16 thousand net increase in various other components of computer service
fees.
Advertising
and marketing expenses increased significantly between 2006 and
2007. In particular, advertising and marketing expenses increased
from $506 thousand in 2006 to $625 thousand in 2007, a $119 thousand or 23.5%
increase. During the fourth quarter of 2006, we engaged an
advertising and marketing firm to assist us in improving the
Company’s
brand image. The increase in marketing fees between 2006 and 2007 was
due, in part, to the costs associated with this project, as well as increased
radio, newspaper and television advertising placements to support our
Company-wide sales efforts.
Professional
fees increased from $892 thousand in 2006 to $976 thousand in 2007, an $84
thousand or 9.4% increase. In 2007 we hired recruiting firms to
assist us in hiring professionals for certain key administrative and sales
positions with the Company. The fees related to these endeavors
totaled $44 thousand. Similar expenses were not incurred during
2006. In addition, during 2007 we incurred a $40 thousand increase in
fees paid to investment banking firms, attorneys and consultants to support
our
bank and branch acquisition and expansion 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 expenses related to the Bank’s accounts
receivable financing services, 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, OREO expenses, minority
interest expense, stock exchange listing fees, and several other miscellaneous
expenses. During 2007 other miscellaneous expenses increased $37
thousand or 1.1%, from $3.253 million in 2006 to $3.290 million in
2007. The following table itemizes individual components of other
miscellaneous expenses that increased (or decreased) significantly between
comparable periods:
Table
of
Other Miscellaneous Expenses:
|
Year
|
||||||||||||
|
Description
of Other Miscellaneous Expense
|
2007
|
2006
|
Increase
/
(Decrease)
|
|||||||||
|
dollars
in thousands
|
||||||||||||
|
Donations
|
$ | 144 | $ | 106 | $ | 38 | ||||||
|
Office
supplies
|
337 | 290 | 47 | |||||||||
|
Postage
and shipping
|
278 | 234 | 44 | |||||||||
|
Deferred
reserves for unfunded loan commitments
|
43 | (24 | ) | 67 | ||||||||
|
Software
amortization
|
180 | 217 | (37 | ) | ||||||||
|
Other
losses
|
88 | 18 | 70 | |||||||||
|
Net
loss on disposal / impairment of fixed assets
|
0 | 362 | (362 | ) | ||||||||
|
Intangible
asset amortization expense
|
129 | 179 | (50 | ) | ||||||||
|
All
other miscellaneous expense items, net
|
2,091 | 1,871 | 220 | |||||||||
|
Total
Other Miscellaneous Expense
|
$ | 3,290 | $ | 3,253 | $ | 37 | ||||||
Most
of
the amount recorded in the net loss on the disposal / impairment of fixed assets
in 2006 was due to flood related property and equipment losses.
Income
Taxes. Income tax
expense decreased from $2.206 million during 2006 to $2.128 million during
2007. Although income before taxes increased from $9.358 million in
2006 to $9.835 million in 2007, income taxes decreased because a greater
proportion of income before taxes was derived from non-taxable sources in 2007,
as compared to 2006. In particular, during the 2007, we recorded a
$615 thousand gain on life insurance coverage due to the death of a senior
executive. Life insurance policy death benefits are
non-taxable. Our effective tax rate decreased from 23.6% in 2006 to
21.6% in 2007, due to the increase in non-taxable revenue between the
periods.
ii.
Comparison of Operating Results for the Years Ended December 31, 2006 and
December 31, 2005
Please
refer to the Consolidated Financial Statements presented in PART II, Item 8,
of
this document.
Summary. Net
income for 2006 was $7.152 million. This was $592 thousand or 7.6%
less than 2005 net income of $7.744 million. Earnings per share were
$0.66 in 2006, as compared to $0.69 in 2005, a $0.03 decrease between the
periods. Our return on average assets declined from 1.02% in 2005 to
0.95% in 2006. Similarly, our return on average shareholders’ equity
also declined from 11.40% in 2005 to 11.20% in 2006. A decrease in net interest
income and an increase in non-interest expense were partially offset by a slight
decrease in the provision for loan losses, an increase in non-interest income
and a decrease in income taxes between the periods.
Throughout
2006 the yield curve was flat or inverted. This poor interest rate
climate made it difficult for us to increase net interest income, particularly
when earning assets were not growing significantly. Like most
community banks, our bank earns some portion of its income by mismatching
short-term liabilities with longer term earning assets. Our net
interest income decreased $399 thousand or 1.6%, from $25.380 million in 2005
to
$24.981 million in 2006. During 2006, the yield on our loan portfolio
increased significantly as our variable rate loans repriced at higher interest
rates due to increases in short-term interest rates during the first-half of
the
year. The increase in loan yields was offset by significant increases
in interest expense on time and other deposit accounts and money market
accounts. The increase in short-term interest rates drove-up the cost
of time accounts, particularly certificates of deposit, and caused a shift
of
non-maturity deposit balances from low-cost savings and NOW accounts to
higher-cost money market accounts. Between 2005 and 2006,
interest income on loans increased $2.660 million, while the interest expense
on
money market and time and other deposit accounts increased $4.083
million.
During
2006 non-interest expense increased significantly. We incurred
$18.966 million of non-interest expense in 2005, as compared to $20.032 million
in 2006, a $1.066 million or 5.6% increase. During the second quarter
of 2006 our market area was affected by a regional flood, which substantially
damaged two of our branch offices, namely our Sidney, New York and Walton,
New
York branch offices. The damages, related clean-up and recovery
charges caused us to record approximately $600 thousand of unanticipated
non-interest expense.
Salaries
expense increased from $9.040 million in 2005 to $9.369 million in 2006, a
$329
thousand or 3.6% increase. In 2006 we raised employee salaries and
commission payments for additional responsibilities and
performance. We also increased staff to meet our regulatory
compliance obligations and satisfy our expansion efforts.
Professional
fees also increased significantly between the periods, from $709 thousand in
2005 to $892 thousand in 2006, a $183 thousand or 25.8% increase. The
Company’s common stock self-tender offer in the second quarter of 2006 and the
outsourcing of our internal audit function were the primary contributors to
the
increase.
The
negative impact of a poor interest rate environment, the regional flood and
the
increase in salaries expense, was partially mitigated by an increase in
non-interest income. Non-interest income increased from $5.625
million in 2005 to $5.969 million in 2006, a $344 thousand or 6.1%
increase. The increase was attributable to several factors, including
a $113 thousand increase in trust fees and a $222 thousand increase in other
income between the periods.
The
decrease in income before tax between 2005 and 2006 reduced income tax
expense. We recorded $2.715 million of income taxes in 2005, versus
$2.206 million in 2006, a $509 thousand or 18.7% decrease.
Net
Interest
Income. Net interest income is our most significant source of
net revenue (net interest income plus non-interest income). During
2006, net interest income comprised 81% of our total revenues. The
other 19% was due to non-interest income. This compares to 82% and
18%, respectively, for 2005. The Asset and Yield Summary
Table, Interest Rate
Table and Rate and
Volume Table provided in Item 7. D. i. above, and the associated
narrative that follows provide detailed net interest income information and
analysis that are important to understanding our results of
operations.
Between
2005 and 2006, net interest income decreased $399 thousand or
1.6%. This decrease was due to a significant increase in the cost of
our interest bearing liabilities (principally deposit funding) offset, in part,
by increases in interest income on earning assets (principally
loans).
In
June
2006 the Federal Open Market Committee raised the target Federal funds rate
from
5.00% to 5.25%. This represented the seventeenth consecutive 25 basis
point increase in the target Federal funds rate over a 2-year
period. These actions, coupled with modest inflation expectations and
a strong international appetite for U.S. Treasury securities during this time
span resulted in a very flat, and at times, inverted yield curve throughout
2006, an interest rate environment which made it difficult for us to maintain
or
improve net interest margin. Historically, a portion of our net
interest income has been earned from mismatching long-term earning assets with
short-term interest bearing liabilities. Additionally, the higher
interest rates during 2006 curbed the demand for new loans, which limited our
ability to improve interest income. Average loans outstanding
increased only modestly between 2005 and 2006. Specifically, average
loans outstanding increased $3.584 million or 0.9% between the periods, from
$398.616 million in 2005 to $402.200 million in 2006.
Between
2005 and 2006, total interest and dividend income increased $3.031 million
or
7.5%, from $40.310 million in 2005 to $43.341 million in 2006. Most
of the increase was due to an increase in the average yield on
loans. Between 2005 and 2006, the weighted average yield on the loan
portfolio increased 60 basis points, from 6.94% to 7.54%. This
contributed $2.409 million of additional interest income between comparable
periods. This represents 79.5% of the net increase in interest income
between 2005 and 2006. During 2005 and 2006, the prime rate, the
primary index rate for our
variable
rate loans, increased significantly. At January 1, 2005, the prime
rate was 5.25%, as compared to 8.25% at December 31, 2006, a 300 basis point
increase during the two-year period.
The
increase in interest rates, particularly short-term interest rates, between
the
periods also increased our average yield on federal funds sold from 3.33% in
2005 to 5.16% in 2006 and our average yield on our investment securities
portfolio from 4.00% in 2005 to 4.19% in 2006. The increase in the
federal funds interest rate and the shorter average maturity on our deposit
liabilities prompted us to increase the amount of federal funds sold during
2006. We maintained $11.548 million of average federal funds sold in
2006, as compared to $8.110 million in 2005. The net increase in
interest income due to a higher federal funds rate and improved investment
securities yields contributed an additional $730 thousand of interest income
between the periods. Interest income on federal funds sold increased
$326 thousand between the periods, from $270 thousand in 2005 to $596 thousand
in 2006, while interest income on our securities portfolio increased $404
thousand, from $11.908 million in 2005 to $12.312 million in
2006. These increases in interest income were offset by a decrease in
the average volume and average yield on interest bearing deposits held at other
banks. During 2005 and 2006, we had several certificates of deposit
at other financial institutions mature. This caused a decrease in the average
balance and average rate in this category of earning assets from $9.006 million
and 4.99% in 2005 to $2.446 million and 3.68% in 2006,
respectively.
Although
there was a modest decrease in the average volume of interest bearing
liabilities between 2005 and 2006, the shift from lower cost deposits to higher
cost deposits raised the average cost of interest-bearing liabilities from
2.43%
in 2005 to 3.00% in 2006 and increased interest expense $3.430 million or
23.0%. Interest expense for 2005 was $14.930 million, as compared to
$18.360 million in 2006. Between the comparable periods (2005 and
2006) there was a general increase in the level of interest
rates. This prompted us, as well as our competitors, to raise the
interest rate paid on interest-bearing deposit accounts, particularly the more
interest-sensitive deposit accounts, such as money market accounts and time
accounts. Between the periods we recorded a $2.515 million net
increase in the cost of interest bearing deposit liabilities due to increase
in
interest rates. In addition, due to the higher interest rates, our
customers increased the amount of deposits held in money market and time and
other deposit accounts. The increased volume in these accounts
contributed an additional $1.646 million of interest expense between comparable
periods.
The
flat
to inverted yield curve that persisted throughout 2006 effectively eliminated
wholesale leverage opportunities and reduced the economic benefit of borrowing
funds throughout the year, causing us to reduce borrowings and, in turn, our
earning assets. During 2006 our total borrowings averaged $67.908
million. This compares to average borrowings of $83.255 million
during 2005, a $15.347 million or 18.4% decrease between the
periods. The decrease in average borrowings, offset by an increase in
borrowing rates, resulted in a net decrease in interest expense on borrowings
of
$418 thousand between the periods.
At
December 31, 2006 the Treasury yield curve was slightly inverted. The
90-day Treasury bill was yielding 5.05% and the 10-year Treasury note was
yielding 4.68%. This interest rate environment inhibited 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.
Comparative
Interest Rate Table:
| 2006 | 2005 | |||||||||||||||||||||||||||||||
|
Interest
Rates
(1)
|
December
|
September
|
June
|
March
|
December
|
September
|
June
|
March
|
||||||||||||||||||||||||
|
Target
Federal Funds
Rate
|
5.25 | % | 5.25 | % | 5.25 | % | 4.75 | % | 4.25 | % | 3.75 | % | 3.25 | % | 2.75 | % | ||||||||||||||||
|
NYC
Prime
|
8.25 | % | 8.25 | % | 8.25 | % | 7.75 | % | 7.25 | % | 6.75 | % | 6.25 | % | 5.75 | % | ||||||||||||||||
|
90
Day Treasury
Bill
|
5.05 | % | 4.89 | % | 5.06 | % | 4.64 | % | 3.97 | % | 3.48 | % | 2.98 | % | 2.78 | % | ||||||||||||||||
|
6
Month Treasury
Bill
|
5.06 | % | 5.01 | % | 5.26 | % | 4.82 | % | 4.32 | % | 3.87 | % | 3.12 | % | 3.09 | % | ||||||||||||||||
|
1
Year Treasury
Note
|
4.96 | % | 4.97 | % | 5.27 | % | 4.77 | % | 4.37 | % | 3.88 | % | 3.40 | % | 3.38 | % | ||||||||||||||||
|
2
Year Treasury
Note
|
4.79 | % | 4.69 | % | 5.17 | % | 4.79 | % | 4.34 | % | 4.08 | % | 3.65 | % | 3.83 | % | ||||||||||||||||
|
3
Year Treasury
Note
|
4.71 | % | 4.58 | % | 5.14 | % | 4.78 | % | 4.30 | % | 4.08 | % | 3.69 | % | 4.03 | % | ||||||||||||||||
|
5
Year Treasury
Note
|
4.68 | % | 4.55 | % | 5.11 | % | 4.77 | % | 4.31 | % | 4.14 | % | 3.77 | % | 4.27 | % | ||||||||||||||||
|
10
Year Treasury
Note
|
4.68 | % | 4.58 | % | 5.15 | % | 4.78 | % | 4.34 | % | 4.29 | % | 4.00 | % | 4.59 | % | ||||||||||||||||
|
Federal
Housing Finance Board
National Avg. Mortgage Contract Rate (2)
|
6.45 | % | 6.75 | % | 6.61 | % | 6.31 | % | 6.22 | % | 5.83 | % | 5.80 | % | 5.68 | % | ||||||||||||||||
|
(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.
|
Rate
and Volume
Analysis: Net interest income was $24.981 million in
2006. This compares to $25.380 million in 2005, a $399 thousand or
1.6% decrease between comparable periods. Although the decrease in
net interest income between comparable periods was not drastic, several
components of interest income and interest expense changed significantly between
the periods due to both rate and volume factors.
Interest
income increased $3.031 million between the periods due principally to an
increase in the rate on earning assets. As interest rates rose
between 2005 and 2006 the yield on federal funds sold, securities, and loans
all
increased. Together, the rate improvement on these three categories
of earning assets contributed an additional $3.150 million of interest income
between comparable periods. This was offset by a $94 thousand
decrease in interest income on interest bearing deposits due to a change in
rate
between the periods. Between 2005 and 2006 the average yield on our
loan portfolio increased 60 basis points, from 6.94% in 2005 to 7.54% in
2006. This increase contributed $2.409 million of additional interest
income during 2006 or 78.8% of the total increase in interest income due to
rate
between the periods. A significant portion of our loan portfolio is
indexed to the prime rate. As the prime rate increased during 2005
and the first six month of 2006, the yield on our variable rate loan portfolio
climbed.
The
$3.056 million net improvement in interest income on earning assets due to
a
change in rate between the periods was offset, in part, by a $25 thousand net
reduction in interest income due to a decrease in the average volume of earning
assets. During 2005, our average earning assets were $713.697 million, which
compares to $710.345 million during 2006. The average volume of
interest bearing deposits and securities decreased between the comparable
periods, while the average volume of federal funds sold and loans increased
slightly. The decrease in the average volume of interest bearing
deposits and securities reduced interest income by $418 thousand between
comparable periods. This was offset, in part, by a $393 thousand
increase in interest income between comparable periods due to an increase in
the
average volume of federal fund sold and loans outstanding.
The
$3.031 million increase in interest income between 2005 and 2006 was offset
by a
$3.430 million increase in the cost of interest bearing liabilities, $2.671
million due to the increase in rate and $759 thousand due to the increase in
the
volume of interest bearing liabilities. The interest expense recorded
on our most interest-sensitive liabilities, including time and other deposits
accounts and money market accounts, increased due to both an increase in volume
and an increase in rate. Specifically, interest expense on time and
other deposit accounts and interest expense on money market accounts increased
$2.821 million and $1.262 million, respectively, over the comparable
periods. Between the comparable periods, we raised the interest rates
paid on our certificates of deposit to remain competitive within our
market. This drove up the cost of time and other deposit accounts
resulting in a $1.911 million increase in interest expense due to changes in
rate. The remaining increase in interest expense on time and other
deposit accounts between the periods totaling $910 thousand was due to an
increase in volume as depositors transferred their monies from low-rate interest
bearing deposit or demand deposit accounts to higher-yield certificates of
deposit. Money market accounts experienced similar
results. As interest rates increased between the periods, we raised
the interest rates paid on our money market deposits, which increased interest
expense $526 thousand on a comparable period basis. The higher
interest rates attracted additional deposits, which resulted in an increase
in
interest expense due to a change in volume of $736 thousand. The
average cost of our money market deposit accounts increased 101 basis points
between comparable periods, from 2.69% in 2005 to 3.70% in 2006, while the
average volume of money market deposit accounts increased from $42.668 million
to $65.103 million over the same periods.
As
short-term interest rates increased rapidly between the periods, we only
modestly increased the interest rate on our NOW account
deposits. This caused some of our customers with NOW account deposits
to either move their monies to another institution or transfer their NOW account
funds to a higher-rate deposit account. This decreased the average
volume of NOW accounts between the periods from $112.042 million in 2005 to
$89.845 million in 2006. The decrease in the average volume of NOW
account deposits reduced interest expense by $242 thousand between comparable
periods. This was offset, however, by a $134 thousand increase in
interest expense on NOW account deposits due to a 13 basis point increase in
the
average rate paid between the periods.
In
spite
of rising interest rates between periods, we modestly reduced the average rate
paid on our savings accounts from 0.69% in 2005 to 0.63% in 2006. The
low interest rate being offered on savings accounts caused depositors to reduce
their savings deposits and decreased the average volume of savings deposits
between the periods. The interest expense recorded on savings
accounts decreased $127 thousand between 2005 and 2006, $71 thousand due to
a
decrease in average volume and $56 thousand due to a decrease in
rate.
The
interest expense on borrowings decreased $418 thousand between 2005 and 2006
due
principally to the repayment of borrowed funds. Between the
comparable periods, the average volume of borrowings decreased by $15.347
million, resulting in a $574 thousand decrease in interest expense due to
changes in volume. This was offset, in part, by a $156 thousand
increase in interest expense on borrowings between comparable periods due to
higher interest rates.
Provision
for Loan
Losses. We recorded a provision for loan losses of $1.560
million in 2006, as compared to $1.580 million in 2005, a $20 thousand
decrease. During 2006 some of our credit quality measures worsened,
while others improved. In particular, between the periods we
experienced a significant increase in potential problem loans. During
the first quarter of 2006, we downgraded some of our large commercial credits,
which increased the level of potential problem loans from $7.897 million or
2.0%
of loans outstanding at December 31, 2005 to $15.264 million or 3.8% of loans
outstanding at March 31, 2006. At December 31, 2006 this level
remained high at $14.538 million or 3.6% of loans outstanding. In
addition, loans 30 to 89 days delinquent totaled $2.062 million or 0.51% of
loans outstanding at December 31, 2005. This increased to $4.393
million or 1.08% of loans outstanding at December 31, 2006.
Additional
increases in the provision for loan losses were mitigated by a decrease in
non-performing loans between December 31, 2005 and December 31, 2006 and a
declining level of net charge-offs during the last three quarters of
2006. Non-performing loans decreased from $4.918 million or 1.22% of
loans outstanding at December 31, 2005 to $2.529 million or 0.62% of loans
outstanding at December 31, 2006.
Although
net charge-offs increased $330 thousand or 27.7% between comparable twelve-month
periods, the trend during the last three quarters of 2006 were
favorable. During the first quarter of 2006, we recorded a $981
thousand charge-off of one borrower’s loans with us, for which an allowance for
loan losses had been previously allocated. This comprised 64.5% of
our 2006 net charge-offs. During the last three quarters of 2006, we
recorded net charge-offs of $436 thousand. This compares to $1.078
million of net charge-offs during the last three quarters of 2005.
Non-Interest
Income. Non-interest income is comprised of trust fees,
service charges on deposit accounts, commissions income, investment security
gains / (losses), income on bank-owned life insurance, other service fees,
and
other income. Non-interest income increased $344 thousand or 6.1% in
2006, from $5.625 million in 2005 to $5.969 million in 2006. The net
increase in non-interest income on a comparable period basis was due to net
increases in trust fees, service charges on deposit accounts, net investment
securities gains, bank-owned life insurance income and other income, offset,
in
part, by a decrease in commission income and other services fees.
Trust
fees increased from $1.472 million in 2005 to $1.585 million in 2006, a $113
thousand or 7.7% increase between the periods. During 2006, executor
and account closing fees increased $110 thousand or 93.2% due to the closing
of
several large estates and accounts. Executor and account closing fees
totaled $228 thousand in 2006, as compared to $118 thousand in
2005. Fees on retained trust, investment management and custodial
accounts remained relatively unchanged year over year.
During
2006 we recorded $1.659 million of service charges on deposit
accounts. This compares to $1.615 million during 2005, a $44 thousand
or 2.7% increase. During the third quarter of 2005 we reduced or
eliminated select demand deposit and NOW account service charges to retain
and
attract new transaction accounts. The decrease in service fees on
these accounts between comparable periods was offset by a $64 thousand increase
in ATM fees between the comparable periods. During 2005 we raised the
fee we charge non-customers to use our ATM network. The increase in
this fee was the primary reason our ATM fees increased during 2006.
During
2006 we recognized net investment securities gains of $514
thousand. This compares to $469 thousand during 2005, a $45 thousand
or 9.6% increase between the periods. The increase in net investment
securities gains between the periods was due to two factors: an $89 thousand
increase in gains of trading securities, offset by a $44 thousand decrease
in
gains on the sale and maturity of available-for-sale investment
securities. During 2006 we recorded a net gain of $188 thousand on
our trading securities portfolio. This compares to a $99 thousand net
gain in 2005. Our trading securities portfolio consists of equity and
debt securities held for the Company’s executive deferred compensation
plan. The securities held by this plan performed better in 2006 than
in 2005.
During
2006 we received proceeds from the sale and maturity of available-for-sale
investment securities totaling $48.281 million. This generated net
investment securities gains of $326 thousand. By comparison, during
2005 we received proceeds from the sale and maturity of available-for-sale
investment securities totaling $70.300 million, which generated net investment
securities gains of $370 thousand.
We
hold
life insurance policies on the lives of sixteen active and former executives
of
the Company. The cash surrender value of these policies totaled
$16.108 million at December 31, 2006. Although we did not purchase
any additional policies in 2006, the income on these policies increased from
$555 thousand in 2005 to $578 thousand in 2006, a $23 thousand or 4.1% increase
due to a modest increase in the net crediting amount provided by our insurance
carriers.
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 bank real estate, and distributions from two insurance trusts, in
which the Bank participates. Other income increased from $554
thousand in 2005 to $776 thousand in 2006, a $222 thousand
or
40.1%
increase. The increase between the periods was due to several
factors. In the second quarter of 2006, we recorded $67 thousand of
other income due to the unanticipated recovery on a defaulted investment
security. Between comparable periods we recorded a $76 thousand
increase in investment services income due to increased investment service
sales. During the third quarter of 2006, we sold a small parcel of
land and house adjacent to one of our branch offices generating a $38 thousand
gain on the sale. And finally, during the fourth quarter we
received a $47 thousand net incentive payment from our ATM network provider
to
convert our ATM network. These increases were offset, in part, by a
decrease in certain components of other income, including a $27 thousand
decrease in rental income and a $36 thousand decrease in income from a title
insurance agency in which we hold an ownership interest.
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 decreased $101 thousand or 21.4% between
2005 and 2006. The decrease in other service fees between the periods
was principally due to the decrease in residential mortgage
commissions. We originate residential mortgage loans as an agent for
a super-regional bank located in the Southeastern United
States. During 2006 the regional housing market slowed and mortgage
interest rates increased. Due to these factors we originated less
mortgages under our agency arrangement during 2006, as compared to
2005. As a result, during 2005 we recorded $228 thousand of
residential mortgage commissions, as compared to $153 thousand in 2006, a $75
thousand or 32.9% decrease.
Our
commission income is generated from the Bank’s insurance agency subsidiary, Mang
– Wilber LLC. During 2006 we recorded $487 thousand of commission
income. This compares to $489 thousand in 2005. An
increase in commission income from our Oneonta, New York and Walton, New York
locations was offset by a significant decrease in commission income from our
specialty lines agency located in Clifton Park, New York.
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
miscellaneous expense. Total non-interest expense increased $1.066
million or 5.6% on a comparable period basis, from $18.966 million in 2005
to
$20.032 million in 2006. Between comparable periods, most categories
of non-interest expense increased with the exception of employee benefits cost
and advertising and marketing expense.
Salaries
expense increased $329 thousand or 3.6% between the comparable periods, from
$9.040 million in 2005 to $9.369 million in 2006. The increase
between periods was due to increases in all three components of salary expense,
namely base salaries and overtime, commission and incentive amounts and deferred
compensation expense. Base salaries and overtime increased $87
thousand or 1.0% between the periods, from $8.692 million in 2005 to $8.779
million in 2006, due to an increase in staff and general increases in base
salary amounts. Commission and incentive payments increased $121
thousand between the periods, from $281 thousand in 2005 to $402 thousand in
2006. And finally, the salaries expense related to the Company’s
executive deferred compensation plan increased $121 thousand between the
periods, from $66 thousand in 2005 to $188 thousand in 2006 due principally
to
the improved performance of the investments held for the benefit of the deferred
compensation accounts.
We
recorded employee benefits expense of $2.572 million in 2006. This
compares to $2.612 million in 2005. The net decrease in employee
benefits expense between comparable periods totaling $40 thousand or 1.5% was
due to several factors. In the first quarter of 2006, we froze our
defined benefit pension plan and began making employer contributions to our
401k
retirement plan. Due principally to the curtailment charge on the
frozen defined benefit plan, we recorded a net increase in retirement benefits
expense (defined benefit pension expense and 401k retirement expense) of $88
thousand between comparable periods. Retirement benefits expense
increased from $574 thousand in 2005 to $662 thousand in
2006. F.I.C.A expense, group life insurance, group disability
insurance, unemployment insurance, workers compensation and employee education
expense each increased between comparable periods, combining for an additional
$118 thousand of benefits expense. The increase in these costs were
offset by a $182 thousand decrease in other benefits due, principally, to a
reduction in the amount recorded to fund the Company’s supplemental executive
retirement plan for two retired executives. In addition, our group
health insurance expense decreased $64 thousand between comparable periods
due
to favorable claims experience.
Occupancy
expense increased $162 thousand or 9.7% between 2005 and
2006. Occupancy expense totaled $1.840 million in 2006, as compared
to $1.678 million in 2005. The increase was substantially due to a
regional flood, which caused us to temporarily close our Walton and Sidney,
New
York branch offices; while a third office, our main office, was modestly damaged
due to water intrusion. We incurred significant costs in 2006 to
clean-up each of these offices. In addition, we entered into two
lease agreements with a third party, to rent “bank-in-a-box” temporary banking
facilities in the Walton and Sidney markets.
Computer
service fees increased $62 thousand or 8.3% between 2005 and 2006. We
recorded $807 thousand of computer service fees in 2006, as compared to $745
thousand in 2005. The increase between the periods can be primarily
attributed to a core computer system conversion completed 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 operate the new system we entered into various software
licensing agreements and maintenance contracts with several hardware and
software computer system vendors, resulting in an increase in computer service
fees.
Furniture
and equipment expense also increased $29 thousand or 3.8% between periods,
from
$764 thousand in 2005 to $793 thousand in 2006. The increase was
primarily due to an increase in expenditures on computer equipment related
to
the 2005 core system conversion.
Professional
fees increased $183 thousand or 25.8% between comparable periods, from $709
thousand in 2005 to $892 thousand in 2006. The increase in
professional fees was due to a couple of significant factors. In
April 2006 we announced a self-tender offer for the Company’s common
stock. To complete the offer we recorded $82 thousand of legal and
other professional fees. In addition, in 2006 we engaged a regional
accounting firm to perform our internal audit function. This
increased professional fees $143 thousand over comparable
periods. These increases were reduced by a $42 thousand net decrease
in other components of legal and professional fees.
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 expenses related to the Bank’s accounts
receivable financing services, 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, OREO
expenses, minority interest expense, stock exchange listing fees,
loss on disposal/impairment of fixed assets and several other miscellaneous
expenses. During 2006, other miscellaneous expenses increased $343
thousand or 11.8%, from $2.910 million in 2005 to $3.253 million in
2006. The following table itemizes certain components of other
miscellaneous expenses that increased or (decreased) significantly between
comparable periods.
Table
of
Other Miscellaneous Expenses:
|
Year
|
||||||||||||
|
Description
of Other Miscellaneous Expense
|
2006
|
2005
|
Increase
/
(Decrease)
|
|||||||||
|
dollars
in thousands
|
||||||||||||
|
Directors
fees
|
$ | 259 | $ | 200 | $ | 59 | ||||||
|
Collection
and non-filing expense
|
186 | 127 | 59 | |||||||||
|
Correspondent
bank services
|
131 | 151 | (20 | ) | ||||||||
|
Donations
|
106 | 84 | 22 | |||||||||
|
Dues
and memberships
|
63 | 52 | 11 | |||||||||
|
Office
Supplies
|
290 | 318 | (28 | ) | ||||||||
|
Postage
and shipping
|
234 | 270 | (36 | ) | ||||||||
|
Deferred
reserves for unfunded loan commitments
|
(24 | ) | 12 | (36 | ) | |||||||
|
Travel
and entertainment
|
212 | 229 | (17 | ) | ||||||||
|
Software
amortization
|
217 | 183 | 34 | |||||||||
|
Other
losses
|
18 | 36 | (18 | ) | ||||||||
|
Minority
interest for Mang - Wilber LLC insurance agency subsidiary
|
79 | 90 | (11 | ) | ||||||||
|
Loss
/ (Gain) on Disposal / Impairment of Fixed Assets
|
362 | (5 | ) | 367 | ||||||||
|
All
other miscellaneous expense items, net
|
1,120 | 1,163 | (43 | ) | ||||||||
|
Total
Other Miscellaneous Expense
|
$ | 3,253 | $ | 2,910 | $ | 343 | ||||||
Most
of
the amount recorded in the impairment / disposal of fixed assets in 2006 was
due
to flood related losses.
Income
Taxes. Income tax
expense decreased from $2.715 million in 2005 to $2.206 million in 2006, a
$509
thousand or 18.7% decrease between the periods. The decrease in
income tax expense was primarily due to a decreased amount of
pre-tax
income. Our
effective tax rate decreased from 26.0% in 2005 to 23.6% in 2006 due to a
greater percentage of our pre-tax income being generated from tax-exempt
securities and bank-owned life insurance.
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:
|
|
●
maintaining the appropriate levels of currency throughout our branch
system to meet the daily cash needs of our customers,
|
|
|
●
balancing our mandated deposit or “reserve” requirements at the Federal
Reserve Bank of New York,
|
|
|
●
maintaining adequate cash balances at our correspondent banks, and
|
|
|
●
assuring that adequate levels of federal funds sold, liquid assets,
and
borrowing resources are available to meet obligations, including
reasonably anticipated daily fluctuations.
|
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
|
|
•
Currency*
|
|
•
Federal Reserve and Correspondent Bank Balances*
|
|
•
Federal Funds Sold*
|
|
•
Loan and Investment Principal and Interest Payments*
|
|
•
Investment Security Maturities and Calls*
|
|
•
Demand Deposits and NOW Accounts*
|
|
•
Savings and Money Market Deposits*
|
|
•
Certificates of Deposit and Other Time Deposits*
|
|
•
Repurchase Agreements*
|
|
•
FHLBNY Advances / Lines of Credit*
|
|
•
Sale of Available-for-Sale Investment Securities
|
|
•
Brokered Deposits
|
|
•
Correspondent Lines of Credit
|
|
•
Federal Reserve Discount Window Borrowings
|
|
•
Sale of Loans
|
|
•
Proceeds from Issuance of Equity Securities
|
|
•
Branch Acquisition
•
Cash Surrender Value of Bank-Owned Life
Insurance
|
In
addition to the daily funds management process, we also monitor certain
liquidity ratios and complete a liquidity assessment on a monthly
basis. The monthly evaluation report, known as the Liquidity
Contingency Scorecard, is reviewed by the ALCO and the Bank’s Board of
Directors. The report provides management with various ratios and
financial market data that are compared to limits established within the Bank’s
Asset and Liability Management Policy. It was designed to provide an
early warning signal of a potential liquidity crisis. Based on the
limits established in our Asset and Liability Management Policy, we determined
that at December 31, 2007 the Bank was in a “1B” liquidity position, the second
strongest liquidity position based on management’s internal rating
system. This compares to a “1A” liquidity position at December 31,
2006, the strongest liquidity position based on management’s internal rating
system.
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
|
2007
|
2006
|
||||||
|
Cash
and Cash Equivalents
|
$ | 18,942 | $ | 25,859 | ||||
|
Available
for Sale Investment Securities at Estimated Fair Value less Securities
pledged for State and Municipal Deposits and Borrowings
|
$ | 59,006 | $ | 72,240 | ||||
|
Total
Loan to Total Asset Ratio
|
55.9 | % | 53.3 | % | ||||
|
FHLBNY
Remaining Borrowing Capacity
|
$ | 14,294 | $ | 24,128 | ||||
|
Available
Correspondent Bank Lines of Credit
|
$ | 15,000 | $ | 15,000 | ||||
Although
our overall liquidity position diminished modestly between December 31, 2006
and
December 31, 2007, we maintained adequate amounts of cash and cash equivalents
at December 31, 2007 to meet anticipated short-term funding needs. In
addition, our ability to meet unanticipated funding needs was
strong. At December 31, 2007, we maintained $59.006 million of
available-for-sale investment securities that could be pledged for borrowings
or
sold to meet unanticipated funding needs. This compares to $72.240
million at December 31, 2006. Our FHLBNY borrowing capacity decreased
from $24.128 million at December 31, 2006 to $14.294 million at December 31,
2007, a $9.834 million decrease. During 2007, we procured long-term
borrowings at the FHLBNY to fund an increase in our loans
outstanding. In addition to these sources of liquidity, at December
31, 2007 and December 31, 2006 we maintained a $15.000 million unsecured credit
facility at a correspondent bank in the event we needed to borrow federal funds
on an overnight basis. And finally, at December 31, 2007 and December
31, 2006, our total loan to total asset ratios of 55.9% and 53.3%, respectively,
were low relative to our comparative peer group of financial
institutions. The slight decrease in the Company’s liquidity position
was principally due to a significant growth in loans during 2007.
Our
commitments to extend credit and stand-by letters of credit increased between
December 31, 2006 and December 31, 2007. At December 31, 2007,
commitments to extend credit and standby and commercial letters of credit were
$97.543 million as compared to $88.510 million at December 31, 2006, a $9.032
million or 10.2% increase between the periods. The increase between
December 31, 2006 and December 31, 2007 was principally due to increases in
our
commercial lines of credit, commercial letters of credit, and commitments to
fund real estate construction. 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 significantly 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 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 shareholders while retaining a sufficient capital base to
provide for future expansion and comply with all regulatory
standards.
Between
December 31, 2006 and December 31, 2007 our total shareholders’ equity increased
$6.067 million or 9.6%. Total shareholders’ equity was $69.399
million at December 31, 2007, as compared to $63.332 million at December 31,
2006. The increase in shareholders’ equity between the periods was
due to an increase in retained earnings and a decrease in accumulated other
comprehensive loss, reduced, in part, by an increase in treasury
stock. During 2007, we earned $7.707 million in net income and
declared and paid $4.010 million in cash dividends to shareholders, resulting
in
a $3.697 million or 4.1% increase in retained earnings.
Accumulated
other comprehensive loss decreased from $3.247 million at December 31, 2006
to
$272 thousand at December 31, 2007, due to two factors, namely a significant
decrease in the net unrealized loss on securities, net of tax and a significant
increase in the pension asset, net of tax. Due to a decrease in the
general level of interest rates between December 31, 2006 and December 31,
2007,
we recorded a $1.533 million decrease in the net unrealized loss
on
securities, net of tax. In addition, we recorded a $1.442 million
increase in the funded status of our defined benefit pension plan, net of
tax.
The
increase in retained earnings and the decrease in accumulated other
comprehensive income was reduced, in part, by a $605 thousand increase in
treasury stock resulting from our purchase of 65,478 shares of common
stock at a total cost of $605 thousand.
The
Company and the Bank are both subject to regulatory capital
guidelines. Under these guidelines, as established by federal bank
regulators, in order to be “adequately capitalized,” the Company and the Bank
must both maintain a minimum ratio of tier 1 capital to risk-weighted assets
of
4.0% and a minimum ratio of total capital to risk-weighted assets of
8.0%. Tier 1 capital is comprised of shareholders’ 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, 2007
and
December 31, 2006. The Company’s tier 1 capital to risk-weighted
assets ratio and total capital to risk-weighted assets ratio at December 31,
2007 were 12.04% and
13.29%, respectively. This compares to 12.25% and 13.50%,
respectively, at December 31, 2006. 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 shareholders. As of
December 31, 2007, under these statutory limitations, the maximum amount that
could have been paid by the Bank subsidiary to the Company without special
regulatory approval was approximately $4.75 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 Bank’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 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 (assets) using the prime rate as a basis, while some of our deposit
accounts (liabilities) are tied to Treasury security yields. In a
given 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 loans, 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 by refinancing 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 that 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 may 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 six
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 twelve-month period beginning January 1, 2008 and
ending December 31, 2008, under ramped shock scenarios.
Interest
Rate Sensitivity Table:
|
Interest
Rates
|
Dollars
in Thousands
|
||||
|
Interest
Rate
Shock
(1)
|
Prime
Rate
|
Projected
Annualized
Net
Interest
Income
|
Projected
Dollar
Change
in
Net
Interest
Income
|
Projected
Percentage
Change
in
Net
Interest
Income
|
Projected
Change
in
Net
Interest
Income
as a
Percent
of
Total
Shareholders'
Equity
|
|
3.00%
|
10.25%
|
$25,215
|
(357)
|
-1.40%
|
-0.51%
|
|
2.00%
|
9.25%
|
$25,096
|
(476)
|
-1.86%
|
-0.69%
|
|
1.00%
|
8.25%
|
$25,208
|
(364)
|
-1.42%
|
-0.52%
|
|
No
change
|
7.25%
|
$25,572
|
-
|
-
|
-
|
|
-1.00%
|
6.25%
|
$26,168
|
596
|
2.33%
|
0.86%
|
|
-2.00%
|
5.25%
|
$25,446
|
(126)
|
-0.49%
|
-0.18%
|
|
-3.00%
|
4.25%
|
$24,822
|
(750)
|
-2.93%
|
-1.08%
|
|
(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 $476 thousand
or
0.69% of total shareholders’ equity in a +2.00% ramped interest rate shock and
by $126 thousand or 0.18% of total shareholders’ 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 overall market
conditions and customer demand, but we generally 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 24% of
our total assets at December 31, 2007 were invested in adjustable rate loans
and
investments.
At
December 31, 2007, the Treasury yield curve was generally flat. This
means the yields on long-term Treasury yields were only modestly greater than
short-term Treasury yields. At December 31, 2007, the one-year
Treasury bill yield was approximately 3.42%, versus 3.90% for the ten year
Treasury note, only a 48 basis point difference. A 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. Furthermore,
due to a weakening national economy since December 31, 2007 the general level
of
interest rates has dropped precipitously, particularly for instruments with
a
maturity of two years or less. Although this interest rate
environment may provide us opportunity to reduce interest expense, the 125
basis
point drop in the target federal funds rate and the national prime rate will
also negatively impact interest income. Our modeling predicts that
this decrease will marginally improve net interest income over a one year
timeframe, although the interest rate environment generally remains difficult
for banks.
ITEM
8: FINANCIAL STATEMENTS AND SUPPLEMENTARY
DATA
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders of The Wilber Corporation:
We
have
audited the accompanying consolidated statements of condition of The Wilber
Corporation and subsidiaries (“the Company”) as of December 31, 2007 and 2006,
and the related consolidated statements of income, change in shareholders'
equity and comprehensive income, and cash flows for each of the years in the
three-year period ended December 31, 2007. 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
subsidiaries as of December 31, 2007 and 2006, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 2007, 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 Wilber Corporation and subsidiaries’
internal control over financial reporting as of December 31, 2007, 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, 2008 expressed an
unqualified opinion on the effectiveness of the Company’s internal control over
financial reporting.
Albany,
New York
March
10,
2008
|
The
Wilber Corporation
|
||||||||
|
Consolidated
Statements of Condition
|
||||||||
|
December
31,
|
December
31,
|
|||||||
|
in
thousands except share and per share data
|
2007
|
2006
|
||||||
|
Assets
|
||||||||
|
Cash
and Due from Banks
|
$ | 11,897 | $ | 12,742 | ||||
|
Time
Deposits with Other Banks
|
0 | 800 | ||||||
|
Federal
Funds Sold
|
7,045 | 12,317 | ||||||
|
Total
Cash and Cash Equivalents
|
18,942 | 25,859 | ||||||
|
Securities
|
||||||||
|
Trading,
at Fair Value
|
1,430 | 1,625 | ||||||
|
Available-for-Sale,
at Fair Value
|
237,274 | 228,959 | ||||||
|
Held-to-Maturity,
Fair Value of $51,743 at December 31, 2007
|
||||||||
|
and
$61,310 at December 31, 2006
|
52,202 | 62,358 | ||||||
|
Other
Investments
|
4,782 | 4,600 | ||||||
|
Loans
Held for Sale
|
456 | 0 | ||||||
|
Loans
|
443,870 | 405,832 | ||||||
|
Allowance
for Loan Losses
|
(6,977 | ) | (6,680 | ) | ||||
|
Loans,
Net
|
436,893 | 399,152 | ||||||
|
Premises
and Equipment, Net
|
6,312 | 5,686 | ||||||
|
Bank
Owned Life Insurance
|
15,785 | 16,108 | ||||||
|
Goodwill
|
4,619 | 4,518 | ||||||
|
Intangible
Assets, Net
|
394 | 520 | ||||||
|
Pension
Asset
|
4,872 | 2,357 | ||||||
|
Other
Assets
|
9,719 | 10,239 | ||||||
|
Total
Assets
|
$ | 793,680 | $ | 761,981 | ||||
|
Liabilities
and Shareholders’ Equity
|
||||||||
|
Deposits:
|
||||||||
|
Demand
|
$ | 71,145 | $ | 71,914 | ||||
|
Savings,
NOW and Money Market Deposit Accounts
|
254,196 | 243,249 | ||||||
|
Certificates
of Deposit (Over $100M)
|
111,949 | 101,025 | ||||||
|
Certificates
of Deposit (Under $100M)
|
198,467 | 188,386 | ||||||
|
Other
Deposits
|
21,737 | 24,470 | ||||||
|
Total
Deposits
|
657,494 | 629,044 | ||||||
|
Short-Term
Borrowings
|
15,786 | 18,459 | ||||||
|
Long-Term
Borrowings
|
41,538 | 42,204 | ||||||
|
Other
Liabilities
|
9,463 | 8,942 | ||||||
|
Total
Liabilities
|
724,281 | 698,649 | ||||||
|
Shareholders’
Equity:
|
||||||||
|
Common
Stock, $.01 Par Value, 16,000,000 Shares Authorized,
|
||||||||
|
and
13,961,664 Shares Issued at December 31, 2007,
|
||||||||
|
and
December 31, 2006
|
140 | 140 | ||||||
|
Additional
Paid in Capital
|
4,224 | 4,224 | ||||||
|
Retained
Earnings
|
93,618 | 89,921 | ||||||
|
Accumulated
Other Comprehensive Loss
|
(272 | ) | (3,247 | ) | ||||
|
Treasury
Stock at Cost, 3,457,960 Shares at December 31, 2007
|
||||||||
|
and
3,392,482 Shares at December 31, 2006
|
(28,311 | ) | (27,706 | ) | ||||
|
Total
Shareholders’ Equity
|
69,399 | 63,332 | ||||||
|
Total
Liabilities and Shareholders’ Equity
|
$ | 793,680 | $ | 761,981 | ||||
|
See
accompanying notes to Consolidated Financial Statements
|
||||||||
|
The
Wilber Corporation
|
||||||||||||
|
Consolidated
Statements of Income
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
in
thousands except share and per share data
|
2007
|
2006
|
2005
|
|||||||||
|
Interest
and Dividend Income
|
||||||||||||
|
Interest
and Fees on Loans
|
$ | 32,172 | $ | 30,343 | $ | 27,683 | ||||||
|
Interest
and Dividends on Securities:
|
||||||||||||
|
U.S.
Government and Agency Obligations
|
9,654 | 9,549 | 9,124 | |||||||||
|
State
and Municipal Obligations
|
2,513 | 2,499 | 2,569 | |||||||||
|
Other
|
425 | 264 | 215 | |||||||||
|
Interest
on Federal Funds Sold and Time Deposits
|
1,266 | 686 | 719 | |||||||||
|
Total
Interest and Dividend Income
|
46,030 | 43,341 | 40,310 | |||||||||
|
Interest
Expense
|
||||||||||||
|
Interest
on Deposits:
|
||||||||||||
|
Savings,
NOW and Money Market Deposit Accounts
|
5,204 | 3,983 | 2,956 | |||||||||
|
Certificates
of Deposit (Over $100M)
|
4,761 | 3,842 | 2,445 | |||||||||
|
Certificates
of Deposit (Under $100M)
|
7,904 | 7,033 | 5,944 | |||||||||
|
Other
Deposits
|
1,091 | 930 | 595 | |||||||||
|
Interest
on Short-Term Borrowings
|
581 | 670 | 633 | |||||||||
|
Interest
on Long-Term Borrowings
|
1,933 | 1,902 | 2,357 | |||||||||
|
Total
Interest Expense
|
21,474 | 18,360 | 14,930 | |||||||||
|
Net
Interest Income
|
24,556 | 24,981 | 25,380 | |||||||||
|
Provision
for Loan Losses
|
900 | 1,560 | 1,580 | |||||||||
|
Net
Interest Income After Provision for Loan Losses
|
23,656 | 23,421 | 23,800 | |||||||||
|
Non
Interest Income
|
||||||||||||
|
Trust
Fees
|
1,641 | 1,585 | 1,472 | |||||||||
|
Service
Charges on Deposit Accounts
|
1,891 | 1,659 | 1,615 | |||||||||
|
Commission
Income
|
476 | 487 | 489 | |||||||||
|
Investment
Security Gains, Net
|
80 | 514 | 469 | |||||||||
|
Net
Gain on Sale of Loans
|
196 | 0 | 0 | |||||||||
|
Increase
in Cash Surrender Value of Bank Owned Life Insurance
|
606 | 578 | 555 | |||||||||
|
Gain
on Life Insurance Coverage
|
615 | 0 | 0 | |||||||||
|
Other
Service Fees
|
221 | 370 | 471 | |||||||||
|
Other
Income
|
1,310 | 776 | 554 | |||||||||
|
Total
Non Interest Income
|
7,036 | 5,969 | 5,625 | |||||||||
|
Non
Interest Expense
|
||||||||||||
|
Salaries
|
9,823 | 9,369 | 9,040 | |||||||||
|
Employee
Benefits
|
2,672 | 2,572 | 2,612 | |||||||||
|
Occupancy
Expense of Bank Premises
|
1,769 | 1,840 | 1,678 | |||||||||
|
Furniture
and Equipment Expense
|
927 | 793 | 764 | |||||||||
|
Computer
Service Fees
|
775 | 807 | 745 | |||||||||
|
Advertising
and Marketing
|
625 | 506 | 508 | |||||||||
|
Professional
Fees
|
976 | 892 | 709 | |||||||||
|
Other
Miscellaneous Expenses
|
3,290 | 3,253 | 2,910 | |||||||||
|
Total
Non Interest Expense
|
20,857 | 20,032 | 18,966 | |||||||||
|
Income
Before Taxes
|
9,835 | 9,358 | 10,459 | |||||||||
|
Income
Taxes
|
(2,128 | ) | (2,206 | ) | (2,715 | ) | ||||||
|
Net
Income
|
$ | 7,707 | $ | 7,152 | $ | 7,744 | ||||||
|
Weighted
Average Shares Outstanding
|
10,544,768 | 10,813,076 | 11,169,730 | |||||||||
|
Basic
Earnings Per Share
|
$ | 0.73 | $ | 0.66 | $ | 0.69 | ||||||
|
See
accompanying notes to Consolidated Financial Statements
|
||||||||||||
|
Consolidated
Statements of Changes in Shareholders' Equity and Comprehensive
Income
|
||||||||||||||||||||||||
|
Accumulated
|
||||||||||||||||||||||||
|
Additional
|
Other
|
|||||||||||||||||||||||
|
Common
|
Paid
in
|
Retained
|
Comprehensive
|
Treasury
|
||||||||||||||||||||
|
in
thousands except share and per share data
|
Stock
|
Capital
|
Earnings
|
Income
(Loss)
|
Stock
|
Total
|
||||||||||||||||||
|
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 Gain (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 | ||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net
Income
|
- | - | 7,152 | - | - | 7,152 | ||||||||||||||||||
|
Change
in Net Unrealized Gain (Loss)
|
||||||||||||||||||||||||
|
on
Securities, Net of Taxes
|
- | - | - | (18 | ) | - | (18 | ) | ||||||||||||||||
|
Total
Comprehensive Income
|
7,134 | |||||||||||||||||||||||
|
Adjustment
to Initally Apply FASB
|
||||||||||||||||||||||||
|
Statement No.
158, Net of Taxes
|
(820 | ) | (820 | ) | ||||||||||||||||||||
|
Cash
Dividends ($.38 per share)
|
- | - | (4,131 | ) | - | - | (4,131 | ) | ||||||||||||||||
|
Purchase
of Treasury Stock (576,755 shares)
|
- | - | - | (6,568 | ) | (6,568 | ) | |||||||||||||||||
|
Balance
December 31, 2006
|
$ | 140 | $ | 4,224 | $ | 89,921 | $ | (3,247 | ) | $ | (27,706 | ) | $ | 63,332 | ||||||||||
|
Comprehensive
Income:
|
||||||||||||||||||||||||
|
Net
Income
|
- | - | 7,707 | - | - | 7,707 | ||||||||||||||||||
|
Change
in Net Unrealized Gain (Loss)
|
||||||||||||||||||||||||
|
on
Securities, Net of Taxes
|
- | - | - | 1,533 | - | 1,533 | ||||||||||||||||||
|
Change
in the Funded Status of Defined
|
||||||||||||||||||||||||
|
Benefit
Plan, Net of Taxes
|
1,442 | 1,442 | ||||||||||||||||||||||
|
Total
Comprehensive Income
|
10,682 | |||||||||||||||||||||||
|
Cash
Dividends ($.38 per share)
|
- | - | (4,010 | ) | - | - | (4,010 | ) | ||||||||||||||||
|
Purchase
of Treasury Stock (65,478 shares)
|
- | - | - | - | (605 | ) | (605 | ) | ||||||||||||||||
|
Balance
December 31, 2007
|
$ | 140 | $ | 4,224 | $ | 93,618 | $ | (272 | ) | $ | (28,311 | ) | $ | 69,399 | ||||||||||
|
See
accompanying notes to Consolidated Financial Statements.
|
||||||||||||||||||||||||
|
The
Wilber Corporation
|
||||||||||||
|
Consolidated
Statements of Cash Flows
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
in
thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
Flows from Operating Activities:
|
||||||||||||
|
Net
Income
|
$ | 7,707 | $ | 7,152 | $ | 7,744 | ||||||
|
Adjustments
to Reconcile Net Income to Net Cash
|
||||||||||||
|
Used
by Operating Activities:
|
||||||||||||
|
Provision
for Loan Losses
|
900 | 1,560 | 1,580 | |||||||||
|
Depreciation
and Amortization
|
1,210 | 1,133 | 1,151 | |||||||||
|
Net
(Gain) / Loss on Disposal/Impairment of Fixed Assets
|
(374 | ) | 324 | 5 | ||||||||
|
Net
Amortization of Premiums and Accretion of Discounts on
Investments
|
485 | 647 | 1,027 | |||||||||
|
Gain
on Life Insurance Coverage
|
(615 | ) | 0 | 0 | ||||||||
|
Available-for-Sale
Investment Security Gains, net
|
(16 | ) | (326 | ) | (370 | ) | ||||||
|
Deferred
Income Tax Expense (Benefit)
|
215 | (130 | ) | (138 | ) | |||||||
|
Other
Real Estate Losses
|
29 | 0 | 0 | |||||||||
|
Increase
in Cash Surrender Value of Bank Owned Life Insurance
|
(606 | ) | (578 | ) | (555 | ) | ||||||
|
Net
Decrease in Trading Securities
|
259 | 105 | 61 | |||||||||
|
Net
Gains on Trading Securities
|
(64 | ) | (188 | ) | (99 | ) | ||||||
|
Net
Gain on Sale of Loans
|
(196 | ) | 0 | 0 | ||||||||
|
Originations
of Mortgage Loans Held for Sale
|
(10,479 | ) | 0 | 0 | ||||||||
|
Proceeds
from Sale of Mortgage Loans Held for Sale
|
10,219 | 0 | 0 | |||||||||
|
(Increase)
Decrease in Other Assets
|
(1,795 | ) | 7 | (180 | ) | |||||||
|
Increase
(Decrease) in Other Liabilities
|
308 | 579 | (223 | ) | ||||||||
|
Net
Cash Provided by Operating Activities
|
7,187 | 10,285 | 10,003 | |||||||||
|
Cash
Flows from Investing Activities:
|
||||||||||||
|
Net
Cash Acquired from Acquisition of a Branch
|
0 | 0 | 22,521 | |||||||||
|
Net
Cash Paid for Provantage Funding Corporation
|
(165 | ) | 0 | 0 | ||||||||
|
Proceeds
from Maturities of Held-to-Maturity Investment Securities
|
10,048 | 7,507 | 9,932 | |||||||||
|
Purchases
of Held-to-Maturity Investment Securities
|
0 | (14,408 | ) | (5,614 | ) | |||||||
|
Proceeds
from Maturities of Available-for-Sale Investment
Securities
|
43,662 | 42,842 | 60,950 | |||||||||
|
Proceeds
from Sales and Calls of Available-for-Sale Investment
Securities
|
6,119 | 5,637 | 9,350 | |||||||||
|
Purchases
of Available-for-Sale Investment Securities
|
(55,943 | ) | (41,903 | ) | (66,367 | ) | ||||||
|
Net
(Increase) / Decrease in Other Investments
|
(182 | ) | (653 | ) | 86 | |||||||
|
Cash
Received from Death Benefit
|
1,544 | 0 | 0 | |||||||||
|
Net
Increase in Loans
|
(38,119 | ) | (3,777 | ) | (6,177 | ) | ||||||
|
Purchase
of Premises and Equipment, Net of Disposals
|
(1,728 | ) | (349 | ) | (932 | ) | ||||||
|
Proceeds
from Sale of Premises and Equipment
|
87 | 40 | 0 | |||||||||
|
Proceeds
from Sale of Other Real Estate
|
77 | 0 | 0 | |||||||||
|
Net
Cash (Used by) Provided by Investing Activities
|
(34,600 | ) | (5,064 | ) | 23,749 | |||||||
|
Cash
Flows from Financing Activities:
|
||||||||||||
|
Net
Increase (Decrease) in Demand Deposits, Savings, NOW,
|
||||||||||||
|
Money
Market and Other Time Deposits
|
7,445 | (3,462 | ) | (8,100 | ) | |||||||
|
Net
Increase in Certificates of Deposit
|
21,005 | 27,548 | 8,162 | |||||||||
|
Net
Decrease in Short-Term Borrowings
|
(2,673 | ) | (898 | ) | (18,202 | ) | ||||||
|
Increase
in Long-Term Borrowings
|
25,000 | 0 | 24,900 | |||||||||
|
Repayment
of Long-Term Borrowings
|
(25,666 | ) | (10,268 | ) | (37,807 | ) | ||||||
|
Purchase
of Treasury Stock
|
(605 | ) | (6,568 | ) | (581 | ) | ||||||
|
Cash
Dividends Paid
|
(4,010 | ) | (4,131 | ) | (4,246 | ) | ||||||
|
Net
Cash Provided by (Used by) Financing Activities
|
20,496 | 2,221 | (35,874 | ) | ||||||||
|
Net
(Decrease) / Increase in Cash and Cash Equivalents
|
(6,917 | ) | 7,442 | (2,122 | ) | |||||||
|
Cash
and Cash Equivalents at Beginning of Year
|
25,859 | 18,417 | 20,539 | |||||||||
|
Cash
and Cash Equivalents at End of Year
|
$ | 18,942 | $ | 25,859 | $ | 18,417 | ||||||
|
Year
Ended December 31,
|
||||||||||||
|
in
thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Supplemental
Disclosures of Cash Flow Information:
|
||||||||||||
|
Cash
Paid during Period for:
|
||||||||||||
|
Interest
|
$ | 21,247 | $ | 18,082 | $ | 14,918 | ||||||
|
Income
Taxes
|
$ | 2,210 | $ | 2,727 | $ | 3,085 | ||||||
|
Non
Cash Investing Activities:
|
||||||||||||
|
Change
in Unrealized Gain / (Loss) on Securities
|
$ | 2,514 | $ | (29 | ) | $ | (4,596 | ) | ||||
|
Transfer
of Loans to Other Real Estate
|
$ | 334 | $ | 83 | $ | 0 | ||||||
|
Adjustment
to Initally Apply FASB Statement No. 158, Net of Tax
|
$ | 0 | $ | (820 | ) | $ | 0 | |||||
|
Fair
Value of Tangible Assets Acquired
|
$ | 504 | $ | 0 | $ | 8,119 | ||||||
|
Goodwill
and Identifiable Intangible Assets Recognized in Purchase
Combination
|
$ | 105 | $ | 0 | $ | 0 | ||||||
|
Fair
Value of Liabilities Assumed
|
$ | 444 | $ | 0 | $ | 32,967 | ||||||
|
See
accompanying notes to Consolidated Financial Statements.
|
||||||||||||
Note
1. Summary of Significant Accounting Policies
The
Wilber Corporation (“the Parent Company”) operates 21 branches serving Otsego,
Delaware, Schoharie, Ulster, Chenango, and Broome Counties through its wholly
owned subsidiary Wilber National Bank (“the Bank”), and also operates 5 licensed
mortgage banking branches in Saratoga, Schenectady, Otsego, and Albany Counties
through its wholly owned subsidiary Provantage Funding Corporation
(“Provantage”). The Parent Company's primary source of revenue is
interest earned on commercial, mortgage, and consumer loans to customers of
the
Bank who are predominately individuals and small and middle-market
businesses. Collectively, the Parent Company, the Bank, and
Provantage 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
shareholders' 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.
Non-marketable
equity securities, including Federal Reserve Bank and Federal Home Loan Bank
of
New York 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 the level yield 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.
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
Note
1. Summary of Significant Accounting Policies, Continued
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
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.
Tax
benefits of uncertain tax positions are accounted for in accordance with FASB
Interpretation No. 48, “Accounting for Uncertainty
in Income
Taxes – An Interpretation of FASB Statement No. 109” (“FIN
48”). FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 109, “Accounting for Income
Taxes.” FIN 48 also prescribes a recognition threshold and
measurement attribute for the financial statement recognition and measurement
of
a tax position taken or expected to be taken in a tax return. In
addition, FIN 48 provides guidance on derecognition, classification, interest
and penalties, accounting in interim periods, disclosure and
transition. The provisions of FIN 48 were applied to all tax
positions upon initial adoption of this standard as of January 1, 2007, with
the
effect of adoption recognized in retained earnings as the cumulative effect
of
an accounting change. Tax positions must have met the
more-likely-than-not recognition threshold at the effective date in order for
the related tax benefits to be recognized or continue to be
recognized. Interest and penalties related to income taxes are
classified as income tax expense on the consolidated statements of
income. The adoption of FIN 48 by the Company had no impact on its
Consolidated Financial Statements.
Pension
—
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. Effective December 31, 2006, the Company
adopted SFAS No. 158, “Employers’ Accounting for Defined
Benefit Pension and Other Postretirement Plans – An Amendment of FASB Statement
No. 87, 88, 106 and 132,” which requires the Company to recognize the
over funded or under funded status of a single employer defined benefit
postretirement plan as an asset or liability on its balance sheet and to
recognize changes in the funded status in comprehensive income in the year
in
which the change occurred. However, gains and losses, prior service
costs or credits, and transition assets or obligations that have not been
included in net periodic benefit cost as of the end of 2006, the fiscal year
in
which SFAS No. 158 was initially applied, were recognized as components of
the
ending balance of accumulated other comprehensive income, net of
tax. The incremental impact of adopting SFAS No. 158 at December 31,
2006 was an increase to accumulated other comprehensive loss of approximately
$820,000, a decrease to other assets for pension benefits (classified as other
assets) of approximately $1,344,000, and an increase in the deferred tax asset
(classified as other assets) of approximately $524,000. Subsequent
changes in the funded status of the defined benefit plan are included in other
comprehensive income.
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
Note
1. Summary of Significant Accounting Policies, Continued
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 two components: 1) the net change
in unrealized gains or losses on securities available for sale, recorded net
of
income taxes, for the period, and 2) the change in the funded status of defined
benefit plans, recorded net of tax, for the period, and is presented in the
consolidated statements of changes in shareholders' equity and comprehensive
income. Accumulated other comprehensive income (loss) represents the net
unrealized gains or losses on securities available-for-sale and the net change
in the funded status of defined benefit plans.
Segment
Reporting — The Company's operations are solely in the 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.
When
facts and circumstances indicate there may be an impairment of amortizable
intangible assets, the Company evaluates the recoverability of the asset
carrying value, using estimates of the undiscounted future cash flows over
the
remaining asset life. Any impairment loss is measured by the excess
of carrying value over fair value.
Goodwill
impairment tests are performed on an annual basis or when events or
circumstances dictate. In these tests, the fair value of each
reporting unit is compared to the carrying amount of that reporting unit in
order to determine if impairment is indicated. If so, the implied
fair value of the reporting unit’s goodwill is compared to its carrying amount
and the impairment loss is measured by the excess of carrying value over fair
value.
|
Note
2. Investment Securities
|
||||||||||||||||||
|
The
amortized cost and fair value of investment securities are as
follows:
|
||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||
|
dollars
in thousands
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||||
|
Available-for-Sale
Portfolio
|
||||||||||||||||||
|
U.S.
Treasuries
|
$ | 5,997 | $ | 73 | $ | 0 | $ | 6,070 | ||||||||||
|
Obligations
of U.S. Government Corporations and Agencies
|
7,997 | 18 | 0 | 8,015 | ||||||||||||||
|
Obligations
of States and Political Subdivisions
|
48,861 | 215 | 358 | 48,718 | ||||||||||||||
|
Mortgage-Backed
Securities
|
172,719 | 295 | 1,619 | 171,395 | ||||||||||||||
|
Corporate
Securities
|
2,294 | 0 | 1 | 2,293 | ||||||||||||||
|
Equity
Securities
|
866 | 0 | 83 | 783 | ||||||||||||||
| $ | 238,734 | $ | 601 | $ | 2,061 | $ | 237,274 | |||||||||||
|
Trading
Portfolio
|
$ | 1,167 | $ | 263 | $ | 0 | $ | 1,430 | ||||||||||
|
Held-to-Maturity
Portfolio
|
||||||||||||||||||
|
Obligations
of States and Political Subdivisions
|
$ | 17,874 | $ | 162 | $ | 18 | $ | 18,018 | ||||||||||
|
Mortgage-Backed
Securities
|
34,328 | 8 | 611 | 33,725 | ||||||||||||||
| $ | 52,202 | $ | 170 | $ | 629 | $ | 51,743 | |||||||||||
|
December
31, 2006
|
||||||||||||||||||
|
Gross
|
Gross
|
Estimated
|
||||||||||||||||
|
Amortized
|
Unrealized
|
Unrealized
|
Fair
|
|||||||||||||||
|
dollars
in thousands
|
Cost
|
Gains
|
Losses
|
Value
|
||||||||||||||
|
Available-for-Sale
Portfolio
|
||||||||||||||||||
|
U.S.
Treasuries
|
$ | 10,963 | $ | 0 | $ | 156 | $ | 10,807 | ||||||||||
|
Obligations
of U.S. Government Corporations and Agencies
|
21,486 | 0 | 150 | 21,336 | ||||||||||||||
|
Obligations
of States and Political Subdivisions
|
47,985 | 240 | 681 | 47,544 | ||||||||||||||
|
Mortgage-Backed
Securities
|
149,400 | 100 | 3,414 | 146,086 | ||||||||||||||
|
Corporate
Securities
|
2,274 | 0 | 7 | 2,267 | ||||||||||||||
|
Equity
Securities
|
825 | 95 | 1 | 919 | ||||||||||||||
| $ | 232,933 | $ | 435 | $ | 4,409 | $ | 228,959 | |||||||||||
|
Trading
Portfolio
|
$ | 1,296 | $ | 329 | $ | 0 | $ | 1,625 | ||||||||||
|
Held-to-Maturity
Portfolio
|
||||||||||||||||||
|
Obligations
of States and Political Subdivisions
|
$ | 22,903 | $ | 48 | $ | 35 | $ | 22,916 | ||||||||||
|
Mortgage-Backed
Securities
|
39,455 | 0 | 1,061 | 38,394 | ||||||||||||||
| $ | 62,358 | $ | 48 | $ | 1,096 | $ | 61,310 | |||||||||||
|
The
following tables provide information on temporarily impaired
securities:
|
||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||||||
|
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 States and Political Subdivisions
|
1,861 | 4 | 24,336 | 372 | 26,197 | 376 | ||||||||||||||||||
|
Mortgage-Backed
Securities
|
47,042 | 260 | 101,020 | 1,970 | 148,062 | 2,230 | ||||||||||||||||||
|
Corporate
Securities
|
0 | 0 | 2,293 | 1 | 2,293 | 1 | ||||||||||||||||||
|
Equity
Securities
|
533 | 24 | 153 | 59 | 686 | 83 | ||||||||||||||||||
| $ | 49,436 | $ | 288 | $ | 127,802 | $ | 2,402 | $ | 177,238 | $ | 2,690 | |||||||||||||
|
Note
2. Investment Securities, Continued
|
||||||||||||||||||||||||
|
December
31, 2006
|
||||||||||||||||||||||||
|
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
|
$ | 0 | $ | 0 | $ | 10,808 | $ | 156 | $ | 10,808 | $ | 156 | ||||||||||||
|
Obligations
of U.S. Government
|
||||||||||||||||||||||||
|
Corporations
and Agencies
|
5,990 | 10 | 15,346 | 140 | 21,336 | 150 | ||||||||||||||||||
|
Obligations
of States and Political Subdivisions
|
4,425 | 42 | 28,724 | 674 | 33,149 | 716 | ||||||||||||||||||
|
Mortgage-Backed
Securities
|
35,204 | 206 | 138,972 | 4,269 | 174,176 | 4,475 | ||||||||||||||||||
|
Corporate
Securities
|
2,267 | 7 | 0 | 0 | 2,267 | 7 | ||||||||||||||||||
|
Equity
Securities
|
94 | 1 | 0 | 0 | 94 | 1 | ||||||||||||||||||
| $ | 47,980 | $ | 266 | $ | 193,850 | $ | 5,239 | $ | 241,830 | $ | 5,505 | |||||||||||||
|
The
above unrealized losses are considered temporary, based on the
following:
|
||||||||||||||||||||||||
|
U.S.
treasuries and agencies, state and political subdivisions, and
corporate
securities: 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 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, which may be 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.
|
||||||||||||||||||||||||
|
The
Company does not believe that the gross unrealized losses as of
December
31, 2007, which is comprised of 203 investment securities, represent
an
other than temporary impairment.
|
||||||||||||||||||||||||
|
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. Mortgage-backed securities are included based on the final
contractual maturity date, while equity securities have no stated
maturity
and are excluded from the following
tables.
|
||||||||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||||||
|
Amortized
|
Fair
|
|||||||||||||||||||||||
|
dollars
in thousands
|
Cost
|
Value
|
||||||||||||||||||||||
|
Available-for-Sale
Securities
|
||||||||||||||||||||||||
|
Due
in One Year or Less
|
$ | 7,973 | $ | 7,978 | ||||||||||||||||||||
|
Due
After One Year Through Five Years
|
57,032 | 56,571 | ||||||||||||||||||||||
|
Due
After Five Years Through Ten Years
|
75,736 | 75,375 | ||||||||||||||||||||||
|
Due
After Ten Years
|
97,127 | 96,567 | ||||||||||||||||||||||
| $ | 237,868 | $ | 236,491 | |||||||||||||||||||||
|
December
31, 2007
|
||||||||||||||||||||||||
|
Amortized
|
Fair
|
|||||||||||||||||||||||
|
dollars
in thousands
|
Cost
|
Value
|
||||||||||||||||||||||
|
Held-to-Maturity
Securities
|
||||||||||||||||||||||||
|
Due
in One Year or Less
|
$ | 9,114 | $ | 9,284 | ||||||||||||||||||||
|
Due
After One Year Through Five Years
|
3,922 | 3,958 | ||||||||||||||||||||||
|
Due
After Five Years Through Ten Years
|
19,679 | 19,541 | ||||||||||||||||||||||
|
Due
After Ten Years
|
19,487 | 18,960 | ||||||||||||||||||||||
| $ | 52,202 | $ | 51,743 | |||||||||||||||||||||
|
Note
2. Investment Securities, Continued
|
||||||||||||
|
The
following table sets forth information with regard to securities
gains and
losses realized on sales or calls of available-for-sale
securities:
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
dollars
in thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Gross
Gains
|
$ | 16 | $ | 326 | $ | 383 | ||||||
|
Gross
Losses
|
0 | 0 | (13 | ) | ||||||||
|
Net
Securities Gains
|
$ | 16 | $ | 326 | $ | 370 | ||||||
|
The
proceeds from sales and calls of available-for sale investment
securities
were $6,119,000, $5,637,000, and $9,350,000 for the years ended
December
31, 2007, 2006, and 2005, respectively.
|
||||||||||||
|
Federal
Home Loan Bank and Federal Reserve Bank stock of $2,949,000 at
December
31, 2007 and $2,933,000 in 2006 is carried at cost as fair values
are not
readily determinable. Both investments are required for membership
and are classified as other investments on the statement of
condition. At December 31, 2007, investment securities with an
amortized cost of $189,513,000 and an estimated fair value of $188,121,000
were pledged as collateral for certain public deposits, borrowings,
and
other purposes as required or permitted by
law.
|
||||||||||||
|
Note
3. Loans
|
||||||||
|
December
31,
|
||||||||
|
dollars
in thousands
|
2007
|
2006
|
||||||
|
Residential
Real Estate
|
$ | 127,113 | $ | 117,815 | ||||
|
Commercial
Real Estate
|
161,071 | 152,128 | ||||||
|
Commercial
|
83,622 | 74,033 | ||||||
|
Consumer
|
72,064 | 61,856 | ||||||
| $ | 443,870 | $ | 405,832 | |||||
|
Less:
Allowance for Loan Losses
|
(6,977 | ) | (6,680 | ) | ||||
|
Net
Loans
|
$ | 436,893 | $ | 399,152 | ||||
|
At
December 31, 2007, $53,251,000 in 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
|
2007
|
2006
|
||||||
|
Balance
at Beginning of Year
|
$ | 14,892 | $ | 6,596 | ||||
|
Loan
Payments
|
(2,705 | ) | (1,573 | ) | ||||
|
Decreases
Due to Director and Executive Officer Attrition
|
(446 | ) | 0 | |||||
|
New
Loans and Advances
|
5,083 | 9,869 | ||||||
|
Increases
Due to the Addition of Executive Officers
|
76 | 0 | ||||||
|
Ending
Balance
|
$ | 16,900 | $ | 14,892 | ||||
|
There
was significant disruption and volatility in the financial and
capital
markets during the second half of 2007. Turmoil in the mortgage
market adversely impacted both domestic and global markets, and
led to a
significant credit and liquidity crisis. These market conditions were
attributable to a variety of factors, in particular the fallout
associated
with subprime mortgage loans (a type of lending we have never actively
pursued). The disruption has been exacerbated by the continued
decline of the real estate and housing market. While we continue to
adhere to prudent underwriting standards, in the event that there
was a
sharp downturn in the housing market in our Central New York market
areas,
it could adversely affect the value of property used as collateral
for our
loans. Adverse changes in the economy may have a negative effect on
the ability of our borrowers to make timely loan payments, which
would
have a negative impact on our earnings. An increase in loan
delinquencies could adversely impact our loan loss experience,
causing
increases in our provision and allowance for loan losses in future
periods.
|
|
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
|
2007
|
2006
|
2005
|
|||||||||
|
Balance
at Beginning of Year
|
$ | 6,680 | $ | 6,640 | $ | 6,250 | ||||||
|
Provision
for Loan Losses
|
900 | 1,560 | 1,580 | |||||||||
|
Recoveries
Credited
|
563 | 586 | 285 | |||||||||
|
Loans
Charged-Off
|
(1,166 | ) | (2,106 | ) | (1,475 | ) | ||||||
|
Ending
Balance
|
$ | 6,977 | $ | 6,680 | $ | 6,640 | ||||||
|
The
following provides information on impaired loans for the periods
presented:
|
||||||||||||
|
As
of and For the Year
|
||||||||||||
|
Ended
December 31,
|
||||||||||||
|
dollars
in thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Impaired
Loans
|
$ | 5,701 | $ | 1,896 | $ | 3,478 | ||||||
|
Allowance
for Impaired Loans
|
1,382 | 334 | 1,179 | |||||||||
|
Average
Recorded Investment in Impaired Loans
|
4,858 | 1,597 | 3,170 | |||||||||
|
At
December 31, 2007, $4,365,000 of the impaired loans had a specific
reserve
allocation of $1,382,000 compared to $1,669,000 of impaired loans
at
December 31, 2006 with a related reserve allocation of
$334,000.
|
||||||||||||
|
The
Company did not record any interest income related to impaired
loans for
the years ended December 31, 2007, 2006 and 2005.
|
||||||||||||
|
The
following table sets forth information with regards to non-performing
loans:
|
||||||||||||
|
As
of December 31,
|
||||||||||||
|
dollars
in thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Loans
in Non-Accrual Status
|
$ | 6,086 | $ | 2,347 | $ | 3,866 | ||||||
|
Loans
Contractually Past Due 90 Days or More
|
||||||||||||
|
and
Still Accruing Interest
|
50 | 182 | 181 | |||||||||
|
Troubled
Debt Restructured Loans
|
0 | 0 | 871 | |||||||||
|
Total
Non-Performing Loans
|
$ | 6,136 | $ | 2,529 | $ | 4,918 | ||||||
|
The
Company did not record any interest income related to non-accrual
loans
for the years ended December 31, 2007, 2006, and 2005. Had the loans
in non-accrual status performed in accordance with their original
terms,
additional interest income of $259,000, $71,000, and $49,000 would
have
been recorded for the years ended December 31, 2007, 2006, and
2005,
respectively.
|
||||||||||||
|
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. Under the
restructured terms, the Company recorded interest income of $4,000
for the
year ended December 31, 2005.
|
||||||||||||
|
Note
5. Premises and Equipment
|
||||||||
|
December
31,
|
||||||||
|
dollars
in thousands
|
2007
|
2006
|
||||||
|
Land
|
$ | 1,001 | $ | 598 | ||||
|
Buildings
|
7,679 | 7,776 | ||||||
|
Furniture,
Fixtures and Equipment
|
5,449 | 4,489 | ||||||
|
Construction
in Progress
|
8 | 122 | ||||||
| $ | 14,137 | $ | 12,985 | |||||
|
Less:
Accumulated Depreciation
|
(7,825 | ) | (7,299 | ) | ||||
| $ | 6,312 | $ | 5,686 | |||||
|
Depreciation
expense was $771,000, $729,000, and $797,000 for the years ended
December
31, 2007, 2006 and 2005, respectively.
|
||||||||
|
Note
6. Goodwill and Intangible Assets
|
||||||||
|
Goodwill
and intangible assets are presented in the following
table:
|
||||||||
|
December
31,
|
||||||||
|
dollars
in thousands
|
2007
|
2006
|
||||||
|
Goodwill
|
$ | 4,619 | $ | 4,518 | ||||
|
Core
Deposit Intangible
|
$ | 777 | $ | 777 | ||||
|
Other
Intangible Assets
|
354 | 350 | ||||||
|
Total
Intangible Assets
|
$ | 1,131 | $ | 1,127 | ||||
|
Accumulated
Amortization
|
(737 | ) | (607 | ) | ||||
|
Intangible
Assets, Net
|
$ | 394 | $ | 520 | ||||
|
In
March 2007, the Company acquired Provantage Funding Corporation,
a
mortgage banking subsidiary, and recorded related goodwill of $101,000
and
a customer list intangible asset of $4,000.
|
||||||||
|
Amortization
expense on intangible assets was $130,000 for 2007, $178,000 for
2006, and
$171,000 for 2005. The core deposit intangible and other intangible
assets are amortized over a weighted average period of approximately
5 and
15 years, respectively.
|
||||||||
|
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
|
||||||||
|
2008
|
$ | 122 | ||||||
|
2009
|
122 | |||||||
|
2010
|
31 | |||||||
|
2011
|
23 | |||||||
|
2012
|
23 | |||||||
|
Note
7. Time Deposits
|
||||||||
|
Contractual
maturities of time deposits were as follows:
|
||||||||
|
December
31, 2007
|
||||||||
|
dollars
in thousands
|
Amount
|
%
|
||||||
|
2008
|
$ | 205,037 | 66.05 | |||||
|
2009
|
89,209 | 28.74 | ||||||
|
2010
|
8,272 | 2.66 | ||||||
|
2011
|
2,222 | 0.72 | ||||||
|
2012
|
5,576 | 1.80 | ||||||
|
Thereafter
|
100 | 0.03 | ||||||
| $ | 310,416 | 100.00 | % | |||||
|
Note
8. Borrowings
|
||||||||
|
The
following is a summary of borrowings:
|
||||||||
|
December
31,
|
||||||||
|
dollars
in thousands
|
2007
|
2006
|
||||||
|
Short-Term
Borrowings:
|
||||||||
|
Securities
Sold Under Agreements to Repurchase
|
$ | 14,189 | $ | 16,748 | ||||
|
Treasury
Tax and Loan Notes
|
1,597 | 1,711 | ||||||
|
Total
Short-Term Borrowings
|
$ | 15,786 | $ | 18,459 | ||||
|
Long-Term
Borrowings:
|
||||||||
|
Advances
from Federal Home Loan Bank of New York
|
||||||||
|
Bearing
Interest at 3.62%, Due February 2008, Callable February
2007
|
0 | 5,000 | ||||||
|
Bearing
Interest at 2.35% to 2.43%, Due March 2007
|
0 | 5,500 | ||||||
|
Bearing
Interest at 3.85%, Due March 2010, Callable March 2007
|
0 | 5,000 | ||||||
|
Bearing
Interest at 3.05%, Due December 2012, Callable December
2007
|
0 | 8,000 | ||||||
|
Bearing
Interest at 5.56%, Due July 2008
|
113 | 274 | ||||||
|
Bearing
Interest at 4.31% Due November 2015, Callable November
2008
|
4,000 | 4,000 | ||||||
|
Bearing
Interest at 5.03%, Due January 2009
|
384 | 696 | ||||||
|
Bearing
Interest at 3.85%, Due January 2010
|
457 | 655 | ||||||
|
Bearing
Interest at 3.12%, Due March 2011
|
1,762 | 2,256 | ||||||
|
Bearing
Interest at 5.89% to 5.95%, Due July 2011
|
742 | 918 | ||||||
|
Bearing
Interest at 5.30%, Due December 2011
|
946 | 1,148 | ||||||
|
Bearing
Interest at 4.11%, Due January 2012
|
629 | 765 | ||||||
|
Bearing
Interest at 4.42%, Due January 2015
|
760 | 848 | ||||||
|
Bearing
Interest at 6.26%, Due July 2016
|
687 | 745 | ||||||
|
Bearing
Interest at 5.77%, Due December 2016
|
1,408 | 1,523 | ||||||
|
Bearing
Interest at 6.04%, Due January 2017
|
713 | 770 | ||||||
|
Bearing
Interest at 6.46%, Due July 2021
|
404 | 422 | ||||||
|
Bearing
Interest at 5.07%, Due January 2025
|
3,558 | 3,684 | ||||||
|
Bearing
Interest at 4.97%, Due October 2014
|
2,475 | 0 | ||||||
|
Bearing
Interest at 4.68%, Due March 2012, Callable March 2010
|
5,000 | 0 | ||||||
|
Bearing
Interest at 4.34%, Due March 2012, Callable March 2008
|
5,000 | 0 | ||||||
|
Bearing
Interest at 4.33%, Due April 2012, Callable January 2008
|
10,000 | 0 | ||||||
|
Bearing
Interest at 4.45%, Due October 2012, Callable October 2010
|
2,500 | 0 | ||||||
|
Total
Long-Term Borrowings
|
$ | 41,538 | $ | 42,204 | ||||
|
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, 2007, $12,500,000 of the long-term
borrowings were collateralized by securities with an amortized
cost and
estimated fair value of $28,411,000 and $28,158,000,
respectively. The remaining long-term borrowings totaling $29,038,000
are collateralized by the Company's mortgage loans. At December 31,
2007, the Bank had a line of credit of $76,234,400 with the FHLB.
However,
based on outstanding borrowings at FHLB, the total potential borrowing
capacity on these lines is reduced to $14,294,000 at December 31,
2007.
|
||||||||
|
At
December 31, 2006, $23,500,000 of the long-term borrowings were
collateralized by securities with an amortized cost and estimated
fair
value of $27,529,000 and $26,863,000, respectively. The
remaining long-term borrowings totaling $18,704,000 are collateralized
by
the Company's mortgage loans. At December 31, 2006, the Bank had a
line of credit of $75,906,000 with the FHLB. However, based on
outstanding borrowings at FHLB, the total potential borrowing capacity
on
these lines is reduced to $24,128,000 at December 31,
2006.
|
||||||||
|
Note
8. Borrowings, Continued
|
||||||||||||
|
Information
related to short-term borrowings is as follows:
|
||||||||||||
|
As
of and For the
|
||||||||||||
|
Year
Ended December 31,
|
||||||||||||
|
dollars
in thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Outstanding
Balance at End of Period
|
$ | 15,786 | $ | 18,459 | $ | 19,357 | ||||||
|
Average
Interest Rate at End of Period
|
3.12 | % | 3.26 | % | 3.30 | % | ||||||
|
Maximum
Outstanding at any Month-End
|
24,036 | 25,778 | 39,447 | |||||||||
|
Average
Amount Outstanding during Period
|
19,426 | 19,980 | 22,747 | |||||||||
|
Average
Interest Rate during Period
|
3.13 | % | 3.36 | % | 2.78 | % | ||||||
|
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
$31,487,000
and $31,175,000, respectively, at December 31, 2007. The amortized
cost and estimated fair value of securities pledged as collateral
for
repurchase agreements was $32,926,000 and $32,196,000, respectively,
at
December 31, 2006. 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
|
2007
|
2006
|
2005
|
|||||||||
|
Current:
|
||||||||||||
|
Federal
|
$ | 1,673 | $ | 2,064 | $ | 2,541 | ||||||
|
State
|
240 | 272 | 312 | |||||||||
|
Total
Current
|
1,913 | 2,336 | 2,853 | |||||||||
|
Deferred:
|
||||||||||||
|
Federal
|
169 | (116 | ) | (75 | ) | |||||||
|
State
|
46 | (14 | ) | (63 | ) | |||||||
|
Total
Deferred
|
215 | (130 | ) | (138 | ) | |||||||
|
Total
Income Tax Expense
|
$ | 2,128 | $ | 2,206 | $ | 2,715 | ||||||
|
The
components of deferred income taxes, which are included in the
consolidated statements of condition, are:
|
||||||||||||
|
Year
Ended December 31,
|
||||||||
|
dollars
in thousands
|
2007
|
2006
|
||||||
|
Assets:
|
||||||||
|
Allowance
for Loan Losses
|
$ | 2,666 | $ | 2,601 | ||||
|
Deferred
Compensation
|
1,303 | 1,356 | ||||||
|
Net
Unrealized Loss on Securities
|
||||||||
|
Available-for-Sale
|
565 | 1,548 | ||||||
|
Pension
Assets - SFAS No. 158
|
(388 | ) | 524 | |||||
|
Other
|
325 | 230 | ||||||
| 4,471 | 6,259 | |||||||
|
Liabilities:
|
||||||||
|
Securities
Discount Accretion
|
351 | 315 | ||||||
|
Defined
Benefit Pension Plan
|
1,493 | 1,442 | ||||||
|
Equity
Investment
|
420 | 283 | ||||||
|
Goodwill
Amortization
|
423 | 329 | ||||||
|
Other
|
246 | 307 | ||||||
| 2,933 | 2,676 | |||||||
|
Net
Deferred Tax Assets at End of Year
|
1,538 | 3,583 | ||||||
|
Net
Deferred Tax Assets at Beginning of Year
|
$ | 3,583 | $ | 2,918 | ||||
|
Decrease
(Increase) in Net Deferred Tax Asset
|
$ | 2,045 | $ | (665 | ) | |||
|
Prior
Year Decrease in Net Adjustment to
|
||||||||
|
Accumulated
Other Comprehensive Income
|
$ | (2,072 | ) | $ | (1,537 | ) | ||
|
Current
Year Decrease in Net Adjustment to
|
||||||||
|
Accumulated
Other Comprehensive Income
|
$ | 177 | $ | 2,072 | ||||
|
Purchase
Accounting Adjustments, Net
|
$ | 65 | $ | 0 | ||||
|
Deferred
Tax Expense (Benefit)
|
$ | 215 | $ | (130 | ) | |||
|
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
|
2007
|
2006
|
2005
|
|||||||||
|
Statutory
Federal Income Tax Rate
|
34.0 | % | 34.0 | % | 34.0 | % | ||||||
|
Variances
from Statutory Rate:
|
||||||||||||
|
State
Income Tax, Net of Federal Tax Benefit
|
1.9 | 1.8 | 1.6 | |||||||||
|
Tax
Exempt Income
|
(14.8 | ) | (13.2 | ) | (12.1 | ) | ||||||
|
Other
|
0.5 | 1.0 | 2.5 | |||||||||
|
Effective
Tax Rate
|
21.6 | % | 23.6 | % | 26.0 | % | ||||||
|
Effective
January 1, 2007, the Company adopted the provisions of the Financial
Accounting Standards Board's Interpretation No. 48, “Accounting for
Uncertainty in Income Taxes” (“FIN 48”). There was no cumulative
effect related to adopting FIN 48. The balance of the Company's
unrecognized tax benefit was $0 and $52 at December 31, 2007 and
December
31, 2006, respectively.
|
||||||||||||
|
The
Company is currently open to audit by the Internal Revenue Service
for the
years ending December 31, 2004 through 2006. The Company’s New York State
income tax return is open to audit for the years ending December
31, 2005
and 2006.
|
||||||||||||
|
The
Company recognized interest accrued related to the unrecognized
tax
benefits in tax expense. There are no accrued interest and penalties
as of December 31, 2007.
|
||||||||||||
|
Note.
10. Employee Benefit Plans
|
|||||||
|
Effective
February 28, 2006, the Company's defined benefit pension plan was
frozen. Under the frozen plan, no future benefits will be
accrued for plan participants, nor will any new participants be
enrolled
in the plan. This plan is sponsored by the Company's bank
subsidiary. Prior to being frozen, the plan covered employees
who had attained the age of 21 and completed one year of
service. Although the plan was frozen, the Company maintains
the responsibility for funding the plan. The Company's funding
practice is to contribute at least the minimum amount annually
to meet
minimum funding requirements. An annual minimum contribution
was not required in 2007 because the plan is more than 100%
funded. 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
Company adopted SFAS No. 158 effective December 31, 2006. SFAS
No. 158 requires an employer to (1) recognize the over funded or
under
funded status of defined benefit postretirement plans, which is
measured
as the difference between the plan assets at fair value and the
benefit
obligation, as an asset or liability in its balance sheet; (2)
recognize
changes in that funded status in the year in which the changes
occur
through comprehensive income; and (3) measure the defined benefit
plan
assets and obligations as of the date of its year-end balance
sheet. SFAS No. 158 does not change how an employer determines
the amount of net periodic benefit
cost.
|
|||||||
|
Note.
10. Employee Benefit Plans, Continued
|
||||||||
|
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 December 31 measurement
date.
|
||||||||
|
dollars
in thousands
|
2007
|
2006
|
||||||
|
Change
in Benefit Obligation:
|
||||||||
|
Benefit
Obligation at Beginning of Year
|
$ | 15,710 | $ | 18,268 | ||||
|
Service
Cost
|
135 | 413 | ||||||
|
Interest
Cost
|
901 | 913 | ||||||
|
Actuarial
Gain
|
(1,010 | ) | (128 | ) | ||||
|
Benefits
Paid
|
(822 | ) | (779 | ) | ||||
|
Curtailment
Loss
|
0 | (2,977 | ) | |||||
|
Projected
Benefit Obligation at End of Year
|
$ | 14,914 | $ | 15,710 | ||||
|
Change
in Plan Assets:
|
||||||||
|
Fair
Value of Plan Assets at Beginning of Year
|
$ | 18,068 | $ | 17,028 | ||||
|
Actual
Gain on Plan Assets
|
2,540 | 1,819 | ||||||
|
Employer
Contribution
|
0 | 0 | ||||||
|
Benefits
Paid
|
(822 | ) | (779 | ) | ||||
|
Fair
Value of Plan Assets at End of Year
|
$ | 19,786 | $ | 18,068 | ||||
|
Funded
Status at End of Year
|
$ | 4,872 | $ | 2,358 | ||||
|
Amounts
recognized in accumulated other comprehensive income, pretax, consist
of
the following at December 31,:
|
||||||||
|
dollars
in thousands
|
2007
|
2006
|
||||||
|
Net
Gain (Loss)
|
$ | 1,012 | $ | (1,214 | ) | |||
|
Prior
Service Cost
|
$ | 0 | $ | (130 | ) | |||
| $ | 1,012 | $ | (1,344 | ) | ||||
|
The
funded status of the plan, which totaled $4,872,000 and $2,358,000
at
December 31, 2007 and 2006, respectively, were recognized as other
assets
in the consolidated statements of condition.
|
||||||||
|
The
following table presents a comparison of the accumulated benefit
obligation and plan assets:
|
||||||||
|
dollars
in thousands
|
2007
|
2006
|
||||||
|
Projected
Benefit Obligation
|
$ | 14,914 | $ | 15,710 | ||||
|
Accumulated
Benefit Obligation
|
14,914 | 15,710 | ||||||
|
Fair
Value of Plan Assets
|
19,786 | 18,068 | ||||||
|
Note.
10. Employee Benefit Plans,
Continued
|
||||||||||||
|
Components
of Net Periodic Benefit
Cost are:
|
||||||||||||
|
dollars
in
thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Service
Cost
|
$ | 135 | $ | 413 | $ | 682 | ||||||
|
Interest
Cost
|
901 | 913 | 924 | |||||||||
|
Expected
Return on Plan
Assets
|
(1,325 | ) | (1,375 | ) | (1,247 | ) | ||||||
|
Net
Amortization
|
130 | 122 | 215 | |||||||||
|
Curtailment
Expense
|
0 | 190 | 0 | |||||||||
| $ | (159 | ) | $ | 263 | $ | 574 | ||||||
|
Amounts
recognized in other
comprehensive income, pretax, during 2007 consist of the
following:
|
||||||||
|
dollars
in
thousands
|
|
|||||||
|
Net
Gain on Pension
Asset
|
$ | (2,226 | ) | |||||
|
Pension
amortization
|
(130 | ) | ||||||
| $ | (2,356 | ) | ||||||
|
The
following weighted-average
assumptions were used to determine the benefit obligation of
the plan as
of September 30:
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Discount
Rate
|
6.25 | % | 5.80 | % | 5.50 | % | ||||||
|
Expected
Return on Plan
Assets
|
7.50 | % | 7.50 | % | 8.00 | % | ||||||
|
Rate
of Compensation
Increase
|
N/A | % | N/A | % | 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:
|
||||||||||||
|
2007
|
2006
|
2005
|
||||||||||
|
Discount
Rate
|
5.80 | % | 5.50 | % | 5.88 | % | ||||||
|
Expected
Return on Plan
Assets
|
7.50 | % | 8.00 | % | 8.00 | % | ||||||
|
Rate
of Compensation
Increase
|
N/A | % | 3.00 | % | 3.00 | % | ||||||
|
The
plan's weighted average asset
allocations at September 30, 2007 and 2006, by asset category,
are as
follows:
|
||||||||||||
|
Plan
Assets
at
|
||||||||||||
|
September
30,
|
||||||||||||
|
2007
|
2006
|
|||||||||||
|
Equity
Securities
|
58.0 | % | 59.8 | % | ||||||||
|
Debt
Securities
|
40.0 | % | 39.9 | % | ||||||||
|
Other
|
2.0 | % | 0.3 | % | ||||||||
| 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
|
||||||||||||
|
2008
|
$ | 777 | ||||||||||
|
2009
|
827 | |||||||||||
|
2010
|
827 | |||||||||||
|
2011
|
860 | |||||||||||
|
2012
|
914 | |||||||||||
|
2013-2018
|
5,588 | |||||||||||
|
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 70% of the total portfolio and Firm
II is
investing approximately 30% 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 portfolio
focuses the purchase and sale of futures and options on futures
on foreign
currencies and foreign and domestic bonds, bond indices 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, there are two supplemental
employee retirement plans for two former executives. The amount
of the liabilities recognized in the Company’s consolidated statements of
condition associated with these plans was $1,013,000 at December
31, 2007
and $905,000 at December 31, 2006. For the years ended December
31, 2007, 2006, and 2005, the Company recognized $206,000, $63,000
and
$194,000, respectively, of expense related to those plans. The
discount rate used in determining the actuarial present values
of the
projected benefit obligations was 5.71% at December 31,
2007.
|
|||||||
|
Note
11. Commitments and
Contingencies
|
||||||||
|
Financial
instruments whose
contract amounts represent credit risk consist of the
following:
|
||||||||
|
December
31,
|
||||||||
|
dollars
in
thousands
|
2007
|
2006
|
||||||
|
Commitments
to Extend
Credit
|
$ | 90,555 | $ | 81,536 | ||||
|
Commercial
and Stand-by Letters of
Credit
|
6,988 | 6,974 | ||||||
|
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.
|
||||||||
|
Stand-by
letters of credit 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.
Stand-by letters of credit outstandings were $4,380,000 and $6,974,000
as
of December 31, 2007 and December 31, 2006,
respectively.
|
||||||||
|
The
estimated fair value of the
Company’s stand-by letters of credit was $16 thousand and $18 thousand
at
December 31, 2007 and December 31, 2006, 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.
|
||||||||
|
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.
|
||||||||
|
Future
payments under operating
lease obligations as of December 31, 2007 are as
follows:
|
||||
|
dollars
in
thousands
|
Amount
|
|||
|
2008
|
$ | 235 | ||
|
2009
|
226 | |||
|
2010
|
223 | |||
|
2011
|
214 | |||
|
2012
|
183 | |||
|
Thereafter
|
1,116 | |||
|
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 for investments were
based on quoted market prices, where available, as provided by
third-party
vendors. If quoted market prices were not available, fair
values provided by the vendors were based on quoted market prices
of
comparable instruments in active markets and/or based on a matrix
pricing
methodology which employs The Bond Market Association's standard
calculations for cash flow and price/yield analysis, or live benchmark
bond pricing, or terms/condition data available from major pricing
sources. The fair value of other investments is estimated at
their carrying value.
|
|||||||||||
|
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.
|
|||||||||||
|
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,
|
|||||||||||||||
|
2007
|
2006
|
|||||||||||||||
|
Carrying
|
Fair
|
Carrying
|
Fair
|
|||||||||||||
|
dollars
in
thousands
|
Value
|
Value
|
Value
|
Value
|
||||||||||||
|
Financial
Assets:
|
||||||||||||||||
|
Cash
and Cash
Equivalents
|
$ | 18,942 | $ | 18,942 | $ | 25,859 | $ | 25,856 | ||||||||
|
Securities
|
295,688 | 295,229 | 297,542 | 296,494 | ||||||||||||
|
Loans
Held for
Sale
|
456 | 456 | 0 | 0 | ||||||||||||
|
Loans
|
443,870 | 448,387 | 405,832 | 405,708 | ||||||||||||
|
Allowance
for Loan
Losses
|
(6,977 | ) | (6,977 | ) | (6,680 | ) | (6,680 | ) | ||||||||
|
Net
Loans
|
436,893 | 441,410 | 399,152 | 399,028 | ||||||||||||
|
Accrued
Interest
Receivable
|
3,621 | 3,621 | 3,674 | 3,674 | ||||||||||||
|
Financial
Liabilities:
|
||||||||||||||||
|
Demand
|
$ | 71,145 | $ | 71,145 | $ | 71,914 | $ | 71,914 | ||||||||
|
Savings,
NOW and
Money
|
||||||||||||||||
|
Market
Deposit
Accounts
|
254,196 | 254,196 | 243,249 | 243,249 | ||||||||||||
|
Certificates
of
Deposit
|
310,416 | 313,328 | 289,411 | 288,916 | ||||||||||||
|
Other
Deposits
|
21,737 | 21,737 | 24,470 | 24,469 | ||||||||||||
|
Borrowings
|
57,324 | 57,702 | 60,663 | 58,892 | ||||||||||||
|
Accrued
Interest
Payable
|
1,195 | 1,195 | 968 | 968 | ||||||||||||
|
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,
2007
|
||||||||||||||||||||||||
|
Total
Capital to Risk-Weighted
Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 71,320 | 13.29 | % | $ | 42,937 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 68,837 | 12.84 | % | $ | 42,874 | 8.00 | % | $ | 53,593 | 10.00 | % | ||||||||||||
|
Tier
1 Capital to Risk-Weighted
Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 64,607 | 12.04 | % | $ | 21,469 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 62,134 | 11.59 | % | $ | 21,437 | 4.00 | % | $ | 32,156 | 6.00 | % | ||||||||||||
|
Tier
1 Capital to Average
Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 64,607 | 8.15 | % | $ | 31,714 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 62,134 | 7.85 | % | $ | 31,676 | 4.00 | % | $ | 39,595 | 5.00 | % | ||||||||||||
|
As
of December 31,
2006
|
||||||||||||||||||||||||
|
Total
Capital to Risk-Weighted
Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 67,826 | 13.50 | % | $ | 40,186 | 8.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 66,309 | 13.20 | % | $ | 40,179 | 8.00 | % | $ | 50,223 | 10.00 | % | ||||||||||||
|
Tier
1 Capital to Risk-Weighted
Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 61,542 | 12.25 | % | $ | 20,093 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 60,026 | 11.95 | % | $ | 20,089 | 4.00 | % | $ | 30,134 | 6.00 | % | ||||||||||||
|
Tier
1 Capital to Average
Assets:
|
||||||||||||||||||||||||
|
The
Company
|
$ | 61,542 | 8.11 | % | $ | 30,367 | 4.00 | % | N/A | N/A | ||||||||||||||
|
Subsidiary
Bank
|
$ | 60,026 | 7.92 | % | $ | 30,330 | 4.00 | % | $ | 37,913 | 5.00 | % | ||||||||||||
|
Banking
regulations limit the
amount of dividends that may be paid to shareholders. Generally,
dividends
are limited to retained net profits for the current year and
two preceding
years. At December 31, 2007, dividends totaling $4,745,000 could
have been
paid without prior regulatory
approval.
|
|
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
|
2007
|
2006
|
2005
|
|||||||||
|
Unrealized
Holding Gains (Losses)
Arising During the Period Net of Tax
|
||||||||||||
|
(Pre-tax
Amount of $2,530,000,
$297,000, and ($4,226,000))
|
$ | 1,542 | $ | 181 | $ | (2,579 | ) | |||||
|
Reclassification
Adjustment for
Gains Realized in Net Income
|
||||||||||||
|
During
the Period, Net of Tax
(Pre-tax Amount of ($16,000),
|
||||||||||||
|
($326,0000),
and
($370,000))
|
(9 | ) | (199 | ) | (226 | ) | ||||||
|
Amortization
of Pension Liability
(Pre-tax Amount of $2,356,000, $0, and $0)
|
1,442 | 0 | 0 | |||||||||
|
Other
Comprehensive Loss, Net of
Tax of $1,895,000, ($11,000)
|
||||||||||||
|
and
($1,791,000)
|
$ | 2,975 | $ | (18 | ) | $ | (2,805 | ) | ||||
|
Components
of accumulated other
comprehensive loss are:
|
||||||||||||
|
As
of December
31,
|
||||||||
|
dollars
in
thousands
|
2007
|
2006
|
||||||
|
Unrealized
Loss on
Securities
|
$ | (895 | ) | $ | (2,427 | ) | ||
|
Unrecognized
Pension Gain
(Loss)
|
623 | (820 | ) | |||||
|
Accumulated
Other Comprehensive
Loss
|
$ | (272 | ) | $ | (3,247 | ) | ||
|
Note
15. Parent Company Only
Financial Statements
|
||||||||||||
|
Presented
below are the condensed
statements of condition December 31, 2007, and 2006 and statements
of
income and cash flows for each of the years in the three-year period
ended
December 31, 2007, 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
|
2007
|
2006
|
|||||||
|
Assets
|
|||||||||
|
Cash
and Cash
Equivalents
|
$ | 923 | $ | 588 | |||||
|
Securities
Available for Sale, at
Estimated Fair Value
|
737 | 916 | |||||||
|
Investment
in Subsidiary, Equity
Basis
|
67,659 | 61,759 | |||||||
|
Other
Assets
|
1,435 | 1,632 | |||||||
|
Total
Assets
|
$ | 70,754 | $ | 64,895 | |||||
|
Liabilities
and Shareholders’
Equity
|
|||||||||
|
Total
Liabilities
|
$ | 1,355 | $ | 1,563 | |||||
|
Shareholders’
Equity
|
69,399 | 63,332 | |||||||
|
Total
Liabilities and
Shareholders’ Equity
|
$ | 70,754 | $ | 64,895 | |||||
|
Condensed
Statements of
Income
|
||||||||||||
|
December
31,
|
||||||||||||
|
dollars
in
thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Dividends
from
Subsidiary
|
$ | 6,356 | $ | 9,756 | $ | 5,305 | ||||||
|
Interest
and Other Dividend
Income
|
47 | 75 | 89 | |||||||||
|
Net
Gain on Sale of
Securities
|
0 | 165 | 0 | |||||||||
| 6,403 | 9,996 | 5,394 | ||||||||||
|
Operating
Expense
|
725 | 682 | 606 | |||||||||
|
Income
Before Income Tax Benefit
and Equity
|
||||||||||||
|
in
Undistributed Income of
Subsidiary
|
5,678 | 9,314 | 4,788 | |||||||||
|
Income
Tax
Benefit
|
(257 | ) | (171 | ) | (190 | ) | ||||||
|
Equity
in Undistributed Income of
Subsidiaries
|
1,772 | (2,333 | ) | 2,766 | ||||||||
|
Net
Income
|
$ | 7,707 | $ | 7,152 | $ | 7,744 | ||||||
|
Note
15. Parent Company Only
Financial Statements, Continued
|
||||||||||||
|
Condensed
Statements of Cash
Flows
|
||||||||||||
|
Year
Ended December
31,
|
||||||||||||
|
dollars
in
thousands
|
2007
|
2006
|
2005
|
|||||||||
|
Cash
Flows from Operating
Activities:
|
||||||||||||
|
Net
Income
|
$ | 7,707 | $ | 7,152 | $ | 7,744 | ||||||
|
Adjustments
to Reconcile Net
Income to Cash
|
||||||||||||
|
Provided
by Operating
Activities:
|
||||||||||||
|
Investment
Security
Gains
|
0 | (165 | ) | 0 | ||||||||
|
Decrease
(Increase) in Other
Assets
|
2 | (3 | ) | 16 | ||||||||
|
Increase
(Decrease) in Other
Liabilities
|
55 | (47 | ) | (32 | ) | |||||||
|
Equity
in Undistributed Income of
Subsidiaries
|
(1,772 | ) | 2,333 | (2,766 | ) | |||||||
|
Net
Cash Provided by Operating
Activities
|
5,992 | 9,270 | 4,962 | |||||||||
|
Cash
Flows from Investing
Activities:
|
||||||||||||
|
Proceeds
from Sales of
Available-for-Sale Securities
|
60 | 472 | 0 | |||||||||
|
Purchase
of Available-for-Sale
Securities
|
(57 | ) | (50 | ) | (625 | ) | ||||||
|
Payments
for Investments in and
Advances to Subsidiaries
|
(1,045 | ) | 0 | 0 | ||||||||
|
Net
Cash Provided by (Used by)
Investing Activities
|
(1,042 | ) | 422 | (625 | ) | |||||||
|
Cash
Flows from Financing
Activities:
|
||||||||||||
|
Purchase
of Treasury
Stock
|
(605 | ) | (6,569 | ) | (581 | ) | ||||||
|
Cash
Dividends
|
(4,010 | ) | (4,128 | ) | (4,246 | ) | ||||||
|
Net
Cash Used in Financing
Activities
|
(4,615 | ) | (10,697 | ) | (4,827 | ) | ||||||
|
Net
Increase (Decrease) in Cash
Equivalents
|
335 | (1,005 | ) | (490 | ) | |||||||
|
Cash
and Cash Equivalents at
Beginning of Year
|
588 | 1,593 | 2,083 | |||||||||
|
Cash
and Cash Equivalents at End
of Year
|
$ | 923 | $ | 588 | $ | 1,593 | ||||||
|
A
statement of changes in
shareholders' equity has not been presented since it is the same
as the
consolidated statement of changes in shareholders' equity previously
presented.
|
||||||||||||
|
Note
16. 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 2, 2008 was
$1,300,000.
|
|||||||||
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,
2007. 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 has reasonable assurance that our internal
control over financial reporting was effective as of December 31,
2007. The independent registered public accounting firm of KMPG LLP,
as auditors of the Company’s Consolidated Financial Statements, has issued an
audit report on the effectiveness of the Company’s internal control over
financial reporting as of December 31, 2007.
Report
of Independent Registered Public Accounting Firm
The
Board
of Directors and Shareholders of The Wilber Corporation:
We
have
audited The Wilber Corporation and subsidiaries’ (the Company) internal control
over financial reporting as of December 31, 2007, 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, included in the accompanying Management's Report on Internal
Control Over Financial Reporting. Our responsibility is to
express an opinion on 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, assessing the risk that a material
weakness exists, and testing and evaluating the design and operating
effectiveness of internal control based on the assessed risk. Our audit also
included 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, The Wilber Corporation and subsidiaries maintained, in all material
respects, effective internal control over financial reporting as of December
31,
2007, based on criteria established in Internal Control - Integrated
Framework issued by 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
Company as of December 31, 2007 and 2006, and the related consolidated
statements of income, shareholders’ equity and comprehensive income, and cash
flows for each of the years in the three-year period ended December 31, 2007,
and our report dated March 10, 2008 expressed an unqualified opinion on those
consolidated financial statements.
Albany,
New York
March
10,
2008
ITEM
9B: OTHER INFORMATION
None.
PART
III
ITEM
10: DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
A.
Directors of the Registrant
Information
contained under the captions Proposal II, "Election of Directors;" "The Nominees
and Continuing Directors" and under "Corporate Governance;” “Board of
Directors;” “Executive Committee;” “Audit and Compliance Committee;”
“Compensation and Benefits Committee;” and “Corporate Governance and Nominating
Committee;” in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 25, 2008, 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 25, 2008, 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) of The Exchange Act
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 25, 2008, 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.
D.
Code
of Ethics
The
Company has adopted a Code of Ethics for adherence by its members of the Board
of Directors, Chief Executive Officer, Chief Financial Officer, Chief Accounting
Officer and other officers of the Company and its affiliates 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, as amended, is posted
and available on the Bank’s website (http://www.wilberbank.com) under 'About
Us.'
E.
Corporate Governance
There
have been no material changes to the procedures by which shareholders of the
Company may recommend director nominees to the Company’s Board.
Information
contained under the captions “Corporate Governance – Audit and Compliance
Committee”, “Audit Committee Report” and “Audit Committee Financial Expert” in
the definitive Proxy Statement for the Annual Meeting of Shareholders to be
held
on April 25, 2008, to be filed with the Commission within 120 days after the
end
of the fiscal year covered by the Form 10-K is incorporated herein by
reference.
ITEM
11: EXECUTIVE COMPENSATION
Information
contained under the captions, “Compensation Committee Report” and
"Compensation," in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 25, 2008, 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 25, 2008, 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, AND DIRECTOR
INDEPENDENCE
A.
Related Transactions
Information
contained under the caption, "Transactions with Directors and Executive
Officers," in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 25, 2008, 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. Director
Independence
Information
contained under the captions “Corporate Governance – Audit and Compliance
Committee”; “Compensation and Benefits Committee”, “Corporate Governance and
Nominating Committee;” “Compensation Committee Report” and “Director
Independence;” in the definitive Proxy Statement for the Annual Meeting of
Shareholders to be held on April 25, 2008, to be filed with the Commission
within 120 days after the end of the fiscal year covered by the Form 10-K is
incorporated herein by 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 25, 2008, 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.
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, 2007 and 2006
|
|
|
-Consolidated
Statements of Income for the Years Ended December 31, 2007, 2006
and 2005
|
|
|
-Consolidated
Statements of Changes in Shareholders’ Equity for the Years Ended December
31, 2007, 2006 and 2005
|
|
|
-Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006
and
2005
|
|
|
-Consolidated
Statements of Comprehensive Income for the Years Ended December 31,
2007,
2006 and 2005
|
|
|
-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.
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
12, 2008
|
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
12, 2008
|
||
|
Douglas
C. Gulotty
|
||||
|
/s/
Joseph E. Sutaris
|
Executive
Vice President, Chief Financial
|
March
12, 2008
|
||
|
Joseph
E. Sutaris
|
Officer,
Treasurer & Secretary
|
|||
|
/s/
Brian R. Wright
|
Director,
Chairman
|
March
12, 2008
|
||
|
Brian
R. Wright
|
||||
|
/s/
Alfred S. Whittet
|
Director,
Vice Chairman
|
March
12, 2008
|
||
|
Alfred
S. Whittet
|
||||
|
/s/
Mary C. Albrecht
|
Director
|
March
12, 2008
|
||
|
Mary
C. Albrecht
|
||||
|
/s/
Olon T. Archer
|
Director
|
March
12, 2008
|
||
|
Olon
T. Archer
|
||||
|
/s/
Thomas J. Davis
|
Director
|
March
12, 2008
|
||
|
Thomas
J. Davis
|
||||
|
/s/
Joseph P. Mirabito
|
Director
|
March
12, 2008
|
||
|
Joseph
P. Mirabito
|
||||
|
/s/
James L. Seward
|
Director
|
March
12, 2008
|
||
|
James
L. Seward
|
||||
|
/s/
Geoffrey A. Smith
|
Director
|
March
12, 2008
|
||
|
Geoffrey
A. Smith
|
||||
|
/s/
David F. Wilber, III
|
Director
|
March
12, 2008
|
||
|
David
F. Wilber, III
|
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 SEC 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 SEC on January 28, 2008)
|
|
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 SEC on
January
6, 2006)
|
|
Amended
and Restated Wilber National Bank Split-Dollar Policy Endorsement
as of
December 31, 2007 for Douglas C. Gulotty (replaces Exhibits 10.2
and 10.3
of the Company’s Form 10/A Registration Statement (No. 001-31896) filed
with the SEC 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 SEC 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 SEC 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 SEC 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 SEC on January 6,
2006)
|
|
Deferred
Compensation Agreement between Wilber National Bank and Alfred S.
Whittet
|
|
|
Annual
Report to Shareholders (included in this annual report on Form
10-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.'
|
|
Subsidiaries
of the Registrant
|
|
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act
|
|
|
Certification
of Chief Executive Officer Pursuant to 18 U.S.C. 1350
|
|
|
Certification
of Chief Financial Officer Pursuant to 18 U.S.C.
1350
|
95-K