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ANNUAL REPORT ON FORM 10-K
to the
SECURITIES AND EXCHANGE COMMISSION
of
THE WILBER CORPORATION
for the Year-Ended December 31, 2004
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2004
Commission file number: 001-31896
The Wilber Corporation
(Exact name of registrant as specified in its charter)
New York 15-6018501
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
245 Main Street, P.O. Box 430, Oneonta, NY 13820
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: 607-432-1700
Securities registered pursuant to 12(b) of the Act:
Title of each class to be registered Name of each exchange on which registered
Common Stock American Stock Exchange
Securities registered pursuant to 12(g) of the Act: None
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes |X| No |_|
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K (ss.229.405 of this chapter) is not contained herein, and will
not be contained, to the best of the registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. |_|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes |_| No |X|
Based upon the closing price of the registrant's common stock as of June 30,
2004, the aggregate value of the voting stock, common stock, $0.01 par value per
share held by non-affiliates of the registrant was $84.3 million. Although
Directors, and Executive Officers of the registrant and Wilber National Bank
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, 2004.
The number of shares of common stock outstanding on March 11, 2005 was
11,178,092.
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 23, 2005 are incorporated by
reference.
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2-K
THE WILBER CORPORATION
FORM 10-K
INDEX
FORWARD-LOOKING STATEMENTS
PART I
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ITEM 1: BUSINESS
- ------
A. General
B. Market Area
C. Lending Activities
a. Loan Products and Services
b. Loan Approval Procedures and Authority
c. Credit Quality Practices
D. Investment Securities Activities
E. Sources of Funds
F. Electronic and Payment Services
G. Trust and Investment Services
H. Insurance Services
I. Supervision and Regulation
a. The Company
b. The Bank
c. Subsidiaries
J. Competition
K. Legislative Developments
ITEM 2: PROPERTIES
- ------
ITEM 3: LEGAL PROCEEDINGS
- ------
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------
PART II
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ITEM 5: MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
- ------ AND ISSUER PURCHASES OF EQUITY SECURITIES
A. Market Price and Dividends on Common Stock
B. Unregistered Sale of Securities (not applicable)
C. Repurchases of Equity Securities
ITEM 6: SELECTED FINANCIAL DATA
- ------
ITEM 7: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- ------ RESULTS OF OPERATIONS
A. General
B. Performance Overview
C. Financial Condition
a. Recent Developments
b. Comparison of Financial Condition at December 31,
2004 and December 31, 2003
D. Results of Operations
a. Comparison of Operating Results for the Years
Ended December 31, 2004 and December 31, 2003
b. Comparison of Operating Results for the Years
Ended December 31, 2003 and December 31, 2002
E. Liquidity
F. Capital Resources and Dividends
3-K
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ------
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- ------ FINANCIAL DISCLOSURE
ITEM 9A: CONTROLS AND PROCEDURES
- -------
ITEM 9B: OTHER INFORMATION
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PART III
--------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- -------
A. Directors of the Registrant
B. Executive Officers of the Registrant Who Are Not Directors
C. Compliance With Section 16(a)
ITEM 11: EXECUTIVE COMPENSATION
- -------
ITEM 12: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
- ------- RELATED STOCKHOLDER MATTERS
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- -------
ITEM 14: PRINCIPAL ACCOUNTANT FEES AND SERVICES
- -------
PART IV
-------
ITEM 15: EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
- -------
4-K
FORWARD-LOOKING STATEMENTS
When we use words or phrases like "will probably result," "we expect," "will
continue," "we anticipate," "estimate," "project," "should cause," or similar
expressions in this annual 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, rates and regulations of federal, state and
local tax authorities, changes in consumer preferences, changes in interest
rates, deposit flows, cost of funds, demand for loan products, demand for
financial services, competition, changes in the quality or composition of the
Company's loan and investment portfolios, changes in accounting principles,
policies or guidelines and other economic, competitive, governmental and
technological factors affecting the Company's operations, markets, products,
services and fees.
Please do not rely unduly on any forward-looking statements, which are valid
only as of the date made. Many factors, including those described above, could
affect our financial performance and could cause our actual results or
circumstances for future periods to differ materially from what we anticipate or
project. We have no obligation to update any forward-looking statements to
reflect future events which occur after the statements are made, and we
specifically disclaim such obligation.
5-K
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 nationally chartered bank established in
1874. The Company's real estate assets were used to expand the banking house of
Wilber National Bank. The Company was an inactive subsidiary of the Bank until
1982. In 1983, under a plan of reorganization, the Company was re-capitalized,
acquired 100% of the voting stock of the Bank, and registered as a bank holding
company within the meaning of the Bank Holding Company Act of 1956 ("BHCA").
The business of the Company consists primarily of the ownership, supervision and
control of the Bank. The Bank is chartered by the Office of the Comptroller of
the Currency ("the OCC"), and its deposits are insured up to the applicable
limits of the Federal Deposit Insurance Corporation ("the FDIC"). The Company,
through the Bank and the Bank's subsidiaries (collectively "we" or "our"),
offers a full range of commercial and consumer financial products including
business, municipal, mortgage and consumer loans, deposits, trust and investment
services, and insurance. We serve our customers through nineteen (19) full
service branch banking offices located in Otsego, Delaware, Schoharie, Chenango,
Ulster, and Broome counties, New York, an ATM network, and electronic / Internet
banking services. In addition, we operate an insurance sales office located in
Walton, New York (Delaware County) and a representative loan production banking
office in Kingston, New York (Ulster County). The Bank's main office is located
at 245 Main Street, Oneonta, New York 13820 (Otsego County). We employed 228
full-time equivalent employees at December 31, 2004. Our website address is
www.wilberbank.com.
The Bank's subsidiaries include Wilber REIT, Inc., Western Catskill Realty, LLC
and Mang-Wilber, LLC. Wilber REIT, Inc. is wholly - owned by the Bank and
primarily holds mortgage related assets. Western Catskill Realty, LLC is a
wholly - owned real estate holding company, which primarily holds foreclosed
real estate. Mang-Wilber, LLC is the Bank's insurance agency subsidiary, which
is operated under a joint venture arrangement with a regional insurance agency.
At December 31, 2004, the Bank owned a 63.1% membership interest in Mang-Wilber,
LLC.
Our principal business is to act as a financial intermediary in the communities
we serve by obtaining funds through customer deposits and institutional
borrowings, lending the proceeds of those funds to our customers, and investing
excess funds in debt securities and short-term liquid investments. Our funding
base consists of deposits derived principally from the central New York
communities which we serve. To a lesser extent, we borrow funds from
institutional sources, principally the Federal Home Loan Bank of New York
("FHLBNY"). We target our lending activities to consumers and municipalities in
the immediate geographic areas and to small and mid-sized businesses in the
immediate geographic areas and broader statewide region. Our investment
activities primarily consist of purchases of high-quality U.S. Treasury, U.S.
Government Agency ("GinnieMae"), U.S. Government Sponsored Entities ("FannieMae"
and "FreddieMac"), municipal, mortgage-backed and high quality corporate debt
instruments. Through our Trust and Investment Division, we provide personal
trust, agency, estate administration and retirement planning services for
individuals, as well as custodial and investment management services to
institutions. We also offer stocks, bonds and mutual funds through a third party
broker-dealer firm. Through Mang-Wilber, LLC, we offer a full line of life,
health and property and casualty insurance products.
B. Market Area
We primarily operate in the small town and rural markets to the north and west
of the Catskill Mountains in central New York. The regional economy is driven by
small not-for-profit organizations; farming; hospitals; small, independently
owned retailers, restaurants and motels; light manufacturing; several small
colleges; and tourism. The National Baseball Hall of Fame (Cooperstown, New
York), the National Soccer Hall of Fame (Oneonta, New York), several youth sport
camps, and outdoor recreation such as camping, hunting, fishing, and skiing
bring seasonal activity to several communities within our market area. The
Bank's main office in Oneonta, New York is approximately 70 miles southwest of
Albany, New York, the state's capital, and 180 miles northwest of New York City.
Our primary market area consists of four rural counties in central New York,
namely Otsego, Delaware, Schoharie and Chenango Counties. The estimated
population of our four county primary market area is 192,000. Between the 1990
and 2000 U.S. Government census, the area population increased by less than 1%.
Approximately 15.9% of the individuals that reside in our four county primary
market area are over the age of 65, as compared to a national average of 12.4%.
In 1999 (the latest available statistics) the per capita income for the four
county region was approximately $17,002. This is
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approximately 79% of the United States national average for 1999 of $21,587 and
73% of the New York State average of $23,389 for the same period. Private
non-farm employment increased by less than 1% between 1990 and 1999 from 47,604
jobs in 1990 to 47,979 jobs in 1999. Management believes the demographic profile
of the primary market area in which we operate has not materially changed
through 2004.
We also operate one full-service branch office in Ulster County, New York.
Although the demographic profile of that county differs from our primary four
county market, the town in which we operate our branch is similar to our primary
market. The full-service branch located in Johnson City, New York (Broome
County) and the representative loan production office located in Kingston, New
York (Ulster County) operate in more densely populated markets.
C. Lending Activities
General. The Company, through the Bank, engages in a wide range of lending
activities, including commercial lending primarily to small and mid-sized
businesses; mortgage lending for 1-4 family and multi-family properties
including home equity loans; mortgage lending for commercial properties;
consumer installment and automobile lending and to a lesser extent agricultural
lending.
Over the last several decades we have implemented lending strategies and
policies that are designed to provide flexibility to meet customer needs, while
minimizing losses associated with borrowers' inability or unwillingness to repay
loans. The loan portfolio, in general, is fully collateralized, and many
commercial loans are further secured by personal guarantees. We do not commonly
grant unsecured loans to our customers. Annually, we utilize the services of an
outside consultant to conduct on-site reviews of the larger, more complex
commercial real estate and commercial loan portfolios to ensure adherence to
underwriting standards and loan policy guidelines.
We periodically participate in loan participations with other banks or financial
institutions both as an originator and as a participant. A participation loan is
generally formed when the aggregate size of a single loan exceeds the
originating bank's regulatory maximum loan size or a self-imposed loan limit. We
typically make participation loans for commercial or commercial real estate
purposes. Although we do not always maintain direct contact with the borrower,
credit underwriting procedures and credit monitoring practices associated with
participation loans are identical in all material respects to those practices
and procedures followed for loans that we originate, service and hold for our
own account. We typically buy participation loans from other commercial banks
operating within New York State with whose management we are familiar. Our total
participation loans represent less than 10% of the total loans outstanding and
are comprised of approximately 20 borrowers.
If deemed appropriate for the borrower and for the Bank, we place certain loans
in Federal, State or Local Government agency or government sponsored loan
programs. These placements often help reduce our exposure to credit losses and
often provide our borrowers with lower interest rates on their loans.
a. Loan Products and Services
Residential Real Estate. We originate and hold residential real estate loans for
our loan portfolio. The terms on these loans are typically 15 - 30 years and are
usually secured by a first lien position on the home of the borrower. We offer
both adjustable rate and fixed rate loans and provide monthly and bi-weekly
payment options. Our 1-4 family residential loan portfolio primarily consists of
owner-occupied, primary residence properties and to a lesser extent rental
properties for off-campus student housing, which surround each of the local
colleges. Our property appraisal process, debt-to-income limits for borrowers,
and established loan-to-value limits dictate our residential real estate lending
practices.
To be more competitive in the interest-rate sensitive 15 to 30-year fixed rate
residential mortgage market, we also originate loans on behalf of a nationally
recognized bank. During 2002 we entered into an agreement with this bank to
originate residential real estate loans as their agent.
We originate and retain home equity loans. Our home equity loans are typically
granted as adjustable rate lines of credit. The interest rate on the line of
credit adjusts twice per year and is tied to the Wall Street Journal Prime loan
rate. The loan terms generally include a 2nd lien position on the borrower's
residence and a 10-year interest only repayment period. At the end of a 10-year
term, the home equity line of credit is either renewed by the borrower or placed
on a scheduled principal and interest payment plan by the Bank.
Commercial Real Estate. We originate commercial real estate loans to finance the
purchase of developed real estate. To a lesser extent, we will also provide
financing for the construction of commercial real estate. Our commercial real
estate loans are typically larger than those made for residential real estate.
The loans are often secured by properties whose tenants include "Main Street"
type small businesses, retailers and motels. We also finance properties for
commercial
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office and owner-occupied manufacturing space. Our commercial real estate loans
are usually limited to a maximum repayment period of 20 years. Most of our
commercial real estate loans are fully collateralized and further secured by the
personal guarantees of the property owners. Construction loans are generally
granted as a line of credit whose term does not exceed 12 months. We typically
advance funds on construction loans based upon an advance schedule, to which the
borrower agrees, and physical inspection of the premises.
Commercial Loans. In addition to commercial real estate loans, we also make
various types of commercial loans to qualified borrowers, including business
installment and term loans, lines-of-credit, demand loans, time notes,
automobile dealer floor-plan financing, and accounts receivable financing.
Business installment and term loans are typically provided to borrowers for long
term working capital or to finance the purchase of a piece of equipment, truck
or automobile utilized in their business. We generally limit the term of the
borrowing to a period shorter than the estimated useful life of the equipment
being purchased. We also place a lien on the equipment being financed by the
borrower.
Lines-of-credit are typically provided to meet the short-term working capital
needs of the borrowers for inventory and other seasonal aspects of their
business. We also offer a "cash management" line of credit that is tied to a
borrower's primary demand deposit operating account. Each day, on an automated
basis, the borrower's line of credit is paid down with the excess operating
funds available in the primary operating account. Upon complete repayment of the
line-of-credit, excess operating funds are invested in securities on a
short-term basis, usually overnight, through a securities repurchase agreement
between the Bank and the customer.
Demand loans and time notes are often granted to borrowers to provide short term
or "bridge" financing for special orders, contracts or projects. These loans are
often secured with a lien on business assets, liquid collateral and/or personal
guarantees.
On a limited basis we also provide inventory financing or "floor plans" for
automobile dealers. Floor plan lines of credit create unique risks that require
close oversight by the Bank's lending personnel. Accordingly, we have developed
special procedures for floor plan lines of credit to assure the borrower
maintains sufficient inventory collateral at all times.
In 1997 we began offering accounts receivable financing to qualified borrowers
through affiliation with a third party vendor specializing in this type of
financing. The program allows business customers to borrow funds from the Bank
by assigning their accounts receivable to the Bank for billing and collection.
The program is supported by limited fraud and credit insurance.
Commercial loans and commercial real estate loans generally involve a higher
degree of risk and are more complex than residential mortgages and consumer
loans. Such loans typically involve large loan balances to single borrowers or
groups of related borrowers. Commercial loan repayment and interest terms are
often established to meet the unique needs of the borrower and the
characteristics of the business. Typically payments on commercial real estate
are dependent upon leases whose terms are shorter than the borrower's repayment
period. This places significant reliance upon the owner's successful operation
and management of the property. Accordingly, the borrower and we must be aware
of the risks that affect the underlying business including, but not limited to,
economic conditions, competition, product obsolescence, inventory cycles,
seasonality and the business owner's experience and expertise.
Standby Letters of Credit. We offer stand-by letters of credit for our business
customers. Stand-by letters of credit are not loans. They are guarantees to pay
other creditors of the customer should the customer fail to meet certain payment
obligations required by the third party creditor. Those guarantees are primarily
issued to support public and private borrowing arrangements, including bond
financing and similar transactions. The issuance of a stand-by letter of credit
creates a contingent liability for the Bank. 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
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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.
b. Loan Approval Procedures and Authority
General. The Bank's Board of Directors delegates the authority to provide loans
to borrowers through the Bank's loan policy. The policy is modified, reviewed
and approved on an annual basis to assure that lending policies and practices
meet the needs of borrowers, mitigate perceived credit risk, and reflect current
economic conditions. Currently, we use a four (4) tier structure to approve
loans. First, the full Board of Directors of the Bank has authority to approve
single loans or loans to any one borrower up to the Bank's legal lending limit,
which was $10.2 million at December 31, 2004. 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. When
conditions merit, the Board of Directors is also authorized to make 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 is limited to 50% of the
Bank's legal lending limit, which is approximately $5.1 million. The Committee
may also make 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 $7,500, 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 five (5) voting members,
the Bank's Chief Executive Officer, President & Chief Operating Officer, the
Chief Credit Officer, the Senior Lender, and the manager of the Credit
Department. The Officers' Loan Committee may approve secured and unsecured loans
up to 15% of the Bank's legal lending limit (approximately $1.5 million) and
loans up to 100% of the Bank's legal lending limit if the loan is secured by
readily marketable collateral. The Committee also has the authority to adjust
loan rates from time to time as market conditions dictate. Loan charge-offs up
to $7,500 and collateral releases within prescribed limits established by the
Board of Directors are also approved by the Officers' Loan Committee. All
actions of the Officers' Loan Committee are reported to the Loan and Investment
Committee for ratification.
Fourth, through the loan policy, individual loan officers are provided specific
loan limits by category of loan. Each officer's lending limits are determined
based on the individual officer's experience, past credit decisions, and
expertise.
Our goal for the loan approval process is to provide adequate review of loan
proposals while at the same time responding quickly to customer requests. We
complete a credit review and maintain a credit file for each borrower. The
purpose of the file is to provide the history and current status of each
borrower's relationship and credit standing, so that a loan officer can quickly
understand the borrower's status and make a fully informed decision on a new
loan request. We require that all business borrowers submit audited, reviewed,
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 finance the education of a
dependent. However, any loans to Executive Officers which are not for the
construction, improvement, or purchase of a residence, or not used to finance a
child's education, or not secured by readily marketable investment collateral,
are limited to a maximum of $100,000. In addition, we require that all loans
made to Executive Officers be reported to the Board of Directors at the next
Board of Directors meeting.
c. Credit Quality Practices
General. One of our key objectives is to maintain strong credit quality of the
Bank's loan portfolio. We strive to accomplish this objective by maintaining a
diversified mix of loan types, limiting industry concentrations, and monitoring
regional 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
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require personal guarantees on small business loans, cross-collateralize loan
obligations, complete on-site inspections of the business, and require the
company to adhere to financial covenants. Similarly, in the event a modification
to an outstanding loan is requested, we reevaluate the loan under the proposed
terms prior to making the modification. If we approve the modification, we often
secure additional collateral or impose stricter financial covenants. In the
event a loan becomes delinquent, we follow collection procedures to assure
repayment. If it becomes necessary to repossess or foreclose on collateral, we
strive to execute the proceedings in a timely manner and dispose of the
repossessed or foreclosed property quickly to minimize the level of
non-performing assets, subsequent asset deterioration, and costs associated with
monitoring the collateral.
Delinquent Loans and Collection Procedures. When a borrower fails to make a
required payment on a loan, we take a number of steps to induce the borrower to
cure the delinquency and restore the loan to current status. Our Chief Credit
Officer continuously monitors the past due status of the loan portfolio.
Individual delinquencies are reported to the Directors' Loan and Investment
Committee at each meeting and the overall delinquency levels to the Board of
Directors at least quarterly. Separate collection procedures have been
established for residential mortgage, consumer, and commercial and commercial
real estate loans.
On residential mortgage loans fifteen (15) days past due, we send the borrower a
notice which requests immediate payment. At twenty (20) days past due, the
borrower is usually contacted by telephone by an employee of the Bank. The
borrower's response and promise to pay is recorded. At sixty (60) days or more
past due, if satisfactory repayment arrangements are not made with the borrower,
generally, an attorney letter will be sent and foreclosure procedures will
begin.
On consumer loans ten (10) days past due, we send the borrower a notice which
requests immediate payment. If the loan remains past due, an employee of the
Bank's Collection Department or the approving Loan Officer will usually contact
the borrower before day thirty (30) of past due status. Loans sixty to ninety
(60 - 90) days past due are generally subject to repossession.
We send past due notices to borrowers with commercial term loans, demand notes
and time notes (including commercial real estate) when the loan reaches ten (10)
days past due. Between day fifteen and day thirty (15 - 30), borrowers are
contacted by telephone by an employee of the Bank's Collection Department or by
the approving Loan Officer to attempt to return the account to current status.
After thirty (30) days past due, the loan officer and senior loan officer decide
whether to pursue further action against the borrower.
Loan Portfolio Monitoring Practices. Our loan policy requires that the Chief
Credit Officer continually monitor the status of the loan portfolio, by
regularly reviewing and analyzing reports, which include information on
delinquent loans, criticized loans and foreclosed real estate. We risk rate our
loan portfolios and individual loans based on their perceived risks and
historical losses. For commercial borrowers whose aggregate loans exceed
$50,000, we assign an individual risk rating annually. We arrive at a risk
rating based on current payment performance and payment history, the current
financial strength of the borrower, and the value of the collateral and personal
guarantee. Loans classified as "substandard" typically exhibit some or all of
the following characteristics:
o the borrower lacks current financial information,
o the business of the borrower is poorly managed,
o the borrower's business becomes highly-leveraged or appears to
be insolvent,
o the borrower exhibits inadequate cash flow to support the debt
service,
o the loan is chronically delinquent, or
o the industry in which the business operates has become
unstable or volatile.
Loans we classify as "special mention" are loans that are generally performing,
but the borrower's financial strength appears to be deteriorating. Loans we
categorize as a "pass" are generally performing per contractual terms and
exhibit none of the characteristics of special mention or substandard loans.
Allowance for Loan Loss. The allowance for loan losses is an amount, which, in
the opinion of management, is necessary to absorb probable losses inherent in
the loan portfolio. We continually monitor the allowance for loan losses to
determine its reasonableness. At each quarter end our Chief Credit Officer
prepares a formal assessment of the allowance for loan losses and submits it to
the full Board of Directors to determine the adequacy of the allowance. The
allowance is determined based upon numerous considerations. For the consumer,
residential mortgage and small commercial loans, we consider local economic
conditions, the growth and composition of the loan portfolio, the trend in
delinquencies and the trend in loan charge-offs and non-performing loans. Based
on these factors, we estimate the probable or "embedded" losses in the loan
portfolio. On large commercial loans, we take into consideration the specific
characteristics of the loan including the borrower's payment history, business
conditions in the borrower's industry, the collateral and guarantees
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securing the loan, and our historical experience with similarly structured
loans. We then assign an estimated loss percentage based on these
characteristics. The adequacy of our allowance for loan losses is also reviewed
by the OCC on a periodic basis. Its comments and recommendations are factored
into the determination of the allowance for loan losses.
The allowance for loan losses is increased by the provision for loan losses,
which is recorded as an expense on our income statement. Charge-offs are
recorded as a reduction in the allowance for loan losses. 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 will place loans on
non-accrual status before they become 90 days delinquent. Upon being placed on
non-accrual status, we reverse all interest accrued in the current year against
interest income. Interest accrued and not collected from a prior year is
charged-off through the allowance for loan losses. If ultimate repayment of a
non-accrual loan is expected, any payments received may be applied in accordance
with contractual terms. If ultimate repayment of principal is not expected, any
payment received on the non-accrual loan is applied to principal until ultimate
repayment becomes expected.
A loan is considered to be a TDR when we grant a special concession to the
borrower because the borrower's financial condition has deteriorated to the
point where servicing the original loan under the original terms becomes
difficult or challenges the financial viability of the business. Such
concessions include the reduction of interest rates, forgiveness of principal or
interest, or other similar modifications to the original terms. TDR loans that
are in compliance with their modified terms and that yield a market rate may be
removed from TDR status after a period of performance.
Our goal is to minimize the number of non-performing loans because of their
negative impact on the Company's earnings.
Foreclosure and Repossession. At times it becomes necessary to foreclose or
repossess property that a delinquent borrower pledged as collateral on a loan.
Upon concluding foreclosure or repossession procedures, we take title to the
collateral and attempt to dispose of it in the most efficient manner possible.
Real estate properties formerly pledged as collateral on loans, which we have
acquired through foreclosure proceedings or acceptance of a deed in lieu of
foreclosure are called Other Real Estate Owned (hereinafter referred to as
"OREO"). OREO is carried at the lower of the recorded investment in the loan or
the fair value of the real estate, less estimated costs to sell. Write-downs
from the unpaid loan balance to fair value are charged to the allowance for loan
losses.
Loan Charge-Offs. We charge off loans or portions of loans that we deem
non-collectible and can no longer justify carrying as an asset on the Bank's
balance sheet. We determine if a loan should be charged-off by analyzing all
possible sources of repayment. Once the responsible Loan Officer or designated
Collections Department personnel determines the loan is not collectible, he/she
completes a "Recommendation for Charge-off" form, which is subsequently reviewed
and approved by the Bank's Loan and Investment Committee (or by the Officers'
Loan Committee for charge-offs less than $7,500).
D. Investment Securities Activities
General. The Bank's Board of Directors has final authority and responsibility
for all aspects of the Bank's investment activities. It exercises this authority
by setting the Bank's Investment Policy each year and appointing the Loan and
Investment Committee to monitor adherence to the policy. The Board of Directors
delegates its powers by appointing designated investment officers to purchase
and sell investment securities for the account of the Bank. The CEO and the
Chief Investment Officer have the authority to make investment purchases within
the limits set by the Board of Directors. All investment securities transactions
are reviewed monthly by the Loan and Investment Committee and the Board of
Directors.
The Bank's investment securities portfolio is primarily comprised of high-grade
fixed income debt instruments. Investment purchases are generally made when we
have funds that exceed the present demand for loans. Our primary investment
objectives are to:
(i) minimize risk through strong credit quality,
(ii) provide liquidity to fund loans and meet deposit run-off,
(iii) diversify the Bank's assets,
(iv) generate a favorable investment return,
(v) meet the pledging requirements of State, County and Municipal
depositors,
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(vi) manage the risk associated with changing interest rates, and
(vii) match the maturities of securities with deposit and borrowing
maturities.
Our current investment policy generally limits securities investments to U.S.
Government, agency and sponsored entity securities, corporate debt, municipal
bonds, pass-through mortgage backed securities issued by Fannie Mae, Freddie Mac
or Ginnie Mae, and collateralized mortgage obligations (issued by these same
agencies).
The investment securities we hold are classified as held-to-maturity, trading,
or available-for-sale, depending on the purposes for which the investment
securities were acquired and are being held. Securities held-to-maturity are
debt securities that the Company has both the positive intent and ability to
hold to maturity. These securities are stated at amortized cost. Debt and equity
securities that are bought and held principally for the purpose of sale in the
near term are classified as trading securities and are reported at fair value
with unrealized gains and losses included in earnings. Debt and equity
securities not classified as either held-to-maturity or trading securities are
classified as available-for-sale and are reported at fair value with unrealized
gains and losses excluded from earnings and reported net of taxes in accumulated
other comprehensive income or loss. We hold the majority of our investment
securities in the available-for-sale category.
On a daily basis we buy and sell overnight federal funds to and from our
correspondent banks. Federal funds are unsecured general obligations of the
purchasing bank and therefore subject to credit risk. To mitigate this risk, we
monitor the financial strength of our correspondent banks on a continuous basis.
Financial strength rating reports of each correspondent bank are reviewed by the
Bank's management on a quarterly basis.
From time to time we purchase and hold certificates of deposit with banks
domiciled in the United States. These obligations are all insured by the FDIC.
On a limited basis, we also invest in permissible types of equity securities.
E. Sources of Funds
General. The Bank's lending and investment activities are highly dependent upon
the Bank's ability to obtain funds. Our primary source of funds is customer
deposits. To a lesser extent we have borrowed funds from the FHLBNY and entered
into repurchase agreements to fund our loan and investment activities.
Deposits. We offer a variety of deposit accounts to our customers. The fees,
interest rates and terms of each deposit product vary to meet the unique needs
and requirements of our depositors. Presently, we offer a variety of accounts
for consumers, businesses, not-for-profit organizations and municipalities
including: demand deposit accounts, interest bearing transaction accounts, money
market accounts, statement savings accounts, passbook savings accounts and fixed
and variable rate certificates of deposit. The majority of our deposit accounts
are owned by individuals and businesses who reside near our branch locations.
Municipal deposits are generally derived from the local and county taxing
authorities, school districts near our branch locations and, to a limited
degree, New York State public funds. Accordingly, deposit levels are dependent
upon regional economic conditions, as well as more general national and
statewide economic conditions, local competition and our pricing decisions.
Borrowed Funds. From time to time we borrow funds to finance our loan and
investment activities. Most of our borrowings are with the FHLBNY. These
advances are secured by a general lien on our eligible 1-4 family residential
mortgage portfolio or specific investment securities collateral. We determine
the maturity and structure of each advance based on market conditions at the
time of borrowing and the interest rate risk profile of the loans or investments
being funded.
We also utilize repurchase and resale agreements to fund our loan and investment
activities. Repurchase / resale agreements are contracts for sale of securities
owned or borrowed by us, with an agreement with the counter party to repurchase
those securities at an agreed upon price and date. In addition, when necessary,
we borrow overnight federal funds from other banks or borrow monies from the
Federal Reserve Bank's discount window.
Deposit account structures, fees and interest rates, as well as funding
strategies, are determined by the Bank's Asset and Liability Committee ("ALCO").
The ALCO is comprised of the Bank's senior managers and meets on a bi-weekly
basis. The ALCO reviews general economic conditions, the Bank's need for funds,
and local competitive conditions prior to establishing funding strategies and
interest rates to be paid. The actions of the ALCO are reported to the
Directors' Loan and Investment Committee at their regularly scheduled meetings.
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F. Electronic and Payment Services
General. We offer a variety of electronic services to our customers. Most of the
services are provided for convenience purposes and are typically offered in
conjunction with a deposit or loan account. Certain electronic and payment
services are provided using marketing arrangements and third party services,
branded with the Bank's name. These services often provide us with additional
sources of fee income or reduce our operating and transaction expenses. Our menu
of electronic and payment services include point of sale transactions, debit
card payments, ATMs, merchant credit and debit card processing, Internet
banking, Internet bill pay services, voice response, wire transfer services,
automated clearing house services, direct deposit of Social Security and other
payments, loan autodraft payments, and cash management services.
G. Trust and Investment Services
General. We offer various personal Trust and Investment services through our
Trust and Investment Division, including both fiduciary and custodial services.
At December 31, 2004 and December 31, 2003 we had $322.248 million and $332.442
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,
-----------------------------------------------
2004 2003
-----------------------------------------------
Estimated Estimated
Number of Market Number of Market
dollars in thousands Accounts Value Accounts Value
-------------------------------------------------------------------------------------------------
Trusts 337 $176,371 320 $198,166
-------------------------------------------------------------------------------------------------
Estates 8 1,851 6 2,954
-------------------------------------------------------------------------------------------------
Custodian, Investment Management and Others 221 144,026 212 131,322
-------------------------------------------------------------------------------------------------
Total 566 $322,248 538 $332,442
-------------------------------------------------------------------------------------------------
We also provide investment services through a third party provider, INVEST
Financial Corp., for the purchase of mutual funds and annuities.
H. Insurance Services
General. In 1998, the Bank established an insurance agency through a joint
venture with a regional independent insurance agency. The agency, Mang-Wilber,
LLC, is licensed to sell, within New York State, various insurance products,
including life, health, property and casualty insurance products to both
consumers and businesses. The principal office of the agency is in Sidney, New
York with satellite sales offices in Oneonta, New York (the Bank's main office),
and Walton, New York (doing business as Mang-Sholes Insurance). Mang - Wilber
LLC also owns a two-thirds interest in a specialty-lines agency in Clifton Park
(Saratoga County), New York.
We offer credit life and disability insurance through an affiliation with the
New York Bankers Association. The insurance is typically offered to and
purchased by consumers securing a mortgage or consumer loan through the Bank. In
addition, we offer title insurance through New York Bankers Title Agency East,
LLC. Title insurance is sold in conjunction with origination of residential and
commercial mortgages. We own an interest in New York Bankers Title Agency East,
LLC and receive profit distributions based upon the overall performance of the
agency.
I. Supervision and Regulation
Set forth below is a brief description of certain laws and regulations governing
the Company, the Bank and its subsidiaries. The description does not purport to
be complete and is qualified in its entirety by reference to applicable laws and
regulations.
a. The Company
Bank Holding Company Act. The Company is a bank holding company registered with,
and subject to regulation and examination by, the Board of Governors of the
Federal Reserve System ("Federal Reserve Board") pursuant to the
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BHCA, as amended. The Federal Reserve Board regulates and requires the filing of
reports describing the activities of bank holding companies and conducts
periodic examinations to test compliance with applicable regulatory
requirements. The Federal Reserve Board has enforcement authority over bank
holding companies, including, among other things, the ability to assess civil
money penalties, to issue cease and desist or removal orders and to require a
bank holding company to divest subsidiaries.
The BHCA prohibits a bank holding company from acquiring direct or indirect
ownership or control of more than 5% of the voting shares of any bank, or
increasing such ownership or control of any bank, without the prior approval of
the Federal Reserve Board. The BHCA further generally precludes a bank holding
company from acquiring direct or indirect ownership or control of any
non-banking entity engaged in any activities other than those which the Federal
Reserve Board has determined to be so closely related to banking or managing and
controlling banks as to be a proper incident thereto. Some of the activities
that have been found to be closely related to banking are: operating a savings
association, mortgage company, finance company, credit card company, factoring
company or collection agency; performing certain data processing services;
providing investment and financial advice; underwriting and acting as an
insurance agent for certain types of credit-related insurance; real and personal
property leasing; selling money orders, travelers' checks and United States
Savings Bonds; real estate and personal property appraising; and providing tax
planning and preparation and check guarantee services.
Under provisions of the BHCA enacted as part of the Gramm-Leach-Bliley Act of
1999, 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 a FHC but continues to evaluate the opportunities presented by FHC
registration.
The BHCA generally permits a bank holding company to acquire a bank located
outside of the state in which the existing bank subsidiaries of the bank holding
company are located, subject to deposit concentration limits and state laws
prescribing minimum periods of time an acquired bank must have been in existence
prior to the acquisition.
A bank holding company must serve as a source of strength for its subsidiary
bank. The Federal Reserve Board may require a bank holding company to contribute
additional capital to an undercapitalized subsidiary bank. The Company is
subject to capital adequacy guidelines for bank holding companies (on a
consolidated basis), which are substantially similar to the FDIC-mandated
capital adequacy guidelines applicable to the Bank.
Federal Securities Law. The Company is subject to the information, reporting,
proxy solicitation, insider trading, and other rules contained in the Securities
Exchange Act of 1934 (the "Exchange Act") and the regulations of the SEC
thereunder.
Sarbanes-Oxley Act of 2002. On July 30, 2002, President Bush signed into law the
Sarbanes-Oxley Act of 2002 (the "Sarbanes-Oxley Act"). The Company is subject to
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 executive officers; (v)
strengthens the powers and resources of the SEC; and (vi) imposes new criminal
and civil penalties for securities fraud and related wrongful conduct. The SEC
has adopted in final form substantially all of the new regulations Congress
directed it to adopt in the Sarbanes-Oxley Act, including: new standards of
independence for directors who serve on the Company's Audit Committee;
disclosure requirements as to whether at least one member of the Company's Audit
Committee qualifies as a "financial expert" as defined in the SEC regulations
and whether the Company has adopted a code of ethics applicable to its chief
executive officer, chief financial officer or those persons performing similar
functions; and disclosure requirements regarding the operations of board
nominating committees and the means, if any, by which security holders may
communicate with directors.
b. The Bank
General. The Bank is a national bank subject to extensive regulation,
examination, and supervision by the OCC, as its primary federal regulator, and
by the FDIC, as its deposit insurer. The Bank's deposit accounts are insured up
to applicable limits by the Bank Insurance Fund of the FDIC. The Bank must file
reports with the OCC and the FDIC concerning its activities and financial
condition and must obtain regulatory approval before commencing certain
activities or engaging in transactions such as mergers and other business
combinations or the establishment, closing, purchase or
14-K
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.
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.
Business Activities. The Bank's lending, investment, deposit and other powers
derive from the National Bank Act and OCC regulations. These powers are also
governed to some extent by the FDIC under the Federal Deposit Insurance Act and
FDIC regulations. The Bank may make mortgage loans, commercial loans and
consumer loans, and may invest in certain types of debt securities, and other
assets. The Bank may offer a variety of deposit accounts, including savings,
certificate (time), demand and NOW accounts.
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 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, 2004. 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.
Community Reinvestment Act, Fair Lending and Consumer Protection Laws. Under the
federal Community Reinvestment Act (the "CRA"), the Bank, consistent with its
safe and sound operation, must help meet the credit needs of its entire
community, including low and moderate income neighborhoods. The OCC periodically
assesses the Bank's compliance with CRA requirements. The Bank received a
SATISFACTORY rating for CRA on its last performance evaluation conducted by the
OCC as of August 11, 2003.
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 borrowers, depositors and other customers of depository
institutions. These include the Truth In Lending Act, the Truth In Savings Act,
the Home Mortgage Disclosure Act, the Fair Housing Act, the Real Estate
Settlement Procedures Act, the Electronic Funds Transfers Act, the Fair Credit
Reporting Act and the Fair Debt Collection Practices Act. The OCC and, in some
instances,
15-K
other regulators, including the Justice Department, may take enforcement action
against institutions that fail to comply with these laws.
Insurance of Deposit Accounts. The Bank is an insured depository institution
subject to assessment by, and the payment of deposit insurance premiums to, the
FDIC. Deposit insurance premiums are determined by a number of factors,
including the institution's capital ratio and supervisory condition. Since the
ratio of reserves to insured deposits in the Bank Insurance Fund of the FDIC was
at its statutory maximum, the Bank was not required to pay any deposit insurance
premiums during 2004, 2003 or 2002. Although the Bank did not pay any premiums
during these periods, the FDIC did levy an assessment based on the Bank's
deposit accounts under the Deposit Insurance Funds Act of 1996. Under the
Deposit Insurance Funds Act, deposits insured by the Bank Insurance Fund ("BIF")
such as the deposits of the Bank, are subject to an assessment for payment on
bond obligations financing the FDIC's Savings Association Fund ("SAIF"). The
rate is adjusted quarterly, depending on the need of the fund. At December 31,
2004, the assessment rate was 1.44 cents per $100 of insured deposits. This
compares to 1.54 cents and 1.44 cents per $100 of insured deposit at December
31, 2003 and December 31, 2002, respectively. There can be no assurance that the
Bank will continue to not be required to pay deposit insurance premiums. If the
Bank is required to pay deposit insurance premiums, this expense could adversely
affect the Bank's earnings in future periods.
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, 2004, the Bank
was in compliance with applicable reserve requirements.
c. Subsidiaries
The Bank's insurance agency subsidiary, Mang-Wilber LLC, is subject to New York
State insurance laws and regulations.
J. Competition
We face competition in all the markets we serve. Traditional competitors are
other local commercial banks, savings banks, savings and loan institutions and
credit unions, as well as local offices of major regional and money center
banks. Also, non-banking financial organizations, such as consumer finance
companies, mortgage brokers, insurance companies, securities firms, money market
funds, and mutual funds and credit card companies offer substantive equivalents
of transaction accounts and various loan and financial products. As a result of
the GLBA (discussed further in Item 1. I (b) above), other non-banking financial
organizations now may be in a position to offer comparable products to those
offered by the Company and to establish, acquire or affiliate with commercial
banks themselves.
K. Legislative Developments
Preemption and Predatory Lending. On January 13, 2004, the OCC adopted
amendments to its regulations, which assert the exclusive authority of the OCC
to regulate the activities and operations of national banks and prohibit certain
"predatory" lending practices. The new regulations preempt the application to
national banks of any state laws that obstruct, impair or condition a national
bank's ability to fully exercise its deposit-taking and lending powers and
reaffirm, subject to narrow exceptions, the OCC's exclusive authority to examine
national banks. The new regulations also prohibit a national bank from making
any consumer loan based predominantly on the bank's realization of the
foreclosure or liquidation value of the borrower's collateral, without regard to
the borrower's ability to repay the loan according to its terms and from
engaging in unfair or deceptive practices within the meaning of section 5 of the
Federal Trade Commission Act. We believe that the Bank's underwriting and other
credit-related policies and procedures comply with the lending standards
prescribed in the new regulations.
FACT Act. In December 2003, The Fair and Accurate Credit Transaction Act of 2003
("FACT Act") was signed into law. The FACT Act was crafted to provide consumers
with more disclosure and notification on their credit score, rating and history
(particularly negative information filings) and how these items impact their
credit-related transactions. The FACT Act also provides consumers with enhanced
identity theft, fraud alert and fraud repair provisions, as well as,
restrictions on information sharing among affiliates.
Patriot Act. In October 2001, Congress passed the USA PATRIOT Act ("Patriot
Act"). Title III of the Patriot Act captioned "International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001" added several new provisions
to the Bank Secrecy Act, which are intended to facilitate the prevention,
detection, and prosecution of international money laundering and the financing
of terrorism. Specific provisions of the Patriot Act require financial
institutions, including
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banks, to implement effective customer identification procedures to deter (or
perhaps identify) terrorist-type activities. Banks that fail to implement
effective customer identification procedures under the Bank Secrecy Act or fail
to comply with the requisite provisions of the Patriot Act may face both civil
and criminal monetary fines and penalties.
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 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 twenty
(20) branch offices and lease two offices at market rates. We also own an
insurance sales office in Walton, New York through our insurance agency
subsidiary, Mang-Wilber LLC.
In the opinion of management, the physical properties of the Company are
suitable and adequate. All of our properties are insured at full replacement
cost.
ITEM 3: LEGAL PROCEEDINGS
The Company is not presently the subject of any material pending legal
proceedings, other than ordinary routine litigation occurring in the normal
course of its business.
On an ongoing basis, the Bank also becomes subject to various legal claims from
time to time, which arise in the normal course of business. The various pending
legal claims against the Bank will not, in the opinion of management based upon
consultation with counsel, result in any material liability to the Company and
will not materially affect our financial position, results of operation or cash
flow.
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, 2004.
PART II
-------
ITEM 5: MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS
A. Market Price and Dividends on Common Stock
During 2003 and through February 11, 2004, the common stock of the Company was
inactively traded on Nasdaq's Over-the-Counter Bulletin Board market under the
symbol "WLBC.OB." Market makers for the stock were Ryan, Beck and Company,
Monroe Securities, Inc., Hill Thompson Magid & Co., Inc., Knight Equity Markets,
L.P., Schwab Capital Markets, L.P., and Stifel, Nicolaus & Company,
Incorporated. On February 12, 2004, the common stock of the Company ($0.01 par
value per share) began trading on the American Stock Exchange(R) ("Amex(R)")
under the symbol "GIW." The following table shows the high and low bid
quotations (while on the Over-the-Counter Bulletin Board) and trading price
(while on the Amex(R)) for the common stock and quarterly dividend paid to our
security holders for the periods presented:
17-K
Common Stock Market Price and Dividend Table:
2004 2003
----------------------------- -----------------------------
High Low Dividend High Low Dividend
----------------------------- -----------------------------
4th Quarter $ 12.64 $ 11.94 $0.0950 $ 15.00 $ 12.10 $0.0925
3rd Quarter $ 12.80 $ 12.00 $0.0950 $ 13.75 $ 10.20 $0.0925
2nd Quarter $ 13.65 $ 12.00 $0.0950 $ 10.81 $ 9.81 $0.0925
1st Quarter $ 15.50 $ 12.65 $0.0950 $ 10.25 $ 9.78 $0.0925
(1) All prices and dividends provided in this table have been
adjusted for the 4:1 stock split approved on September 5, 2003.
(2) The high and low bid quotations and trading prices provided in
this table were obtained from www.finance.yahoo.com. The high and
low prices provided for periods in which the common stock of the
Company was traded on the Over-the-Counter Bulletin Board market
reflect inter-dealer bid quotations without retail mark-up,
mark-down, or commissions and may not represent actual transactions.
At March 11, 2005, there were 651 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 11, 2005 was
$12.47 per share.
The Company has not sold any unregistered securities within the past three
years.
During 2004 the rights of holders of our registered securities were not
modified; nor were any other class of security issued that could materially
limit or qualify our registered securities.
B. Unregistered Sale of Securities (not applicable)
C. Repurchases of Equity Securities
On August 27, 2004, we announced that our Board of Directors approved a stock
repurchase program, which authorizes the purchase, at the discretion of
management, of up to $1,500,000 of the Company's common stock. All shares
repurchased under the repurchase program were made in the open market or through
private transactions, were limited to one transaction per week, and were
conducted exclusively through Merrill Lynch, a registered broker-dealer. All
such purchases were in compliance with the laws of the State of New York, Rule
10b(18) of the Securities Exchange Act of 1934 and the rules and regulations
thereunder, and the rules and regulations of the Amex. The following table
summarizes the shares repurchased by us under this repurchase program during the
fourth quarter of 2004:
Share Repurchases:
Remaining
Total Number Average Share
of Shares Price Paid Repurchase
Period Repurchased per Share Total Cost (1) Authority
------------------------------------------------------------------------------------------------------
October 1 - October 31, 2004 0 $ -- $ -- $1,447,970
November 1 - November 30, 2004 0 -- -- $1,447,970
December 1 - December 31, 2004 10,500 12.28 128,975 $1,318,995
------------------------------------------------------------
Total 10,500 $ 12.28 $ 128,975
(1) Excludes brokerage commissions paid by the Company.
All shares purchased by the Company during 2004 were purchased under the
publicly announced program.
ITEM 6: SELECTED FINANCIAL DATA
The comparability of the information provided in the following 5-Year Summary
Table of Selected Financial Data and the Table of Selected Quarterly Financial
Data have not been materially impacted by any significant business combinations,
18-K
dispositions of business operations or accounting changes other than those
provided in the footnotes to our financial statements provided in PART II, Item
8, of this document. However, all per share financial information contained in
this document, as well as all exhibits, was restated to reflect a 4:1 stock
split approved on September 5, 2003.
5-Year Summary Table of Selected Financial Data:
The Wilber Corporation and Subsidiary
(Dollars in Thousands, Except Per Share Data)
As of and for 12-month Period Ended December 31,
-----------------------------------------------------------------
2004 2003 2002 2001 2000
-----------------------------------------------------------------
Consolidated Statements of Income Data:
Interest Income $ 37,165 $ 38,628 $ 41,646 $ 42,307 $ 42,374
Interest Expense 12,761 14,153 17,170 20,449 21,438
-----------------------------------------------------------------
Net Interest Income 24,404 24,475 24,476 21,858 20,936
Provision for Loan Losses 1,200 1,565 1,920 1,540 1,680
Net Interest Income After Provision for Loan
Losses 23,204 22,910 22,556 20,318 19,256
Other Income 4,603 4,599 4,982 4,645 4,331
Net Gains (Losses) on Securities
Transactions 1,031 1,064 272 175 (11)
Other Expense (1) 17,218 16,583 15,890 13,945 12,701
-----------------------------------------------------------------
Income Before Provision for Income Taxes 11,620 11,990 11,920 11,193 10,875
Provision for Income Taxes 3,002 3,277 3,358 3,147 3,017
-----------------------------------------------------------------
Net Income $ 8,618 $ 8,713 $ 8,562 $ 8,046 $ 7,858
=================================================================
Earnings Per Common Share: (2)
Basic $ 0.77 $ 0.78 $ 0.76 $ 0.71 $ 0.68
Per Common Share: (2)
Cash Dividends 0.380 0.370 0.375 0.350 0.350
Book Value 6.04 5.74 5.61 4.92 4.51
Tangible Book Value (3) 5.77 5.46 5.32 4.88 4.39
Consolidated Period-End Balance Sheet Data:
Total Assets $ 750,861 $ 729,023 $ 708,984 $ 626,787 $ 560,089
Securities Available-for-Sale 249,415 275,051 234,542 188,712 111,329
Securities Held-to-Maturity 59,463 44,140 42,837 46,017 74,888
Gross Loans 391,043 360,906 358,295 329,544 324,758
Nonperforming Assets 2,751 3,678 3,160 4,137 4,243
Deposits 571,929 580,633 549,081 491,012 439,408
Long-Term Borrowings 65,379 55,849 73,346 62,512 50,500
Short-Term Borrowings 37,559 20,018 13,260 10,530 13,765
Shareholder's Equity 67,605 64,304 63,162 55,827 51,526
Selected Key Ratios:
Return on Average Assets 1.17% 1.20% 1.25% 1.36% 1.42%
Return on Average Equity 13.08% 13.67% 14.36% 14.91% 16.20%
Dividend Payout 49.35% 47.44% 49.34% 49.30% 51.47%
(1) Amortization of goodwill was discontinued with retroactive effect back
to January 1, 2002 upon adoption of SFAS No. 147 during the third quarter
of 2003.
(2) All per share amounts have been adjusted for the 4 for 1 stock split
approved on September 5, 2003.
(3) Tangible book value numbers exclude goodwill and intangible assets
associated with prior business combinations.
19-K
Table of Selected Quarterly Financial Data:
2004
-------------------------------------------------------------
Fourth Third Second First
-------------------------------------------------------------
(Dollars in Thousands)
Interest income $ 9,933 $ 9,248 $ 8,890 $ 9,094
Interest expense 3,383 3,172 3,097 3,109
-------------------------------------------------------------
Net interest income 6,550 6,076 5,793 5,985
Provision for loan losses 240 300 300 360
-------------------------------------------------------------
Net interest income after provision
for loan losses 6,310 5,776 5,493 5,625
-------------------------------------------------------------
Investment Security Gains (Losses), Net 156 224 (27) 678
-------------------------------------------------------------
Other non-interest income 1,115 1,253 1,099 1,136
-------------------------------------------------------------
Non-interest expense 4,463 4,329 4,113 4,313
-------------------------------------------------------------
Income before income tax expense $ 3,118 $ 2,924 $ 2,452 $ 3,126
-------------------------------------------------------------
Income tax expense 799 760 601 842
-------------------------------------------------------------
Net income $ 2,319 $ 2,164 $ 1,851 $ 2,284
=============================================================
Basic earnings per share $ 0.21 $ 0.19 $ 0.17 $ 0.20
=============================================================
Basic weighted average shares
outstanding 11,202,087 11,208,037 11,209,392 11,209,392
=============================================================
Net interest margin
(tax equivalent) (1) 3.95% 3.75% 3.58% 3.75%
Return on average assets 1.23% 1.17% 1.01% 1.27%
Return on average equity 13.57% 13.16% 11.53% 14.00%
Efficiency ratio (2) 53.99% 55.19% 55.72% 56.71%
2003
-----------------------------------------------------------
Fourth Third Second First
-----------------------------------------------------------
(Dollars in Thousands)
Interest income $ 9,445 $ 9,373 $ 9,785 $ 10,025
Interest expense 3,314 3,433 3,609 3,797
-----------------------------------------------------------
Net interest income 6,131 5,940 6,176 6,228
Provision for loan losses 360 350 435 420
-----------------------------------------------------------
Net interest income after provision
for loan losses 5,771 5,590 5,741 5,808
-----------------------------------------------------------
Investment Security Gains (Losses), Net 171 75 420 398
-----------------------------------------------------------
Other non-interest income 1,241 1,069 1,101 1,188
-----------------------------------------------------------
Non-interest expense 4,241 4,252 4,080 4,010
-----------------------------------------------------------
Income before income tax expense $ 2,942 $ 2,482 $ 3,182 $ 3,384
-----------------------------------------------------------
Income tax expense 741 658 889 989
-----------------------------------------------------------
Net income $ 2,201 $ 1,824 $ 2,293 $ 2,395
===========================================================
Basic earnings per share $ 0.20 $ 0.16 $ 0.21 $ 0.21
===========================================================
Basic weighted average shares
outstanding 11,209,392 11,209,392 11,209,392 11,229,248
===========================================================
Net interest margin
(tax equivalent) (1) 3.76% 3.67% 3.81% 3.86%
Return on average assets 1.19% 0.99% 1.27% 1.35%
Return on average equity 13.68% 11.49% 14.27% 15.25%
Efficiency ratio (2) 54.77% 56.73% 53.02% 51.15%
(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,
2004. This discussion and tabular presentations should be read in conjunction
with the accompanying Consolidated Financial Statements and Notes presented in
PART II, Item 8, of this document.
Our financial performance is heavily dependent upon net interest income, which
is the difference between the interest and dividend income earned on our loans
and investment securities less the interest paid on our deposits and borrowings.
Results of operations are also affected by the provision for loan losses,
investment securities gains (losses), service charges and penalty fees on
deposit accounts, fees collected for trust and investment services, insurance
commission income, the increase on the cash surrender value on bank owned life
insurance, other service fees, other income and taxes. Our non-interest expenses
primarily consist of employee salaries and benefits, occupancy and equipment
expense, computer service fees, advertising and marketing expense, professional
fees and other miscellaneous expenses. Results of operations are also influenced
by general economic conditions (particularly changes in interest rates),
competitive conditions, government policies, changes in Federal or State tax
law, and the actions of our regulatory authorities.
20-K
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 additional
provisions for loan losses.
Our policy on the allowance for loan losses is disclosed in Note 1 of the
Consolidated Financial Statements. A more detailed description of the allowance
for loan losses is included in PART II, Item 7 C.a., of this document. All
accounting policies are important, and as such, we encourage the reader to
review each of the policies included in Note 1 of the Consolidated Financial
Statements (provided in PART II, Item 8, of this document) to obtain a better
understanding of how our financial performance is reported.
Recent Accounting Pronouncements. In December 2004, the Financial Accounting
Standards Board revised Statement of Financial Accounting Standards (SFAS) No.
123R, "Share-Based Payment (Revised 2004)." SFAS 123R establishes standards for
the accounting for transactions in which an entity (i) exchanges its equity
instruments for goods or services, or (ii) incurs liabilities in exchange for
goods or services that are based on the fair value of the entity's equity
instruments or that may be settled by the issuance of the equity instruments.
SFAS 123R eliminates the ability to account for stock-based compensation using
APB 25 and requires that such transactions be recognized as compensation cost in
the income statement based on their fair values on the date of grant. SFAS 123R
is effective for financial statements issued for fiscal quarters beginning July
1, 2005. Since, we do not currently have an employee stock option plan or any
other form of stock-based compensation, this pronouncement is not expected to
have any impact on our Consolidated Financial Statements.
The Emerging Issues Task Force ("EITF") of the Financial Accounting Standards
Board ("FASB") has provided guidance for the determination and recognition of
other-than-temporary impairment on investment securities in EITF 03-1, "The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain
Investments." EITF 03-1 provides guidance for determining when an investment is
considered impaired, whether impairment is other-than-temporary, and measurement
of an impairment loss. An investment is considered impaired if the fair value of
the investment is less than its cost. Generally, an impairment is considered
other-than-temporary unless: (i) the investor has the ability and intent to hold
an investment for a reasonable period of time sufficient for an anticipated
recovery of fair value up to (or beyond) the cost of the investment; and (ii)
evidence indicating that the cost of the investment is recoverable within a
reasonable period of time outweighs evidence to the contrary. If impairment is
determined to be other-than-temporary, then an impairment loss should be
recognized equal to the difference between the investment's cost and its fair
value. Since certain disclosure requirements of EITF were adopted in 2003, we
have presented the new disclosure requirements in Note 2 of our Consolidated
Financial Statements for the years ended December 31, 2004 and 2003. The
recognition and measurement provisions were initially effective for
other-than-temporary impairment evaluations in reporting periods beginning after
June 15, 2004. However, in September 2004, the effective date of these
provisions was delayed until the finalization of a FASB staff position to
provide addition implementation guidance. Upon finalization of the FASB Staff
Position, we will evaluate the impact on our Consolidated Financial Statements.
Accounting for Branch Acquisition. In February 2002, the Company acquired a
branch. This acquisition was accounted for as a business combination in
accordance with SFAS No. 141. SFAS No. 141 states that a business combination
occurs when a entity acquires net assets that constitute a business, as defined
by Emerging Issues Task Force Issue (EITF) No. 98-3, "Determining Whether a
Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business."
EITF No. 98-3 states that a business is a self-sustaining integrated set of
activities and assets conducted and managed for the purpose of providing a
return to investors. A business consists of inputs (long-lived assets,
intellectual property, the ability to obtain access to necessary materials or
rights, employees, etc.), processes (the existence of systems necessary for
normal, self sustaining operations) and outputs (the ability to obtain access to
customers).
Our branch acquisition involved the acquisition of (i) long-lived and intangible
assets (building, core deposit intangible and equipment), (ii) employees (branch
management and staff), (iii) certain processes (administration of personnel,
operational processes and strategic management processes); and (iv) the ability
to obtain access to customers who purchase outputs (deposit and loan customers
and accounts of the acquired branch were included in the purchase).
21-K
Due to the factors involved in the acquisition of the branch in February 2002,
the Company's management has concluded that the branch acquired was a business
under EITF No. 98-3 and, therefore, the acquisition of that branch constituted a
business combination within the scope of SFAS No. 141. In connection with the
branch acquisition in February 2002, the Company, in accordance with SFAS No.
72, "Accounting for Certain Acquisitions of Banking or Thrift Institutions,"
recorded an unidentified intangible asset of $1.877 million and in accordance
with SFAS No. 141, a core deposit intangible of $285 thousand. Upon the adoption
of SFAS No. 147 in October 2002, the unidentified intangible asset of $1.877
million was reclassified as goodwill on the Company's consolidated balance
sheet.
B. Performance Overview for Period Ended December 31, 2004
During 2004 we experienced growth in our total assets, but a modest decrease in
our key performance measures. In particular, net income, earnings per share,
return on assets and return on equity all declined in 2004 as compared to 2003.
A decrease in net interest income and net interest margin, primarily driven by a
significant decrease in our yield on investment securities, in addition to
increases in non-interest expense, were the primary reasons for the slight
decline in performance in 2004.
Throughout 2004 residential mortgage interest rates remained near historical
lows throughout the United States. This condition resulted in a very active
housing market, which meant that many consumers refinanced their mortgage debt
or purchased new homes. The active housing market resulted in very large
principal repayments (also called prepayments) on the mortgage-backed securities
sector of our available-for-sale and held-to-maturity securities portfolios.
This caused a significant decrease in the interest income recorded on our
investment securities for two reasons. First, the large prepayments forced us to
reinvest the proceeds in new investments at lower yields. Second, the large
prepayments required us to amortize (as an offset to interest income) a
significant amount of the purchase premiums paid for these investments
securities in the period in which we received the prepayment. During 2004 the
interest income on our investment securities portfolios totaled $11.684 million,
as compared to $13.049 million in 2003, a $1.365 million or 10.5% decrease.
Similarly, the yield on our investment securities was 3.79% in 2004, as compared
to 4.32% in 2003, a 53 basis point decrease between the periods.
Non-interest expenses increased $635 thousand or 3.8% in 2004, from $16.583
million in 2003 to $17.218 million in 2004. During 2004 we continued our
expansion efforts into new markets by establishing a full-service branch in
Johnson City, New York (Broome County) and a representative loan production
office in Kingston, New York (Ulster County). These efforts contributed to the
increase in salaries and employee benefits expense, occupancy expense and
advertising and marketing expense. We also experienced a $293 thousand or 96.1%
increase in computer service fees. In 2004, we procured several new computer
operating systems and upgrades, as well as incurred data conversion expenses
related to a core computer operating system conversion, which we expect to
execute during the second quarter of 2005. In addition, during the third quarter
of 2004 we recorded a $135 thousand expense due to the termination of a prior
contract to convert our core computer system. And finally, professional fees
increased $103 thousand or 25.2% in 2004 due primarily to the Company's
registration with the SEC and listing on the Amex.
During 2004 our total assets increased by $21.838 million or 3.0%, from $729.023
million at December 31, 2003 to $750.861 million at December 31, 2004. The
modest growth in total assets was not impacted by any significant acquisitions
or dispositions and was largely driven by an increase in borrowed funds, which
were secured to fund our loan growth and to adequately maintain our targeted
total stockholders' equity to total asset ratio. Specifically, total loans
increased $30.137 million or 8.35% between December 31, 2003 and December 31,
2004 due to our effort to expand the Bank's loan markets and commercial loan
origination channels, including loans provided through brokers and participation
loans from other banks. Conversely, our total deposits decreased slightly
primarily due to a decrease in non-maturity interest-bearing savings, NOW and
money market deposit accounts. Specifically, total deposits decreased from
$580.633 million at December 31, 2003 to $571.929 million at December 31, 2004,
a $8.704 million or 1.5% decrease. Our total borrowed funds (including
short-term and long-term borrowings) increased from $75.867 million at December
31, 2003 to $102.938 million at December 31, 2004, a $27.071 million or 35.7%
increase.
Our asset quality improved during 2004. Loans charged-off net of recoveries
decreased by $493 thousand in 2004. Specifically, loans charged-off net of
recoveries totaled $707 thousand in 2004, as compared to $1.200 million in 2003.
Total non-performing loans and total non-performing loans as a percent of total
loans improved between periods. At December 31, 2004 total non-performing loans
and total non-performing loans as a percent of total loans were $2.751 million
and 0.70%, as compared to $3.658 million and 1.01% at December 31, 2003, a $907
thousand improvement. The improvement in our asset quality resulted in a
reduction in our provision for loan losses year over year. The provision for
loan losses totaled $1.565 million in 2003, as compared to $1.200 million in
2004, a $365 thousand reduction. The allowance for loan losses increased $493
thousand between December 31, 2003 and December 31, 2004, from $5.757
22-K
million at December 31, 2003 to $6.250 million at December 31, 2004. The
allowance for loan losses as a percent of period-end loans remained unchanged
between the periods at 1.60%.
C. Financial Condition
a. Recent Developments - Branch Acquisition
Branch Acquisition
- ------------------
On February 4, 2005, the Bank acquired two branch offices from HSBC Bank USA,
National Association. Under the terms of our agreement with HSBC, we assumed
approximately $33.054 million of deposit liabilities for HSBC's Sidney, New York
and Walton, New York offices. Approximately, $19.522 million of the deposit
liabilities were housed in the Walton branch office and $13.532 million in the
Sidney, New York office (both Delaware County). We also acquired approximately
$7.668 million of consumer and residential real estate loans in the transaction
and purchased the Walton office building and fixtures. HSBC closed its Sidney
office upon transferring the branch offices to us. The customers in the Sidney
market will be served by our existing branch located within 1 mile of the office
closed by HSBC. Our total assets immediately following the transaction increased
to approximately $773 million.
b. Comparison of Financial Condition at December 31, 2004 and December 31, 2003
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,
intangibles, non-interest bearing deposits at other banks, and cash. We
generally maintain between 92 - 95% of our total assets in earning assets. The
ratio of earning assets to total assets we maintain is slightly greater than the
ratio maintained by comparable bank holding companies.
Total Assets
- ------------
During 2004 our total assets increased $21.838 million or 3.0%, from $729.023
million at December 31, 2003 to $750.861 million at December 31, 2004. This
compares to a 2.8% increase in total assets in 2003. The modest growth in total
assets was driven primarily by an increase in total loans and two $15.0 million
wholesale leverage transactions executed to leverage our equity capital and
improve return on equity.
During the first quarter, we purchased $15.0 million available-for-sale
investment securities and funded the purchases with a series of advances
(borrowings) from the FHLBNY. Similarly, during the fourth quarter we purchased
an additional $15.0 million of available-for-sale investment securities and
funded it with a short-term repurchase agreement (borrowing) from a large money
center bank. The fourth quarter wholesale leverage transaction was executed with
the intent of replacing the short-term repurchase agreement with customer
deposits pursuant to the Bank's agreement to assume approximately $33.0 million
of deposit liabilities from HSBC Bank USA, National Association. The borrowing
was repaid in February 2005 upon assuming the HSBC Bank USA, National
Association deposit liabilities. Net of other repayments throughout 2004,
borrowed funds (including short-term borrowings and long-term borrowings)
increased from $75.867 million at December 31, 2003 to $102.938 million at
December 31, 2004.
Even though we purchased $30.000 million in investment securities in wholesale
leverage transactions during 2004, total investment securities (including
trading, available-for-sale and held-to-maturity) decreased $9.834 million or
3.1% between December 31, 2003 and December 31, 2004. Throughout 2004, we
experienced high levels of principal repayments on the mortgage-backed
securities sector of the investment portfolio. We used portions of these
proceeds to fund $30.137 million of net loan growth as our total deposits
decreased. Total deposit balances were $571.929 million at December 31, 2004, as
compared to $580.633 million at December 31, 2003, an $8.704 million or 1.5%
decrease.
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.
23-K
Summary of Investment Securities:
At December 31
--------------------------------------------------------------------------------
2004 2003 2002
--------------------------------------------------------------------------------
Amortized Estimated Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value Cost Fair Value
--------------------------------------------------------------------------------
(In thousands)
-------- -------- --------------------------------------------------
Trading (1): $ 1,347 $ 1,504 $ 1,028 $ 1,025 $ 1,263 $ 907
-------- -------- --------------------------------------------------
Available-for-sale:
U.S. Treasury and obligations of U.S.
Government corporations and agencies $ 16,949 $ 16,970 $ 5,978 $ 6,028 $ 18,265 $ 18,469
Obligations of States and Political
Subdivisions (Municipal Bonds) 66,656 67,745 56,684 58,016 38,172 39,629
Mortgage - Backed Securities 159,289 158,645 192,745 192,365 142,983 146,574
Corporate Bonds -- -- 13,038 13,949 23,171 24,816
Equity securities 5,870 6,055 4,520 4,693 4,963 5,054
-------- -------- -------- -------- -------- --------
Total available-for-sale $248,764 $249,415 $272,965 $275,051 $227,554 $234,542
-------- -------- -------- -------- -------- --------
Held-to-maturity:
Obligations of States and Political
Subdivisions (Municipal Bonds) $ 7,811 $ 7,999 $ 6,292 $ 6,515 $ 3,230 $ 3,231
Mortgage-Backed Securities 51,652 51,325 37,848 37,901 39,607 40,721
-------- -------- -------- -------- -------- --------
Total held-to-maturity $ 59,463 $ 59,324 $ 44,140 $ 44,416 $ 42,837 $ 43,952
-------- -------- -------- -------- -------- --------
(1) These securities are held by the Company for its non-qualified Executive
Deferred Compensation plan.
Between December 31, 2003 and December 31, 2004 our investment securities
portfolio (including trading, available-for-sale and held-to-maturity) decreased
$9.834 million or 3.1%. During 2004 we experienced a significant turnover in our
investment securities portfolio. The principal proceeds received from the sale
and maturity of available-for-sale and held-to-maturity investment securities
totaled $188.757 million in 2004, approximately 58.9% of our total investment
securities holdings at the start of the year. Although we replaced $181.028
million of these proceeds with new purchases, the composition and risk
characteristics of our investment securities portfolio has changed between the
periods. First, we eliminated our corporate bond holdings during the year. At
December 31, 2003 we held $13.949 million of corporate bonds. The reduction in
corporate bonds and subsequent reinvestment in U.S. government corporation and
agency bonds and insured municipal bonds reduced our credit risk. Second, during
2004 we reduced our concentration of mortgage-backed securities (including both
mortgage pass-through securities and collateralized mortgage obligations). At
December 31, 2003 mortgage-backed securities represented 71.9% of our total
investment securities portfolio. At December 31, 2004 mortgage-backed securities
represented 67.6% of our total investment securities portfolio. Our
concentration in mortgage-backed securities and prepayment options embedded in
these types of securities provides for more volatile investment securities cash
flows and yields. Third, in order to diversify investment security holdings by
type and reduce prepayment risk, we increased our holdings of municipal bonds
and U.S. government agency securities by a total of $22.190 million or 31.5%,
from $70.336 million at December 31, 2003 to $92.526 million at December 31,
2004.
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, 2003, the net unrealized gain on the
available-for-sale investment securities portfolio was $2.086 million. By
comparison, at December 31, 2004, the net unrealized gain on the
available-for-sale investment securities portfolio was $651 thousand. The
decrease in net unrealized investment securities gains between the periods was
due to several factors including the changes in interest rates between the
periods, the significant change in the composition of our investment securities
portfolio, as well as, the sale of available-for-sale securities. During 2004,
we realized investment securities gains on the sale and maturity of investment
securities totaling $1.031 million.
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, 2004. All amortizing security
principal
24-K
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 at the date in which management believes the bond will be
called. 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, 2004. Yields on obligations of states and
municipalities exempt from federal taxation were not tax-effected.
Investment Securities Maturity Table:
At December 31, 2004
---------------------------------------------------------------
After One
Year through After Five Years
In One Year or Less Five Years through Ten Years
---------------------------------------------------------------
Weighted Weighted Weighted
Carrying Average Carrying Average Carrying Average
Dollars in Thousands Value Yield Value Yield Value Yield
---------------------------------------------------------------
U.S Treasury and federal
agency securities $ -- 0.00% $ 11,990 3.41% $ 4,980 4.26%
Municipal obligations 3,726 5.10% 33,726 4.28% 30,247 3.54%
Mortgage-backed securities 13,760 4.28% 144,762 4.15% 49,669 4.60%
Corporate securities -- 0.00% -- 0.00% -- 0.00%
---------------------------------------------------------------
Total securities (1) $ 17,486 4.45% $190,478 4.13% $ 84,896 4.20%
===============================================================
At December 31, 2004
----------------------------------------
After Ten Years Total
----------------------------------------
Weighted Weighted
Carrying Average Carrying Average
Dollars in Thousands Value Yield Value Yield
----------------------------------------
U.S Treasury and federal
agency securities $ -- 0.00% $ 16,970 3.66%
Municipal obligations 7,856 3.58% 75,555 3.95%
Mortgage-backed securities 2,107 5.11% 210,298 4.27%
Corporate securities -- 0.00% -- 0.00%
----------------------------------------
Total securities (1) $ 9,963 3.90% $302,823 4.16%
========================================
(1) This table excludes trading securities totaling $1.504 million and other
equity securities totaling $6.055 million at December 31, 2004.
At December 31, 2004 the approximate weighted average maturity for all of the
Bank's available-for-sale and held-to-maturity debt securities was 4.8 years.
This estimate was established based upon projected cash flows provided by a
third party investment securities analyst and is used to provide comparisons
with other companies in the banking industry. Our estimate fluctuates
considerably from period to period due to our concentration in mortgage-backed
securities. This estimated weighted average maturity was greater at December 31,
2004 than our actual experience throughout 2004 due to the diminishing economic
advantage for homeowners to refinance their existing mortgage debt. During 2002,
2003 and 2004 millions of homeowners refinanced their mortgage debt given
historically low mortgage rates. Although low mortgage rates persisted at
December 31, 2004, the likelihood that a homeowner would refinance their current
mortgage debt decreased because their existing mortgage debt already carried a
low rate of interest.
The credit quality of our debt securities is strong. At December 31, 2004, 99.8%
of the securities held in our available-for-sale and held-to-maturity investment
securities portfolio were rated "A" or better by Moody's credit rating services;
94.1% were rated AAA. This compares to 98.5% and 89.8%, respectively for the
period ended December 31, 2003.
At December 31, 2004 we also held $6.055 million of equity securities including:
$135 thousand of Federal Reserve Bank of New York stock, $3.369 million in
FHLBNY stock, $1.629 million equity interest in a Small Business Investment
Company, Meridian Venture Partners II, L.P, $250 thousand in a money market
mutual fund, $35 thousand in New York Business Development Corp. stock and $637
thousand of common stock of other banking institutions. At December 31, 2003
equity securities totaled $4.693 million at estimated fair value. The increase
in the estimated fair value of equity securities between the periods totaling
$1.362 million was primarily due to a $896 thousand increase in the Bank's
investment in Meridian Venture Partners II, L.P., a $316 thousand increase in
FHLBNY stock and a $239 thousand increase in the money market mutual fund
balance. We slightly reduced our position in common stock of other banking
institutions during 2004.
Interest Bearing Bank Balances and Federal Funds Sold
- -----------------------------------------------------
During 2004 we increased our interest bearing bank balances. At December 31,
2003 our interest-bearing bank balance totaled $7.998 million. By comparison at
December 31, 2004 our interest-bearing bank balances totaled $10.099 million, a
$2.101 million or 26.3% increase. These balances are invested in FDIC-insured
certificates of deposit (in amounts of $100,000 or less) in various FDIC-insured
banks throughout the United States. We purchased these certificates of deposit
during our execution of wholesale leverage transactions in 2000, 2001 and 2004.
The certificates of deposit purchased in December 2000 and January 2001
(original total - $20.0 million) were funded by equal amounts of FHLBNY advances
with identical maturity terms. The cost of the advances were 0.70 - 0.75% below
the yield on the like maturity
25-K
certificates of deposit at the time of purchase. All of the certificates of
deposit currently in our portfolio will mature prior to December 31, 2007.
In the normal course of business, we sell and purchase federal funds to and from
other banks to meet our daily liquidity needs. Because the funds are generally
an unsecured obligation of the counter party, we only sell federal funds to
well-capitalized banks that carry strong credit ratings. Given the daily
fluctuation in our federal funds sold position throughout the year, it is
appropriate to compare the annual average federal funds sold positions rather
than the positions at the end of the periods. During 2004, our average federal
funds sold position was $6.346 million. By comparison, during 2003 our average
federal funds sold was $15.175 million.
Loan Portfolio
- --------------
General. The Bank's total loan portfolio increased by $30.137 million or 8.35%
during 2004. Total loans outstanding at December 31, 2004 were $391.043 million,
as compared to $360.906 million at December 31, 2003. During 2004, we continued
to increase the loans outstanding in the commercial and commercial real estate
categories due to our efforts to expand our market area and focus our resources
on this type of lending. During 2004 we established a new representative loan
production office in the Kingston, New York (Ulster County) market, continued to
seek loan opportunities with select loan brokers, expanded our network of banks
to grow participation loans, and maintained a geographic footprint for small
business loans that extended beyond our primary market area. The following table
summarizes the composition of our loan portfolio over the prior five-year
period.
Distribution of Loans Table:
At December 31,
-------------------------------------------------------------------------------------------------------
2004 2003 2002 2001 2000
-------------------------------------------------------------------------------------------------------
Amount Percent Amount Percent Amount Percent Amount Percent Amount Percent
-------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential real estate (1) $119,103 30.5% $118,571 32.9% $125,464 35.0% $ 125,510 38.1% $ 130,003 40.0%
Commercial real estate 129,516 33.1% 115,733 32.1% 104,967 29.3% 87,268 26.5% 76,860 23.7%
Commercial (2) 78,003 19.9% 65,031 18.0% 65,595 18.3% 53,157 16.1% 50,946 15.7%
Consumer 64,421 16.5% 61,571 17.1% 62,269 17.4% 63,609 19.3% 66,949 20.6%
-------------------------------------------------------------------------------------------------------
Total loans 391,043 100.0% 360,906 100.0% 358,295 100.0% 329,544 100.0% 324,758 100.0%
-----------======---------------======---------------======----------------======----------------======
Less:
Allowance for loan losses (6,250) (5,757) (5,392) (4,476) (4,003)
-------- -------- -------- --------- ---------
Net loans $384,793 $355,149 $352,903 $ 325,068 $ 320,755
======== ======== ======== ========= =========
(1) Includes home equity loans
(2) Includes agricultural loans and obligations (other than securities and
leases) of states and political subdivisions in the United States
During the prior five-year period the composition of our loan portfolio has
shifted from one with a concentration in residential real estate to one with a
concentration in commercial real estate and commercial (primarily small
business) loans. During 2004 we ceded the fixed-rate closed end 1-4 family
residential mortgage loan market to competition in a very low interest rate
environment. Residential mortgage providers who had the capability to originate
and sell conforming mortgages to the secondary market lowered their mortgage
interest rates to very low levels. During the same period, we established
minimum interest rates for fixed rate residential mortgages that we would hold
in our loan portfolio. Our strategy was intended to maintain acceptable levels
of interest rate risk in our loan portfolio. However, during 2004 our
residential real estate balances increased modestly on a net basis primarily due
to an increase in the outstanding balances of variable rate home equity lines of
credit. During 2004 we continued to actively promote and competitively price our
home equity line of credit product known as the "Prestige Line of Credit." The
loan balances outstanding in this category increased $7.760 million or 40.6%
during 2004, from $19.091 million at December 31, 2003 to $26.851 million at
December 31, 2004.
During 2004 we increased our total consumer loans outstanding by $2.850 million
or 4.6%. The growth in this category of loans is due to our continued emphasis
in indirect automobile lending (primarily used vehicles). Throughout 2004 we
continued to broaden our automobile dealer network and cater to our highest
volume dealers. At December 31, 2003, our indirect automobile loan portfolio was
comprised of 3,878 accounts totaling $36.545 million. This compares to 4,123
accounts and $41.268 million at December 31, 2004, a 6.3% net increase in
accounts and 12.9% net increase in loan volume outstanding.
26-K
The following table sets forth the amount of loans maturing and repricing in our
portfolio. The full principal amount outstanding of adjustable rate loans are
included in the period in which the interest rate is next scheduled to adjust.
Similarly, the full principal amount outstanding of fixed-rate loans are shown
based on their final maturity date. The full principal amount outstanding of
demand loans without a repayment schedule and no stated maturity, financed
accounts receivable, and overdrafts are reported as due within one year. The
table has not been adjusted for scheduled principal payments or anticipated
principal pre-payments.
Maturity and Repricing of Loans Table:
One More
Within One Through Than
Year (1) Five Years Five Years Total
------------------------------------------------------
Residential real estate (1) 55,188 4,604 59,311 119,103
Commercial real estate 57,363 23,335 48,818 129,516
Commercial (2) 53,229 11,271 13,503 78,003
Consumer 8,948 44,878 10,595 64,421
-----------------------------------------------------
Total loans receivable $174,728 $ 84,088 $132,227 $391,043
=====================================================
(1) Includes home equity loans
(2) Includes 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, 2005:
Table of Fixed and Adjustable Rate Loans:
Due After December 31, 2005
--------------------------------------
Fixed Adjustable Total
--------------------------------------
Residential real estate (1) 60,817 47,478 108,295
Commercial real estate 72,791 50,246 123,037
Commercial (2) 22,507 19,913 42,420
Consumer 54,497 977 55,474
--------------------------------------
Total loans $210,612 $118,614 $329,226
======================================
(1) Includes home equity loans
(2) Includes agricultural loans and obligations (other than
securities and leases) of states and political subdivisions in the
United States
Commitments and Lines of Credit. Standby letters of credit are conditional
commitments issued by us to guarantee the performance of a customer to a third
party. Those guarantees are primarily issued to support public and private
borrowing arrangements, including bond financing and similar transactions. The
credit risk involved in issuing standby letters of credit is essentially the
same as that involved in extending loans to customers. Since most of the standby
letters of credit are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. At
December 31, 2004 and December 31, 2003, standby letters of credit totaled
$9.948 million and $9.954 million, respectively. At December 31, 2004 and
December 31, 2003, the fair value of the Bank's standby letters of credit was
not material.
In addition to standby letters of credit, we have issued lines of credit and
other commitments to lend to our customers. Commitments to extend credit are
agreements to lend to a customer as long as there is no violation of any
condition established in the loan agreement. Commitments generally have fixed
expiration dates or other termination clauses and may require payment of a fee.
These include home equity lines of credit, commitments for residential and
commercial construction loans, and other personal and commercial lines of
credit. At December 31, 2004 and December 31, 2003, we had outstanding unfunded
loan commitments of $57.055 million and $49.124 million, respectively, a $7.931
million or 16.1% increase. The increase in the unfunded loan commitments was
primarily due to growth in the unused portion of commercial and home equity
lines of credit. Our experience shows that these unfunded commitments do not
fluctuate significantly from month to month.
27-K
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, 2004 we had $2.267 million of loans that were
30 or more days past due (excluding loans placed on non-accrual status). This
equaled 0.58% of total loans outstanding. By comparison, at December 31, 2003 we
had $2.752 million of this same category of loans that were 30 or more days past
due (excluding loans placed on non-accrual status). This equaled 0.76% of total
loans outstanding. The decrease in delinquent loans (still accruing interest)
between the periods totaling $485 thousand was primarily due to a decrease in
residential real estate delinquency. At December 31, 2003 we had $1.486 million
of delinquent residential real estate loans outstanding. This decreased to
$1.035 million at December 31, 2004. We attribute these improvements to stricter
consumer and mortgage underwriting guidelines implemented in 2001 and improved
delinquent loan collection procedures.
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 2004 2003 2002 2001 2000
--------------------------------------------------
Loans in Non-Accrual Status:
Residential real estate (1) $ 141 $ 257 $ 222 $ 465 $ 437
Commercial real estate 2,168 1,199 1,049 1,587 1,249
Commercial (2) 243 1,700 760 33 227
Consumer 9 8 3 5 --
--------------------------------------------------
Total non-accruing loans 2,561 3,164 2,034 2,090 1,913
Loans Contractually Past Due 90 Days or More and
Still Accruing Interest 190 123 717 329 345
Troubled Debt Restructured Loans -- 371 387 861 888
--------------------------------------------------
Total non-performing loans 2,751 3,658 3,138 3,280 3,146
Other real estate owned 78 20 22 857 1,097
--------------------------------------------------
Total non-performing assets $2,829 $3,678 $3,160 $4,137 $4,243
==================================================
Total non-performing assets as a percentage
of total assets 0.38% 0.50% 0.45% 0.66% 0.76%
==================================================
Total non-performing loans as a percentage of
total loans 0.70% 1.01% 0.88% 1.00% 0.97%
==================================================
(1) Includes home equity loans
(2) Includes agricultural loans and obligations (other than
securities and leases) of states and political subdivisions in the
United States
Total non-performing assets decreased from $3.678 million at December 31, 2003
to $2.829 million at December 31, 2004, a $849 thousand or 23.1% decrease.
Non-performing assets as a percent of total assets totaled 0.50% at December 31,
2003, as compared to 0.38% at December 31, 2004, a 12 basis point improvement.
The net decrease in non-performing assets can be primarily attributed to three
large loan relationships. First, during the second quarter, we transferred a
$1.357 million agricultural loan from non-accrual status to performing status
due to an increase in the value of the collateral held by the Bank and the
borrower's resumption of payment in accordance with the loan's terms and
including all accrued and unpaid interest. Second, during the fourth quarter we
removed two commercial real estate loans from non-accrual status totaling $704
thousand because we received full payment on the loans. Third, during the fourth
quarter we transferred a commercial real estate loan totaling $2.003 million
from accrual status to non-accrual status upon paying a portion of delinquent
taxes on behalf of the borrower to avoid a tax sale of the property.
Other Real Estate Owned and Repossessed Assets. Other Real Estate Owned ("OREO")
consists of properties formerly pledged as collateral on loans, which have been
acquired by the Bank through foreclosure proceedings or acceptance of a deed in
lieu of foreclosure. OREO is carried at the lower of the recorded investment in
the loan or the fair value of the
28-K
real estate, less estimated costs to sell. At both December 31, 2004 and
December 31, 2003 we held insignificant amounts of OREO property totaling less
than $100 thousand.
Potential Problem Loans. In addition to non-performing loans, we have identified
through normal credit review procedures, potential problem loans totaling $8.662
million or 2.2% of total loans outstanding at December 31, 2004. By comparison,
at December 31, 2003 potential problem loans totaled $7.846 million or 2.2% of
total loans outstanding. Potential problem loans are loans that are currently
performing, but where known information about possible credit problems of the
related borrowers causes management to have doubts as to the ability of such
borrowers to comply with the present loan repayment terms and which may result
in disclosure of such loans as non-performing at some time in the future.
Potential problem loans are typically loans that are performing but are
classified by our loan rating system as "substandard." Potential problem loans
may fluctuate significantly from period to period due to a rating upgrade of
loans previously classified as substandard or a rating downgrade of loans
previously carried in a higher credit classification. Management does not
believe the increase in potential problem loans totaling $816 thousand between
December 31, 2003 and December 31, 2004 to be significant or indicative of a
decrease in the overall quality of the loan portfolio. In fact, the level of
potential problem loans as a percent of total loans remained unchanged at 2.2%
between the periods due to an increase in the volume of loans outstanding
between the periods. However, management cannot predict the extent to which
economic conditions may worsen or other factors which may impact borrowers and
the potential problem loans. Accordingly, there can be no assurance that other
loans will not become 90 days or more past due, be placed on non-accrual status,
become restructured, or require increased allowance coverage and provision for
loan losses.
Loan Concentrations. At December 31, 2004 we had outstanding $22.595 million or
5.8% of our total loans outstanding to borrowers who operate in the hotel /
motel industry. By comparison, at December 31, 2003 we had outstanding $29.221
million or 8.1% of our total loans outstanding in this same category. The hotel
/ motel properties that we finance are geographically dispersed throughout our
market area and the broader statewide region. The Bank's Board of Directors have
established a specific exposure guideline for this hotel / motel industry at 50%
of the Bank's total equity capital, which at December 31, 2004 was $33.803
million.
At December 31, 2004 we also held $22.707 million or 5.81% of our total loans
outstanding in commercial rental properties. The portfolio is comprised of a
diverse group of properties and borrowers. The average loan size for each of
these borrowings at December 31, 2004 was approximately $344 thousand. Seven (7)
of these loans were each in excess of $1.0 million, totaling $12.873 million. By
comparison, at December 31, 2003 we had $18.173 million of commercial rental
property loans outstanding with five (5) of these loans in excess of $1.0
million totaling $7.728 million.
At December 31, 2004 we had $22.036 million or 5.6% of total loans outstanding
to borrowers in the convenience store / fuel business. By comparison, at
December 31, 2003 we had $11.313 million of loans outstanding and $16.771
million of total loan commitments to this industry. At December 31, 2004 none of
the loans to these borrowers were rated substandard by our management. These
loans were primarily distributed among five (5) borrowers. We have loan
commitments totaling $8.000 million to one borrower in this industry.
At December 31, 2004 we had $18.301 million or 4.7% of our total loans
outstanding to automotive dealerships. The largest seven (7) borrowers comprise
approximately $15.000 million of the loans outstanding. Management monitors the
dealer floor plan loans provided to six of these seven borrowers by conducting
inventory reviews on a monthly basis.
At December 31, 2004 we had $15.778 million or 4.0% of our total loans
outstanding to 5+ unit residential rental properties. There were five (5)
borrowers who comprised approximately $8.200 million of the total loans
outstanding. One loan in this category totaling $842 thousand was classified as
substandard at December 31, 2004.
Other areas of concentration at December 31, 2004 include $31.871 million
outstanding to borrowers in the manufacturing sector, $12.352 million to general
residential and commercial contractors, and $8.046 million of loans outstanding
to various restaurants. Although these are deemed to be areas of concentration,
management believes the underlying borrowers provide adequate size and industry
diversification to mitigate significant industry-sector risk.
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.
29-K
Analysis of the Allowance for Loan Losses Table:
Years Ended December 31,
--------------------------------------------------
2004 2003 2002 2001 2000
--------------------------------------------------
(Dollars in thousands)
Balance at beginning of year $5,757 $5,392 $4,476 $4,003 $3,998
Charge offs:
Residential real estate (1) 133 174 93 225 559
Commercial real estate 51 -- -- 148 --
Commercial (2) 121 193 402 123 753
Consumer 639 1,109 926 905 722
--------------------------------------------------
Total charge offs 944 1,476 1,421 1,401 2,033
--------------------------------------------------
Recoveries:
Residential real estate (1) 20 10 -- 24 7
Commercial real estate -- -- -- 40 --
Commercial (2) 51 78 250 88 135
Consumer 166 188 167 181 216
--------------------------------------------------
Total recoveries 237 276 417 334 358
--------------------------------------------------
Net charge-offs 707 1,200 1,004 1,068 1,675
Provision for loan losses 1,200 1,565 1,920 1,540 1,680
--------------------------------------------------
Balance at end of year $6,250 $5,757 $5,392 $4,476 $4,003
==================================================
Ratio of net charge-offs during the year to
average loans outstanding during the year 0.19% 0.33% 0.29% 0.33% 0.51%
==================================================
Allowance for loan losses to total loans 1.60% 1.60% 1.50% 1.36% 1.23%
==================================================
Allowance for loan losses to non-performing loans 227% 157% 172% 136% 127%
==================================================
(1) Includes home equity loans
(2) Includes agricultural loans and obligations (other than
securities and leases) of states and political subdivisions in the
United States
The allowance for loan losses increased from $5.757 million at December 31, 2003
to $6.250 million at December 31, 2004, a $493 thousand or 8.6% increase. The
allowance for loan losses as a percent of total loans was unchanged between the
periods. Specifically, the allowance for loan losses as a percent of total loans
was 1.60% at December 31, 2004 and December 31, 2003. Management and the Board
of Directors deemed the allowance for loan losses as adequate at December 31,
2004 and December 31, 2003.
Allocation of the Allowance for Loan Losses. We allocate our allowance for loan
losses among the loan categories indicated below. This allocation should not be
interpreted as a projection of (i) likely sources of future charge-offs, (ii)
likely proportional distribution of future charge-offs among loan categories, or
(iii) likely amounts of future charge-offs. Additionally, since management
regards the allowance for loan losses as a general balance, the amounts
presented do not represent the total balance available to absorb future
charge-offs that might occur within the designated categories.
Subject to the qualifications noted above, an allocation of the allowance for
loan losses by principal classification and the proportion of the related loan
balance represented by the allocation is presented below for the periods
indicated.
30-K
Loan Loss Summary Allocation Table:
At December 31,
------------------------------------------------------------------------
2004 2003 2002
------------------------------------------------------------------------
Percent of Percent of Percent of
Loans in Loans in Loans in
Amount of Each Amount of Each Amount of Each
Allowance Category Allowance Category Allowance Category
for Loan to Total for Loan to Total for Loan to Total
Dollars in Thousands Losses Loans Losses Loans Losses Loans
------------------------------------------------------------------------
Residential real estate (1) 670 10.72% $ 545 9.47% $ 718 13.32%
Commercial real estate 2,454 39.26% 2,248 39.05% 2,051 38.04%
Commercial (2) 1,435 22.96% 1,297 22.53% 1,282 23.78%
Consumer 1,080 17.28% 966 16.78% 1,017 18.86%
Unallocated 611 9.78% 701 12.18% 324 6.01%
------------------------------------------------------------------------
Total $6,250 100.00% $5,757 100.00% $5,392 100.00%
========================================================================
At December 31,
-----------------------------------------------
2001 2000
-----------------------------------------------
Percent of Percent of
Loans in Loans in
Amount of Each Amount of Each
Allowance Category Allowance Category
for Loan to Total for Loan to Total
Dollars in Thousands Losses Loans Losses Loans
-----------------------------------------------
Residential real estate (1) $ 598 13.36% $ 639 15.96%
Commercial real estate 1,461 32.64% 1,447 36.15%
Commercial (2) 891 19.91% 959 23.96%
Consumer 982 21.94% 689 17.21%
Unallocated 544 12.15% 269 6.72%
-----------------------------------------------
Total $4,476 100.00% $4,003 100.00%
===============================================
(1) Includes home equity loans
(2) Includes agricultural loans and obligations (other than leases and
securities) 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, 2004 we maintained $10.440 million or
1.4% of total assets in these categories of non-earning assets. This compares to
$11.892 million or 1.6% of total assets at December 31, 2003.
Premises and Equipment. At December 31, 2004 the net book value of Bank premises
and equipment totaled $5.860 million. This compares to $5.721 million at
December 31, 2003. During 2004 we expanded and improved several branch
properties and purchased additional equipment (primarily computer equipment),
which resulted in a $139 thousand net increase in premises and equipment between
the periods.
Bank-Owned Life Insurance. The cash surrender value of the life insurance at
December 31, 2004 was $14.975 million, compared to $14.405 million at December
31, 2003. The increase was attributable to an increase in the cash surrender
value of the policies between the periods totaling $570 thousand. The policies
are issued by four life insurance companies who all carry strong financial
strength ratings. The policies are issued on the lives of the Bank's senior
management.
Goodwill and Other Intangible Assets. In February 2002 we acquired a branch in
the City of Norwich, New York from a regional competitor. We acquired $34.3
million in deposit liabilities and $3.2 million in loan assets. We recorded
$1.877 million in goodwill and $285 thousand in core deposit intangible in
conjunction with the branch acquisition. No impairment of the goodwill was
deemed necessary during 2004. The core deposit intangible is being amortized
over 5 years.
Other Assets. Other assets increased by $754 thousand or 7.2% from $10.499
million at December 31, 2003 to $11.253 million at December 31, 2004. Other
assets are comprised of other real estate owned, interest receivable, our
prepaid dealer reserve, prepaid pension plan assets, computer software, net
deferred tax assets and other assets, other prepaid items and other accounts
receivable. Several factors contributed to the net increase in other assets
between the periods. Specifically, our net deferred tax assets increased $569
thousand between the periods due to the decline in the unrealized gains in our
available-for-sale investment securities portfolio during the year. In the
second quarter, our insurance agency subsidiary Mang - Wilber LLC purchased a
two-thirds interest in a small insurance agency located in Clifton Park, New
York. The investment in the agency at December 31, 2004 was being carried at
$468 thousand. Due to the increase in our indirect automobile loan volumes, our
prepaid dealer reserve increased $207 thousand between the periods. These
increases were offset by a $179 thousand decrease in interest receivable, a $185
thousand decrease in other prepaid items and a $133 thousand decrease in
computer software.
31-K
Composition of Liabilities
- --------------------------
Deposits. Deposits are our primary funding source. At December 31, 2004 deposits
represented 83.7% of our total liabilities, compared to 87.4% at December 31,
2003. At December 31, 2003 our total deposits were $580.633 million. This
compares to $571.929 million at December 31, 2004, an $8.704 million or 1.5%
decrease. The decrease in total deposits was primarily due to a decrease in our
interest-bearing non-maturity deposit accounts, including savings, NOW and money
market accounts. Throughout 2004, we maintained low rates of interest on many of
the balance tiers in our interest-bearing non-maturity deposit accounts in order
to contain our interest expense. Some of our interest rate sensitive deposit
customers transferred these funds to time deposits or non-deposit investments,
thereby reducing their balances in the interest-bearing non-maturity deposit
accounts.
The following table indicates the amount of our time accounts by time remaining
until maturity as of December 31, 2004.
Time Accounts Maturity Table:
Maturity as of December 31, 2004
------------------------------------------------------------------
3 Months or Over 3 to 6 Over 6 to 12 Over 12
Dollars in Thousands Less Months Months Months Total
------------------------------------------------------------------
Certificates of Deposit and Other Time
Deposits of $100,000 or more $ 18,464 $ 14,296 $ 11,817 $ 34,797 $ 79,374
Certificates of Deposit and Other Time
Deposits less than $100,000 22,311 21,330 41,588 102,429 187,658
------------------------------------------------------------------
Total of time accounts $ 40,775 $ 35,626 $ 53,405 $137,226 $267,032
==================================================================
Foreign Deposits in Domestic Offices. At December 31, 2004 we held $13.824
million of deposits from foreign depositors. This compares to $14.353 million at
December 31, 2004. The substantial majority of these deposit relationships were
acquired during 1994 when we purchased certain assets and all of the deposit
liabilities from the First National Bank of Downsville in Delaware County, New
York.
Borrowings. Total borrowed funds consist of short-term and long-term borrowings.
Short-term borrowings include federal funds purchased, treasury, tax and loan
notes held for the benefit of the U.S. Treasury Department, and securities sold
under agreements to repurchase with our customers and other third parties.
Long-term borrowings consist of monies we borrowed from the FHLBNY for various
funding requirements and wholesale funding strategies. At December 31, 2004 our
ratio of borrowed funds (including short-term and long-term borrowings) to total
liabilities increased as compared to December 31, 2003. Total borrowed funds
were $102.938 million or 15.1% of total liabilities at December 31, 2004, as
compared to $75.867 or 11.4% of total liabilities at December 31, 2003; a
$27.071 million increase. The increase in total borrowed funds was primarily due
to the implementation of two $15.0 million wholesale leverage transactions
executed by management, one in the first quarter and another in the fourth
quarter. During the first quarter, we borrowed $15.0 million from the FHLBNY in
a series of advances (borrowings) with varying terms of repayment. The borrowed
funds were used to purchase an equal amount of available-for-sale investment
securities. During the fourth quarter, we borrowed $15.0 million from a large
money center bank through a security resale agreement to purchase an equal
amount of available-for-sale investment securities. These funds were borrowed on
a short-term basis, with the intention of replacing the borrowing with the core
deposit liabilities, scheduled to be assumed by the Bank from HSBC Bank,
National Association during the first quarter of 2005. This transaction closed
on February 4, 2005 and the borrowed funds were repaid. See Note 8 of the
Consolidated Financial Statements contained in PART II, Item 8, of this document
for additional detail on our borrowed funds.
D. Results of Operations
a. Comparison of Operating Results for the Years Ended December 31, 2004 and
December 31, 2003
Please refer to the Consolidated Financial Statements presented in PART
II, Item 8, of this document.
Summary. Net income for 2004 was $8.618 million. This was $95 thousand or 1.1%
less than 2003 net income of $8.713 million. Earnings per share also decreased
slightly, from $0.78 in 2003 to $0.77 in 2004. Minor decreases in net interest
income and other income and an increase in other expenses were partially offset
by reductions in the provision for loan losses and income taxes. During 2004 net
interest income decreased by $71 thousand or 0.3% from $24.475 million in 2003
to $24.404 million in 2004. A reduction in net interest income due to rate
totaling $785 thousand was offset by an
32-K
increase in net interest income due to volume of $714 thousand. Similarly, other
income decreased modestly from $5.663 million in 2003 to $5.634 million in 2004.
Decreases in trust fees, investment securities gains, bank-owned life insurance
income, other service fees and other income were offset by increases in service
charges on deposit accounts and commission income. Other expenses increased $635
thousand or 3.8% in 2004 due to increases in occupancy expense, computer service
fees, advertising and marketing, professional fees and other fees totaling $724
thousand, offset by reductions in salaries and employee benefits expense and
furniture and equipment expense totaling $89 thousand. The provision for loan
losses in 2004 was $1.200 million, as compared to $1.565 million in 2003, a $365
thousand decrease due primarily to a decrease in net charge-offs and improved
asset quality. Income taxes decreased from $3.277 million in 2003 to $3.002
million in 2004, a $275 thousand or 9.2% decrease due to increased tax-exempt
municipal security income and a reduction in income before taxes.
Our return on average assets declined from 1.20% in 2003 to 1.17% in 2004.
Similarly, our return on average stockholders' equity also declined from 13.67%
in 2003 to 13.08% in 2004. In 2004 average earning assets and average
stockholders' equity increased modestly, while net income declined, resulting in
a lower return on average assets and lower return on average equity.
Net Interest Income. Net interest income is our most significant source of
earnings. During both 2004 and 2003 net interest income contributed 81% of our
total revenues, as compared to 19% for non-interest income. For this reason, the
following tables, including the Asset and Yield Summary Table, the Interest Rate
Table and the Rate and Volume Table and the associated analytical narrative are
important components of our results of operations.
The following table summarizes the total dollar amount of interest income from
average earnings assets and the resultant yields, as well as, the interest
expense and rate paid on average interest bearing liabilities. No tax equivalent
adjustments were made for tax-exempt assets. The average balances presented are
calculated using daily totals and averaging them for the period indicated.
33-K
Asset and Yield Summary Table:
For the Years Ended December 31,
----------------------------------------------------------------------------------
2004 2003
----------------------------------------------------------------------------------
Average Interest Average Interest
Outstanding Earned Yield / Outstanding Earned Yield /
Balance /Paid Rate Balance /Paid Rate
----------------------------------------------------------------------------------
(Dollars in thousands)
Earning Assets:
Federal funds sold $ 6,346 $ 81 1.28% $ 15,175 $ 173 1.14%
Interest bearing
deposits 8,581 534 6.22% 14,149 928 6.56%
Securities (1) 308,101 11,685 3.79% 302,387 13,050 4.32%
Loans, Net (2) 367,328 24,865 6.77% 352,935 24,477 6.94%
---------------------- ----------------------
Total earning assets 690,356 37,165 5.38% 684,646 38,628 5.64%
Non-earning assets 46,394 43,580
-------- --------
Total assets $736,750 $728,226
======== ========
Liabilities:
Savings accounts $ 95,657 $ 601 0.63% $ 89,087 $ 791 0.89%
Money market
accounts 28,773 328 1.14% 30,938 298 0.96%
NOW accounts 122,640 1,023 0.83% 121,288 1,353 1.12%
Time accounts 271,317 7,526 2.77% 280,290 8,258 2.95%
Borrowings 82,929 3,283 3.96% 77,068 3,453 4.48%
---------------------- ----------------------
Total interest bearing
liabilities 601,316 12,761 2.12% 598,671 14,153 2.36%
Non-interest bearing
deposits 61,626 57,355
Other non-interest
bearing liabilities 7,913 8,454
-------- --------
Total liabilities 670,855 664,480
Shareholder equity 65,895 63,746
-------- --------
Total liabilities and
shareholder equity $736,750 $728,226
======== ========
Net interest income $ 24,404 $ 24,475
======== ========
Net interest rate spread (3) 3.26% 3.28%
====== ======
Net earning assets $ 89,040 $ 85,975
======== ========
Net interest margin (4) 3.53% 3.57%
====== ======
Ratio of earning
assets to interest- ======== ========
bearing liabilities 114.81% 114.36%
======== ========
For the Years Ended December 31,
---------------------------------------
2002
---------------------------------------
Average Interest
Outstanding Earned Yield /
Balance /Paid Rate
---------------------------------------
(Dollars in thousands)
Earning Assets:
Federal funds sold $ 14,291 $ 238 1.67%
Interest bearing
deposits 19,769 1,257 6.36%
Securities (1) 276,550 13,648 4.94%
Loans, Net (2) 336,283 26,503 7.88%
----------------------
Total earning assets 646,893 41,646 6.44%
Non-earning assets 41,520
--------
Total assets $688,413
========
Liabilities:
Savings accounts $ 79,382 $ 1,101 1.39%
Money market
accounts 36,548 537 1.47%
NOW accounts 95,861 1,678 1.75%
Time accounts 274,985 9,719 3.53%
Borrowings 80,129 4,135 5.16%
----------------------
Total interest bearing 566,905 17,170 3.03%
liabilities
Non-interest bearing
deposits 52,652
Other non-interest
bearing liabilities 9,230
--------
Total liabilities 628,787
Shareholder equity 59,626
--------
Total liabilities and
shareholder equity $688,413
========
Net interest income $ 24,476
========
Net interest rate spread (3) 3.41%
======
Net earning assets $ 79,988
========
Net interest margin (4) 3.78%
======
Ratio of earning
assets to interest- ========
bearing liabilities 114.11%
========
(1) Securities are shown at average amortized cost with net unrealized gains or
losses on securities available-for-sale included as a component of non-earning
assets.
(2) Average net loans equal average total loans less the average allowance for
loan losses. However, for purposes of these computations, non-accrual loans are
included in average loan balances outstanding.
(3) Net interest rate spread represents the difference between the weighted
average yield on interest-earning assets and the weighted average cost of
interest-bearing liabilities.
(4) The net interest margin, also known as the net yield on average
interest-earning assets, represents net interest income as a percentage of
average interest-earning assets.
34-K
Net interest income decreased by $71 thousand or 0.3% in 2004. Specifically, our
net interest income was $24.404 million in 2004, as compared to $24.475 million
in 2003. Throughout 2004 national interest rates remained low relative to
historical interest rates (see comparative interest rate table below for an 8
quarter history of interest rates). This interest rate environment allowed us to
reduce the interest rates paid on our deposits (particularly time deposits) and
borrowings, netting a reduction in interest expense and the total cost of
interest-bearing liabilities. In 2004 our interest-bearing liabilities expense
and cost were $12.761 million and 2.12% respectively. This compares to $14.153
million and 2.36%, respectively, in 2003. A reduction in interest expense
totaling $1.392 million was offset by a reduction in interest income totaling
$1.463 million. In 2004 the interest income and net yield on our earning assets
were $37.165 million and 5.38%, respectively. In 2003, the interest income and
net yield on our earning assets were $38.628 million and 5.64%, respectively.
The primary cause for the decrease in interest income and our total earning
asset yield was the reduction in interest income on our investment securities
portfolio (including trading, available-for-sale and held-to-maturity).
Comparative Interest Rate Table:
==================================================================================================================
2004 2003
---------------------------------------- ----------------------------------------
Interest Rates (1) December September June March December September June March
---------------------------------------------------------------------- ----------------------------------------
Target Federal Funds Rate 2.25% 1.75% 1.00% 1.00% 1.00% 1.00% 1.00% 1.25%
---------------------------------------------------------------------- ----------------------------------------
NYC Prime 5.25% 4.75% 4.00% 4.00% 4.00% 4.00% 4.00% 4.25%
---------------------------------------------------------------------- ----------------------------------------
90 Day Treasury Bill 2.23% 1.71% 1.32% 0.95% 0.88% 0.91% 0.81% 1.10%
---------------------------------------------------------------------- ----------------------------------------
6 Month Treasury Bill 2.56% 1.95% 1.68% 0.99% 0.99% 1.00% 0.82% 1.10%
---------------------------------------------------------------------- ----------------------------------------
1 Year Treasury Note 2.77% 2.14% 2.20% 1.17% 1.21% 1.06% 0.84% 1.16%
---------------------------------------------------------------------- ----------------------------------------
2 Year Treasury Note 3.09% 2.53% 2.84% 1.53% 1.84% 1.47% 1.10% 1.49%
---------------------------------------------------------------------- ----------------------------------------
3 Year Treasury Note 3.27% 2.81% 3.32% 1.93% 2.31% 1.97% 1.40% 1.86%
---------------------------------------------------------------------- ----------------------------------------
5 Year Treasury Note 3.65% 3.29% 3.97% 2.71% 3.24% 2.82% 2.16% 2.73%
---------------------------------------------------------------------- ----------------------------------------
7 Year Treasury Note 3.68% 3.68% 3.68% 3.68% 3.68% 3.36% 2.67% 3.33%
---------------------------------------------------------------------- ----------------------------------------
10 Year Treasury Note 4.29% 4.04% 4.75% 3.76% 4.27% 3.94% 3.27% 3.82%
---------------------------------------------------------------------- ----------------------------------------
Federal Housing Finance
Board National Avg 5.65% 5.77% 5.73% 5.69% 5.79% 5.61% 5.68% 5.88%
Mortgage Contract Rate (2)
==================================================================================================================
(1) The yields and interest rates presented in this table are provided to
us by a third party vendor on a bi-weekly basis. The interest rates
provided in the table were obtained from the report nearest to the
month-end.
(2) The Federal Housing Finance Board national average mortgage contract
rate is presented with a one-month lag.
In 2003, our investment securities portfolio generated $13.050 million in
interest income resulting in a 4.32% yield. By comparison, in 2004 our
investment securities portfolio generated $11.685 million in interest income and
yielded 3.79%, a $1.365 million reduction in interest income and 53 basis point
reduction in yield. During 2004 we experienced very rapid prepayments on the
mortgage-backed securities sector of our investment securities portfolio
requiring us to record a significant amount of amortization of premiums on our
investment securities. During 2003, we recorded a net amortization of premiums
and accretion of discounts on investments of $1.682 million. This compares to
$2.180 million in 2004, a $498 thousand increase. Additionally, due to the high
levels of prepayments and the low interest rate environment, we reinvested much
of the investment securities proceeds in investment securities at investment
yields below the investment yield on the maturing security, driving down our
yields. Specifically, during 2003 and 2004 we received investment securities
proceeds (primarily due to prepayments) totaling $344.788 million, $156.031
million in 2003 and $188.757 million in 2004.
The yield on the loan portfolio declined from 6.94% in 2003 to 6.77% in 2004, a
17 basis point decrease. As existing loans matured and amortized throughout
2004, they were replaced by new loans at lower rates of interest. In spite of
the decreased yields, the interest income on loans increased by $388 thousand
period over period due to a substantial increase in our average total loans
outstanding. Average total loans outstanding were $352.935 million in 2003, as
compared to $367.328 million in 2004, a $14.393 million or 4.1% increase period
over period.
During 2004 both the yield and average volume outstanding of interest-bearing
bank balances decreased. This resulted in a $394 thousand decrease in interest
income year over year. In 2003 the average balances outstanding and average
yield on interest-bearing bank balances were $14.149 million and 6.56%
respectively. This compares to $8.581 million and 6.22% in 2004. During 2003 and
2004 several FDIC-insured bank certificates of deposit acquired in a wholesale
leverage transaction during the fourth quarter of 2000 and first quarter of 2001
matured. The average yield on these
35-K
maturing certificates ranged from 6.50 - 6.75%. During the fourth quarter of
2004, we acquired $4.800 million of FDIC-insured certificates of deposit as part
of a wholesale leverage transaction. The interest rate paid on these
certificates of deposit was lower (2.40 - 3.40%) than the interest rates paid on
the matured certificates, resulting in a decrease in our average yield on
interest-bearing bank balances in 2004.
During 2004 the interest income earned on federal funds sold decreased,
primarily due to a reduction in our average outstanding balances. During 2003,
we maintained an average balance in federal funds sold of $15.175 million, as
compared to $6.346 million in 2004. Although the average yield on federal funds
sold increased during the last two quarters of 2004, our interest income
decreased from $173 thousand in 2003 to $81 thousand in 2004.
During 2004, we offset our decrease in earning asset yields by decreasing the
cost of interest-bearing liabilities. Specifically, the interest expenses and
total cost of interest-bearing liabilities was $14.153 million and 2.36% in
2003, as compared to $12.761 million and 2.12% in 2004, respectively. During
2004 we reduced our interest expense on our savings accounts, NOW accounts, time
accounts and borrowings, and only modestly increased the interest expense on our
money market accounts.
The most significant decrease in our interest expense occurred in time accounts.
During 2003, we recorded $8.258 million of interest expense on time accounts.
This compares to $7.526 million of interest expense on time accounts in 2004, a
$732 thousand decrease. During 2004 the weighted average interest rate on
maturing certificates of deposit exceeded the rates of interest being paid on
new and renewed certificates of deposit, primarily because the maturing
certificates of deposit were initially issued at a time when market interest
rates were higher. This caused a reduction in the average cost of time deposits
from 2.95% in 2003 to 2.77% in 2004, an 18 basis point decrease.
During 2004 the interest expense and cost associated with savings accounts and
NOW accounts also decreased even though the average balance maintained in both
categories increased. In 2003 savings accounts balances averaged $89.087
million. This compares to $95.657 million in 2004, a $6.570 million or 7.4%
increase. In spite of this increase, the interest expense related to savings
accounts decreased by $190 thousand, from $791 thousand in 2003 to $601 thousand
in 2004. During 2003 and 2004 we decreased the interest rate paid on our savings
accounts as a result of the decrease in short-term interest rates during the
second quarter of 2003. This decreased our average cost on savings deposits from
0.89% in 2003 to 0.63% in 2004, a 26 basis point decrease. Similarly, the
average cost of our NOW accounts decreased from 1.12% in 2003 to 0.83% in 2004
for this same reason. This reduced interest expense on NOW accounts from $1.353
million in 2003 to $1.023 million in 2004, a $330 thousand or 24.4% decrease.
Our interest expense and average cost of borrowings decreased during 2004.
Specifically, in 2003 our interest expense on borrowings was $3.453 million, as
compared to $3.283 million in 2004. During 2003 and 2004 respectively, we repaid
$17.497 million and $5.470 million of high cost borrowings. These matured
borrowings were replaced by $6.758 million and $32.541 million of new lower-cost
borrowings in 2003 and 2004, respectively; which reduced the average cost of
borrowed funds from 4.48% in 2003 to 3.96% in 2004.
The cost of our money market accounts increased from 0.96% in 2003 to 1.14% in
2004 due to an increase in the 90-day Treasury bill rate during 2004. The
majority of our money market account balances were deposited in our highest
interest rate tier in 2004, which was indexed weekly to the 90-day Treasury bill
rate. For this reason, as the 90-day Treasury rate bill increased during 2004,
so did our cost of money market deposit accounts.
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.
36-K
Rate and Volume Table:
Year Ended December 31,
-----------------------------------------------------------------------------
2004 vs. 2003 2003 vs. 2002
-----------------------------------------------------------------------------
Rate Volume Total Rate Volume Total
-----------------------------------------------------------------------------
(In thousands)
Earning assets:
Federal funds sold $ 19 $ (111) $ (92) $ (79) $ 14 $ (65)
Interest-bearing deposits (46) (348) (394) 38 (367) (329)
Securities (1,608) 243 (1,365) (1,803) 1,205 (598)
Loans (595) 983 388 (3,292) 1,266 (2,026)
----------------------------------- -----------------------------------
Total earning assets (2,230) 767 (1,463) (5,136) 2,118 (3,018)
----------------------------------- -----------------------------------
Interest bearing liabilities:
Savings accounts (245) 55 (190) (433) 123 (310)
Money market accounts 52 (22) 30 (165) (74) (239)
NOW accounts (345) 15 (330) (700) 375 (325)
Time accounts (486) (246) (732) (1,646) 185 (1,461)
Borrowings (421) 251 (170) (529) (153) (682)
----------------------------------- -----------------------------------
Total interest bearing liabilities (1,445) 53 (1,392) (3,473) 456 (3,017)
----------------------------------- -----------------------------------
Change in net interest income $ (785) $ 714 $ (71) $(1,663) $ 1,662 $ (1)
----------------------------------- -----------------------------------
During 2004 we were able to maintain our net interest income near the 2003
levels because we increased the volume of our earning assets and reduced the
cost of interest-bearing liabilities. Specifically, in 2004 net interest income
decreased by $71 thousand, from $24.475 million in 2003 to $24.404 million in
2004. The growth in the volume of our earning assets contributed an additional
$767 thousand in interest income in 2004 (over 2003), while the reduction in our
interest-bearing liability costs reduced interest expense by $1.445 million.
These two factors combined nearly offset the decrease in interest income on
earning assets of $2.230 million due to a change in interest rates.
Interest income on investment securities decreased by $1.365 million during
2004. An increase in the average volume of securities contributed an additional
$243 thousand of interest income in 2004, while a reduction in the yield on the
securities portfolio decreased interest income by $1.608 million. During 2004 we
experienced very rapid prepayments on our mortgage-backed securities portfolio
due to the low interest rates available on home mortgages. During 2004 many
homeowners refinanced or repaid their existing mortgage to lower their interest
rate or move into a new home. These rapid prepayments required us to amortize a
significant portion of premiums paid by us to obtain these securities.
Additionally, due to a high turnover rate on our investment securities portfolio
in 2003 and 2004 many of the securities purchased were purchased at yields below
the yield on the maturing security. The reduction in interest income on the
securities portfolio due to a change in interest rates was the largest
contributing factor toward our decrease in net interest income.
Interest income on loans increased by $388 thousand during 2004. Changes in
interest rates caused a $595 thousand reduction in interest income, while an
increase in the average volume of loans outstanding increased interest income by
$983 thousand. Although interest rates declined on loans during 2004, we
increased the interest income earned on loans by increasing loans outstanding.
Interest income earned on interest-bearing deposits (at other banks) decreased
by $394 thousand during 2004. A decrease in the average volume of
interest-bearing deposits reduced interest income by $348 thousand, while a
decrease in the average yield reduced interest income by $46 thousand.
Interest income on federal funds sold in 2004 decreased by $92 thousand, from
$173 thousand in 2003 to $81 thousand in 2004. The interest income earned on
federal funds sold decreased by $111 thousand due to a reduction in the average
volume of federal funds sold during the year. This reduction was partially
offset by a $19 thousand increase in interest income on federal funds sold due
to the increase in the federal funds rate during the second half of 2004.
During 2004 we experienced a significant reduction in interest expense due to a
reduction in the rate and volume of time accounts. During 2004 higher-rate
certificates of deposit were replaced by new certificates of deposit at lower
rates. Interest expense on time accounts decrease by $732 thousand in 2004, as
compared to 2003. Interest expense decreased $486 thousand as a result of a
reduction in rates and $246 thousand as a result of a reduction in volume. The
37-K
average cost of time deposits was 2.95% in 2003, as compared to 2.77% in 2004,
while the average volume of time deposits decreased from $280.290 million in 203
to $271.317 million in 2004.
Savings accounts, NOW accounts and borrowings experienced similar rate and
volume patterns in 2004. In 2004 the average balances of all three of these
categories of interest bearing liabilities increased, while the average interest
rate paid decreased. The increase in the average balances resulted in additional
interest expense due to a change in volume, while the change in the rates
decreased interest expense. On the savings accounts, interest expense decreased
$190 thousand due to a $245 thousand reduction in interest expense due to a
change in rates, offset by a $55 thousand increase in interest expense due to an
increase in the average volume. On the NOW accounts, interest expense decreased
$330 thousand due to a $345 thousand reduction in interest expense due to a
change in rates, offset by a $15 thousand increase in interest expense due to an
increase in the average volume. And finally, on borrowings, interest expense
decreased $170 thousand due to a $421 thousand reduction in interest expense due
to a change in rates, offset by a $251 thousand increase in interest expense due
to an increase in the average volume.
Interest expense on our money market accounts increased $30 thousand in 2004
(over 2003). Interest expense increased $52 thousand due to an increase in
interest rates paid on money market accounts, while interest expense decreased
$22 thousand due to a reduction in the volume of money market accounts. The
majority of our money market accounts are indexed to the 90-day Treasury bill
rate, which increased during 2004.
Provision for Loan Losses. The provision for loan losses was $1.200 million or
0.33% of average total loans outstanding in 2004, as compared to $1.565 million
or 0.44% of average total loans outstanding in 2003. This was a $365 thousand or
23.3% decrease. The provision for loan losses decreased in 2004, as compared to
2003 due to a general improvement in the credit quality of our loan portfolio.
During 2004, net loan charge-offs decreased by $493 thousand or 41.1%, from
$1.200 million or 0.33% of average loans outstanding in 2003 to $707 thousand or
0.19% of average loans outstanding in 2004. Similarly, during 2004 we
experienced a reduction in the level of our non-performing loans. At December
31, 2003 we had $3.658 million of non-performing loans outstanding versus $2.751
million at December 31, 2004. This was a $907 thousand or 24.8% decrease between
the periods. Delinquent loans also decreased between the periods. At December
31, 2004 we had $2.267 million of loans or 0.58% of total loans outstanding that
were 30 or more days past due (excluding loans place on non-accrual status). By
comparison, at December 31, 2003 we had $2.752 million or 0.76% of total loans
outstanding that were 30 or more days past due (excluding loans placed on
non-accrual status). The potential problem loans did not change significantly
between the periods. Potential problem loans increased slightly between the
periods, from $7.846 million or 2.2% of total loans outstanding at December 31,
2003 to $8.662 million or 2.2% of total loans outstanding at December 31, 2004.
Non-Interest Income. Non-interest income is comprised of trust fees, service
charges on deposit accounts, commission income, investment security gains /
(losses), income on bank-owned life insurance, other service fees and other
income. Non-interest income decreased slightly from $5.663 million in 2003 to
$5.634 million in 2004. This represents a $29 thousand or 0.5% decrease.
Increases in service charges on deposit accounts and commissions income were
negatively offset by decreases in trust fees, investment security gains,
bank-owned life insurance income, other service fees and other income.
Total trust fees decreased slightly in 2004. Specifically, trust fees totaled
$1.383 million in 2003, as compared to $1.326 million in 2004, a $57 thousand or
4.3% decrease. The decrease in trust fees between the periods was primarily due
to a reduction in non-recurring closing fees, including estate administration
commissions and trust account termination fees. In 2003, we recorded $289
thousand in trust / estate closing fees, as compared to $81 thousand in 2004. We
partially offset this decline in 2004 by recording a $151 thousand increase in
fees on other trusts, custodial and investment management accounts. Although
there was a decrease in the period end market value of trust accounts between
December 31, 2003 and December 31, 2004, the average value of trust assets
administered by the Bank increased, driving the increase in our trust fees. The
decrease in the period end market value of trust accounts between the periods
was primarily due to the reduction in value of a single trust account totaling
approximately $26.600 million.
Service charges on deposit accounts increased from $1.457 million in 2003 to
$1.556 million in 2004, a $99 thousand or 6.8% increase. During the second half
of 2004, we increased certain penalty charges on checking accounts. This in
addition to a higher average balance of demand deposit accounts in 2004, versus
2003, increased our service charge income year over year.
Our commission income is generated from the Bank's insurance agency subsidiary,
Mang - Wilber LLC. During 2004, we increased the number of policies through
additional sales to customers and purchased a two-thirds interest in a small
specialty-lines insurance agency located in Clifton Park, New York. These
factors increased our commission income from $434 thousand in 2003 to $524
thousand in 2004, a $90 thousand or 20.7% increase.
38-K
During 2004 we netted pre-tax investment securities gains of $1.031 million on
the call and sale of investment securities. This was a $33 thousand or 3.1%
decrease as compared to 2003. In 2003 we recorded $1.064 million in net pre-tax
investment securities gains. During 2004 we sold $12.986 million of
available-for-sale investment securities and had an additional $175.771 million
in available-for-sale and held-to-maturity securities mature or be called as
interest rates declined. Our corporate securities were sold during 2004 to
reduce the credit risk in our investment securities portfolio.
The income related to the increase in the cash surrender value of bank-owned
life insurance decreased from $639 thousand in 2003 to $569 thousand in 2004, a
$70 thousand or 11.0% decrease. During 2004 the insurance companies decreased
the crediting rates for their policyholders because yields decreased on their
investment securities portfolios as a result of the low interest rate
environment.
Other service fees are comprised of numerous types of fee income, including
merchant credit card processing fees, residential mortgage origination fees,
official check and check cashing fees, travelers' check sales, wire transfer
fees, letter of credit fees and other miscellaneous service charges, commissions
and fees. Other service fees decreased from $325 thousand in 2003 to $286
thousand in 2004, a $39 thousand or 12.0% decrease. During the second quarter of
2003, we lost our largest merchant credit card customer, which decreased fees
related to this service from $58 thousand in 2003 to $9 thousand in 2004, a $49
thousand decrease. This decrease was partially offset by an increase in our
mortgage loan fees. During 2004 we increased our marketing efforts and
origination process to increase the volume of mortgages we originate as agent
for another bank. These efforts, coupled with the low mortgage rates, increased
our mortgage loan fees by $30 thousand, from $39 thousand in 2003 to $69
thousand in 2004.
Other income is comprised of numerous types of fee income, including investment
services, lease income, safe deposit box income, title insurance agency income,
rental of foreclosed real estate, and distributions from two insurance trusts,
in which the Bank participates. Other income decreased from $361 thousand in
2003 to $342 thousand in 2004, a $19 thousand or 5.3% decrease. During 2004 we
recorded $113 thousand of investment services income, as compared to $54
thousand in 2003, a $59 thousand increase. During 2003 we hired a financial
planning and investment management specialist and licensed eight additional
employees to sell investment services. The fee income improvements experienced
in 2004 were the result of additional mutual fund, annuity and investment
securities sales generated by these employees. These improvements were
negatively offset by a $50 thousand decrease in income related to the Bank's
investment in New York Bankers Title Agency East, and a $28 thousand net
decrease in other miscellaneous income items.
Non-Interest Expense. Non-interest expenses are comprised of salaries and
employee benefits, occupancy expense, furniture and equipment expense, computer
service fees, advertising and marketing expense, professional fees, and other
expense. Total non-interest expense increased from $16.583 million in 2003 to
$17.218 million in 2004, a $635 thousand or 3.8% increase.
Salaries and employee benefits expense decreased slightly in 2004. Total
salaries and benefits expense was $10.741 million in 2004, as compared to
$10.778 million in 2003, a $37 thousand or 0.3% decrease. Although the net
decrease in salaries and employee benefits was modest in 2004, there were
several positive and negative factors, which contributed to the net change. Base
salaries, overtime and employee incentive pay increased by $429 thousand or 5.4%
in 2004, from $7.885 million in 2003 to $8.314 million in 2004 due to annual
wage and salary adjustments for existing employees and expansionary activities,
including the addition of new employees. Our group health insurance expenses
increased from $650 thousand in 2003 to $717 thousand in 2004, a $67 thousand or
9.3% increase due to increased claims and plan administration costs. In
addition, during 2004 we recorded increases in group life insurance, group
disability, employee education, supplemental executive retirement plan benefits,
and other benefits totaling $96 thousand.
These increases were offset by a $66 thousand decrease in our pension plan
expense, a $10 thousand decrease in workers' compensation expense, and most
significantly, a $553 thousand decrease in expense related to the Bank's
executive deferred compensation plan. During 2003 we recorded a $663 thousand
expense for our executive deferred compensation plan, as compared to $110
thousand in 2004. The decrease was primarily due to a decrease in the returns
generated by the investments held in the plan, including the Company's phantom
stock units.
Our net occupancy expense on bank premises increased $86 thousand or 6.3%, from
$1.360 million in 2003 to $1.446 million in 2004. During 2004 building repairs,
utilities, insurance, building rental expense, school and land taxes, and
depreciation expense all increased due to general inflationary-type increases
and the establishment of a new full-service branch office in Johnson City
(Broome County), New York and a representative loan production office in
Kingston (Ulster County), New York.
39-K
Furniture and equipment expense decreased $52 thousand or 6.5% in 2004, from
$803 thousand in 2003 to $751 thousand in 2004. During 2004 equipment
maintenance and repair costs and depreciation expense declined by $30 thousand
and $26 thousand respectively.
During 2004, we recorded a significant increase in computer service fees. Total
computer service fees were $598 thousand in 2004, as compared to $305 thousand
in 2003, a $293 thousand or 96.1% increase. During the third quarter of 2004, we
terminated a contract to convert our core computer processing system. At that
time we were carrying $135 thousand of prepaid conversion costs in other assets,
which we expensed to computer service fees. The remaining $158 thousand in
computer service fee increases were incurred as the result of implementing new
computer systems and data conversion costs related to increased information
technology system demands and the pending core computer system conversion
scheduled for the second quarter of 2005.
Marketing and advertising expense increased $102 thousand or 23.4% in 2004, from
$436 thousand in 2003 to $538 thousand in 2003. Our market expansion activities,
increased product promotions and an increased level of participation in
community events drove the increase in our marketing and advertising expense in
2004.
Professional fees increased by $103 thousand or 25.2% in 2004, from $409
thousand in 2003 to $512 thousand in 2004. In 2004 we expanded the scope of our
loan review process. We recorded $39 thousand of additional professional fees
expense for this purpose. Other various professional fees increases account for
the remaining of professional fees increases.
Other miscellaneous expenses include directors' fees, fidelity insurance, the
Bank's OCC assessment, FDIC premiums and assessments, bad debt collection
expenses, correspondent bank services, service expense related to the Bank's
accounts receivable financing service, charitable donations and customer
relations, other miscellaneous losses, dues and memberships, office supplies,
postage and shipping, subscriptions, telephone expense, employee travel and
entertainment, software amortization, intangible asset amortization expense,
goodwill impairment, OREO expenses, gain / loss on the disposal of assets,
minority interest expense, American Stock Exchange listing fees and several
other miscellaneous expenses. During 2004, other expenses increased $140
thousand or 5.6%, from $2.492 million in 2003 to $2.632 million in 2004. The
following table itemizes the individual components of other miscellaneous
expenses that increased or (decreased) by more than $10 thousand between the
periods.
Table of Other Miscellaneous Expenses:
---------------------------------------------------------------------------
Year
------------------
Increase/
Description of Other Expense 2004 2003 (Decrease)
---------------------------------------------------------------------------
dollars in thousands
Directors fees $ 150 $ 168 $ (18)
Bad debt collection expense 137 178 (41)
Accounts receivable financing
servicing expense 152 100 52
Customer relations expense 67 31 36
Charitable donations 107 89 18
Telephone 178 227 (49)
Travel and entertainment 198 177 21
Software amortization 165 130 35
Intangible asset amortization 84 115 (31)
Deferred reserves for unused loan
commitments 4 38 (34)
Minority interest for Mang - Wilber
insurance agency subsidiary 110 89 21
Other losses 25 38 (13)
American stock exchange listing fees 73 -- 73
All other expense items, net 1,182 1,112 70
------------------------------
Total Other $2,632 $2,492 $ 140
---------------------------------------------------------------------------
40-K
Income Taxes. Income tax expense decreased from $3.277 million in 2003 to $3.002
million in 2004, a $275 thousand or 8.4% decrease. The decrease in the income
tax expense was primarily due to a net increase in tax-exempt income of $397
thousand in 2004 and decreased pre-tax earnings. Our effective tax rate for 2004
and 2003, was 25.8% and 27.3%, respectively.
Our income tax expense and effective tax rate were reduced in 2004 (as well as,
in prior years) because current New York State tax law allows us to claim a 60%
dividends paid deduction for dividends paid to the Bank by its subsidiary,
Wilber REIT, Inc. Legislation has been proposed at the New York State level,
which would change the tax treatment of dividends paid by real estate investment
trusts, such as Wilber REIT, Inc. If the law is passed in its current form with
and effective date of January 1, 2005, our annual income tax expense would
increase by approximately $320 thousand, increasing our effective tax rate to
28.6%.
b. Comparison of Operating Results for the Years Ended December 31, 2003 and
December 31, 2002
Please refer to the Consolidated Financial Statements presented in PART
II, Item 8, of this document.
Summary. Net income for 2003 was $8.713 million. This represents a $151 thousand
or 1.8% increase over 2002 net income of $8.562 million. Earnings per share
increased by $0.02 per share from $0.76 per share in 2002 to $0.78 per share in
2003. Net interest income was very flat between periods. Therefore, the increase
in our earnings was primarily due to an increase in other income, a reduction in
the provision for loan losses, and a lower provision for income taxes offset by
an increase in other expenses. More specifically, during 2003 other income
increased by $409 thousand, the provision for loan losses decreased by $355
thousand and the income tax provision was $81 thousand less in 2003 than in
2002. The combined improvement of these items totaling $845 thousand was offset
by a $693 thousand increase in other expenses.
Return on average assets declined from 1.25% in 2002 to 1.20% in 2003. This
occurred primarily because net interest margin declined during 2003.
Historically low and declining interest rates prompted significant loan
refinancing activity, reducing interest rate spreads on new loans and
investments. Return on average stockholders' equity also declined from 14.36% in
2002 to 13.67% in 2003.
Net Interest Income. Net interest income is our most significant source of
revenue. During 2003 and 2002 respectively net interest income comprised 81% and
82% of our total revenues. Therefore, the following tables including the Asset
and Yield Summary Table, the Interest Rate Table and the Rate and Volume Table
and the associated analytical narrative are important components of our results
of operations.
Net interest income was flat period over period, decreasing by only $1 thousand
from 2002 to 2003. More specifically, net interest income was $24.475 million in
2003 as compared to $24.476 million in 2002. Although net interest margin
declined by 21 basis points between the periods from 3.78% in 2002 to 3.57% in
2003, its negative impact on net interest income was offset by growth in earning
assets. The decrease in our net interest margin was primarily driven by rapidly
declining earning asset yields. Our earning asset yields declined by 80 basis
points, from 6.44% in 2002 to 5.64% in 2003. This occurred because the interest
rates at which we originated new loans, acquired new investment securities and
sold overnight federal funds during 2003 were significantly lower than
comparable interest rates in 2002 (see comparative interest rate table below).
41-K
Comparative Interest Rate Table:
=================================================================================================================
2003 2002
---------------------------------------- ----------------------------------------
Interest Rates (1) December September June March December September June March
--------------------------------------------------------------------- ----------------------------------------
Target Federal Funds Rate 1.00% 1.00% 1.00% 1.25% 1.25% 1.75% 1.75% 1.75%
--------------------------------------------------------------------- ----------------------------------------
NYC Prime 4.00% 4.00% 4.00% 4.25% 4.25% 4.75% 4.75% 4.75%
--------------------------------------------------------------------- ----------------------------------------
90 Day Treasury Bill 0.88% 0.91% 0.81% 1.10% 1.18% 1.44% 1.66% 1.75%
--------------------------------------------------------------------- ----------------------------------------
6 Month Treasury Bill 0.99% 1.00% 0.82% 1.10% 1.21% 1.43% 1.68% 2.02%
--------------------------------------------------------------------- ----------------------------------------
1 Year Treasury Note 1.21% 1.06% 0.84% 1.16% 1.20% 1.47% 1.92% 2.57%
--------------------------------------------------------------------- ----------------------------------------
2 Year Treasury Note 1.84% 1.47% 1.10% 1.49% 1.59% 1.73% 2.75% 3.58%
--------------------------------------------------------------------- ----------------------------------------
3 Year Treasury Note 2.31% 1.97% 1.40% 1.86% 1.94% 2.13% 3.30% 4.18%
--------------------------------------------------------------------- ----------------------------------------
4 Year Treasury Note 2.77% 2.34% 1.79% 2.36% 2.37% 2.46% 3.70% 4.56%
--------------------------------------------------------------------- ----------------------------------------
5 Year Treasury Note 3.24% 2.82% 2.16% 2.73% 2.71% 2.72% 3.99% 4.81%
--------------------------------------------------------------------- ----------------------------------------
7 Year Treasury Note 3.68% 3.36% 2.67% 3.33% 3.21% 3.28% 4.41% 5.12%
--------------------------------------------------------------------- ----------------------------------------
10 Year Treasury Note 4.27% 3.94% 3.27% 3.82% 3.79% 3.68% 4.73% 5.28%
--------------------------------------------------------------------- ----------------------------------------
15 Year Treasury Note 4.81% 4.52% 3.89% 4.45% 4.48% 4.47% 5.34% 5.81%
--------------------------------------------------------------------- ----------------------------------------
30 Year Treasury Note 5.08% 4.88% 4.35% 4.84% 4.76% 4.78% 5.13% 5.42%
--------------------------------------------------------------------- ----------------------------------------
Federal Housing Finance
Board National Avg 5.79% 5.61% 5.68% 5.88% 6.03% 6.32% 6.62% 6.77%
Mortgage Contract Rate
=================================================================================================================
(1) The above interest rates are provided to us by a third party vendor on
a bi-weekly basis. The interest rates provided in the table are obtained
from the report nearest to the month-end. The Federal Housing Finance
Board national average mortgage contract rate is presented with a
one-month lag.
The yield on the loan portfolio declined from 7.88% in 2002 to 6.94% in 2003. As
existing loans matured and amortized throughout 2003, they were replaced by new
loans at lower rates of interest. In addition, the interest rates earned on
variable rate loans were lower in 2003 than in 2002. The prime rate and the
1-year constant maturity Treasury rate are index rates upon which a significant
amount of our variable rate loans are based. On average, these index rates were
lower in 2003 than in 2002. And finally, many large commercial and commercial
real estate borrowers with fixed rate loans renegotiated their existing loans to
lower rates of interest throughout 2002 and 2003.
The average yield on the investment securities portfolio also decreased during
2003. Specifically, the investment securities portfolio decreased 62 basis
points, from 4.94% in 2002 to 4.32% in 2003. Increased levels of mortgage
refinancing activity accelerated prepayments on our mortgage backed securities
requiring that we reinvest the maturing principal dollars at lower market
yields. Additionally, the increased prepayment levels also required us to
increase amortization expense on investment securities being held with
"premiums," i.e., securities with amortized book values exceeding par value,
thereby decreasing interest income and average yield.
The yield on the federal funds sold declined significantly between 2002 and
2003. During 2002 and the first half of 2003, the Federal Open Market Committee
lowered the federal funds target rate to stimulate the national economy. These
actions lowered our average yield on average federal funds sold.
The average yield on our interest-bearing deposits at other banks increased from
6.36% in 2002 to 6.56% in 2003 due to a shortened duration of the portfolio. The
certificates of deposit in this portfolio were acquired in December 2000 and
January 2001 at varying terms and rates. As the shorter-term certificates of
deposit matured (which were initially issued at lower interest rates than the
longer-term certificates of deposit) it caused the average yield of the
portfolio to increase. In total $8.0 million of our FDIC-insured certificates of
deposit matured during 2003 and were not replaced by new interest-bearing
deposits with comparable yields.
While earning asset yields decreased, management was only able to decrease the
cost of interest-bearing liabilities by 0.67% from 3.03% in 2002 to 2.36% in
2003. We, along with other banks and competitors, dropped deposit rates
significantly throughout the last two quarters of 2002 and the first two
quarters of 2003 to offset a general decline in interest rates, and in turn,
asset yields. Management, however, found it increasingly difficult throughout
2003 to lower interest rates paid on deposits further as many of the Bank's
non-maturity deposit accounts, such as savings and interest-bearing checking
accounts, were already near an interest rate floor of 0%. Accordingly,
management's options to reduce interest expense declined as interest rates
decreased.
42-K
Rate and Volume Analysis. Net interest income decreased by $1 thousand from
$24.476 million in 2002 to $24.475 million in 2003. Changes in volume increased
net interest income by $1.662 million between the two periods, while changes in
rate decreased net interest income by $1.663 million.
The interest income earned on loans decreased by $2.026 million between the two
periods, from $26.503 million in 2002 to $24.477 million in 2003. The increase
in average loan volume from $336.283 million in 2002 to $352.935 million in 2003
contributed $1.266 million of additional interest income, whereas the reduction
in the average loan yield decreased interest income by $3.292 million. Average
loan yields decreased by 0.94% between the two periods from 7.88% in 2002 to
6.94% in 2003.
The interest income on investment securities decreased by $598 thousand, from
$13.648 million in 2002 to $13.050 million in 2003. The average volume of the
investment portfolio increased significantly between periods from $276.550
million during 2002 to $302.387 million during 2003, generating $1.205 million
in additional interest income. This improvement, however, was offset by lower
investment yields, which reduced interest income by $1.803 million.
The interest income on federal funds sold decreased period over period.
Specifically, interest income on federal funds sold decreased by $65 thousand,
from $238 thousand in 2002 to $173 thousand in 2003. During 2003, interest
income on federal funds sold decreased $79 thousand due to a reduction in the
interest rate, while a lower average volume outstanding decreased interest
income by $14 thousand.
The interest income on interest-bearing deposits (at other banks) decreased
period over period by $329 thousand, from $1.257 million in 2002 to $928
thousand in 2003. Specifically, interest income increased by $38 thousand due to
an increase in the average interest rate, but was negatively offset by a $367
thousand reduction in interest income due to a reduction in volume. During 2003,
$8.000 million of FDIC-insured certificate of deposit portfolio matured and were
not replaced by new certificates.
The average volume of savings accounts and NOW accounts increased significantly
between the two periods in spite of declining interest rates. Specifically, the
average volume of savings accounts increased from $79.382 million in 2002 to
$89.087 million in 2003. Similarly, the average volume of NOW accounts increased
from $95.861 million in 2002 to $121.288 million in 2003. Interest expense for
savings and NOW accounts decreased between the two periods by $635 thousand.
Increased volume in these two deposit categories created additional interest
expense of $498 thousand, while a significant decline in short-term interest
rates allowed management to reduce the interest expense on these accounts by
$1.133 million.
Interest expense on money market accounts decreased from $537 thousand in 2002
to $298 thousand in 2003. Both a reduction in the average volume of money market
balances, as well as a reduction in the interest rate paid on money market
accounts, contributed to this reduction in interest expense.
Time account balances increased slightly between the two years. The average
outstanding balance of time accounts during 2003 was $280.290 million, as
compared to $274.985 million during 2002. Accordingly, interest expense due to
volume for time accounts only increased $185 thousand period over period. By
comparison, a substantial decrease in interest rates allowed management to lower
certificate of deposit rates, saving $1.646 million of interest expense period
over period. The net interest expense decrease due to time account balances
equaled $1.461 million.
Interest expense for borrowings decreased from $4.135 million in 2002 to $3.453
million in 2003. The $682 thousand decrease in interest expense for borrowings
is attributable to both a reduction in borrowings outstanding and a decrease in
average borrowing costs.
Provision for Loan Losses. The provision for loan losses for 2003 was $1.565
million, as compared to $1.920 million in 2002, a $355 thousand or 18.5%
decrease. The provision for loan losses decreased in 2003, as compared to 2002
due to a significant decrease in delinquent loans, a relatively stable level of
net charge-offs, and a stable level of specifically identified inherent losses
in the loan portfolio. Delinquent loans (those 30 or more days past due) as a
percent of total loans outstanding averaged 1.49% during 2003, as compared to
2.13% during 2002. Management attributes the improvement in delinquency levels
to implementation of an improved consumer credit identification and management
system established in 2001. Net charge-offs remained relatively stable between
2003 and 2002. Net charge-offs in 2003 were $1.200 million in 2003 or 0.33% of
average loans outstanding. By comparison, net charge-offs in 2002 were $1.004
million or 0.29% of average loans outstanding. While the level of non-performing
loans increased slightly period to period, the loans that were transferred to
non-accrual status during 2003 were adequately reserved for in the allowance for
loan losses prior to transfer to non-accrual status. The provision for loan
losses as a percentage of average total loans outstanding was 0.44% for 2003, as
compared to 0.57% for 2002.
43-K
Non-Interest Income. Non-interest income is comprised of trust fees, service
charges on deposit accounts, commission income, investment security gains /
(losses), other service fees and other income. Non-interest income increased
from $5.254 million in 2002 to $5.663 million in 2003. This represents a $409
thousand or 7.8% increase. The most significant reason non-interest income
increased period over period is due to the increase in the realized gains on the
sale of available for sale investment securities.
Total trust fees decreased slightly in 2003. Specifically, trust fees totaled
$1.416 million in 2002, as compared to $1.383 million in 2003, a $33 thousand or
2.3% decrease. The decrease in trust fees was due to a slight reduction in the
average market value and account income in 2003, versus 2002, at the time fees
were charged. The sharp increase in the period end market value of trust
accounts between December 31, 2002 and December 31, 2003 was due to a single
Trust that was funded during December 2003. No fees were charged on this account
in 2003.
Service charges on deposit accounts declined from $1.583 million in 2002 to
$1.457 million in 2003, a $126 thousand or 8.0% decrease. During the second half
of 2002, the Bank removed certain service fee charges on its business checking
accounts in an effort to remain competitive and retain customers. This led to a
reduction in service fee income generated on these accounts.
Commission income from the Bank's insurance policy sales activities remained
fairly flat at $434 thousand for 2003, as compared to $428 thousand for 2002.
During 2003 we netted pre-tax realized gains of $1.064 million on the call and
sale of investment securities. This represents a $792 thousand increase over
2002 when net pre-tax realized gains were $272 thousand. During 2003 we sold
$11.239 million available-for-sale investment securities (primarily corporate
bonds) and had an additional $144.792 million in available-for-sale and
held-to-maturity securities mature or be called as interest rates declined. The
corporate securities were sold because management believed it was prudent to
reduce the credit risk, lock in gains and shorten the duration of the
available-for-sale investment securities portfolio while interest rates were at
or near 40-year lows. The long-term corporate bonds were sold in particular
because of their sensitivity to market value decline in an increasing interest
rate environment.
The income related to the increase in the cash value of bank-owned life
insurance increased from $552 thousand in 2002 to $639 thousand in 2003, an $87
thousand or 15.8% increase. The increase was primarily due to the purchase of
three additional policies, totaling $2.500 million in premium, which occurred
during the fourth quarter of 2002. The policies were purchased to finance the
benefit expense associated with the Company's implementation of two supplemental
executive retirement plans ("SERP").
Other service fees are comprised of numerous types of fee income, including
merchant credit card processing fees, residential mortgage origination fees,
official check and check cashing fees, travelers' check sales, wire transfer
fees, letter of credit fees and other miscellaneous service charges, commissions
and fees. Other service fees decreased from $404 thousand in 2002 to $325
thousand in 2003, a $79 thousand or 19.6% decrease. The reduction in other
service fees was primarily due to the loss of one significant merchant credit
card processing account offset by a slight increase in letter of credit fees.
Other income is comprised of numerous types of fee income, including investment
services, lease income, safe deposit box income, title insurance agency income,
rental of foreclosed real estate, and distributions from two insurance trusts,
in which the Bank participates. Other income decreased from $599 thousand in
2002 to $361 thousand in 2003, a $238 thousand or 39.8% decrease. The net
decrease in other income was due to one significant positive variation and
several negative variations between 2002 and 2003. During 2003, income related
to the Bank's investment in New York Bankers Title Agency East increased by $34
thousand, from $34 thousand in 2002 to $68 thousand in 2003. These improvements
were offset by a $64 thousand reduction in other real estate owned (foreclosed
property) rental income due to sale of a foreclosed rental property in November
2002; a reduction in investment service fee income of $47 thousand; a reduction
in the New York Bankers Insurance Trust dividend payments of $62 thousand; a $24
thousand decrease in lease income; a $25 thousand insurance claim paid in 2002
only; and other miscellaneous items totaling $49 thousand.
Non-Interest Expense. Non-interest expenses are comprised of salary and employee
benefit expense, occupancy expense, furniture and equipment expense, computer
service fees, advertising and marketing expense, professional fees, and other
miscellaneous expenses. Total non-interest expenses increased from $15.890
million in 2002 to $16.583 million in 2003, a $693 thousand or 4.4% increase.
Salaries and benefits expense increased by $638 thousand or 6.3%, from $10.140
million in 2002 to $10.778 million in 2003. Although the net increase in
salaries and employee benefits was $638 thousand, there were several positive
and negative factors, which contributed to the net change. Two factors that
increased expense most significantly were an increase in the executive deferred
compensation expense and an increase in pension plan expense. Specifically, in
2003
44-K
the underlying investments held for the benefit of the executive deferred
compensation plan performed well, which required us to record a $538 thousand
increase in salaries expense to fully fund the executive deferred compensation
liability. In 2002 we recorded $125 thousand expense for the executive deferred
compensation plan, as compared to $663 thousand in 2003. The Bank's pension plan
expense also increased from $226 thousand in 2002 to $543 thousand in 2003, a
$317 thousand increase, due primarily to increase in the benefit obligation
under the plan. Base salaries, overtime and employee incentive pay also
increased by $89 thousand or 1.1%, from $7.796 million in 2002 to $7.885 million
in 2003 due to annual wage and salary adjustments for existing employees and
expansionary activities. And finally, group health, group life, group
disability, unemployment insurance, worker's compensation and employee education
expense increased by a total of $73 thousand between the periods.
These increases were offset by a $378 thousand decrease in our supplemental
executive retirement plan expense in 2003. During 2002, the Company's Board of
Directors approved two supplemental executive retirement plans for Mr. Whittet
and Mr. Moyer. To fund the benefits provided under the plans, we recorded other
benefits expense totaling $541 thousand. By comparison, in 2003 we recorded $163
thousand in expense for the supplemental executive retirement plan.
Net occupancy expense totaled $1.360 million in 2003 as compared to $1.158
million in 2002, a $202 thousand or 17.4% increase. Increases in snow removal
and utility expenses related to a cold winter in the first-half of 2003, as well
as general increases in insurance cost and property taxes, were responsible for
the increased occupancy expense.
Furniture and equipment expense remained relatively unchanged between 2002 and
2003. Furniture and equipment expense was $803 thousand in 2003, as compared to
$810 thousand in 2002.
Computer service fees, advertising and marketing expense and professional fees
all increased during 2003. On a combined basis these expenses totaled $1.150
million in 2003 as compared to $904 thousand in 2002, a $246 thousand or 27%
increase. Professional fees increased by $134 thousand from 2002 to 2003,
primarily due to fees paid to legal advisors and KPMG LLP for listing the
Company's common stock on the Amex and the associated registration with the SEC.
Other miscellaneous expenses include directors' fees, fidelity insurance, the
Bank's OCC assessment, FDIC premiums and assessments, bad debt collection
expenses, correspondent bank services, service expense related to the Bank's
accounts receivable financing service, charitable donations and customer
relations, other miscellaneous losses, dues and memberships, office supplies,
postage and shipping, subscriptions, telephone expense, employee travel and
entertainment, software amortization, intangible asset amortization expense,
goodwill impairment, OREO expenses, gain / loss on the disposal of assets,
minority interest expense and several other miscellaneous expenses. Other
miscellaneous expenses decreased from $2.878 million in 2002 to $2.492 million
in 2003, a $386 thousand or 13.4% decrease. During 2003 we recorded a $141
thousand reduction in expenses associated with managing foreclosed property; a
$114 thousand decrease on the loss associated with the disposal of assets; a $78
thousand reduction in expenses related to servicing the Bank's accounts
receivable financing program; and a $73 thousand decrease in telephone expense.
Other miscellaneous expenses increased (net) $20 thousand from 2002 to 2003.
Income Taxes. Income tax expense decreased from $3.358 million in 2002 to $3.277
million in 2003, an $81 thousand decrease. The decrease in the income tax
expense is primarily due to an increase in tax-exempt income, for state and
municipal investment securities and an increase in the income related to
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 and to fund our current and
planned expenditures. We are committed to maintaining a strong liquidity
position. Accordingly, we monitor our liquidity position on a daily basis
through our daily funds management process. This includes:
o maintaining the appropriate levels of currency throughout our
branch system to meet the daily cash needs of our customers,
o balancing our mandated deposit or "reserve" requirements at
the Federal Reserve Bank of New York,
o maintaining adequate cash balances at our correspondent banks,
and
o assuring that adequate levels of federal funds sold, liquid
assets, and borrowing resources are available to meet
obligations including reasonably anticipated daily
fluctuations.
In addition to the daily funds management process, we also monitor certain
liquidity ratios and complete a liquidity assessment every 90 days to estimate
current and future sources and uses of liquidity. The 90 day sources and uses
45-K
assessment is reviewed by our Asset and Liability Committee ("ALCO"). The ALCO,
based on this assessment and other data, determines our future funding or
investment needs and strategies. The following list represents the sources of
funds available to meet our liquidity requirements. Our primary sources of funds
are denoted by an asterisk (*).
Source of Funding
o Currency*
o Federal Reserve and Correspondent Bank Balances*
o Federal Funds Sold*
o Loan and Investment Principal and Interest Payments*
o Investment Security Maturities and Calls*
o Demand Deposits & NOW Accounts*
o Savings & Money Market Deposits*
o Certificates of Deposit and Other Time Deposits*
o Repurchase Agreements*
o FHLBNY Advances / Lines of Credit*
o Sale of Available-for-Sale Investment Securities
o Brokered Deposits
o Correspondent Lines of Credit
o Fed. Reserve Discount Window Borrowings
o Sale of Loans
o Proceeds from Issuance of Equity Securities
o Branch Acquisition
o Cash Surrender Value of Bank-Owned Life Insurance
Between December 31, 2003 and December 31, 2004, we experienced a significant
decrease in our liquidity position. During 2003 and 2004, we received principal
payments on our available-for-sale and held-to-maturity investment securities
portfolio totaling $144.792 million and $175.771 million, respectively. This
occurred primarily because we maintained significant volumes of mortgage-backed
securities during those periods and received unusually large amounts of
prepayments on those securities due to low interest rates and the high level of
mortgage refinancing occurring during those periods. By comparison, during 2005
we expect to receive approximately $45.280 million of principal payments on the
available-for-sale and held-to-maturity investment securities held at December
31, 2004. In spite of the projected decrease in investment securities cash flow
during 2005, we believe that the anticipated principal repayments on existing
loans and investment securities, as well as the anticipated deposit retention
levels, will provide us with an adequate amount of liquidity throughout 2005.
Furthermore, at December 31, 2004 the Bank had $19.180 million of available
borrowing capacity at the FHLBNY, $7.600 million of borrowing capacity at its
primary correspondent bank, $63.472 million of unencumbered, liquid
available-for-sale securities which could be sold to generate cash or pledged as
collateral to obtain additional borrowings (see table of liquidity measures
below).
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 2004 2003
-------------------------------------------------------------------------
Cash and Cash Equivalents $ 20,539 $ 19,890
-------------------------------------------------------------------------
Available for Sale Investment Securities at
Estimated Fair Value less Securities pledged for $ 63,472 $106,933
-------------------------------------------------------------------------
State and Municipal Deposits and Borrowings
Total Loan to Total Asset Ratio 52.08% 49.50%
-------------------------------------------------------------------------
FHLBNY Remaining Borrowing Capacity $ 19,180 $ 18,314
-------------------------------------------------------------------------
Available Correspondent Bank Lines of Credit $ 7,600 $ 10,000
-------------------------------------------------------------------------
In addition to the above liquidity measures, at December 31, 2004 and December
31, 2003 we had $14.975 million and $14.405 million, respectively, of cash
surrender value in our bank-owned life insurance portfolio. These policies could
be terminated and surrendered for cash upon our demand.
Our commitments to extend credit and standby letters of credit increased by
$7.925 million or 13.4% between December 31, 2003 to December 31, 2004. At
December 31, 2004 commitments to extend credit and standby letters of credit
were $67.003 million, as compared to $59.078 million at December 31, 2003. Our
experience indicates that draws
46-K
on the commitments to extend credit and standby letters of credit do not
fluctuate significantly and therefore are not expected to materially impact our
liquidity.
We recognize that deposit flows and loan and investment prepayment activity are
impacted 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.
At December 31, 2004 our stockholders' equity was $67.605 million, a $3.301
million or 5.1% increase over December 31, 2003 stockholders' equity of $64.304
million. The increase in stockholders' equity was due to an increase in retained
earnings of $4.359 million offset by a $876 thousand reduction in other
comprehensive income and a $182 thousand increase in Treasury stock.
The Company and the Bank are both subject to regulatory capital guidelines.
Under these guidelines, as established by federal bank regulators, to be
adequately capitalized, the Company and the Bank must both maintain the minimum
ratio of Tier 1 capital to risk-weighted assets at 4.0% and the minimum ratio of
total capital to risk-weighted assets 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 of 6.0% and a total capital to risk-weighted assets ratio
of 10.0%. The Company and the Bank exceeded all capital adequacy and well
capitalized guidelines at December 31, 2004 and December 31, 2003. The Company's
Tier 1 capital to risk-weighted assets ratio and total capital to risk-weighted
assets ratio at December 31, 2004 were 13.09% and 14.34%, respectively. This
compares to 13.01% and 14.26%, respectively, at December 31, 2003. Additional
details 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, 2004, under
this statutory limitation, the maximum amount that could have been paid by the
Bank subsidiary to the Company, without special regulatory approval, was
approximately $10.542 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 Price of and Dividends on the
Registrant's Common Equity and Related Stockholder Matters," for a recent
history of the Company's cash dividend payments and stock sale and repurchase
activities.
ITEM 7A: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our business activities generate market risk. Market risk is the possibility
that changes in future market conditions, including rates and prices, will
reduce earnings and make the Company less valuable. We are primarily exposed to
market risk through changes in interest rates. This risk is called interest rate
risk and is an inherent component of risk for all banks. The risk occurs because
we pay interest on deposits and borrowed funds at varying rates and terms, while
receiving interest income on loans and investments with different rates and
terms. As a result, our earnings and the imputed economic value of assets and
liabilities are subject to potentially significant fluctuations as interest
rates rise and fall. Our objective is to minimize the fluctuation in net
interest margin and net interest income caused by anticipated and unanticipated
changes in interest rates.
Ultimately, the Company's Board of Directors is responsible for monitoring and
managing market and interest rate risk. The Board accomplishes this objective by
annually reviewing and approving an Asset and Liability Management Policy, which
establishes broad risk limits and delegates responsibility to carry out asset
and liability oversight and control to the Directors' Loan and Investment
Committee and management's Asset and Liability Committee ("ALCO").
47-K
We manage a few different forms of interest rate risk. The first is mismatch
risk, which involves the mismatch of maturities of fixed rate assets and
liabilities. The second is basis risk. Basis risk is the risk associated with
non-correlated changes in different interest rates. For example, we price many
of our adjustable rate commercial loans (an asset) using the prime rate as a
basis, while some of our deposit accounts (a liability) are tied to Treasury
security yields. In a given timeframe, the prime rate might decrease 2% while a
particular Treasury security might only decrease 1%. If this were to occur, our
yield on prime based commercial loans would decrease by 2%, while the cost of
deposits might only decrease by 1% negatively affecting net interest income and
net interest margin. The third risk is option risk. Option risk generally
appears in the form of prepayment volatility on residential mortgages,
commercial and commercial real estate loans, consumer loans, mortgage-backed
securities, and callable agency or municipal investment securities. The Bank's
customers generally have alternative financing sources (or options) to refinance
their existing debt obligations with other financial institutions. When interest
rates decrease, many of these customers exercise this option and refinance at
other institutions and prepay their loans with us, forcing us to reinvest the
prepaid funds in lower yielding investments and loans. The same type of
refinancing activity also accelerates principal payments on mortgage-backed
securities held by the Bank. Municipal investment securities and agency
securities are issued with specified call dates and call prices and are
typically exercised by the issuer when interest rates on comparable maturity
securities are lower than the current coupon rate on the security.
Measuring and managing interest rate risk is a dynamic process that the Bank's
management must continually perform to meet the objective of maintaining stable
net interest income and net interest margin. This means that prior to setting
the term or interest rate on loans or deposits, or before purchasing investment
securities or borrowing funds, management must understand the impact that
alternative interest rates will have on the Bank's interest rate risk profile.
This is accomplished through simulation modeling. Simulation modeling is the
process of "shocking" the current balance sheet under a variety of interest rate
scenarios and then measuring the impact of interest rate changes on both
projected earnings and the economic value of the Bank's equity. The estimates
underlying the sensitivity analysis are based on numerous assumptions including,
but not limited to: the nature and timing of interest rate changes, prepayments
on loans and securities, deposit decay rates, pricing decisions on loans and
deposits, and reinvestment/replacement rates on asset and liability cash flows.
While assumptions are developed based on available information and current
economic and local market conditions, management cannot make any assurances as
to the ultimate accuracy of these assumptions including competitive influences
and customer behavior. Accordingly, actual results will differ from those
predicted by simulation modeling.
The following table shows the projected changes in net interest income from a
parallel shift in all market interest rates. The shift in interest rates is
assumed to occur in monthly increments of 0.50% per month until the full shift
is complete. In other words, the model assumes it will take 6 months for a 3.00%
shift to take place. This is also known as a "ramped" interest rate shock. The
projected changes in net interest income are totals for the 12-month period
beginning January 1, 2005 and ending December 31, 2005 under ramped shock
scenarios.
Interest Rate Sensitivity Table:
----------------------------------------------------------------------------------------
Interest Rates Dollars in Thousands
----------------------------------------------------------------------------------------
Projected
Change in Net
Interest
Projected Projected Income as a
Projected Dollar Percentage Percent of
Annualized Change in Change in Total
Interest Rate Net Interest Net Interest Net Interest Stockholders'
Shock (1) Prime Rate Income Income Income Equity
----------------------------------------------------------------------------------------
3.00% 8.25% $26,032 $215 0.83% 0.32%
----------------------------------------------------------------------------------------
2.00% 6.25% $25,296 ($521) -2.02% -0.77%
----------------------------------------------------------------------------------------
1.00% 6.25% $25,111 ($706) -2.73% -1.04%
----------------------------------------------------------------------------------------
No change 5.25% $25,817 -- -- --
----------------------------------------------------------------------------------------
-1.00% 4.25% $25,349 ($468) -1.81% -0.69%
----------------------------------------------------------------------------------------
-2.00% 3.25% $24,005 ($1,812) -7.02% -2.68%
----------------------------------------------------------------------------------------
-3.00% 2.25% $23,775 ($2,042) -7.91% -3.02%
----------------------------------------------------------------------------------------
(1) Under a ramped interest rate shock, interest rates are modeled
to change at a rate of 0.50% per month.
48-K
Many assumptions are embedded within our interest rate risk model. These
assumptions are approved by the Bank's Asset and Liability Committee 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 $521 thousand or 0.77% of
total stockholders' equity in a +2.00% ramped interest rate shock and $1.812
million or 1.81% of total stockholders' equity in a -2.00% ramped interest rate
shock. This is within our Asset and Liability Policy guideline, which limits the
maximum projected decrease in net interest income in a +2.00% or -2.00% ramped
interest rate shock to -5.0% of the Company's total equity capital.
Our strategy for managing interest rate risk is impacted by general market
conditions and customer demand. But, generally, we try to limit the volume and
term of fixed-rate assets and fixed-rate liabilities, so that we can adjust the
mix and pricing of assets and liabilities to mitigate net interest income
volatility. We also purchase investments for the securities portfolio and
structure borrowings from the FHLBNY to offset interest rate risk taken in the
loan portfolio. We also offer adjustable rate loan and deposit products that
change as interest rates change. Approximately 22% of our total assets at
December 31, 2004 were invested in adjustable rate loans and investments.
49-K
ITEM 8: FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
The Board of Directors of The Wilber Corporation:
We have audited the accompanying consolidated statements of condition of The
Wilber Corporation and subsidiary as of December 31, 2004 and 2003, and the
related consolidated statements of income, changes in stockholders' equity and
comprehensive income, and cash flows for each of the years in the three-year
period ended December 31, 2004. These Consolidated Financial Statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these Consolidated Financial Statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the Consolidated Financial Statements referred to above present
fairly, in all material respects, the financial position of The Wilber
Corporation and subsidiary as of December 31, 2004 and 2003, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 2004, in conformity with U.S generally accepted
accounting principles.
/s/ KPMG LLP
Albany, New York
March 11, 2005
50-K
The Wilber Corporation
Consolidated Statements of Condition
December 31,
dollars in thousands except share and per share data 2004 2003
- -------------------------------------------------------------------------------------------
Assets
Cash and Due from Banks $ 10,440 $ 11,892
Time Deposits with Other Banks 10,099 7,998
--------- ---------
Total Cash and Cash Equivalents 20,539 19,890
--------- ---------
Securities
Trading, at Fair Value (Note 2) 1,504 1,025
Available-for-Sale, at Fair Value (Note 2) 249,415 275,051
Held-to-Maturity, Fair Value of $59,324 at December 31, 2004
and $44,416 at December 31, 2003 (Note 2) 59,463 44,140
Loans (Note 3) 391,043 360,906
Allowance for Loan Losses (Note 4) (6,250) (5,757)
--------- ---------
Loans, Net 384,793 355,149
--------- ---------
Premises and Equipment, Net (Note 5) 5,860 5,721
Bank Owned Life Insurance 14,975 14,405
Goodwill (Note 6) 2,682 2,682
Intangible Assets, Net (Note 6) 377 461
Other Assets 11,253 10,499
--------- ---------
Total Assets $ 750,861 $ 729,023
========= =========
Liabilities and Stockholders' Equity
Deposits:
Demand $ 63,746 $ 61,267
Savings, NOW and Money Market Deposit Accounts 241,151 251,180
Certificates of Deposit (Over $100M) 76,346 82,847
Certificates of Deposit (Under $100M) 165,194 158,783
Other Time Deposits 25,492 26,556
--------- ---------
Total Deposits 571,929 580,633
--------- ---------
Short-Term Borrowings (Note 8) 37,559 20,018
Long-Term Borrowings (Note 8) 65,379 55,849
Other Liabilities 8,389 8,219
--------- ---------
Total Liabilities 683,256 664,719
--------- ---------
Stockholders' Equity:
Common Stock, $.01 Par Value, 16,000,000 Shares Authorized,
and 13,961,664 Shares Issued at December 31, 2004,
and December 31, 2003 140 140
Additional Paid in Capital 4,224 4,224
Retained Earnings 83,402 79,043
Accumulated Other Comprehensive Income 396 1,272
Treasury Stock at Cost, 2,767,072 Shares at December 31, 2004
and 2,752,272 Shares at December 31, 2003 (20,557) (20,375)
--------- ---------
Total Stockholders' Equity 67,605 64,304
--------- ---------
Total Liabilities and Stockholders' Equity $ 750,861 $ 729,023
========= =========
See accompanying notes to Consolidated Financial Statements.
51-K
The Wilber Corporation
Consolidated Statements of Income
Year Ended December 31,
dollars in thousands except share and per share data 2004 2003 2002
- ------------------------------------------------------------------------------------------------------------------
Interest and Dividend Income
Interest and Fees on Loans $ 24,865 $ 24,477 $ 26,503
Interest and Dividends on Securities:
U.S. Government and Agency Obligations 8,605 9,751 9,839
State and Municipal Obligations 2,665 2,198 1,992
Other 415 1,101 1,817
Interest on Federal Funds Sold and Time Deposits 615 1,101 1,495
------------ ------------ ------------
Total Interest and Dividend Income 37,165 38,628 41,646
------------ ------------ ------------
Interest Expense
Interest on Deposits:
Savings, NOW and Money Market Deposit Accounts 1,952 2,442 3,316
Certificates of Deposit (Over $100M) 2,197 2,414 2,891
Other Time 5,329 5,844 6,828
Interest on Short-Term Borrowings 212 116 189
Interest on Long-Term Borrowings 3,071 3,337 3,946
------------ ------------ ------------
Total Interest Expense 12,761 14,153 17,170
------------ ------------ ------------
Net Interest Income 24,404 24,475 24,476
Provisions for Loan Losses (Note 4) 1,200 1,565 1,920
------------ ------------ ------------
Net Interest Income After Provision for Loan Losses 23,204 22,910 22,556
------------ ------------ ------------
Other Income
Trust Fees 1,325 1,383 1,416
Service Charges on Deposit Accounts 1,556 1,457 1,583
Commissions Income 524 434 428
Investment Security Gains, Net 1,031 1,064 272
Increase in Cash Surrender Value of Bank Owned Life Insurance 570 639 552
Other Service Fees 286 325 404
Other Income 342 361 599
------------ ------------ ------------
Total Other Income 5,634 5,663 5,254
------------ ------------ ------------
Other Expense
Salaries and Employee Benefits 10,741 10,778 10,140
Net Occupancy Expense of Bank Premises 1,446 1,360 1,158
Furniture and Equipment Expense 751 803 810
Computer Service Fees 598 305 277
Advertising and Marketing 538 436 352
Professional Fees 512 409 275
Other Miscellaneous Expenses 2,632 2,492 2,878
------------ ------------ ------------
Total Other Expense 17,218 16,583 15,890
------------ ------------ ------------
Income Before Taxes 11,620 11,990 11,920
Income Taxes (3,002) (3,277) (3,358)
------------ ------------ ------------
Net Income $ 8,618 $ 8,713 $ 8,562
============ ============ ============
Weighted Average Shares Outstanding (1) 11,207,215 11,214,288 11,285,340
Basic Earnings Per Share (1) $ 0.77 $ 0.78 $ 0.76
See accompanying notes to Consolidated Financial Statements.
(1) All Share and per share information has been restated to give retroactive
effect to the 4-for-1 stock split that was approved September 5, 2003.
52-K
The Wilber Corporation
Consolidated Statements of Changes in Stockholders' Equity and Comprehensive
Income
- --------------------------------------------------------------------------------
Accumulated
Additional Other
dollars in thousands except Common Paid in Retained Comprehensive Treasury
share and per share data Stock Capital Earnings Income (Loss) Stock Total
- -------------------------------------------------------------------------------------------------------------------------------
Balance December 31, 2001 $ 2,182 $ 2,182 $ 70,149 $ 520 $(19,206) $ 55,827
-------- -------- -------- -------- -------- --------
Comprehensive Income:
Net Income -- -- 8,562 -- -- 8,562
Change in Net Unrealized Gain (Loss)
on Securities, Net of Taxes -- -- -- 3,722 -- 3,722
--------
Total Comprehensive Income 12,284
--------
Cash Dividends ($.375 per share) -- -- (4,272) -- -- (4,272)
Purchase of Treasury Stock (20,316 shares) -- -- -- -- (677) (677)
-------- -------- -------- -------- -------- --------
Balance December 31, 2002 $ 2,182 $ 2,182 $ 74,439 $ 4,242 $(19,883) $ 63,162
-------- -------- -------- -------- -------- --------
Comprehensive Income:
Net Income -- -- 8,713 -- -- 8,713
Change in Net Unrealized Gain (Loss)
on Securities, Net of Taxes -- -- -- (2,970) -- (2,970)
--------
Total Comprehensive Income 5,743
--------
Cash Dividends ($.37 per share) -- -- (4,109) -- -- (4,109)
Purchase of Treasury Stock (11,917 shares) -- -- -- -- (492) (492)
Change in Par Value and Stock Split (2,042) 2,042 -- -- -- --
-------- -------- -------- -------- -------- --------
Balance December 31, 2003 $ 140 $ 4,224 $ 79,043 $ 1,272 $(20,375) $ 64,304
-------- -------- -------- -------- -------- --------
Comprehensive Income:
Net Income -- -- 8,618 -- -- 8,618
Change in Net Unrealized Gain (Loss)
on Securities, Net of Taxes -- -- -- (876) -- (876)
--------
Total Comprehensive Income 7,742
--------
Cash Dividends ($.38 per share) -- -- (4,259) -- -- (4,259)
Purchase of Treasury Stock (14,800 shares) (182) (182)
-------- -------- -------- -------- -------- --------
Balance December 31, 2004 $ 140 $ 4,224 $ 83,402 $ 396 $(20,557) $ 67,605
-------- -------- -------- -------- -------- --------
See accompanying notes to Consolidated Financial Statements.
(1) Per share information has been restated to give retroactive effect to the
4-for-1 stock split that was approved September 5, 2003.
53-K
The Wilber Corporation
Consolidated Statements of Cash Flows
Year Ended December 31,
dollars in thousands 2004 2003 2002
- -----------------------------------------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 8,618 $ 8,713 $ 8,562
Adjustments to Reconcile Net Income to Net Cash
Provided by Operating Activities:
Provision for Loan Losses 1,200 1,565 1,920
Depreciation and Amortization 1,022 1,026 931
Net Amortization of Premiums and Accretion of Discounts on Investments 2,180 1,682 1,042
Available-for-Sale Investment Security Gains, net (871) (808) (488)
Deferred Income Tax, (Benefit) Expense (56) 336 (373)
Other Real Estate Losses 41 66 188
Increase in Cash Surrender Value of Bank Owned Life Insurance (570) (639) (552)
Net (Increase) Decrease in Trading Securities (319) 138 (135)
Net (Gains) Losses on Trading Securities (160) (256) 216
Increase in Other Assets (302) (2,849) (667)
Increase (Decrease) in Other Liabilities 226 (141) 1,455
--------- --------- ---------
Net Cash Provided by Operating Activities 11,009 8,833 12,099
--------- --------- ---------
Cash Flows from Investing Activities:
Net Cash Provided by Branch Acquisition -- -- 29,168
Proceeds from Maturities of Held-to-Maturity Investment Securities 24,150 32,230 13,757
Purchases of Held-to-Maturity Investment Securities (39,767) (33,745) (10,635)
Proceeds from Maturities of Available-for-Sale Investment Securities 151,552 112,562 42,721
Proceeds from Sales of Available-for-Sale Investment Securities 12,986 11,239 21,181
Purchases of Available-for-Sale Investment Securities (141,352) (169,874) (104,107)
Purchase of Bank Owned Life Insurance -- -- (3,050)
Net Increase in Loans (31,295) (3,921) (26,797)
Proceeds from Sale of Loans 294 -- --
Purchase of Premises and Equipment, Net of Disposals (912) (548) (853)
Proceeds from Sale of Other Real Estate 58 47 966
--------- --------- ---------
Net Cash Used in Investing Activities (24,286) (52,010) (37,649)
--------- --------- ---------
Cash Flows from Financing Activities:
Net (Decrease) Increase in Demand Deposits, Savings, NOW,
Money Market and Other Time Deposits (8,614) 28,452 41,364
Net (Decrease) Increase in Certificates of Deposit (90) 3,100 (17,951)
Net Increase in Short-Term Borrowings 17,541 6,758 2,730
Increase in Long-Term Borrowings 15,000 -- 21,000
Repayment of Long-Term Borrowings (5,470) (17,497) (10,167)
(Decrease) Increase in Dividends Payable -- (209) 209
Purchase of Treasury Stock (182) (492) (677)
Cash Dividends Paid (4,259) (4,109) (4,272)
--------- --------- ---------
Net Cash Provided by Financing Activities 13,926 16,003 32,236
--------- --------- ---------
Net Increase (Decrease) in Cash and Cash Equivalents 649 (27,174) 6,686
Cash and Cash Equivalents at Beginning of Year 19,890 47,064 40,378
--------- --------- ---------
Cash and Cash Equivalents at End of Period $ 20,539 $ 19,890 $ 47,064
========= ========= =========
See accompanying notes to Consolidated Financial Statements.
54-K
The Wilber Corporation
Consolidated Statements of Cash Flows, continued
Year Ended December 31,
dollars in thousands 2004 2003 2002
- -------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information:
Cash Paid during Period for:
Interest $ 12,852 $ 14,334 $ 17,374
Income Taxes $ 2,874 $ 3,683 $ 2,321
Non Cash Investing Activities:
Change in Unrealized Gain on Securities $ (1,435) $ (4,902) $ 6,120
Transfer of Loans to Other Real Estate $ 157 $ 110 $ 202
Fair Value of Assets Acquired $ -- $ -- $ 3,325
Fair Value of Liabilities Assumed $ -- $ -- $ 34,656
See accompanying notes to Consolidated Financial Statements.
55-K
Note 1. Summary of Significant Accounting Policies
The Wilber Corporation (the Parent Company) operates 19 branches serving Otsego,
Delaware, Schoharie, Ulster and Chenango and Broome, Counties through its wholly
owned subsidiary Wilber National Bank (the Bank). The Company's primary source
of revenue is interest earned on commercial, mortgage and consumer loans to
customers who are predominately individuals and small and middle-market
businesses. Collectively, the Parent Company and the Bank are referred to herein
as "the Company."
The Bank owns a majority interest in Mang-Wilber, LLC, an insurance agency
offering a full line of life, health and property and casualty insurance.
Accordingly, the assets and liabilities and revenues and expenses of
Mang-Wilber, LLC are included in the Company's Consolidated Financial
Statements.
The Consolidated Financial Statements of the Company conform to accounting
principles generally accepted in the United States of America (GAAP). The
following is a summary of the more significant policies:
Principles of Consolidation -- The Consolidated Financial Statements include the
accounts of the Parent Company and its wholly owned subsidiary after elimination
of intercompany accounts and transactions. In the "Parent Company Only Financial
Statements," the investment in subsidiary is carried under the equity method of
accounting.
Management's Use of Estimates -- The preparation of the Consolidated Financial
Statements in conformity with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the Consolidated
Financial Statements and the reported amounts of revenue and expense during the
reporting period. Actual results could differ from those estimates.
Reclassifications -- Whenever necessary, reclassifications are made to prior
period amounts to conform to current year presentation.
Cash Equivalents -- The Company considers amounts due from correspondent banks,
cash items in process of collection, federal funds sold and time deposit
balances with other banks to be cash equivalents for purposes of the
consolidated statements of cash flows.
Securities -- The Company classifies its investment securities at date of
purchase as either held-to-maturity, available-for-sale or trading.
Held-to-maturity securities are those for which the Company has the intent and
ability to hold to maturity, and are reported at amortized cost.
Available-for-sale securities are reported at fair value, with net unrealized
gains and losses reflected in stockholders' equity as accumulated other
comprehensive income (loss), net of the applicable income tax effect. Trading
securities are reported at fair value, with unrealized gains and losses
reflected in the income statement. Transfers of securities between categories
are recorded at full value at the date of transfer.
Non-marketable equity securities, including Federal Reserve and Federal Home
Loan Bank stock required for membership in those organizations, are carried at
cost.
Premiums and discounts are amortized or accreted over the life of the related
security as an adjustment to yield using a method that approximates the interest
method. Dividend and interest income are recognized when earned. Realized gains
and losses on the sale of securities are included in securities gains (losses).
The cost of securities sold is based on the specific identification method.
A decline in the fair value of any available-for-sale or held-to-maturity
security below cost that is deemed to be other than temporary is charged to
earnings, resulting in the establishment of a new cost basis for the security.
Loans -- Loans are reported at their outstanding principal balance. Interest
income on loans is accrued based upon the principal amount outstanding.
Loans are placed on nonaccrual status when timely collection of principal and
interest in accordance with contractual terms is doubtful. Loans are transferred
to a nonaccrual 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 nonaccrual 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.
If ultimate repayment of a nonaccrual 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 nonaccrual loan is applied
to principal until ultimate repayment becomes expected. Nonaccrual 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
56-K
Note 1. Summary of Significant Accounting Policies, Continued
principal and interest. When in the opinion of management the collection of
principal appears unlikely, the loan balance is charged-off in total or in part.
Commercial type loans are considered impaired when it is probable that the
borrower will not repay the loan according to the original contractual terms of
the loan agreement, and all loan types are considered impaired if the loan is
restructured in a troubled debt restructuring.
A loan is considered to be a troubled debt restructured loan (TDR) when the
Company grants a concession to the borrower because of the borrower's financial
condition that it would not otherwise consider. Such concessions include the
reduction of interest rates, forgiveness of principal or interest or other
modifications of interest rates that are less than the current market rate for
new obligations with similar risk. TDR loans that are in compliance with their
modified terms and that yield a market rate may be removed from the TDR status
after a period of performance.
Allowance for Loan Losses -- The allowance for loan losses is the amount, which
in the opinion of management, is necessary to absorb probable losses inherent in
the loan portfolio. The allowance is determined based upon numerous
considerations, including local economic conditions, the growth and composition
of the loan portfolio with respect to the mix between the various types of loans
and their related risk characteristics, a review of the value of collateral
supporting the loans, comprehensive reviews of the loan portfolio by the
external Loan Review and management, as well as consideration of volume and
trends of delinquencies, non-performing loans, and loan charge-offs. As a result
of the test of adequacy, required additions to the allowance for loan losses are
made periodically by charges to the provision for loan losses.
The allowance for loan losses related to impaired loans is based on discounted
cash flows using the loan's initial effective interest rate or the fair value of
the collateral for certain loans where repayment of the loan is expected to be
provided solely by the underlying collateral (collateral dependent loans). The
Company's impaired loans are generally collateral dependent. The Company
considers the estimated cost to sell, on a discounted basis, when determining
the fair value of collateral in the measurement of impairment if those costs are
expected to reduce the cash flows available to repay or otherwise satisfy the
loans.
Management believes that the allowance for loan losses is adequate. While
management uses available information to recognize loan losses, future additions
to the allowance for loan losses may be necessary based on changes in economic
conditions or changes in the values of properties securing loans in the process
of foreclosure. In addition, various regulatory agencies, as an integral part of
their examination process, periodically review the Company's allowance for loan
losses. Such agencies may require the Company to recognize additions to the
allowance for loan losses based on their judgments about information available
to them at the time of their examination, which may not be currently available
to management.
Other Real Estate Owned ("OREO") -- Other real estate owned consists of
properties formerly pledged as collateral on loans, which have been acquired by
the Company through foreclosure proceedings or acceptance of a deed in lieu of
foreclosure. Other real estate owned is carried at the lower of the recorded
investment in the loan or the fair value of the real estate, less estimated
costs to sell. Upon transfer of a loan to foreclosure status, an appraisal is
obtained and any excess of the loan balance over the fair value, less estimated
costs to sell, is charged against the allowance for loan losses. Expenses and
subsequent adjustments to the fair value are treated as other operating expense.
Gains on the sale of other real estate owned are included in income when title
has passed and the sale has met the minimum down payment requirements prescribed
by GAAP.
Bank Premises and Equipment -- Land is carried at cost. Premises and equipment
are stated at cost less accumulated depreciation computed principally using
accelerated methods over the estimated useful lives of the assets, which range
from 15 to 40 years for buildings and from 3 to 10 years for furniture and
equipment. Maintenance and repairs are charged to expense as incurred.
Bank-Owned Life Insurance ("BOLI") -- The BOLI was purchased as a financing tool
for employee benefits. The value of life insurance financing is the tax
preferred status of increases in life insurance cash values and death benefits
and the cash flow generated at the death of the insured. The purchase of the
life insurance policy results in an interest sensitive asset on the Company's
consolidated statements of condition that provides monthly tax-free income to
the Company. In 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
57-K
Note 1. Summary of Significant Accounting Policies, Continued
in the years in which temporary differences are expected to be recovered or
settled. The effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Pension Costs -- The Company maintains a noncontributory, defined benefit
pension plan covering substantially all employees, as well as supplemental
employee retirement plans covering certain executives. Costs associated with
these plans, based on actuarial computations of current and future benefits for
employees, are charged to current operating expenses.
Treasury Stock -- Treasury stock acquisitions are recorded at cost. Subsequent
sales of treasury stock are recorded on an average cost basis. Gains on the sale
of treasury stock are credited to additional paid-in-capital. Losses on the sale
of treasury stock are charged to additional paid-in-capital to the extent of
previous gains, otherwise charged to retained earnings.
Earnings Per Share -- Basic earnings per share (EPS) is computed by dividing
income available to common stockholders by the weighted average number of common
shares outstanding for the period. Entities with complex capital structures must
also present diluted EPS, which reflect the potential dilution that could occur
if securities or other contracts to issue common stock were exercised or
converted into common shares. The Company does not have a complex capital
structure and, accordingly, has presented only basic EPS.
Trust Department -- Assets held in fiduciary or agency capacities for customers
are not included in the accompanying consolidated statements of condition, since
such items are not assets of the Company.
Financial Instruments with Off-Balance Sheet Risk -- The Bank is a party to
other financial instruments with off-balance sheet risk in the normal course of
business to meet the financing needs of its customers. These financial
instruments include commitments to extend credit and standby letters of credit
which involve, to varying degrees, elements of credit and interest rate risk in
excess of the amount recognized in the statement of condition. The contract
amounts of those instruments reflect the extent of involvement the Bank has in
particular classes of financial instruments.
Comprehensive Income -- For the Company, comprehensive income represents net
income plus other comprehensive income (loss), which consists of the net change
in unrealized gains or losses on securities available for sale, net of income
taxes, for the period and is presented in the consolidated statements of changes
in stockholders' equity and comprehensive income. Accumulated other
comprehensive income (loss) represents the net unrealized gains or losses on
securities available-for-sale as of the balance sheet dates, net of income
taxes.
Segment Reporting -- The Company's operations are solely in the community
banking industry and include the provision of traditional commercial banking
services. The Company operates solely in the geographical region of Central New
York State. The Company has identified separate operating segments; however,
these segments did not meet the quantitative thresholds for separate disclosure.
Goodwill and Other Intangible Assets -- The Company accounts for goodwill and
intangible assets in accordance with SFAS No. 142, "Goodwill and Other
Intangible Assets." SFAS No. 142 requires that acquired intangible assets (other
than goodwill) be amortized over their useful economic life, while goodwill and
any acquired intangible assets with an indefinite useful economic life would not
be amortized, but would be reviewed for impairment on an annual basis based upon
guidelines specified in the Statement. SFAS No. 142 requires that goodwill be
evaluated for impairment annually.
58-K
Note 2. Investment Securities
The amortized cost and fair value of investment securities are as follows:
December 31, 2004
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
dollars in thousands Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
Available-for-Sale Portfolio
U.S. Treasuries $ 4,960 $ 56 $ -- $ 5,016
Obligations of U.S. Government Corporations and Agencies 11,989 5 40 11,954
Obligations of States and Political Subdivisions 66,656 1,556 467 67,745
Mortgage-Backed Securities 159,289 612 1,256 158,645
Equity Securities 5,870 185 -- 6,055
-------- -------- -------- --------
$248,764 $ 2,414 $ 1,763 $249,415
======== ======== ======== ========
-------- -------- -------- --------
Trading Portfolio 1,347 157 -- 1,504
======== ======== ======== ========
Held-to-Maturity Portfolio
Obligations of States and Political Subdivisions $ 7,811 $ 205 $ 17 $ 7,999
Mortgage-Backed Securities 51,652 127 454 $ 51,325
-------- -------- -------- --------
$ 59,463 $ 332 $ 471 $ 59,324
======== ======== ======== ========
December 31, 2003
----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
dollars in thousands Cost Gains Losses Value
- -----------------------------------------------------------------------------------------------------------------
Available-for-Sale Portfolio
U.S. Treasuries $ 3,978 $ 45 $ -- $ 4,023
Obligations of U.S. Government Corporations and Agencies 2,000 5 -- 2,005
Obligations of States and Political Subdivisions 56,684 1,736 404 58,016
Mortgage-Backed Securities 192,745 1,191 1,571 192,365
Corporate Bonds 13,038 911 -- 13,949
Equity Securities 4,520 173 -- 4,693
-------- -------- -------- --------
$272,965 $ 4,061 $ 1,975 $275,051
======== ======== ======== ========
-------- -------- -------- --------
Trading Portfolio 1,028 1 5 1,024
======== ======== ======== ========
Held-to-Maturity Portfolio
Obligations of States and Political Subdivisions $ 6,292 $ 238 $ 15 $ 6,515
Mortgage-Backed Securities 37,848 341 288 $ 37,901
-------- -------- -------- --------
$ 44,140 $ 579 $ 303 $ 44,416
======== ======== ======== ========
59-K
Note 2. Investment Securities, Continued
The following table provides information on temporarily impaired securities at
December 31, 2004:
--------------------------------------------------------------------------------
Less Than 12 Months 12 Months or Longer Total
Estimated Unrealized Estimated Unrealized Estimated Unrealized
------------------------ ------------------------ ------------------------
dollars in thousands Fair Value Losses Fair Value Losses Fair Value Losses
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Treasury and Obligations of U.S.
Government Corporations and Agencies 9,955 40 -- -- 9,955 40
Obligations of States and Political Subdivisions 16,193 127 8,744 357 24,937 484
Mortgage-Backed Securities 119,403 1,386 26,545 324 145,948 1,710
-------- -------- -------- -------- -------- --------
$145,551 $ 1,553 $ 35,289 $ 681 $180,840 $ 2,234
======== ======== ======== ======== ======== ========
The above unrealized losses are considered temporary, based on the following:
U.S. Treasuries and agencies, State and political subdivisions: The unrealized
losses on these investments were caused by market interest rate increases. The
contractual terms of these investments require the issuer to settle the
securities at par upon maturity of the investment. Because the Company has the
ability and intent to hold these investments until a market price recovery or 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 amortized cost and fair value of debt securities by contractual maturity,
are shown below. Expected maturities will differ from contractual maturities
because issuers may have the right to call or prepay obligations with or without
call or prepayment penalties. Equity securities have no stated maturity and are
excluded from the following tables.
December 31, 2004
-------------------------
Amortized Fair
dollars in thousands Cost Value
- --------------------------------------------------------------------------------
Available-for-Sale Securities
Due in One Year or Less 957 969
Due After One Year Through Five Years 38,675 39,058
Due After Five Years Through Ten Years 97,733 97,797
Due After Ten Years 105,530 105,536
-------- --------
$242,895 $243,360
======== ========
December 31, 2004
-------------------------
Amortized Fair
dollars in thousands Cost Value
- --------------------------------------------------------------------------------
Held-to-Maturity Securities
Due in One Year or Less 580 686
Due After One Year Through Five Years 1,541 1,658
Due After Five Years Through Ten Years 6,806 6,752
Due After Ten Years 50,536 50,228
-------- --------
$ 59,463 $ 59,324
======== ========
60-K
Note 2. Investment Securities, Continued
The following table sets forth information with regard to securities gains and
losses realized on sales or calls:
Year Ended Year Ended Year Ended
December 31, 2004 December 31, 2003 December 31, 2002
---------------------- ---------------------- ----------------------
Available - Available - Available -
dollars in thousands -for-Sale Trading -for-Sale Trading -for-Sale Trading
- ----------------------------------------------------------------------------------------------------
Gross Gains $ 932 $ 161 $ 842 $ 280 $ 760 $ 3
Gross Losses (61) (1) (34) (24) (272) (219)
----- ----- ----- ----- ----- -----
Net Securities Gains $ 871 $ 160 $ 808 $ 256 $ 488 $(216)
===== ===== ===== ===== ===== =====
Federal Home Loan Bank and Federal Reserve Bank stock of $3,504,000 at December
31, 2004, and $3,188,000 in 2003 is carried at cost as fair values are not
readily determinable. Both investments are required for membership. At December
31, 2004, investment securities with an amortized cost of $191,631,000, and an
estimated fair value of $192,238,000 were pledged as collateral for certain
public deposits and other purposes as required or permitted by law.
Note 3. Loans
December 31,
dollars in thousands 2004 2003
- -------------------------------------------------------------------------------
Residential Real Estate 119,103 118,571
Commercial Real Estate 129,516 115,733
Commercial 78,003 65,031
Consumer 64,421 61,571
--------- ---------
391,043 360,906
Less: Allowance for Loan Losses (6,250) (5,757)
--------- ---------
Net Loans $ 384,793 $ 355,149
========= =========
At December 31, 2004, $69,163,000 residential real estate loans were pledged as
collateral for FHLBNY advances.
At the periods presented below, the subsidiary bank had loans to directors and
executive officers of the Company and its subsidiary, or company in which they
have ownership. Such loans are made in the ordinary course of business on
substantially the same terms, including interest rates and collateral, as those
prevailing at the time for comparable transactions with other persons and did
not involve more than normal risk of collectibility or present other unfavorable
features. Loan transactions with related parties are as follows:
December 31,
dollars in thousands 2004 2003
- -------------------------------------------------------------------------------
Balance at Beginning of Year $ 13,254 $ 17,701
Loan Payments (2,320) (7,108)
New Loans and Advances 3,315 2,661
-------- --------
Ending Balance $ 14,249 $ 13,254
======== ========
61-K
Note 4. Allowance for Loan Losses
Changes in the allowance for loan losses are presented in the following summary:
Year Ended December 31,
dollars in thousands 2004 2003 2002
- ----------------------------------------------------- ------- -------
Balance at Beginning of Year $ 5,757 $ 5,392 $ 4,476
Provision for Loan Losses 1,200 1,565 1,920
Recoveries Credited 237 276 417
Loans Charged-Off (944) (1,476) (1,421)
------- ------- -------
Ending Balance $ 6,250 $ 5,757 $ 5,392
======= ======= =======
The following provides information on impaired loans for the periods presented:
As of and For the Year
Year Ended December 31,
dollars in thousands 2004 2003 2002
- --------------------------------------------------------------------------------
Impaired Loans $2,411 $3,270 $2,196
Allowance for Impaired Loans 651 510 442
Average Recorded Investment in Impaired Loans 2,089 3,485 2,339
The following table sets forth information with regards to non-performing loans:
As of December 31,
dollars in thousands 2004 2003 2002
- --------------------------------------------------------------------------------
Loans in Non-Accrual Status $2,561 $3,164 $2,034
Loans Contractually Past Due 90 Days or More
and Still Accruing Interest 190 123 717
Troubled Debt Restructured Loans -- 371 387
------ ------ ------
Total Non-Performing Loans $2,751 $3,658 $3,138
====== ====== ======
Had the loans in non-accrual status performed in accordance with their original
terms, additional interest income of $22,000 would have been recorded for the
year ended December 31, 2004. In addition, in 2003, and 2002 interest income of
$83,000, and $116,000, respectively, would have been recorded.
Had the troubled debt restructured loans performed in accordance with their
original terms, the Company would have recorded interest income of $31,000 and
$34,000 for the years ended December 31, 2003, and 2002, respectively. Under the
restructured terms, the Company recorded interest income of $32,000 and $35,000
for the years ended December 31, 2003, and 2002, respectively.
Note 5. Premises and Equipment
December 31,
dollars in thousands 2004 2003
- -------------------------------------------------------------------------------
Land $ 539 $ 539
Buildings 7,892 7,418
Furniture, Fixtures and Equipment 5,518 5,386
-------- --------
13,949 13,343
Less: Accumulated Depreciation (8,089) (7,622)
-------- --------
$ 5,860 $ 5,721
======== ========
Depreciation expense was $773,000, $781,000, and $825,000 for the years ended
December 31, 2004, 2003 and 2002, respectively.
62-K
Note 6. Goodwill and Intangible Assets
Goodwill and intangible assets are presented in the following table:
December 31,
dollars in thousands 2004 2003
- --------------------------------------------------------------------------------
Goodwill $ 2,682 $ 2,682
======= =======
Core Deposit Intangible $ 285 $ 285
Other Intangible Assets 350 450
------- -------
Total Intangible Assets $ 635 $ 735
Accumulated Amortization (258) (274)
------- -------
Intangible Assets, Net $ 377 $ 461
======= =======
Amortization expense on intangible assets was $84,000 for 2004, $115,000 for
2003, and $106,000 for 2002. The core deposit intangible and other intangible
assets are amortized over a weighted average period of approximately 5 and 15
years, respectively.
In February 2002, the Company acquired a branch and recorded related goodwill of
$1,877,000 and a core deposit intangible asset of $285,000.
Estimated annual amortization expense of intangible assets, absent any
impairment or change in estimated useful lives is summarized as follows for each
of the next five years:
dollars in thousands
- --------------------------------------------------------------------------------
2005 $81
2006 80
2007 30
2008 23
2009 23
Note 7. Time Deposits
Contractual maturities of time deposits were as follows:
December 31, 2004
dollars in thousands Amount %
- -------------------------------------------------------------------------------
2005 $129,728 48.58
2006 46,819 17.53
2007 45,951 17.21
2008 34,717 13.00
2009 9,717 3.64
Thereafter 100 0.04
-------- ------
$267,032 100.00%
======== ======
63-K
Note 8. Borrowings
The following is a summary of borrowings:
December 31,
dollars in thousands 2004 2003
- ---------------------------------------------------------------------------------------------------
Short-Term Borrowings:
Federal Funds Purchased $ 2,400 $ 8,100
Securities Sold Under Agreements to Repurchase 33,106 11,178
Treasury Tax and Loan Notes 2,053 740
Long-Term Borrowings:
Advances from Federal Home Loan Bank of New York
Bearing Interest at 5.47%, Due January 2004 -- 500
Bearing Interest at 3.64% to 5.68%, Due January 2005 617 1,304
Bearing Interest at 6.52%, Due January 2005 10,000 10,000
Bearing Interest at 1.30% to 6.55%, Due March 2005 13,000 10,000
Bearing Interest at 3.43% to 6.13%, Due December 2004 -- 2,746
Bearing Interest at 2.62%, Due November 2012, Callable November 2005 8,000 8,000
Bearing Interest at 5.90% to 6.11%, Due December 2005 4,000 4,000
Bearing Interest at 5.77%, Due January 2006 1,000 1,000
Bearing Interest at 1.81%, Due March 2006 3,000 --
Bearing Interest at 5.22%, Due July 2006 544 848
Bearing Interest at 2.35% to 2.43%, Due March 2007 5,500 --
Bearing Interest at 3.05%, Due December 2012, Callable December 2007 8,000 8,000
Bearing Interest at 5.56%, Due July 2008 572 709
Bearing Interest at 5.03%, Due January 2009 1,274 1,542
Bearing Interest at 3.12%, Due March 2011 3,199 --
Bearing Interest at 5.89% to 5.95%, Due July 2011 1,241 1,388
Bearing Interest at 5.30%, Due December 2011 1,521 1,694
Bearing Interest at 6.26%, Due July 2016 851 899
Bearing Interest at 5.77%, Due December 2016 1,733 1,830
Bearing Interest at 6.04%, Due January 2017 873 920
Bearing Interest at 6.46%, Due July 2021 454 469
-------- --------
Total Borrowings $102,938 $ 75,867
======== ========
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, 2004, $29,500,000 of the long term borrowings
were collateralized by securities with an amortized cost and estimated fair
value of $31,788,000 and $31,641,000, respectively. The remaining long term
borrowings totaling $35,879,000 are collateralized by the Company's mortgage
loans. At December 31, 2004, the Bank had a line of credit of $74,026,000 with
the FHLB. However, based on outstanding borrowings at FHLB the total potential
borrowing capacity on these lines is reduced to $19,180,000 at December 31,
2004.
Information related to short-term borrowings is as follows:
As of and For the
Year Ended December 31,
dollars in thousands 2004 2003 2002
- -------------------------------------------------------------------------------
Outstanding Balance at End of Period $37,559 $20,018 $13,260
Average Interest Rate at End of Period 1.77% 0.92% 1.13%
Maximum Outstanding at any Month-End 37,559 20,018 16,416
Average Amount Outstanding during Period 17,288 13,529 12,889
Average Interest Rate during Period 1.23% 0.86% 1.4%
64-K
Note 8. Borrowings, Continued
Average amounts outstanding and average interest rates are computed using
weighted daily averages.
Securities sold under agreements to repurchase included in short-term borrowings
represent the purchase of interests in government securities by the Bank's
customers and 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 $25,934,000 and $25,979,000 at December 31, 2004,
respectively. These amounts are included in the total of investment securities
pledged disclosed in Note 2.
Note 9. Income Taxes
Income tax expense attributable to income before taxes is comprised of the
following:
Year Ended December 31,
dollars in thousands 2004 2003 2002
- -------------------------------------------------------------------------------
Current:
Federal $ 2,738 $ 2,620 $ 3,328
State 320 321 403
------- ------- -------
Total Current 3,058 2,941 3,731
Deferred:
Federal (109) 275 (299)
State 53 61 (74)
------- ------- -------
Total Deferred (56) 336 (373)
------- ------- -------
Total Income Tax Expense $ 3,002 $ 3,277 $ 3,358
======= ======= =======
The components of deferred income taxes, which are included in the consolidated
statements of condition are:
Year Ended December 31,
dollars in thousands 2004 2003
- --------------------------------------------------------------------------------
Assets:
Allowance for Loan Losses $2,434 $2,242
Deferred Compensation 1,255 1,255
Reserves 97 97
Other 71 45
------ ------
3,857 3,639
------ ------
Liabilities:
Securities Discount Accretion 221 211
Defined Benefit Pension Plan 1,768 1,738
Net Unrealized Gain on Securities
Available-for-Sale 252 812
Other 625 503
------ ------
2,866 3,264
------ ------
Net Deferred Tax Assets $ 991 $ 375
====== ======
65-K
Note 9. Income Taxes, Continued
Realization of deferred tax assets is dependent upon the generation of future
taxable income or the existence of sufficient taxable income within the
carryback period. A valuation allowance is provided when it is more likely than
not that some portion of the deferred tax assets will not be realized. In
assessing the need for a valuation allowance, management considers the scheduled
reversal of the deferred tax liabilities, the level of historical taxable income
and projected future taxable income over the periods in which the temporary
differences comprising the deferred tax assets will be deductible. Based on its
assessment, management determined that no valuation allowance is necessary.
A reconciliation of the statutory federal income tax rate to the effective
income tax rate is as follows:
Year Ended December 31,
dollars in thousands 2004 2003 2002
- -------------------------------------------------------------------------------
Statutory Federal Income Tax Rate 34.0% 34.0% 34.0%
Variances from Statutory Rate:
State Income Tax, Net of Federal Tax Benefit 2.1 2.1 1.8
Tax Exempt Income (10.2) (8.8) (8.0)
Other (0.1) -- 0.4
------ ------ ------
Effective Tax Rate 25.8% 27.3% 28.2%
====== ====== ======
Note. 10. Employee Benefit Plans
The Company, through its bank subsidiary, has a non-contributory defined benefit
pension plan covering employees who have attained the age of 21 and have
completed one year of service. The Company's funding practice is to contribute
at least the minimum amount annually to meet minimum funding requirements.
Contributions are intended to provide not only for benefits attributed to
service to date, but for those expected to be earned in the future. Plan assets
consist primarily of marketable fixed income securities and common stocks. Plan
benefits are based on years of service and the employee's average compensation
during the five highest consecutive years of the last ten years of employment.
The following table sets forth the components of pension expense (benefit) as
well as changes in the plan's projected benefit obligation and plan assets and
the plan's funded status and amounts recognized in the consolidated statements
of condition based on a September 30 measurement date.
dollars in thousands 2004 2003
- -------------------------------------------------------------------------------
Change in Benefit Obligation:
Benefit Obligation at Beginning of Year $ 14,259 $ 11,868
Service Cost 646 541
Interest Cost 839 785
Actuarial Loss 903 1,413
Additional Prior Service Cost -- 161
Benefits Paid (597) (509)
-------- --------
Projected Benefit Obligation at End of Year $ 16,050 $ 14,259
======== ========
Change in Plan Assets:
Fair Value of Plan Assets at Beginning of Year $ 14,538 $ 10,929
Actual Gain on Plan Assets 1,462 1,908
Employer Contribution -- 2,210
Benefits Paid (597) (509)
-------- --------
Fair Value of Plan Assets at End of Year $ 15,403 $ 14,538
======== ========
66-K
Note. 10. Employee Benefit Plans, continued
dollars in thousands 2004 2003
- -------------------------------------------------------------------------------
Funded (Unfunded) Status $ (647) $ 279
Unrecognized Net Actuarial Loss 4,244 3,827
Unrecognized Net Transition Asset -- (21)
Unrecognized Prior Service Cost 389 444
------- -------
Prepaid Benefit Cost before Fourth Quarter Contribution $ 3,986 $ 4,529
Amount Contributed during the Fourth Quarter $ 552 $ --
------- -------
Prepaid Benefit Cost at December 31 $ 4,538 $ 4,529
======= =======
The following table presents a comparison of the accumulated benefit obligation
and plan assets:
dollars in thousands 2004 2003
- --------------------------------------------------------------------------------
Projected benefit obligation $16,050 $14,259
Accumulated benefit obligation 13,491 11,926
Fair Value of Plan Assets 15,403 14,538
Components of Net Periodic Benefit Cost are:
dollars in thousands 2004 2003 2002
- -------------------------------------------------------------------------------
Service Cost $ 646 $ 541 $ 484
Interest Cost 839 785 758
Expected Return on Plan Assets (1,142) (949) (1,034)
Net Amortization 200 166 18
------- ------- -------
$ 543 $ 543 $ 226
======= ======= =======
The following weighted-average assumptions were used to determine the benefit
obligation of the plan as of September 30:
2004 2003 2002
- --------------------------------------------------------------------------------
Discount Rate 5.8% 6.0% 6.7%
Expected Return on Plan Assets 8.0% 8.0% 8.5%
Rate of Compensation Increase 3.0% 3.0% 4.0%
The following weighted-average assumptions were used to determine the net
periodic benefit cost of the plan for the years ended December 31:
2004 2003 2002
- --------------------------------------------------------------------------------
Discount Rate 6.0% 6.7% 7.25%
Expected Return on Plan Assets 8.0% 8.5% 8.50%
Rate of Compensation Increase 3.0% 4.0% 4.00%
The plan's weighted average asset allocations at September 20, 2004 and 2003, by
asset category are as follows:
Plan Assets at
September 30,
2004 2003
- -------------------------------------------------------------------------------
Equity Securities 64.7% 59.7%
Debt Securities 34.9% 34.5%
Other 0.4% 5.8%
------ ------
100.0% 100.0%
====== ======
67-K
Note. 10. Employee Benefit Plans, continued
The following benefit payments, which reflect expected future service, as
appropriate, are expected to be paid over the next five years
dollars in thousands
- --------------------------------------------------------------------------------
2005 $ 658
2006 655
2007 750
2008 808
2009 808
2010-2014 5,016
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, each investing approximately
50% of the total 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 a diversified portfolio of common or capital
stocks, or bonds, debentures, notes, or preferred stocks convertible into common
or capital stocks, or in other types of equity investments whether foreign or
domestic. The fixed income porfolio focuses on high quality securities drawn
from various market sectors, including U.S. treasuries and government sponsored
agencies, sovereigns, supranationals, residential Mortgage Backed Securities
(MBS), corporates, Commercial Mortgage Backed Securities (CMBS), Asset Backed
Securities (ABS), and municipals.
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.
The Company expects to make a tax deductible contribution of $2,000,000 to the
pension plan in 2005.
Supplemental Retirement Income Agreement
In addition to the Company's noncontributory defined benefit pension plan, in
2002 the Company adopted two supplemental employee retirement plans for one
current executive and one former executive. The amount of the liabilities
recognized in the Company's consolidated statements of condition associated with
these plans was $787,000 at December 31, 2004 and $656,000 at December 31, 2003.
For the years ended December 31, 2004, 2003, and 2002, the Company recognized
$178,000, $163,000 and $541,000, respectively, of expense related to those
plans. The discount rate used in determining the actuarial present values of the
projected benefit obligations was 6.00% at December 31, 2004.
68-K
Note 11. Commitments and Contingencies
Financial instruments whose contract amounts represent credit risk consist of
the following:
December 31,
dollars in thousands 2004 2003
- --------------------------------------------------------------------------------
Commitments to Extend Credit $57,055 $49,124
Standby Letters of Credit 9,948 9,954
Commitments to extend credit are agreements to lend to a customer as long as
there is no violation of any condition established in the contract. Commitments
generally have fixed expiration dates or other termination clauses and may
require payment of a fee. Since some of the commitments are expected to expire
without being drawn upon, the total commitment amounts do not necessarily
represent future cash requirements.
Standby letters of credit written are conditional commitments issued by the Bank
to guarantee the performance of a customer to a third party. Those guarantees
are primarily issued to support public and private borrowing arrangements,
including bond financing and similar transactions. The credit risk involved in
issuing letters of credit is essentially the same as that involved in extending
loan facilities to customers. Since some of the letters of credit are expected
to expire without being drawn upon, the total commitment amounts do not
necessarily represent future cash requirements.
The estimated fair value of the Company's stand-by letters of credit was $22
thousand and $11 thousand at December 31, 2004 and December 31, 2003
respectively. The estimated fair value of stand-by letters of credit at their
inception is equal to the fee that is charged to the customer by the Company.
Generally, the Company's stand-by letters of credit have a term of one year. In
determining the fair values disclosed above, the fees were reduced on a
straight-line basis from the inception of each stand-by letter of credit to the
respective dates above. Due to immateriality of the fair value of the Company's
stand-by letters of credit, as well as their short-term nature, the Company
recognized the fees for the stand-by letters of credit in income at inception
during 2003 and 2004.
The amount of collateral obtained, if deemed necessary, by the Bank upon
extension of credit for commitments to extend credit and letters of credit, is
based upon management's credit evaluation of the counter party. Collateral held
varies but includes residential and commercial real estate.
In the ordinary course of business there are various legal proceedings pending
against the Company. After consultation with outside counsel, management
considers that the aggregate exposure, if any, arising from such litigation
would not have a material adverse effect on the Company's consolidated financial
position.
Note 12. Disclosures about Fair Value of Financial Instruments
SFAS No. 107, "Disclosures about Fair Value of Financial Instruments," requires
disclosure of fair value information about financial instruments, whether or not
recognized in the consolidated statement of condition, for which it is
practicable to estimate that value. In cases where quoted market prices are not
available, fair values are based on estimates using present value or other
valuation techniques. Those techniques are significantly affected by the
assumptions used, including the discount rate and estimates of future cash
flows. In that regard, the derived fair value estimates cannot be substantiated
by comparison to independent markets and in many cases, could not be realized in
immediate settlement of the instruments. SFAS No. 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
Accordingly, the aggregate fair value amounts presented do not represent the
underlying value of the Bank.
The following methods and assumptions were used to estimate the fair value of
each class of financial instruments:
Short-Term Financial Instruments
The fair value of certain financial instruments is estimated to approximate
their carrying value because the remaining term to maturity of the financial
instrument is less than 90 days or the financial instrument reprices in 90 days
or less. Such financial instruments include cash and due from banks, federal
funds sold, accrued interest receivable and accrued interest payable.
69-K
Note 12. Disclosures about Fair Value of Financial Instruments, Continued
Securities
Fair values of securities are based on quoted market prices or dealer quotes. If
a quoted market price is not available, fair value is estimated using quoted
market prices for similar securities.
Loans
For certain homogenous categories of loans, such as some residential mortgages,
credit card receivables, and other consumer loans, fair value is estimated using
the quoted market prices for securities backed by similar loans, adjusted for
differences in loan characteristics. The fair value of other types of loans is
estimated by discounting the future cash flows using the current rates at which
similar loans would be made to borrowers with similar credit ratings and for the
same remaining maturities.
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
2004 2003
---------------------------------------------------------
Carrying Fair Carrying Fair
dollars in thousands Value Value Value Value
- ---------------------------------------------------------------------------------------------------------
Financial Assets:
Cash and Cash Equivalents $ 20,539 $ 21,112 $ 19,890 $ 19,891
Securities 310,382 310,243 319,191 319,467
Loans 391,043 393,640 360,906 361,434
Allowance for Loan Losses (6,250) (6,250) (5,757) (5,757)
--------- --------- --------- ---------
Net Loans 384,793 387,390 355,149 355,677
Accrued Interest Receivable 2,857 2,857 3,045 3,045
Financial Liabilities:
Demand, Savings, NOW and Money
Market Deposit Accounts $ 304,897 $ 304,897 $ 312,447 $ 312,447
Time Deposits 267,032 266,577 268,186 271,217
Borrowings 102,938 103,675 75,867 78,290
Accrued Interest Payable 678 678 769 769
70-K
Note 13. Regulatory Matters
The Company and the subsidiary bank are subject to various regulatory capital
requirements administered by the Federal banking agencies. Failure to meet
minimum capital requirements can initiate certain mandatory, and possibly
additional discretionary, actions by regulators that, if undertaken, could have
a direct material effect on the Company's consolidated financial statements.
Under capital adequacy guidelines and the regulatory framework for prompt
corrective action, the subsidiary bank must meet specific capital guidelines
that involve quantitative measures of assets, liabilities, and certain
off-balance sheet items as calculated under regulatory accounting practices. The
Company's and subsidiary bank's capital amounts and classifications are also
subject to qualitative judgments by the regulators about components, risk
weightings, and other factors.
Quantitative measures established by regulation to ensure capital adequacy
require the maintenance of minimum amounts and ratios (set forth in the table
below) of total and Tier 1 capital (as defined in the regulations) to
risk-weighted assets (as defined), and of Tier 1 capital (as defined) to average
assets (as defined). Management believes the Company and subsidiary bank meet
all capital adequacy requirements to which they are subject.
The most recent notification from the Office of the Comptroller of the Currency
categorized the subsidiary bank as well capitalized under the regulatory
framework for prompt corrective action. To be categorized as well capitalized
the Company and subsidiary bank must maintain minimum total risk-based, Tier 1
risk-based, and Tier 1 leverage ratios as set forth in the following table.
There have been no conditions or events since that notification that management
believes have changed the subsidiary institution's category.
For Capital
Actual: Adequacy Purposes: Well Capitalized:
dollars in thousands Amount Ratio Amount Ratio Amount Ratio
- ------------------------------------------------------------------------------------------------------------------------
As of December 31, 2004
Total Capital to Risk-Weighted Assets:
The Company $70,276 14.34% $39,197 8.00% N/A N/A
Subsidiary Bank $67,689 13.84% $39,132 8.00% $48,915 10.00%
Tier 1 Capital to Risk-Weighted Assets:
The Company $64,150 13.09% $19,599 4.00% N/A N/A
Subsidiary Bank $61,571 12.59% $19,566 4.00% $29,349 6.00%
Tier 1 Capital to Average Assets:
The Company $64,150 8.59% $29,880 4.00% N/A N/A
Subsidiary Bank $61,571 8.25% $29,854 4.00% $37,318 5.00%
As of December 31, 2003
Total Capital to Risk-Weighted Assets:
The Company $65,642 14.26% $36,817 8.00% N/A N/A
Subsidiary Bank $63,849 13.88% $36,794 8.00% $45,993 10.00%
Tier 1 Capital to Risk-Weighted Assets:
The Company $59,889 13.01% $18,409 4.00% N/A N/A
Subsidiary Bank $58,099 12.63% $18,397 4.00% $27,596 6.00%
Tier 1 Capital to Average Assets:
The Company $59,889 8.18% $29,278 4.00% N/A N/A
Subsidiary Bank $58,099 7.94% $29,255 4.00% $36,569 5.00%
As of December 31, 2002
Total Capital to Risk-Weighted Assets:
The Company $60,912 14.49% $36,641 8.00% N/A N/A
Subsidiary Bank $59,601 14.19% $33,590 8.00% $41,987 10.00%
Tier 1 Capital to Risk-Weighted Assets:
The Company $55,662 13.24% $16,820 4.00% N/A N/A
Subsidiary Bank $54,351 12.94% $16,795 4.00% $25,192 6.00%
Tier 1 Capital to Average Assets:
The Company $55,662 7.92% $28,116 4.00% N/A N/A
Subsidiary Bank $54,351 7.74% $28,081 4.00% $35,101 5.00%
71-K
Note 13. Regulatory Matters, Continued
Banking regulations limit the amount of dividends that may be paid to
stockholders. Generally, dividends are limited to retained net profits for the
current year and two preceding years. At December 31, 2004, dividends totaling
$10,481,000 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 2004 2003 2002
- ---------------------------------------------------------------------------------------------------------
Unrealized Holding (Losses) Gains Arising During the Period Net of Tax
(Pre-tax Amount of ($564,000), ($4,094,000), and $6,608,000) $ (344) $(2,485) $ 4,015
Reclassification Adjustment for (Gains) Losses Realized in Net Income
During the Period, Net of Tax (Pre-tax Amount of ($871,000),
($808,000), and ($488,000)) (532) (485) (293)
------- ------- -------
Other Comprehensive (Loss) Income, Net of Tax of ($559,000),
($1,932,000) and $2,398,000 $ (876) $(2,970) $ 3,722
======= ======= =======
Note 15. Parent Company Only Financial Statements
Presented below are the condensed statements of condition December 31, 2004, and
2003 and statements of income and cash flows for each of the years in the
three-year period ended December 31, 2004, 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 2004 2003
- --------------------------------------------------------------------------------
Assets
Cash and Cash Equivalents $ 2,083 $ 1,121
Securities Available for Sale, at Estimated Fair Value 638 726
Investment in Subsidiary, Equity Basis 64,913 62,408
Other Assets 1,525 1,029
------- -------
Total Assets $69,159 $65,284
======= =======
Liabilities and Stockholders' Equity
Total Liabilities $ 1,554 $ 980
Stockholders' Equity 67,605 64,304
------- -------
Total Liabilities and Stockholders' Equity $69,159 $65,284
======= =======
72-K
Note 15. Parent Company Only Financial Statements, Continued
Condensed Statements of Income
December 31,
dollars in thousands 2004 2003 2002
- ----------------------------------------------------------------------------------------
Dividends from Subsidiary $ 5,306 $ 5,375 $ 5,026
Interest and Other Dividend Income 47 31 28
Net (Loss) Gain on Sale of Securities 95 -- (165)
------- ------- -------
5,448 5,406 4,889
Operating Expense 301 172 83
------- ------- -------
Income Before Income Tax (Benefit) Expense and Equity
in Undistributed Income of Subsidiary 5,147 5,234 4,806
Income Tax (Benefit) Expense (81) (56) (91)
Equity in Undistributed Income of Subsidiaries 3,390 3,423 3,665
------- ------- -------
Net Income $ 8,618 $ 8,713 $ 8,562
======= ======= =======
Condensed Statements of Cash Flows
Year Ended December 31,
dollars in thousands 2004 2003 2002
- ----------------------------------------------------------------------------------------
Cash Flows from Operating Activities:
Net Income $ 8,618 $ 8,713 $ 8,562
Adjustments to Reconcile Net Income to Cash
Provided by Operating Activities:
Investment Security Losses (Gains) (95) -- 165
(Increase) Decrease in Other Assets (16) (4)
(Decrease) Increase in Other Liabilities 91 (44) (91)
Equity in Undistributed Income of Subsidiaries (3,390) (3,423) (3,665)
------- ------- -------
Net Cash Provided by Operating Activities 5,208 5,242 4,971
------- ------- -------
Cash Flows from Investing Activities:
Proceeds from Sales of Available-for-Sale Securities 195 -- 258
Purchase of Available-for-Sale Securities -- -- (246)
------- ------- -------
Net Cash Provided by Investing Activities 195 -- 12
------- ------- -------
Cash Flows from Financing Activities:
Purchase of Treasury Stock (182) (492) (677)
Sale of Treasury Stock -- -- --
Cash Dividends (4,259) (4,319) (4,062)
------- ------- -------
Net Cash Used in Financing Activities (4,441) (4,811) (4,739)
------- ------- -------
Net Increase (Decrease) in Cash Equivalents 962 431 244
Cash and Cash Equivalents at Beginning of Year 1,121 690 446
------- ------- -------
Cash and Cash Equivalents at End of Year $ 2,083 $ 1,121 $ 690
======= ======= =======
73-K
Note 16. Stockholders' Equity
On July 21, 2003 the Board of Directors approved a 4-for-1 stock split payable
on September 18, 2003. On September 5, 2003, the stockholders approved: (i) an
increase in authorized shares of common stock to 16,000,000 and (ii) a change in
the par value of the common stock from no par value to $0.01 par value. All per
share amounts have been restated to reflect the 4-for-1 stock split. The stock
split resulted in an increase in the shares issued and treasury shares of
10,471,248 and 2,064,204 shares, respectively, on September 5, 2003.
Note 17. Federal Reserve Bank Requirement
The Company is required to maintain a clearing balance with the Federal Reserve
Bank. The required clearing balance for the 14-day maintenance period ending
December 24, 2004 was $1,300,000.
74-K
ITEM 9: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A: CONTROLS AND PROCEDURES
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, 2004. 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.
ITEM 9B: OTHER INFORMATION
None.
PART III
--------
ITEM 10: DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A. Directors of the Registrant
Information contained under the caption, "Election of Directors (introduction);"
"Election of Directors - The Nominees;" and in Proposal II "Meetings of the
Board of Directors and Certain Committees" in the definitive Proxy Statement for
the Annual Meeting of Shareholders to be held on April 23, 2005, 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, "Election of Directors
- -The Nominees - Douglas C. Gulotty" and "Election of Directors - Executive
Officers Who Are Not Directors," in the definitive Proxy Statement for the
Annual Meeting of Shareholders to be held on April 23, 2005, to be filed with
the Commission within 120 days after the end of the fiscal year covered by this
Form 10-K, is incorporated herein by this reference.
C. Compliance With Section 16(a)
Information contained under the caption, "Section 16(a) Beneficial Ownership
Reporting Compliance," in the definitive Proxy Statement for the Annual Meeting
of Shareholders to be held on April 23, 2005, to be filed with the Commission
within 120 days after the end of the fiscal year covered by this Form 10-K, is
incorporated herein by this reference.
The Company has adopted a Code of Ethics for adherence by its Chief Executive
Officer, Chief Financial Officer, and Chief Accounting Officer to ensure honest
and ethical conduct; full, fair and proper disclosure of financial information
in the Company's periodic reports; and compliance with applicable laws, rules,
and regulations. The text of the Company's Code of Ethics is posted and
available on the Bank's website (http://www.wilberbank.com) under 'About Us.'
-------------------------
ITEM 11: EXECUTIVE COMPENSATION
Information contained under the caption, "Compensation," in the definitive Proxy
Statement for the Annual Meeting of Shareholders to be held on April 23, 2005,
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.
75-K
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 Stockholders to be
held on April 23, 2005, to be filed with the Commission within 120 days after
the end of the fiscal year covered by this Form 10-K, is incorporated herein by
this reference.
ITEM 13: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption, "Compensation - Transactions With
Directors and Officers," in the definitive Proxy Statement for the Annual
Meeting of Stockholders to be held on April 23, 2005, to be filed with the
Commission within 120 days after the end of the fiscal year covered by this Form
10-K, is incorporated herein by this reference.
ITEM 14: PRINCIPAL ACCOUNTANT 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
Stockholders to be held on April 23, 2005, 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, 2004 and 2003
-Consolidated Statements of Income for the Years Ended December 31,
2004, 2003 and 2002
-Consolidated Statements of Changes in Shareholders' Equity for the
Years Ended December 31, 2004, 2003 and 2002
-Consolidated Statements of Cash Flows for the Years Ended December
31, 2004, 2003 and 2002
-Consolidated Statements of Comprehensive Income for the Years Ended
December 31, 2004, 2003 and 2002
-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.
76-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this registration statement to be
signed on its behalf by the undersigned, thereunto duly authorized.
THE WILBER CORPORATION
Date: March 18, 2005 By: /s/ Alfred S. Whittet
-------------- ---------------------
Alfred S. Whittet
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/ Alfred S. Whittet President and Chief Executive Officer March 18, 2005
- ------------------------- --------------
Alfred S. Whittet
/s/ Joseph E. Sutaris Treasurer and Chief Financial Officer March 18, 2005
- ------------------------- --------------
Joseph E. Sutaris
/s/ Brian R. Wright Director, Chairman March 18, 2005
- ------------------------- --------------
Brian R. Wright
/s/ Robert W. Moyer Director, Vice Chairman March 18, 2005
- ------------------------- --------------
Robert W. Moyer
/s/ David F. Wilber, III Director March 18, 2005
- ------------------------- --------------
David F. Wilber, III
/s/ James F. VanDeusen Director March 18, 2005
- ------------------------- --------------
James F. VanDeusen
/s/ Philip J. Devine Director March 18, 2005
- ------------------------- --------------
Philip J. Devine
77-K
EXHIBIT INDEX
No. Document
3.1 Articles of Incorporation of The Wilber Corporation (incorporated by
reference to Exhibit 3.1 of the Company's Form 10/A Registration Statement
(No. 001-31896) filed with the Securities and Exchange Commission on
January 30, 2004)
3.2 Bylaws of The Wilber Corporation (incorporated by reference to Exhibit 3.2
of the Company's Form 10/A Registration Statement (No. 001-31896) filed
with the Securities and Exchange Commission on January 30, 2004)
10.1 Deferred Compensation Agreement between Wilber National Bank and Alfred S.
Whittet (incorporated by reference to Exhibit 10.1 of the Company's Form
10/A Registration Statement (No. 001-31896) filed with the Securities and
Exchange Commission on January 30, 2004)
10.2 Summary Plan Description for the Amended and Restated Wilber National Bank
Split-Dollar Life Insurance Plan (incorporated by reference to Exhibit
10.2 of the Company's Form 10/A Registration Statement (No. 001-31896)
filed with the Securities and Exchange Commission on January 30, 2004)
10.3 Amendment to the Wilber National Bank Split-Dollar Life Insurance Plan
Agreement and Split-Dollar Policy Endorsement between Wilber National Bank
and Alfred S. Whittet (incorporated by reference to Exhibit 10.3 of the
Company's Form 10/A Registration Statement (No. 001-31896) filed with the
Securities and Exchange Commission on January 30, 2004)
10.4 Executive Salary Continuation Agreement between Wilber National Bank and
Robert W. Moyer (incorporated by reference to Exhibit 10.4 of the
Company's Form 10/A Registration Statement (No. 001-31896) filed with the
Securities and Exchange Commission on January 30, 2004)
10.5 Executive Salary Continuation Agreement between Wilber National Bank and
Alfred S. Whittet (incorporated by reference to Exhibit 10.5 of the
Company's Form 10/A Registration Statement (No. 001-31896) filed with the
Securities and Exchange Commission on January 30, 2004)
10.6 Employment Agreement between Wilber National Bank and Alfred S. Whittet
(incorporated by reference to Exhibit 10.6 of the Company's Form 10/A
Registration Statement (No. 001-31896) filed with the Securities and
Exchange Commission on January 30, 2004)
10.7 Severance Compensation Agreement between The Wilber Corporation and Alfred
S. Whittet (incorporated by reference to Exhibit 10.7 of the Company's
Form 10/A Registration Statement (No. 001-31896) filed with the Securities
and Exchange Commission on January 30, 2004)
10.8 Retention Bonus Agreement between Wilber National Bank and Douglas C.
Gulotty (incorporated by reference to Exhibit 10.8 of the Company's Form
10/A Registration Statement (No. 001-31896) filed with the Securities and
Exchange Commission on January 30, 2004)
13 Annual Report to Shareholders (included in this annual report on Form
10-K)
14 Code of Ethics incorporated by reference to Exhibit 14 of the Company's
Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 25, 2005, as amended and available on the Company's
website (http://www.wilberbank.com) under the link 'About Us.'
21 Subsidiaries of the Registrant
31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32.1 Certification of Chief Executive Officer Pursuant to 18 U.S.C. 1350
32.2 Certification of Chief Financial Officer Pursuant to 18 U.S.C. 1350
78-K